Week 1 (Tutorial Exercises)

Chapter 1 The Financial Planning Process

M.C. Questions:

1) Being financially secure involves balancing what you earn with

A) your investments.
B) what you spend.
C) your retirement plans.
D) your current level of debt.

2) Financial planning might not help you earn more, but it can help you use the money you do
earn to achieve your
A) life's purpose.
B) dreams.
C) financial goals.
D) desired lifestyle.

3) Which statement is true about managing personal finances?

A) The ability to manage finances is a skill with which you are born.
B) Personal finance courses are commonly offered in high school.
C) Financial difficulties can be a major cause of marital problems.
D) Personal financial management is not a skill worth learning.

4) In order for your financial plan to be realistic and attainable it needs to be based upon your
A) budget.
B) income level.
C) number of tax deductions, exemption, exclusions, and credits.
D) balance sheet.
E) none of the above.

5) Personal financial planning can help you to

A) deal with unplanned health issues.
B) minimize your tax payments to Uncle Sam.
C) minimize your chances of personal bankruptcy.
D) have enough money for a comfortable retirement.
E) all of the above.

6) What elements are found in an effective financial plan?

A) Flexibility to allow for changes in your situation
B) Sufficient liquidity to meet unexpected needs
C) Insurance protection from catastrophic events
D) Helps you legally reduce the amount of taxes you owe
E) All of the above

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7) Which of the following is one of the five basic steps in personal financial planning?
A) Evaluate your personal health.
B) Define your career goals.
C) Develop a plan of action.
D) Let an accountant review your plan.

8) The personal financial planning process consists of ________ steps.

A) three
B) five
C) seven
D) ten

9) While each person's financial plan is different, some common factors guide all sound financial
plans. Which of the following is one of the common factors?
A) Sustainability
B) Illiquidity
C) Protection
D) Maximization of taxes

10) Evaluating your financial health consists of

A) preparing a personal balance sheet.
B) determining what you are worth.
C) preparing a personal income statement.
D) determining where your money comes from and where it goes.
E) all of the above.

11) You need to review your progress and reevaluate and revise your plan (Step 5) because
A) your financial needs change over the course of your life.
B) your employment situation changes over time.
C) your net worth changes over time.
D) your family situation might change over time.
E) all of the above are good reasons to periodically review your financial plan.

12) Suppose that you just completed your first year of college with $12,000 in loans and plan to
borrow the maximum each year from now until graduation. You have never accounted for the
way you spend your money, do not have a budget, and want to insure that you will be able to
repay your loans after college. What is the most important thing you can do right now?
A) Talk to your parents about an allowance.
B) Visit your career counselor at school.
C) Ask a friend who took the Personal Finance course for advice.
D) Immediately begin to develop a personal financial plan.

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13) Suppose you have just retired, have accumulated many luxury goods over the years, still owe
a mortgage on your home, still have unpaid travel expenses on your credit cards, and have helped
your adult children financially. Your spouse has recently passed away, and you miss his/her
contribution to the household income. Which step in the personal financial planning process have
you neglected?
A) Develop your financial health.
B) Define your financial goals.
C) Develop a plan of action.
D) Implement your plan.
E) Review your progress, reevaluate, and revise your plan.

14) While reviewing your current financial plan, you discover that you most likely won't achieve
your long term financial goals. What should you do now?
A) Look at increasing your income.
B) Look at cutting back on your expenses.
C) Look at revising your goals.
D) All of these would be realistic things to do.

15) The term that considers having money readily available when you need it is the concept of
A) flexibility.
B) liquidity.
C) equity.
D) solvency.
E) none of the above.

16) The major reason to make a financial plan is to

A) account for your spending.
B) see where you are overspending or underspending.
C) achieve your financial goals.
D) allow for a surplus.
E) serve as a tax planning guide.

17) What is the significance of the financial life cycle?

A) To help you to compare your situation with other people's situation
B) To better understand how your financial needs will most likely change over time
C) To allow you to be more proactive in dealing with expected changes in the future and take
steps today to prepare for them
D) To help you realize that your original plan is sufficient and doesn't need to change
E) Both B and C are significant aspects of the financial life cycle.

18) Which of the following typically occur(s) during stage 1 of the financial life cycle?
A) Initial goal setting
B) Insurance planning
C) Saving for goals
D) Home purchase
E) All the above
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19) Suppose that you are a 21-year-old college student. What stage of the financial life cycle are
you currently in?
A) Stage 1: wealth accumulation
B) Stage 2: the golden years
C) Stage 3: the retirement years
D) Stage 4: the formative years
E) Stage 5: the educational years

20) Which stage in the Financial Life Cycle is the longest in terms of years?
A) Stage 1: wealth accumulation
B) Stage 2: the golden years
C) Stage 3: the retirement years
D) Stage 4: the formative years

21) According to the Keown book, you might begin to think about estate planning during this
stage of the financial life cycle.
A) Stage 1: wealth accumulation
B) Stage 2: the golden years
C) Stage 3: the retirement years
D) Stage 4: the formative years

22) Suppose that you are a 60-year-old business owner. What stage of the financial life cycle are
you currently in?
A) Stage 1: wealth accumulation
B) Stage 2: the golden years
C) Stage 3: the retirement years
D) Stage 4: the formative years

23) What is the main factor in determining your potential income level?
A) Education and skills that you have attained
B) Who you know in your company administration
C) Your age and years of employment
D) The size of the company you work for

24) Which of the following statements applies to obtaining an undergraduate college degree?
A) They are expensive and rarely pay off in increased earnings.
B) There is no relationship between personal wealth and earning a college degree.
C) It may be the single best investment you will ever make.
D) All of the above.

25) Probably the most important determinant of your future earnings will be
A) your highest level of education obtained.
B) the size of the company where you will work.
C) your seniority with your company.
D) joining a labor union.

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26) One of the most important factors to remember when hunting for your first job is to
A) seize every opportunity.
B) wait patiently.
C) start early.
D) procrastinate.

27) ________ is the process of identifying a job that you feel is important and that will lead to
the kind of lifestyle you desire.
A) Financial planning
B) Career planning
C) Goal planning
D) Retirement planning

28) The concept that emphasizes that people should not put all their eggs in one basket is
A) the time dimension of investing.
B) the curse of competitive investment markets.
C) diversification reduces risk.
D) the farmers analogy.
E) liquidity is first.