Deck 17: Synthesis of Financial Planning - Integrating the Components of a Financial Plan

Question 1

There is a cost-benefit relationship for insurance protection, which means you could be underinsured or overinsured.

Answer 1

True

Question 2

Loans restrict your spending or saving in future months and therefore can prevent you from achieving financial goals.

Answer 2

True

Question 3

Investing in stocks of large, well-known firms may enhance your liquidity, but typically these investments do not generate as high a return as stocks of smaller firms.

Answer 3

True

Question 4

You should maintain just enough money in liquid assets to satisfy your liquidity needs. Then you can earn a higher return on your other assets.

Question 5

It is not possible to have too much insurance coverage.

Question 6

Stocks of smaller firms are more volatile than those of larger firms and might not be liquid.

Question 7

The idea of having adequate insurance is to protect against events that could reduce your income or wealth.

Question 8

Budgeting decisions involve a trade-off between spending today and allocating funds for the future.

Question 9

You should make investments only after you have sufficient liquidity and sufficient insurance to protect your existing assets.

Question 10

Financing may be good for obtaining assets right away but also may end up restricting your budget to save for your goals.

Question 11

One disadvantage of investing in retirement accounts is that these funds are typically not very liquid.

Question 12

You may want to make additional loan payments if the interest rate you are paying is higher than you could obtain from an investment.

Question 13

Paying off loans is advisable when the after-tax return on investments is more than the interest rate on the loan.

Question 14

By investing a portion of your income consistently over time, you should attain your goals.

Question 15

Careful budgeting lets you spend more to achieve your short-term financial goals.

Question 16

If you have enough liquidity, you should either obtain short-term financing or sell assets.

Question 17

Personal financing is good because it allows you to make purchases now without the full amount of cash on hand.

Question 18

Budgeting allows you to forecast how much money you will have at the end of each month so you can determine how much you will be able to invest in assets.

Question 19

Even though insurance costs cannot be used for building net worth, insurance should be given consideration before making investments.

Question 20

The more you spend, the less money you will have available for liquidity purposes or to make investments or to save for retirement.

Question 21

As time passes, your financial position and goals are likely to change, so you will need to revise your financial plan.

Question 22

You can improve your income by making withdrawals from an RRSP to fund education so that you can apply for higher-paying jobs.

Question 23

Maintaining all documents in a safe place and leaving instructions on their location is not necessary in the high-tech age.

Question 24

If your budget forecasts that your expenses will exceed income, you should also forecast any surplus.

Question 25

By constantly reviewing your financial plan you will make sure that all of its components are properly integrated to meet your goals.

Question 26

Normally, you should use all of your liquid assets to pay off your loan.

Question 27

You need life insurance, car insurance, and property insurance to protect your family, car, and property.

Question 28

The more money you contribute now to RRSPs and employer retirement plans, the more money you will have at retirement.

Question 29

To budget for savings or retirement, you should ensure that you have net cash flows every month.

Question 30

When incompetent, the only way you can make arrangements about decisions on your health care is to complete a non-durable power of attorney.

Question 31

Having a power of attorney will guarantee the preservation of your net worth should you become incapacitated.

Question 32

Most people set financial goals early in life and these goals rarely change.

Question 33

No financial plan is complete if it does not include a will.

Question 34

Property insurance provides your family or beneficiaries with financial support in the event of your death.

Question 35

RRSPs can contribute to net worth by making withdrawals to purchase a home.

Question 36

Although borrowing allows you to make purchases now, it restricts your future spending or saving.

Question 37

To monitor your financial plan over time, it is important to store finance-related documents in a safe and accessible place.

Question 38

Some retirement plans, such as RRSPs, are more liquid than other plans.

Question 39

The stocks of large, well-known firms tend to pay relatively stable dividends.

Question 40

Paying off loans rather than making additional investments is appropriate when the expected return is higher than the interest rates on loans.

Question 41

If you are looking for fast-growth stocks, you should look for stocks that do not pay dividends.

Question 42

Monitoring liquidity includes tracking your

A)RRSP balances.
B)emergency funds.
C)TFSA growth stocks.
D)bond mutual funds.

Question 43

Personal financing

A)allows you to make grocery purchases with your credit card.
B)increases the amount of your assets.
C)is useful for large purchases.
D)helps in increasing your ability to save.

Question 44

The first component in creating a financial plan is

A)preparing a budget.
B)setting up a brokerage account.
C)starting an emergency fund.
D)purchasing the necessary car insurance.

Question 45

You should not make investments after you have sufficient liquidity.

Question 46

To invest in mutual funds of small stocks is to look for stable dividend income.

Question 47

Which of the following is true?

A)You should use all of your liquid assets to pay off loans when the return on the investments is high.
B)Paying off loans is appropriate when the interest rate is high and you have enough liquidity.
C)Paying off loans is wise whenever the expected rate you will earn on investments is lower than the interest rate on the loan.
D)Loan payments will not restrict your spending and saving but may prevent you from achieving financial goals.

Question 48

What is meant by the financing trade-off?

A)Financing is a necessary evil and people today could not live without it.
B)Financing enables people to get what they want faster.
C)Over extending yourself on credit can lead to bankruptcy.
D)Borrowing is an important tool but it can cause budgeting problems.

Question 49

Financing does not allow you to make purchases now without having the full amount of cash on hand.

Question 50

What is the liquidity trade-off?

A)Determining the best liquid assets
B)Having enough liquid assets to cover cash deficiencies for one year in advance
C)Maintaining adequate liquidity to avoid borrowing every time you need money
D)Maintaining enough liquid assets to meet obligations and earning a higher return on other assets

Question 51

We should recognize how the components of our financial plan are independent of each other.

Question 52

The more you spend, the less money you will have available for other purposes.

Question 53

If you withdraw funds from your RRSP, the withdrawn amount will be taxed accordingly.

Question 54

Which of the following assets will increase your liquidity?

A)A higher balance in your chequing account
B)Ethical mutual fund investment
C)Cash in your RRSP
D)Defined-contribution plan

Question 55

You will need to revise your financial plan if your financial position changes.

Question 56

Insurance planning is the key to building your wealth over time.

Question 57

A disadvantage of paying off your mortgage with all your remaining liquid funds is that

A)you likely make higher interest with your liquid funds.
B)you could incur a surprise expense you cannot pay.
C)you might not be able to qualify for another loan.
D)early repayment could damage your credit rating.

Question 58

It is important to consider your goals before putting money into your investments or retirement accounts.

Question 59

A budget is not intended to help you determine

A)how much money you will have at the end of each month.
B)a plan for spending all of your income on current needs.
C)how much you can allocate for the future.
D)how to prevent excessive spending to achieve financial goals.

Question 60

Liquid assets usually generate

A)high returns.
B)returns similar to those of stocks.
C)returns similar to those of bonds.
D)lower returns.

Question 61

Which of the following increases your net worth?

A)An increase in your retirement savings
B)A pension plan
C)Borrowing to invest
D)The purchase of a new car

Question 62

To increase your net worth, you should

A)pay off a loan with cash flow.
B)spend all cash remaining in your budget.
C)invest in household assets.
D)buy a luxury car.

Question 63

Automobile insurance protects

A)your family.
B)your car and wealth.
C)your wealth.
D)your car and assets.

Question 64

Which of the following will increase your net worth over time?

A)Leasing a car
B)Renting a house
C)Buying a house
D)Term insurance

Question 65

Which of the following statements about insurance is true?

A)It protects you from events that could reduce your wealth.
B)Money used to buy insurance is wasted because you cannot invest it.
C)You cannot have too much insurance.
D)It should be given priority before you start investing.

Question 66

Disability insurance protects your

A)lifestyle.
B)income.
C)health.
D)net worth.

Question 67

Compared to the stocks of larger firms, the stocks of smaller firms are

A)less volatile.
B)more volatile.
C)more liquid.
D)safer.

Question 68

In deciding how much to contribute to your retirement, which of the following should you ignore?

A)Anticipated inheritances
B)Other financial goals
C)Liquidity needs
D)Current expenses

Question 69

If you are investing for long term growth in an RRSP, you should invest in

A)bonds.
B)stocks that pay cash dividends.
C)diversified and growth mutual funds.
D)guaranteed investment certificates.

Question 70

Which of the following investments reduces your taxable income?

A)Stocks
B)RRSP contributions
C)Mutual funds
D)Bonds

Question 71

Which of the following investments achieves the greatest diversification?

A)Stocks
B)Bonds
C)Mutual funds
D)Savings accounts

Question 72

If you want periodic income, which of the following investments should you purchase?

A)Bonds and dividend producing equities
B)Stocks that have high betas
C)Growth mutual funds
D)IPOs

Question 73

If you save monthly for retirement, which of the following would be used to determine how much you would ultimately have in your retirement account?

A)Present value of an annuity
B)Future value of an annuity
C)Present value of $1
D)Standard deviation

Question 74

Which of the following will decrease your net worth?

A)Increase your income
B)Decrease your expenses
C)Increase your assets
D)Increase your liabilities

Question 75

What is the disadvantage of retirement investments compared to other investments?

A)Low returns
B)Low liquidity
C)High risk
D)Low risk

Question 76

Which is the most expensive way to fund purchases?

A)Savings
B)Mortgage loans
C)Personal loans
D)Credit cards

Question 77

The purpose of insurance is to protect your

A)liabilities and expenses.
B)assets and liabilities.
C)assets and net worth.
D)income and expenses.

Question 78

You are 25 years old and saving for an early retirement. Assuming that you have a high risk tolerance, which of the following can best help you reach your goal of retiring early?

A)A bond fund
B)A money market fund
C)A growth fund
D)A dividend fund

Question 79

Which of the following should you do first?

A)Retirement savings
B)Pay off loans
C)Make a budget
D)Make investments

Question 80

In retirement you need income, so you should invest in

A)bonds and stable companies with dividends.
B)growth stocks.
C)strip bonds.
D)global mutual funds.