Question 1

The two most critical elements of one's finances are personal net worth and personal cash flow.

Accepted Answer

While it is possible to track all kinds of information over time, the two most critical elements of your finances are your personal net worth and your personal cash flow. The information necessary for these two measures is often required by lending institutions on loan applications, so keeping it up to date can save you time and effort later.

Question 2

Nearly everyone should include retirement planning as a long-term objective.

Accepted Answer

Nearly everyone should include retirement planning as a long-term objective. Long-term goals are those that require substantial time to achieve.

Question 3

A budget shows what you are doing with your money currently.

Accepted Answer

Whereas the cash flow table you completed in the previous section tells you what you are doing with your money currently, a budget shows what you plan to do with it in the future. A budget can be for any period of time, but it is common to budget in monthly and/or annual intervals.

Question 4

Borrowing money to buy an asset that appreciates in value by more than the cost of the debt is a terrific way to invest.

Accepted Answer

Borrowing money to buy an asset that appreciates in value by more than the cost of the debt is a terrific way to invest.

Question 5

Investing for 35 years instead of 45 years does not amount to a huge difference in your retirement wealth.

Accepted Answer

Thirty-five years of investing instead of 45 doesn't sound like a big difference, but it cuts your retirement wealth in half. The earlier you start investing, the better off you will be.

Question 6

All of the following are steps in the development and implementation of an effective financial plan EXCEPT

Accepted Answer

To develop and implement an effective financial plan, you must evaluate your financial health, set short-term and long-term financial goals, create and adhere to a budget, manage credit wisely, develop a savings and investment plan, evaluate and purchase insurance, develop an estate plan, and adjust your financial plan to new circumstances.

Question 7

Tracey keeps an ongoing spreadsheet to keep track of her income, expenses, and overall financial condition. What two items are the most critical elements of her finances that she should track?

Accepted Answer

While it is possible to track all kinds of information over time, the two most critical elements of your finances are your personal net worth and your personal cash flow. The information necessary for these two measures is often required by lending institutions on loan applications, so keeping it up to date can save you time and effort later.

Question 8

Personal net worth is best defined as the total value of

Accepted Answer

Personal net worth is simply the total value of all personal assets less the total value of unpaid debts or liabilities.

Question 9

Margo is a college student who has student loans and a car loan. She currently works a part-time job at a clothing store, but most of this income goes toward her rent. Based on this scenario, Margo most likely has a(n) ________ net worth.

Accepted Answer

Based on this scenario, Margo most likely has a negative net worth. This is common among students who are not yet earning enough to have accumulated significant assets, such as a house or stock portfolio. However, students are likely to have incurred various forms of debt, including student loans, car loans, and credit card debt. At this stage in life, negative net worth is not necessarily an indication of poor future financial prospects.

Question 10

Sandy is a 50-year-old woman who has a negative net worth. All of the following are possible causes for this situation EXCEPT

Accepted Answer

Unfortunately, there are many people, like Sandy, in the United States who have negative net worth much later in their lives. This can result from unforeseen circumstances, like divorce, illness, or disability, but the easy availability of credit in the last couple of decades has also been blamed for the heavy debt loads of many American families. The most recent recession, caused partially by excessive risk-taking, has resulted in many bankruptcies and housing foreclosures. No matter the immediate trigger, it is usually poor financial planning-the failure to prepare in advance for those unforeseen circumstances-that makes the difference between those who fail and those who survive.

Question 11

Amir has a savings and checking account with an average balance of $32,000, a 401(k) account with his company, a house, and a car. These are examples of

Accepted Answer

These are examples of assets, which are all the things you own that have value. On the left-hand side of the balance sheet, you should include assets such as savings and checking account balances, investments, furniture, books, clothing, vehicles, houses, and the like. Assets are usually arranged from most liquid (easily convertible to cash) to least liquid.

Question 12

Anya recently bought a house and took out a $250,000 mortgage. She also used her credit card to buy furniture for her house, and she is on a payment plan to pay for these purchases. These are examples of

Accepted Answer

These are examples of liabilities, which are amounts of money that you owe to others. The right-hand side of the balance sheet is for recording liabilities such as bank loans, mortgages, credit card debt, and other personal loans. They are usually listed in the order of how soon they must be paid back to the lender.

Question 13

Any time you receive money or pay for something, the dollar amount that is moving from one person to another is a(n)

Accepted Answer

Any time you receive cash or pay cash, including payments with checks, the dollar amount that is moving from one person to another is a cash flow.

Question 14

Tonya is a single mother who works as a server at a restaurant. Her paychecks, tips, and child support payments are examples of

Accepted Answer

Tonya's paychecks, tips, and child support payments are cash inflows. Any time you receive cash, the dollar amount moving from another person to you is a cash inflow.

Question 15

Wendell owns a house. All of the following are cash outflows he might have for his house EXCEPT

Accepted Answer

Mortgage payments, utility payments, furniture purchases, and home insurance payments would be cash outflows. The rent he collects from a tenant would be a cash inflow. Any time you pay cash, the dollar amount moving from you to another person is a cash outflow.

Question 16

It is important that you have enough ________ to cover your cash outflows.

Accepted Answer

Although it may seem obvious that you need to have enough inflows to cover the outflows, it is very common for people to estimate incorrectly and overspend.

Question 17

Tamika went on a shopping spree and bought clothing, shoes, and furniture with her credit card. When should she add these purchases to her cash flow statement?

Accepted Answer

Because credit card purchases do not require payment of cash now, Tamika's cash flow statement should not reflect the value of her purchases as outflows until after she pays the bill.

Question 18

Which action results in living beyond your means, thus making your balance sheet more and more "upside down" over time?

Accepted Answer

If you purchase on credit and only pay minimum balances, you will be living beyond your means, and your balance sheet will get more and more "upside down."
If you always pay your credit card balances in full each month, the purchases are really the same thing as cash, and your balance sheet will never reflect the debt.

Question 19

Carl doesn't spend a lot money on big-ticket items. However, he is surprised to find that he is spending more money than he thinks he is every month. All of the following are little expenditures that he might not notice that can add up to a lot EXCEPT

Accepted Answer

Like Carl, many people are surprised to find that they are spending more than they make or that they have significant cash leakage; those little expenditures add up to a lot without their even noticing. Examples include afternoon lattes or snacks, too many nights out at the local pub, eating lunch out instead of packing a bag, and regularly paying for parking instead of biking or riding the bus.

Question 20

Just as a business develops its vision and strategic plan, individuals should have a

Accepted Answer

Just as a business develops its vision and strategic plan, individuals should have a clear set of financial goals. This component of your financial plan is the roadmap that will lead you to achieving your short-term and long-term financial goals.

Quiz 17: Personal Financial Planning and Legal and Regulatory Environment

The two most critical elements of one's finances are personal net worth and personal cash flow.

Nearly everyone should include retirement planning as a long-term objective.

A budget shows what you are doing with your money currently.

Borrowing money to buy an asset that appreciates in value by more than the cost of the debt is a terrific way to invest.

Investing for 35 years instead of 45 years does not amount to a huge difference in your retirement wealth.

All of the following are steps in the development and implementation of an effective financial plan EXCEPT

Tracey keeps an ongoing spreadsheet to keep track of her income, expenses, and overall financial condition. What two items are the most critical elements of her finances that she should track?

Personal net worth is best defined as the total value of

Margo is a college student who has student loans and a car loan. She currently works a part-time job at a clothing store, but most of this income goes toward her rent. Based on this scenario, Margo most likely has a(n) ________ net worth.

Sandy is a 50-year-old woman who has a negative net worth. All of the following are possible causes for this situation EXCEPT

Amir has a savings and checking account with an average balance of $32,000, a 401(k) account with his company, a house, and a car. These are examples of

Anya recently bought a house and took out a $250,000 mortgage. She also used her credit card to buy furniture for her house, and she is on a payment plan to pay for these purchases. These are examples of

Any time you receive money or pay for something, the dollar amount that is moving from one person to another is a(n)

Tonya is a single mother who works as a server at a restaurant. Her paychecks, tips, and child support payments are examples of

Wendell owns a house. All of the following are cash outflows he might have for his house EXCEPT

It is important that you have enough ________ to cover your cash outflows.

Tamika went on a shopping spree and bought clothing, shoes, and furniture with her credit card. When should she add these purchases to her cash flow statement?

Which action results in living beyond your means, thus making your balance sheet more and more "upside down" over time?

Carl doesn't spend a lot money on big-ticket items. However, he is surprised to find that he is spending more money than he thinks he is every month. All of the following are little expenditures that he might not notice that can add up to a lot EXCEPT

Just as a business develops its vision and strategic plan, individuals should have a