Term
| What are the consequences of neglecting personal financial planning? |
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Definition
| A person who failes to plan is unlikely to achieve personal financial goals. If the person does not have objectives clearly defined, his or her actions are unlikely to be focused toward achievement of a goal. Developing sufficient assets for retirement is not likely if a person has not been planning and pursuing a plan for retirement saving and investing. Neglecting planning can also have added costs for a person or family. Failing to obtain insurance for liability or property losses can be very expensive for a family. Failing to set aside money for education can mean a family is unable to obtain higher education for a child. Failing to plan for income tax reduction means a person is paying more than is necessary for taxes. |
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Term
| Identify a personal balance sheet and personal income statement and briefly explain why they are important in financial planning. |
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Definition
| A personal balance sheet shows the assets, liabilities, and net worth of a person. A personal income statement shows the person's income, expenses, and taxes or cash inflows and outflows, and it shows the balance available for discretionary investment. The balance sheet and income statement are a useful way to summarize the information gathered about a person for purposes of personal financial planning. These statements will reveal an enormous amount of information about the present situation of the person and the areas where there are deficiencies in meeting objectives. |
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Term
| Explain why the personal financial planning process includes a step of periodic review and revision. |
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Definition
| A person's or family's situation will change over time. Economic conditions change, and families undergo marriage, divorce, births, or deaths. Over the course of a person's life, financial planning objectives may change. The plan must be reconsidered and reviewed to adjust for these changes. |
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Term
| Explain the personal risk of custodial care expenses and identify two ways of dealing with the risk. |
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Definition
| Custodial care expenses are incurred to take care of persons who are no longer able to perform the normal activities of daily living. Custodial care is usually associated with old age, but can be required when a person is disabled. Custodial care can be at various levels and costs, but generally it is quite expensive. The care is distinguished from acute medical care for injuries and illnesses. Protection for custodial care expenses is obtained with long-term care insurance and Medicaid. It can also be provided by other personal or family assets. |
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Term
| With regard to an emergency fund, explain the need, the size, and the investment of assets held in such a fund. |
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Definition
An emergency fund is for unexpected expenses, such as unusual medical expenses, property or liability losses, or disabilities. It is also used to provide a buffer against unanticipated loss of employment or drop in income. The emergency fund should be 3 to 6 months of the family's income. The fund should be invested conservatively. |
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Term
| Explain what is meant by the incapacity exposure and identify one way to deal with it. |
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Definition
| The incapacity exposure is the risk that a person may suffer an accident or illness, or, as a result of old age, become physically or mentally unable to manage his or her property or personal affairs. To deal with the incapacity exposure, a person might execute powers of attorney or establish a revocable living trust. |
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Term
| Compare inflation and deflation and contrast the ways in which an investor should protect for inflation and deflation. |
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Definition
| Inflation is a general increase in the price level for goods and services. Deflation is a general decline in price levels. To protect from inflation, one needs to obtain increasing amounts of income and increasing values of assets to maintain purchasing power. One invests in assets that will grow in value, such as common stock. To protect from deflation, one needs to maintain one's income and the value of assets. One invests in conservative assets that have guaranteed or secure sources of income, such as bonds. |
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Term
| Explain the large-loss principle of insurance buying. |
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Definition
| The determining factor in the decision to insure is the severity of the loss, rather than its frequency. A loss that will wipe out a family financially or that will have a substantial negative impact on net worth should be insured, even though its probability of occurrence is low. |
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Term
| Identify two of the independent rating services for insurance companies. |
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Definition
| The most widely followed rating services are Moody's, A.M. Best, and Standard & Poor's. Other services are Duff & Phelps and Weiss Research |
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Term
| Explain some of the key provisions included in the Economic Growth and Tax Relief Reconsiliation Act of 2001. |
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Definition
1. Decrease in income tax rates for individual taxpayers starting in 2001. 2. Income tax relief for married taxpayers, beginning in 2005. 3. Educational savings accounts and qualified tuition programs to help families save money for college, starting in 2002. 4. Higher contribution limitations and deduction thresholds for IRAs and other retirement plans, starting in 2002 to allow taxpayers to save more for retirement. 5. Creation of Roth 401(k) plans, starting in 2006, that would allow for tax-free distributions similar to Roth IRAs created under the 1997 Tax Act. 6. Higher applicable exclusion amounts for estate tax and generation-skipping transfer taxes, starting in 2002 with the eventual repeal of both taxes in 2010. 7. Elimination of the step-up in basis while the estate tax is repealed during 2010. |
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