Term
What is personal financial planning? |
|
Definition
| The essential elements of personal financial planning are: (1) developing a coordinated plan for a person, (2) treating all of an individual's financial objectives, and (3) considering the overall financial affairs of the individual |
|
|
Term
| Why do many people fail to do personal financial planning? |
|
Definition
| There are many reasons people fail to plan for their personal finances. They may feel that they have insufficient assets or income to merit the entire process of financial planning. They may be dissuaded by the cost of planning. Many people may simply procrastinate or may actually fear thinking abou the unpleasant subjects of death, disability, incapacity, or loss. Some people may refrain from personal financial planning because they feel their affairs are already adequately arranged. |
|
|
Term
| What are the five steps of the financial planning process? |
|
Definition
1. Gathering information and arranging it into personal financial statements 2. Setting goals and identifying objectives 3. Analyzing a person's present situation and considering alternatives. 4. Preparing a recommended plan and implementing it. 5. Reviewing and revising the plan. |
|
|
Term
| Describe the five categories of financial losses that may result from an individual's premature death. |
|
Definition
1. loss of future earning power 2. unpaid debt and costs of death, such as funeral bills 3. increased expenses for the family to replace an individual's services 4. reduction in business values from loss of a key person 5. estate shrinkage due to estate and death taxes and probate costs |
|
|
Term
| What are some of the personal risks, other than death, for which people need to plan? |
|
Definition
| People need to plan for the personal risks of: 1) disability which can cause income loss and additional health expenditures; 2) physical or mental incapacity which prevents people from handling their own affairs; 3) injury, illness, or old age, which require medical care and sometimes custodial or long-term care; and 4) property and liability losses |
|
|
Term
| Why would people want to accumulate capital? |
|
Definition
| People accumulate capital for an emergency fund, for education needs, for retirement needs, and for an investment fund. An emergency fund is usually 3 to 6 months of the family's income and is for unexpected family expenses. An education fund is to pay for the cost of higher education for family members. An accumulation of capital for retirement needs is to enable a person to live independently after retiring. An investment fund may be for many different purposes, such as to improve the family's future standard of living or to provide greater financial security. |
|
|
Term
| Describe five basic tax-saving techniques that form the foundation of a variety of tax savings plans. |
|
Definition
| 1. Eliminating or reducing the income tax, such as by investing in tax-exempt municipal bonds; 2. shifting income to individuals in lower income tax brackets; 3. postponing income tax by accumulating wealth in tax-deferred vehicles, such as an IRA; 4. investing for capital gains rather than dividend or interest income; and 5. avoiding recognition of capital gains, so no tax is owed, such as by exchanges of properties rather than a sale. |
|
|
Term
What are the three ways in which investment advisors operate? |
|
Definition
| 1. discretionary basis- the advisor makes the decisions without consulting the client; 2. client decides- the advisor and client consult extensively before any investment decisions are made, but the client makes the actual decision; and 3. consultation- the advisor makes the decisions, but consults w/the client to advise him or her of the decisions and reasons. |
|
|
Term
| What is the "sunset provision" of EGTRRA? |
|
Definition
Causes all of the provisions of the 2001 Tax Act to expire as of December 31, 2010. Congress was required to sunset the provisions under the "Byrd Amendment," which requires all bills that are not revenue neutral or revenue positive to expire w/in 10 yrs. |
|
|
Term
| Contrast risk management and insurance. |
|
Definition
Insurance is one of the techniques that can be used in risk management. Risk management involves using various techniques to deal with risk. The techniques include transferring risks, avoiding risk, preventing and reducing loss, and loss retention. Insurance is the most important technique for transferring risk of loss. |
|
|
Term
| Although no foolproof rules exist on how to determine whether an insurer is financially secure, what are some general observations to follow? |
|
Definition
1. Look for high ratings by at least two independent rating services. 2. Check that the insurer is subject to regulation in a state with an effective insurance regulator, such as New York. 3. Watch the financial news for reports on insurers. 4. Avoid an insurer whose rates are far out of line on comparable products. 5. Generally, deal with insurers with stability and proven financial soundness over a long period of time. 6. Evaluate alternative policies and insurers when an existing insurer weakens financially |
|
|
