FFC Personal Financial Planning 2 — Questions and Answers
Question 1: A client has $10,000 in credit card debt at 22% APR and $5,000 in savings earning 1.5%. What is the most financially optimal action?
- Keep savings intact for emergencies and make minimum payments
- Use $5,000 from savings to pay down the credit card debt
- Transfer the balance to a 0% introductory APR card and keep savings (Correct answer)
- Invest the savings in the stock market for higher returns
Correct answer: Transfer the balance to a 0% introductory APR card and keep savings
A 0% balance transfer eliminates the 22% interest while preserving liquid savings, making it the most cost-effective strategy.
Question 2: Which financial planning principle states that a dollar received today is worth more than a dollar received in the future?
- Compound interest principle
- Time value of money (Correct answer)
- Law of diminishing returns
- Opportunity cost principle
Correct answer: Time value of money
The time value of money recognizes that money available now can be invested to earn returns, making it worth more than the same amount received later.
Question 3: A couple has a combined gross income of $120,000 and wants to buy a home. Using the 28/36 rule, what is the maximum monthly housing payment they should target?
- $2,000
- $2,800 (Correct answer)
- $3,600
- $3,000
Correct answer: $2,800
The 28% front-end ratio applied to $120,000 annual income ($10,000/month) yields a maximum housing payment of $2,800.
Question 4: What is the primary purpose of a personal net worth statement?
- To calculate monthly cash flow
- To determine credit score eligibility
- To measure total financial position by comparing assets to liabilities (Correct answer)
- To project future income and expenses
Correct answer: To measure total financial position by comparing assets to liabilities
A net worth statement is a financial snapshot that subtracts total liabilities from total assets to reveal overall financial health.
Question 5: Which type of insurance is specifically designed to replace lost income if a client becomes disabled and cannot work?
- Term life insurance
- Disability income insurance (Correct answer)
- Long-term care insurance
- Critical illness insurance
Correct answer: Disability income insurance
Disability income insurance provides a portion of pre-disability income if the insured becomes unable to work due to illness or injury.
Question 6: A client's monthly take-home pay is $4,500. According to the 50/30/20 budgeting rule, how much should go toward savings and debt repayment?
- $675
- $900 (Correct answer)
- $1,350
- $2,250
Correct answer: $900
The 20% savings/debt repayment category applied to $4,500 monthly take-home pay equals $900.
Question 7: What does the term 'liquidity' refer to in personal financial planning?
- The interest rate earned on investments
- The ease and speed with which an asset can be converted to cash without significant loss (Correct answer)
- The total value of all investment accounts
- The ratio of income to expenses
Correct answer: The ease and speed with which an asset can be converted to cash without significant loss
Liquidity describes how quickly and easily an asset can be converted to cash, which is critical for meeting short-term financial obligations.
FFC Personal Financial Planning 2
A client has $10,000 in credit card debt at 22% APR and $5,000 in savings earning 1.5%.
What is the most financially optimal action?