FFC Personal Financial Planning 3 — Questions and Answers
Question 1: A financial fitness coach is helping a client prioritize financial goals. Which framework helps clients rank goals by time horizon and importance?
- SMART goal framework
- Priority matrix using short-term, mid-term, and long-term categories (Correct answer)
- Debt avalanche method
- Monte Carlo simulation
Correct answer: Priority matrix using short-term, mid-term, and long-term categories
Categorizing goals by time horizon (short, mid, long-term) combined with importance allows clients to allocate resources strategically.
Question 2: Which of the following best describes 'dollar-cost averaging'?
- Investing a lump sum when the market is at its lowest point
- Investing a fixed dollar amount at regular intervals regardless of market price (Correct answer)
- Rebalancing a portfolio to match target allocations quarterly
- Buying only the lowest-priced shares available
Correct answer: Investing a fixed dollar amount at regular intervals regardless of market price
Dollar-cost averaging reduces the impact of market volatility by spreading purchases over time at varying prices.
Question 3: What is the difference between a traditional IRA and a Roth IRA in terms of tax treatment?
- Traditional IRA contributions are post-tax; Roth IRA withdrawals are taxed
- Traditional IRA contributions may be tax-deductible; Roth IRA qualified withdrawals are tax-free (Correct answer)
- Both accounts are taxed at the same rate upon withdrawal
- Roth IRA contributions are tax-deductible; Traditional IRA withdrawals are tax-free
Correct answer: Traditional IRA contributions may be tax-deductible; Roth IRA qualified withdrawals are tax-free
Traditional IRAs may offer upfront tax deductions with taxable withdrawals, while Roth IRAs use after-tax contributions to allow tax-free qualified withdrawals.
Question 4: A client wants to accumulate $50,000 for a home down payment in 5 years. Assuming a 6% annual return, approximately how much must they invest monthly?
- $718 (Correct answer)
- $833
- $1,000
- $550
Correct answer: $718
Using a future value of annuity calculation at 6% annually (0.5% monthly) over 60 months, the required monthly contribution is approximately $718.
Question 5: Which component of a comprehensive financial plan addresses the transfer of assets to heirs upon death?
- Investment planning
- Estate planning (Correct answer)
- Risk management
- Tax planning
Correct answer: Estate planning
Estate planning covers wills, trusts, beneficiary designations, and strategies to transfer wealth efficiently upon death.
Question 6: What is the primary risk of relying solely on an employer-sponsored group life insurance policy?
- It earns no cash value over time
- Coverage typically ends when employment ends, leaving the client uninsured (Correct answer)
- The premiums are higher than individual policies
- It does not cover accidental death
Correct answer: Coverage typically ends when employment ends, leaving the client uninsured
Group life insurance is tied to employment, so losing a job or changing employers can eliminate coverage with no portability guarantee.
Question 7: A client asks about the Rule of 72. If their investment earns 8% annually, approximately how many years will it take to double?
- 6 years
- 8 years
- 9 years (Correct answer)
- 12 years
Correct answer: 9 years
The Rule of 72 divides 72 by the annual interest rate: 72 ÷ 8 = 9 years to double the investment.
FFC Personal Financial Planning 3
A financial fitness coach is helping a client prioritize financial goals.
Which framework helps clients rank goals by time horizon and importance?