AAFM Financial Planning Principles Flashcards

A client can save $500 monthly and needs $60,000 for a down payment in five years. Which concept most directly helps determine if the goal is achievable?

Answer: Future value of an annuity

Regular monthly contributions growing over time are evaluated using future value of an annuity.

Which factor causes money received today to be worth more than the same amount received in the future?

Answer: Its potential to earn a return over time

The time value of money reflects that present funds can be invested to grow.

A client's investments earn 8% but inflation is 3%. What is the approximate real rate of return?

Answer: About 5%

The real return roughly equals the nominal return minus inflation, about 5%.

Which emergency fund guideline is most commonly recommended in financial planning?

Answer: Three to six months of living expenses

A reserve of three to six months of expenses covers most income disruptions.

Under the Rule of 72, how long does it take money to double at a 6% annual return?

Answer: About 12 years

Dividing 72 by the interest rate of 6 gives approximately 12 years to double.

A high debt-to-income ratio primarily signals which concern for a client's financial health?

Answer: Reduced capacity to take on new obligations

A high debt-to-income ratio shows that a large share of income services debt, limiting flexibility.

Which statement best describes the purpose of dollar-cost averaging?

Answer: Investing fixed amounts regularly to reduce timing risk

Investing a set amount on a schedule smooths purchase prices and reduces timing risk.