Review Questions, Chapter 1
1a. As for the single parent of two school-aged children who is currently unemployed the most important financial goals would be to obtain appropriate career training, seek employment, and create a flexible budget to follow. They should also reduce their debt level and have an emergency savings fund. Some specific financial activities would be to obtain adequate amounts of health, life, and disability insurance while finding the means to contribute towards a savings account and an investment fund for college. Naming a guardian for their children and making any other necessary estate plans is also essential.
1b. A dual-income couple in their 40’s with no children should coordinate insurance coverage and other benefits, develop a savings and investment program for future life situations, and consider tax-deferred contributions to a retirement fund. Assessing progress towards long-term financial goals should also be a priority.
1c. A couple with a child and one on the way should have an effective financial record keeping system, along with a regular savings and investment program, which includes an emergency fund. Some specifics would be to carefully manage the increased need for the use of credit, have appropriate life insurance for the care of dependents, and a will to name a guardian for the children.
1d. A woman supporting a school-aged child and her retired father should have an emergency fund, regular savings and investment program along with a strong financial record keeping system. Specialized financial activities should include obtaining long-term health care insurance and life/disability income towards the care of her child. If needed, use a dependent care service. If her father becomes ill arrangements should be provided for handling his finances. Investment cost splitting should also be considered, which would allow the principal to go to surviving relatives.
2. Current interest rates will determine the financial opportunity cost. The time value of money is the increase in an amount of money as a result of interest earned.
3. Future value, also referred to as compounding, is the amount to which current savings will increase based on a certain interest rate and a specific time period. Present value, which is calculated through a process called discounting, is the current value for a future amount based on a certain interest rate and a certain time period.
4. A financial plans purpose is to help you become financially responsible. To determine where and how you want your money saved