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Exam 25: Extension: Managing Personal Finances

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Question 21

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Pete wants life insurance to provide benefits for his family if he were to die. He also wants part of his premium to go into a savings plan that he will need if he lives to retirement age. His best strategy to achieve insurance and savings with one premium is term insurance.

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Question 22

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Luke and Beth were recently married soon after graduating from college. Although they incurred a significant amount of debt to finance their education, both recently got good-paying jobs and appear to have promising careers. Given their situation, down the road Luke and Beth:

A) are almost certain to be able to retire comfortably when the time comes, given the high level of income they are likely to earn.
B) could be able to retire comfortably, but doing so will take planning and discipline on their part.
C) have little chance of enjoying a comfortable retirement because the college debts will take years to repay and become a major burden.
D) will probably find that Social Security will provide an adequate retirement, but that they may need to supplement this with a modest pension if they really want to enjoy the fine life in their golden years.

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Question 23

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Which of the following would be included as an asset in the preparation of a personal balance sheet?

If you are in the 25 percent tax bracket and your home mortgage interest is $1,000 per month, then your after-tax mortgage interest cost is $750 per month.

Given a 25% tax bracket, the after-tax cost of a house mortgage interest payment of $1,000 would be:

The death benefits of a variable life insurance policy vary depending upon the performance of the investment.

Mini-Case Ira Roth and Penny Weiss met and married in the early 1990s, during their days at State University. Both came from families with limited financial resources. They had to work at part-time jobs during school, and still needed student loans to help pay for their college education. Ira and Penny shared a strong work ethic and had a great desire to succeed financially and enjoy the good life. Penny and Ira quickly experienced financial success in the latter half of the booming 1990s. Ira used his marketing major and extensive knowledge of computers to obtain a high-paying job in a successful dot-com business. Penny, who cleaned homes to earn money during college, used her experience to start her own business. Her entrepreneurial spirit surprised Ira and their friends, and she built a successful cleaning business with a growing base of residential clients and even a few commercial customers. She soon had to hire several part-time employees to keep up with demand. With money rolling in, Ira and Penny began to live the good life, buying an expensive new car, a state-of-the-art home entertainment center, and expensive wardrobes. As busy as they were, and as hard as they both worked, they often found it easier to dine at a nice restaurant rather than fix meals at home. When the dot-com bubble burst in the early 2000s, Ira was lucky enough to keep his job, but was forced to take a significant pay cut. The economic downturn forced some of the households and businesses that used Penny's company to cut back on professional cleanings, so her business suffered too. Soon the couple was struggling to pay the rent on their upscale apartment. They began relying on credit cards to cover expenses, but after a few months the credit limits on their cards had been reached. They fell behind in paying off their student loans and started getting some unpleasant calls from bill collectors. The stress and frustration led to arguments that began to threaten their personal relationship. With their personal finances out of control, Ira and Penny knew that they had to make changes to save not only their financial dreams, but also their marriage. However, they were at a loss as to where to start. Family members encouraged them to seek the advice of a financial planner. The couple reluctantly agreed that this was something they needed to do. -One of the first things the financial planner is likely to have them do would be to:

Listing all of your personal assets is the first step in preparing your own income statement.

The people who assist families in developing a comprehensive program that covers investments, taxes, insurance, and retirement plans are called:

Wendy wants to obtain life insurance at the lowest possible cost, but is leery of term insurance because she has heard the premiums tend to go up every few years. One way for her to avoid this concern would be to purchase multiyear level-premium insurance.

The tax-sheltered program to encourage self-employed people to accumulate retirement funds is called a(n) :

An advantage of both traditional and Roth IRAs is that both the income invested and the earnings from these investments are never taxed.

House payments tend to rise at a faster rate than do rent payments on a similar sized house.

Most financial experts will tell you to save about one month's earnings for contingency purposes.

The first step you would take to get control of your personal finances is to:

It is usually better to use any money left after paying monthly bills to pay off debts that carry high interest rates rather than putting that money into a savings account.

Earnings of Keogh plans are not taxed until the funds are withdrawn from the retirement account.

The best financial planners are actually insurance salespeople.

It is likely that young adults today will benefit from the recent trend in the Social Security system to increase benefits and expand the cost-of-living adjustments.

If you find yourself regularly running out of cash, your only real option is to focus your attention on finding ways to increase your income.