Intro to Financial Planning Lession 1
Terms
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- What are the six stages of the financial planning process?
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Establishing the client's financial goals and objectives and defining the relationship between the planner and the client
Gathering data
Processing and analyzing information
Recommending the plan
Implementing the plan
Monitoring the plan - What are the advantages/disadvantages of using a directive approach in an interview?
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Advantages:
Brief
Provides measurable data
Disadvantages:
Inflexible
Does not allow interviewee input as to topics - What are the advantages/disadvantages of using a non-directive approach in an interview?
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Advantages:
More in-depth responses are gathered
Closer relationship between parties is established
Disadvantages:
Is more time consuming
Generates subjective data which may be difficult to evaluate - What are the five basic physical attributes associated with physical attention?
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S - Face the other person Squarely.
O - Adopt an Open posture.
L - Lean toward the other person.
E - Maintain good Eye contact.
R - Be Relaxed while attending - Describe the M1 concept
- M1 - Coins and currency in circulation plus personal demand deposits in banks and other financial institutions. (This is the most liquid measure)
- Describe the M2 concept
- M2 - Represents the aggregate total of all money in circulation, including M1 plus saving accounts in savings institutions; traveler's checks and most money market accounts. (M2 is generally 4 times as large as M1.)
- Describe the M3 concept
- M3 - Includes M2 plus institutional money market funds large denomination time deposits and certain less spendable assets such as repurchase agreements.
- discount rate
- the borrowing rate from the Federal Reserve
- Fed Funds Rate
- the lending rate BETWEEN member banks
- Price
- amount of money seller is willing to accept in exchange for given quantity of good or service (e.g. $1.00 per gallon)
- Inflation
- is the increasing of the general level of prices and services over time. The end result is a drop in purchasing power. Its most common measure is CPI (Consumer Price Index), published monthly by the Bureau of Labor Statistics. It is important to note that not only individual consumers, but also businesses, government agencies and foreign markets are impacted by rising price levels.
- Deflation
- the opposite of inflation, and occurs when the general level of prices is falling.
- Disinflation
- occurs when the overall level of prices continues to rise, but its growth rate is slowing. The most likely time to observe this trend is during a recession.
- Hyperinflation
- occurs when inflation is extremely pronounced (such as in 1923 Germany when prices skyrocketed more than 2000% in one month).
- The Consumer Price Index
- a weighted average measuring the changes in the prices paid for goods and services by consumers for a specific time period. It does not include every item that an individual consumer might use, but instead measures a sampling of several hundred goods and services.
- Interest Rate
- the price of money.
- Nominal Interest Rate
- measures the yield in dollars per year per dollar invested.
- How is the Real Interest Rate determined?
- determined by adjusting the nominal interest rate for the rate of inflation
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What economic cycle does this describe?: Declining demand for goods and services
Decreased production
Prices begin to decline
Industrial output and industrial production will fall
Businesses cut back on inventory and production - Trough to Recovery
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WhatWhat economic cycle does this describe?: Economic activity increases
Employment and incomes are up
Consumer sentiment improves
Spending increases
Profits increase early on
Wages, interest rates lag behind costs
Lab - Recovery to Expansion
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What economic cycle does this describe?: Demand remains strong
Temporary shortages
Lagging costs and wages catch up with prices
As limits on monetary expansion are reached, interest rates rise
Inventories and capital goods expendi - Expansion to Peak
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What economic cycle does this describe?: Psychological factors come into play
Prices begin to fall/profits are squeezed
Costs and wages are slow to fall/lag behind prices
Declines in production and employment
Inventory liquidation - Peak to Contraction
- Substitution effect
- As the cost of a certain product increases, consumers tend to substitute another similar product.
- Income effect
- As the cost rises further, consumers may simply reduce consumption.
- Market Equilibrium
- is said to exist at the price and quantity where Supply and Demand are in balance.
- Price Elasticity
- the responsiveness of the quantity demanded to changes in the product's price (all other things being the same).
- When is a product considered elastic?
- if its quantity demanded responds greatly to price changes.
- When is a product considered inelastic?
- when its quantity demanded responds little to price changes.
- What is believed to be the main determinant of quality of life?
- standard of living with wealth playing an important part
- Average propensity to consume
- The percentage of each dollar of income that is spent currently, rather than saved or how much we spend of what we make
- Fiscal policy
- used to stimulate or slow economic activity
- monetary policy
- Controls the amount of money in circulation
- CPI
- Consumer Price Index a measure of inflation based on the changes in the cost of a market basket of consumer goods and services
- GDP
- Gross Domestic Product the total of all goods and services produced by workers located within a country. It is used to measure economic growth