AAFM AAFM Financial Planning Principles 3

Question 1

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?

Accepted Answer

Future value of an annuity

Answer

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

Question 2

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

Accepted Answer

Its potential to earn a return over time

Answer

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

Question 3

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

Accepted Answer

About 5%

Answer

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

Question 4

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

Accepted Answer

Three to six months of living expenses

Answer

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

Question 5

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

Accepted Answer

About 12 years

Answer

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

American Academy of Financial Management (AAFM) Practice Test

American Academy of Financial Management (AAFM) Practice Test

AAFM AAFM Financial Planning Principles 3