Budgeting & Debt Management Flashcards
6 cards from real AFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Budgeting & Debt Management flashcards as text
A couple earning $6,000 monthly has fixed expenses of $3,200 and variable expenses averaging $2,100. What is the recommended first step in their financial counseling session?
Answer: Track actual spending for 30 days to identify specific variable expense categories
Before making changes, accurate spending data is essential. A 30-day tracking period reveals where money actually goes versus where clients think it goes.
Which financial ratio measures a household's ability to cover basic living expenses from liquid assets if all income ceased?
Answer: Basic liquidity ratio
The basic liquidity ratio (liquid assets divided by monthly expenses) measures how many months a household could sustain itself without income.
A client consistently overspends on dining and entertainment by $400 per month despite having a budget. Which behavioral intervention is most effective for this pattern?
Answer: Switching to a cash envelope system for discretionary categories
The cash envelope system creates a physical spending constraint that makes overspending impossible once the allocated cash is gone.
When a client has both a car loan at 4.5% APR and credit card debt at 19.8% APR, what does the debt avalanche method prescribe?
Answer: Focus extra payments on the credit card debt first since it has the highest interest rate
The debt avalanche method targets the highest interest rate debt first, saving the most money in total interest charges over the repayment period.
What percentage of gross income do most financial counseling standards recommend as the maximum housing expense ratio?
Answer: 28%
The standard front-end housing expense ratio should not exceed 28% of gross monthly income, including mortgage/rent, property taxes, insurance, and HOA fees.
A client has received a $5,000 tax refund and has both an emergency fund shortfall and high-interest debt. As a financial counselor, what is the recommended allocation approach?
Answer: Split the refund between the emergency fund and debt repayment based on urgency
A balanced approach that addresses both the emergency fund shortfall and high-interest debt provides both financial security and debt reduction progress.