Savings Strategies and Emergency Fund Planning Flashcards
7 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 7 Savings Strategies and Emergency Fund Planning flashcards as text
A client has $8,000 in emergency savings and monthly essential expenses of $3,200. Their emergency fund coverage ratio is approximately:
Answer: 2.5 months
$8,000 ÷ $3,200 = 2.5 months of coverage, which is below the typical 3-6 month recommendation.
Which psychological concept explains why people save more effectively when savings are held in a separate account labeled 'Emergency Fund' rather than a general savings account?
Answer: Mental accounting
Mental accounting causes people to treat money differently based on its labeled purpose, making a dedicated emergency fund account less likely to be spent impulsively.
A client is rebuilding their emergency fund after using it. Which savings automation strategy is most effective for rapid rebuilding?
Answer: Set up bi-weekly automatic transfers aligned with paycheck deposits
Bi-weekly automatic transfers aligned with paycheck deposits ensure consistent contributions before discretionary spending occurs.
Under the bucket strategy for savings, which bucket should contain emergency fund money?
Answer: Liquidity bucket (cash and cash equivalents)
Emergency funds belong in the liquidity bucket, which holds cash and cash equivalents that can be accessed immediately without market risk.
A client in a dual-income household where both partners work in the same industry asks about emergency fund sizing. What is the AFC's best recommendation?
Answer: 6 months or more, since both jobs could be at risk simultaneously in an industry downturn
When both partners work in the same industry, a sector-wide downturn could threaten both jobs simultaneously, warranting a larger emergency fund of 6+ months.
Which of the following is NOT considered an appropriate use of an emergency fund?
Answer: Down payment on a vacation home opportunity
A vacation home down payment is a discretionary planned purchase, not an emergency; it should be funded through a separate sinking fund.
A client asks why financial counselors recommend keeping emergency funds in a high-yield savings account rather than a money market mutual fund. What is the most accurate answer?
Answer: High-yield savings accounts are FDIC-insured while money market mutual funds are not
High-yield savings accounts carry FDIC insurance up to $250,000, while money market mutual funds are not federally insured, making savings accounts safer for emergency reserves.