AFC Developing Financial Plans 4 — Questions and Answers
Question 1: A client wants to retire in 20 years with $1.5 million. Assuming a 7% annual return, which approach best estimates the required monthly savings?
- Divide $1.5M by 240 months
- Use a future value of annuity formula (Correct answer)
- Multiply current savings by the inflation rate
- Apply the Rule of 72 to current assets
Correct answer: Use a future value of annuity formula
The future value of an annuity formula accounts for compounding returns over time to determine required periodic contributions.
Question 2: When prioritizing debt repayment in a financial plan, the avalanche method recommends paying off debts in which order?
- Smallest balance first
- Largest balance first
- Highest interest rate first (Correct answer)
- Oldest debt first
Correct answer: Highest interest rate first
The avalanche method targets highest-interest debt first to minimize total interest paid over time.
Question 3: A couple earning $120,000 annually wants to build a 6-month emergency fund. What is the recommended target amount if their essential monthly expenses are $4,200?
- $25,200 (Correct answer)
- $60,000
- $30,000
- $42,000
Correct answer: $25,200
A 6-month emergency fund based on $4,200/month in essential expenses equals $4,200 × 6 = $25,200.
Question 4: Which type of financial goal is BEST described as 'saving $500 per month for the next 3 years for a home down payment'?
- Long-term goal
- Intermediate-term goal (Correct answer)
- Ongoing goal
- Short-term goal
Correct answer: Intermediate-term goal
Intermediate-term goals typically have a 1–5 year time horizon, making a 3-year savings goal an intermediate-term objective.
Question 5: In a comprehensive financial plan, which section addresses the client's protection against catastrophic loss?
- Investment planning
- Tax planning
- Risk management and insurance planning (Correct answer)
- Estate planning
Correct answer: Risk management and insurance planning
Risk management and insurance planning specifically addresses protecting clients from large, potentially devastating financial losses.
Question 6: A financial counselor is helping a client who has identified five financial goals but has limited resources. What is the most important step before creating the plan?
- Recommend eliminating all discretionary spending
- Help the client prioritize goals by urgency and importance (Correct answer)
- Invest aggressively to maximize returns quickly
- Focus only on the single highest-priority goal
Correct answer: Help the client prioritize goals by urgency and importance
When resources are limited, prioritizing goals by urgency and importance ensures the plan addresses the most critical needs first.
Question 7: Which document is MOST essential for a counselor to review when assessing a client's current financial position?
- Client's credit score only
- Net worth statement (Correct answer)
- Last year's tax return only
- Investment account statements only
Correct answer: Net worth statement
A net worth statement summarizes total assets minus total liabilities, providing the clearest snapshot of a client's current financial position.
AFC Developing Financial Plans 4
A client wants to retire in 20 years with $1.5 million.
Assuming a 7% annual return, which approach best estimates the required monthly savings?