AFC Savings Strategies and Emergency Fund Planning 3

Question 1

According to behavioral finance research, which psychological bias most commonly causes individuals to consistently under-save for the future?

Accepted Answer

Present bias (hyperbolic discounting)

Answer

Present bias causes individuals to overvalue immediate rewards relative to future benefits, leading them to consistently prioritize current consumption over saving for the future.

Question 2

When applying the SMART framework to savings goals, the 'T' component requires that goals be:

Accepted Answer

Time-bound with a specific deadline

Answer

In the SMART goal framework, 'T' stands for Time-bound, meaning savings goals should have a specific deadline to create urgency and maintain accountability.

Question 3

A financial counselor working with a client who lives paycheck-to-paycheck and has no savings should FIRST recommend:

Accepted Answer

Building a starter emergency fund of $500 to $1,000

Answer

Financial counselors typically recommend building a small starter emergency fund first for clients with no savings, as it prevents small unexpected expenses from creating new debt.

Question 4

Which of the following best describes 'sinking funds' as used in personal financial counseling?

Accepted Answer

Dedicated savings set aside regularly for known, anticipated future expenses

Answer

Sinking funds are savings accounts designated for known, anticipated future expenses (e.g., annual insurance premiums, holiday gifts, car registration), preventing these predictable costs from disrupting the monthly budget.

Question 5

Under the Rule of 72, if a savings account earns 6% annual interest, approximately how many years will it take for the balance to double?

Accepted Answer

12 years

Answer

The Rule of 72 states that dividing 72 by the annual interest rate gives the approximate years to double a balance; 72 ÷ 6 = 12 years.

AFC - Accredited Financial Counselor Practice Test

AFC - Accredited Financial Counselor Practice Test

AFC Savings Strategies and Emergency Fund Planning 3