AFC Savings Strategies and Emergency Fund Planning 5

Question 1

A client has $8,000 in emergency savings and monthly essential expenses of $3,200. Their emergency fund coverage ratio is approximately:

Accepted Answer

2.5 months

Answer

$8,000 ÷ $3,200 = 2.5 months of coverage, which is below the typical 3-6 month recommendation.

Question 2

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?

Accepted Answer

Mental accounting

Answer

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.

Question 3

A client is rebuilding their emergency fund after using it. Which savings automation strategy is most effective for rapid rebuilding?

Accepted Answer

Set up bi-weekly automatic transfers aligned with paycheck deposits

Answer

Bi-weekly automatic transfers aligned with paycheck deposits ensure consistent contributions before discretionary spending occurs.

Question 4

Under the bucket strategy for savings, which bucket should contain emergency fund money?

Accepted Answer

Liquidity bucket (cash and cash equivalents)

Answer

Emergency funds belong in the liquidity bucket, which holds cash and cash equivalents that can be accessed immediately without market risk.

Question 5

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?

Accepted Answer

6 months or more, since both jobs could be at risk simultaneously in an industry downturn

Answer

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.

AFC - Accredited Financial Counselor Practice Test

AFC - Accredited Financial Counselor Practice Test

AFC Savings Strategies and Emergency Fund Planning 5