FFC Personal Financial Planning 4 — Questions and Answers
Question 1: Which debt repayment strategy minimizes total interest paid over time?
- Debt snowball — paying smallest balances first
- Debt avalanche — paying highest-interest debt first (Correct answer)
- Paying equal amounts to all debts simultaneously
- Making only minimum payments on all debts
Correct answer: Debt avalanche — paying highest-interest debt first
The debt avalanche method targets the highest-APR debt first, mathematically minimizing total interest paid across all accounts.
Question 2: A client's emergency fund should ideally cover how many months of essential living expenses according to standard financial planning guidelines?
- 1–2 months
- 3–6 months (Correct answer)
- 8–10 months
- 12–18 months
Correct answer: 3–6 months
Financial planning guidelines recommend 3–6 months of essential expenses in a liquid, accessible account to cover job loss or emergencies.
Question 3: What is 'asset allocation' in the context of personal investing?
- Choosing individual stocks within a single sector
- Distributing investments among different asset classes such as stocks, bonds, and cash (Correct answer)
- Timing the market to buy assets at the lowest price
- Selecting the asset with the highest historical return
Correct answer: Distributing investments among different asset classes such as stocks, bonds, and cash
Asset allocation divides a portfolio among asset classes to balance risk and return according to the client's goals, time horizon, and risk tolerance.
Question 4: A 35-year-old client plans to retire at 65. Which type of risk is most important for their long-term retirement portfolio to address?
- Inflation risk (Correct answer)
- Liquidity risk
- Short-term market volatility risk
- Currency risk
Correct answer: Inflation risk
Inflation risk is the primary long-term concern because it erodes purchasing power over a 30-year retirement horizon.
Question 5: Which document legally designates who will manage an individual's financial affairs if they become incapacitated?
- A last will and testament
- A durable power of attorney for finances (Correct answer)
- A revocable living trust
- A beneficiary designation form
Correct answer: A durable power of attorney for finances
A durable power of attorney for finances grants a named agent legal authority to manage financial matters if the principal is unable to do so.
Question 6: What is the 'replacement ratio' concept used in retirement planning?
- The percentage of pre-retirement income needed to maintain living standards in retirement (Correct answer)
- The ratio of Roth to traditional IRA contributions
- The share of expenses covered by Social Security alone
- The proportion of portfolio in bonds vs. stocks at retirement
Correct answer: The percentage of pre-retirement income needed to maintain living standards in retirement
The replacement ratio estimates the percentage of pre-retirement income — typically 70–90% — a retiree needs to maintain their lifestyle.
Question 7: A client earns $80,000 annually and contributes 6% to their 401(k) with a 50% employer match up to 6%. What is the total annual 401(k) contribution including the match?
- $4,800
- $7,200 (Correct answer)
- $9,600
- $12,000
Correct answer: $7,200
Employee contributes 6% × $80,000 = $4,800; employer matches 50% of that = $2,400; total annual contribution = $7,200.
FFC Personal Financial Planning 4
Which debt repayment strategy minimizes total interest paid over time?