FFC Personal Financial Planning 5 — Questions and Answers
Question 1: Which behavioral finance concept explains why clients are more motivated by avoiding losses than by achieving equivalent gains?
- Anchoring bias
- Loss aversion (Correct answer)
- Recency bias
- Overconfidence effect
Correct answer: Loss aversion
Loss aversion, identified by Kahneman and Tversky, describes the tendency to feel losses approximately twice as intensely as equivalent gains.
Question 2: What is the main advantage of a Health Savings Account (HSA) compared to a Flexible Spending Account (FSA)?
- HSA funds never expire and roll over year to year, while FSA funds are typically use-it-or-lose-it (Correct answer)
- FSA allows higher annual contribution limits than HSA
- HSA can be used for any expense, not just medical costs
- FSA funds can be invested in mutual funds
Correct answer: HSA funds never expire and roll over year to year, while FSA funds are typically use-it-or-lose-it
HSA balances roll over indefinitely and can be invested, making them a powerful long-term savings tool, unlike the FSA's annual forfeiture rule.
Question 3: A client asks about the impact of a 1% annual fee difference on a $200,000 investment over 30 years at 7% growth. What is the approximate cost of the higher fee?
- $60,000
- $120,000 (Correct answer)
- $200,000
- $300,000
Correct answer: $120,000
A 1% fee difference on a $200,000 portfolio over 30 years at 7% growth costs approximately $120,000–$140,000 in lost compounding.
Question 4: When should a financial fitness coach refer a client to a licensed financial advisor or CPA rather than providing guidance themselves?
- When the client asks about budgeting strategies
- When the client needs specific investment product recommendations or tax preparation services (Correct answer)
- When the client wants to set financial goals
- When the client is creating an emergency fund plan
Correct answer: When the client needs specific investment product recommendations or tax preparation services
Coaches are not licensed to provide specific securities recommendations or prepare taxes — those services require licensed professionals.
Question 5: What is a 'sinking fund' in personal financial planning?
- A fund set aside to pay off mortgage principal early
- A dedicated savings account built up over time to cover a specific planned future expense (Correct answer)
- An emergency reserve held in a money market account
- A retirement account that declines in value over time
Correct answer: A dedicated savings account built up over time to cover a specific planned future expense
A sinking fund is intentional savings accumulated gradually to cover a known future expense, such as car replacement or annual insurance premiums.
Question 6: Which credit score factor carries the greatest weight in the FICO scoring model?
- Credit utilization ratio
- Payment history (Correct answer)
- Length of credit history
- New credit inquiries
Correct answer: Payment history
Payment history represents 35% of a FICO score — the largest single factor — reflecting whether a borrower pays obligations on time.
Question 7: A client has a variable-rate student loan and a fixed-rate mortgage. If interest rates are expected to rise significantly, which debt should they prioritize paying down faster?
- The fixed-rate mortgage, because it is the larger balance
- The variable-rate student loan, because rising rates will increase its cost (Correct answer)
- Both equally, since interest rates affect all debt the same way
- Neither — invest the extra cash instead
Correct answer: The variable-rate student loan, because rising rates will increase its cost
Variable-rate debt becomes more expensive as rates rise, so accelerating payoff reduces exposure to future interest rate increases.
FFC Personal Financial Planning 5
Which behavioral finance concept explains why clients are more motivated by avoiding losses than by achieving equivalent gains?