Personal Finance Planning Flashcards

What is the primary purpose of an estate plan?

Answer: To specify how assets are distributed after death and designate decision-makers

An estate plan directs asset distribution after death, names guardians for dependents, and designates powers of attorney for financial and medical decisions.

Which document grants someone legal authority to make financial decisions on your behalf if you become incapacitated?

Answer: Durable power of attorney

A durable power of attorney authorizes a designated agent to manage financial affairs if the principal is unable to do so.

What is a 'net worth' statement used for in personal financial planning?

Answer: Measuring total assets minus total liabilities to show financial position

Net worth (assets minus liabilities) provides a snapshot of your overall financial health and tracks progress toward wealth-building goals.

Which of the following is a FIXED expense in a household budget?

Answer: Monthly mortgage payment

A fixed mortgage payment stays the same each month, unlike variable expenses that fluctuate based on usage or choices.

Dollar-cost averaging (DCA) is best described as:

Answer: Investing a fixed dollar amount at regular intervals regardless of price

DCA involves investing a consistent dollar amount at set intervals, buying more shares when prices are low and fewer when prices are high.

What is the recommended maximum debt-to-income (DTI) ratio for qualifying for a mortgage in the US?

Answer: 43%

Most lenders use a 43% DTI as the maximum threshold for qualified mortgage approval, though lower is better.

Which term describes the process of periodically restoring a portfolio to its original target asset allocation?

Answer: Rebalancing

Rebalancing involves selling overweighted assets and buying underweighted ones to restore the portfolio to its intended risk/return profile.