Chapter 1 Concept Checks

Isabel Huisman

Use these questions to confirm your understanding of each major section of the chapter.
1.1
What is a standard of living? What factors affect the quality of life?
A standard of living is the necessities, comforts, and luxuries we have or desire. Factors that affect the quality of
life include geographic location, public facilities, local cost of living, and population density. Money is
commonly considered as the key determinant of quality of life.
1.2

What is average propensity to consume? Is it possible for two people with very different incomes to
have the same average propensity to consume? Why?

Average propensity to consume is the percentage of each dollar of income, on average, that is spent for current
needs rather than savings. It is possible for two people with very different incomes to have the same average
propensity to consume. One person with a low income, and one with a high income can spend the same amount
in percentage of money on needs instead of savings.
1.3

Discuss the various forms in which wealth can be accumulated.

Wealth can be accumulated in income as well as assets. Assets are things that you own that are worth some
amount of money. Wealth consists of financial and tangible assets, and you can accumulate those by purchasing
them with the money you earn from your job. Financial assets are intangible such as savings accounts, stocks,
bonds, mutual funds, and so on. Tangible assets are physical assets, such as cars or land.
1.4

What is the role of money in setting financial goals? What is the relationship of money to utility?

Money is the key consideration when setting financial goals, because it is the medium of exchange used to
measure value in financial transactions. It would be extremely difficult to set financial goals without money,
because money is the medium we use to obtain tangible things. Utility is the amount of satisfaction received
from purchasing certain types or quantities of goods and services. You use money to purchase those goods or
services, so money makes it possible to have that utility.
1.5

Explain why financial plans must be psychologically as well as economically sound. What is the best
way to resolve money disputes in a relationship?

They must be psychologically as well as economically sound, because your own personal value system shapes
your attitude towards money. In order to be satisfied with your financial situation, you must factor in your
attitudes towards money into your financial plans. Your financial plans must not only consider your wants,
needs, and financial resources, but also must realistically reflect your personality and emotional reactions to
money. The best way to resolve money disputes in a relationship is to know your partners financial style, open
up your lines of communication and keep them open, and be willing to compromise. Although you probably
will to be able to change your partners style- or your own either- you can work out your differences if you
communicate properly. Work together to establish a set of financial goals that take into account each persons
needs and values.
1.6

Explain why it is important to set realistically attainable financial goals. Select one of your personal
financial goals and develop a brief financial plan for achieving it.

It is important to set realistically attainable financial goals, because if you set- for example- a savings goal too
high, then you will never be able to achieve it. If you set a savings goal too low, then you will not have enough
for a meaningful investment program. Either one of these extremes will lead to ongoing financial frustration and
stress until you can set realistic goals. One of my personal financial goals is to save 50% of all the money I earn

Isabel Huisman
from now until August 2017. I will set aside the money I intend to save, and put it into a savings account as
soon as possible to avoid spending it.
1.7

Distinguish between long-term, intermediate, and short-term financial goals. Give examples of each.

Long-term financial goals are goals that are set 30 to 40 years from now. They will change over time, so you
should be willing to adjust them as you go, and they should be realistic but not too conservative. Short-term
goals are set every year and span the next 12 months. Intermediate goals bridge the gap between short- and
long-term goals. A long-term goal would be to buy a bigger house. An intermediate goal would be to trade your
current car for a bigger car if needed. A short-term goal would be to buy new tires and brakes for your car.
1.8

What types of financial planning concerns does a complete set of financial plans cover?

A complete set of financial plans would cover all the important financial elements in your life. Some elements
deal with the more immediate aspects of money management, such as preparing a budget to help manage
spending. Others focus on obtaining main assets, regulating borrowing, dropping financial risk, preparing to
provide for emergency funds and accumulating wealth in the future, taking advantage of and handling
employer-sponsored benefits, deferring and reducing taxes, making sure you will be financially secure if you
were to stop working, and guaranteeing a tidy and cost-effective relocation of assets to your inheritors.
1-9

What is inflation, and why should it be a concern in financial planning?

Inflation is when the government decides to print more money than usual. Because of the surplus of paper
money, the value of that money decreases. This is because there is more paper being printed, but nothing put
into the treasury to back the value of that paper. Because the value of the paper money is decreasing, that means
that you need more of that money than you usually would to equal the amount it was usually worth. This causes
prices to raise, not because the items being sold are worth more- they arent. Gas prices are a good example.
The price of gas has raised over the years and fluctuates often from week to week. This is not because gas itself
has become more valuable- it is still pretty much the same exact gas we have always been buying. No, it is not
the value of the gas that has increased, but conversely the value of money that has decreased. Inflation is a
concern in financial planning because even though you are earning a certain amount this year, in the next couple
of years, the value of money will have dropped. You will need more cash to pay for the things that have now
risen in price. The same amount you earn that is sufficient one year, may not be sufficient the next. It probably
wont be, in fact, because the government will most likely continue to print paper money without backing it
with anything of real worth.
1-10 All people who have equivalent formal education earn similar incomes. Do you agree or disagree with
this statement? Explain your position.
Disagree, because someone who went to school and earned a degree the same as someone else, could end up as
a stay-at-home mom whereas the other could work their way up in the business world and become extremely
wealthy. Just because you have an education doesnt mean you will inevitably earn the money associated with
the level of education you have. In the end, only you- not your education or anyone else- is responsible for how
financially successful you become.
What are some of your own personal career goals?
To become an Interior Designer and eventually own my own Interior Design firm.