CFP-FINANCIAL PLANNING TEST GUIDE
QUESTIONS AND ANSWERS
risk tolerance - Answer-The degree of uncertainty you can personally handle in regard
to a negative change in the value of your investment portfolio. Your risk tolerance to
your investments will be either high or low
SMART goals - Answer-Goals that are specific, measurable, attainable, realistic, and
time-bound.
values - Answer-What a person finds important and valuable, often in a moral sense.
People derive their values from a wide variety of sources, including family, religion,
culture, education, and friends. A person's values help guide him or her in making
decisions.
wants - Answer-Those things in life that are not basic necessities, such as
entertainment and leisure travel. These often include enhancements and improvements
to our basic needs, such as luxury clothing, food, housing, and vehicles.
dependents - Answer-People who rely on you for financial support and who also
typically live in your home.
asset - Answer-Anything an individual owns that has commercial or exchange value.
These can include houses, cars, computers, collectibles, stocks, bonds, cash in the
bank, and so on.
balance sheet - Answer-A list of all of a person's assets and liabilities at a specific point
in time. Balance sheets help one to determine current net worth and should be updated
at least once a year. Changes in the balance sheet over time are a key measure of the
quality of overall financial decision making.
budget - Answer-A plan for spending and saving money based on a person's goals
during a given time period. It is an itemized forecast of an individual's income and
expenses expected for some period in the future, often a month, and it is used to
compare anticipated expenses with actual expenses.
cash flow statement - Answer-A statement of actual income and spending for a certain
time period, usually a year or month.
fixed expenses - Answer-Expenses that do not vary from one time to the next, meaning
you must pay an exact amount; expenses that have a set dollar amount, such as rent,
insurance premiums, and car payments.
, liabilities - Answer-The debts of a person or company. Loans or expenses that must be
paid.
net worth - Answer-A person's net worth is the difference between what a person owns
and what he or she owes. It is also called wealth.
variable expenses - Answer-Expenses and costs in one's budget that fluctuate and can
be controlled, thereby allowing for a budget that can be automatically adjusted.
wealth-building asset - Answer-Items of value owned by an individual that are likely to
increase in value over time, such as savings, investments, and real estate. Assets that
are not wealth building usually lose value or depreciate over time.
APR - Answer-Annual percentage rate
ARM - Answer-Adjustable rate mortgage
bankruptcy - Answer-A legal declaration by a person or organization that it cannot pay
its creditors. The debtor's assets are sold to pay the debt, and the debtor can have a
fresh start (although the debtor may have difficulty getting credit).
collateral - Answer-An object of value pledged to a creditor to secure a loan. If the
borrower doesn't pay back the loan, the creditor gets to keep the collateral.
co-signer - Answer-Someone who signs a contract to pay another person's debt if he or
she defaults. A co-signer with good credit can help someone with bad credit get a credit
card, loan, or mortgage.
credit history - Answer-A record of someone's previous activity with credit. It can include
personal information, current extended credit, and recent bankruptcy.
credit report - Answer-A report of someone's credit history that can be looked at by
potential creditors.
default terms - Answer-The conditions of a loan, which usually include when it must be
repaid and the interest rate.
down payment - Answer-An initial cash payment of a percentage of the cost of an
expensive item, like a house or car. The buyer borrows the rest of the money.
FICO score - Answer-The most widely used type of credit score. A FICO score
measures someone's creditworthiness by summarizing several factors that predict the
borrower's ability to pay.
fixed rate loan - Answer-A type of loan that always has the same interest rate, even
when the prime interest rate goes up or down.
QUESTIONS AND ANSWERS
risk tolerance - Answer-The degree of uncertainty you can personally handle in regard
to a negative change in the value of your investment portfolio. Your risk tolerance to
your investments will be either high or low
SMART goals - Answer-Goals that are specific, measurable, attainable, realistic, and
time-bound.
values - Answer-What a person finds important and valuable, often in a moral sense.
People derive their values from a wide variety of sources, including family, religion,
culture, education, and friends. A person's values help guide him or her in making
decisions.
wants - Answer-Those things in life that are not basic necessities, such as
entertainment and leisure travel. These often include enhancements and improvements
to our basic needs, such as luxury clothing, food, housing, and vehicles.
dependents - Answer-People who rely on you for financial support and who also
typically live in your home.
asset - Answer-Anything an individual owns that has commercial or exchange value.
These can include houses, cars, computers, collectibles, stocks, bonds, cash in the
bank, and so on.
balance sheet - Answer-A list of all of a person's assets and liabilities at a specific point
in time. Balance sheets help one to determine current net worth and should be updated
at least once a year. Changes in the balance sheet over time are a key measure of the
quality of overall financial decision making.
budget - Answer-A plan for spending and saving money based on a person's goals
during a given time period. It is an itemized forecast of an individual's income and
expenses expected for some period in the future, often a month, and it is used to
compare anticipated expenses with actual expenses.
cash flow statement - Answer-A statement of actual income and spending for a certain
time period, usually a year or month.
fixed expenses - Answer-Expenses that do not vary from one time to the next, meaning
you must pay an exact amount; expenses that have a set dollar amount, such as rent,
insurance premiums, and car payments.
, liabilities - Answer-The debts of a person or company. Loans or expenses that must be
paid.
net worth - Answer-A person's net worth is the difference between what a person owns
and what he or she owes. It is also called wealth.
variable expenses - Answer-Expenses and costs in one's budget that fluctuate and can
be controlled, thereby allowing for a budget that can be automatically adjusted.
wealth-building asset - Answer-Items of value owned by an individual that are likely to
increase in value over time, such as savings, investments, and real estate. Assets that
are not wealth building usually lose value or depreciate over time.
APR - Answer-Annual percentage rate
ARM - Answer-Adjustable rate mortgage
bankruptcy - Answer-A legal declaration by a person or organization that it cannot pay
its creditors. The debtor's assets are sold to pay the debt, and the debtor can have a
fresh start (although the debtor may have difficulty getting credit).
collateral - Answer-An object of value pledged to a creditor to secure a loan. If the
borrower doesn't pay back the loan, the creditor gets to keep the collateral.
co-signer - Answer-Someone who signs a contract to pay another person's debt if he or
she defaults. A co-signer with good credit can help someone with bad credit get a credit
card, loan, or mortgage.
credit history - Answer-A record of someone's previous activity with credit. It can include
personal information, current extended credit, and recent bankruptcy.
credit report - Answer-A report of someone's credit history that can be looked at by
potential creditors.
default terms - Answer-The conditions of a loan, which usually include when it must be
repaid and the interest rate.
down payment - Answer-An initial cash payment of a percentage of the cost of an
expensive item, like a house or car. The buyer borrows the rest of the money.
FICO score - Answer-The most widely used type of credit score. A FICO score
measures someone's creditworthiness by summarizing several factors that predict the
borrower's ability to pay.
fixed rate loan - Answer-A type of loan that always has the same interest rate, even
when the prime interest rate goes up or down.
