Think Like a CFP®: Practice Questions & Expert Answers

So without further ado, should we dive right in?

Let's do it.

Go.

Excellent.

All right, first we have Jerry with our general principles question.

A client age 32 has $2,000 per month surplus cashflow, $6,000 in savings and $9,000 on a credit card at 22% APR making minimum payments.

Their employer offers a 100% 401k match on the first 3%, but the client is not contributing.

They want to start saving for a home down payment in 12 months.

What is the most appropriate initial use of the $2,000 per month? Is it A, save all $2,000 per month for the down payment to avoid market risk? B, build savings to six months of expenses first, then address the credit card.

C, contribute enough to capture the full 401k match, then prioritize paying off the credit card, then build emergency reserves, then save for the down payment.

Or D, pay off the credit card first, then start 401k contributions after the home purchase.

Yeah.

So this is a classic order of priorities question.

These tend to get asked a lot on the exam because it's kind of like the most basic form of financial planning advice that you can give to a client.

You know, what priority should you give to all of these various goals? How should you order them in order of importance? And yeah, Kind of the trap answer is the answer that we kind of get beat over the head with all the time when we're first entering the financial industry is emergency fund, emergency fund, emergency fund.

You know, everyone kind of hits you over the head with that as that's the most important.

And in reality, the real answer is, well, it depends.

There are several things that will take precedence over saving for your emergency fund.

And so because of that, right off the bat, I am eliminating B from the answer choices.

Build savings to six months of expenses first.

That's essentially saying get a six month emergency fund.

That is the attractive answer that you would assume to be the correct answer if you just take it at face value.

But when we look at the overall picture, this client has some more pressing priorities they need to take care of first.

Namely... their 401k match really we want to be maximizing our 401k first especially for the match because otherwise you're just leaving money on the table you know there are very very few instant 100 returns in the financial industry your 401k match is one of them That first 3% means the first 3% of the client's salary.

They're going to get a dollar for dollar match on their 401k.