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Free response · 5.3 Saving and Investing for Education, Housing, and Retirement Goals
Exam-style personal-finance task: read a household's situation and write a recommendation. Suggested time 12–13 minutes.
FRQ 2 — Personal finance (household recommendation) — Financial Advisor Project style
The Alvarez household: Rosa (41) and Daniel (44), two children (ages 15 and 10), household net income $7,200/month, $900/month available to save after expenses. Goals: (1) the older child's college in 3 years; (2) retirement in about 22 years; (3) ongoing giving to a youth sports nonprofit. Current holdings: $38,000 in a savings account earning 1.5%; Daniel's employer retirement plan, into which he contributes nothing (the employer would match contributions up to 4% of pay); no other investments. Rosa says they 'don't trust the stock market' after a relative lost money in a downturn. Inflation has averaged about 3%.
(A) Explain ONE problem with keeping all $38,000 in the 1.5% savings account for 22 years, using the concepts of inflation and compounding. 1 pt
(B) Recommend how to split the $900/month between the college goal and the retirement goal, and justify the asset choice for each using time horizon and risk tolerance. 1 pt
(C) Rosa's distrust of the market reflects a concern the framework names. Identify the behavioral bias most relevant to her situation, and recommend ONE strategy and ONE tool (from the framework) that would help the household stay on plan. 1 pt