CFP CFP General Principles of Financial Planning: practice questions with answers

Question 1

Seraphina Blackwood's CFP® professional has collected her account statements, insurance policies and tax returns and has discussed her health, values and expectations with her. They now discuss whether retiring at 62 or buying a lake cabin in the next five years matters more to her, since the plan cannot fully fund both. Which step of the financial planning process is the CFP® professional performing?

1. A Analyzing the client's current course of action and potential alternative courses of action
2. B Identifying and selecting goals
3. C Developing the financial planning recommendations
4. D Understanding the client's personal and financial circumstances

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Answer: B. CFP Board's Practice Standards (Code and Standards, Section C) set out seven steps. Step 2, identifying and selecting goals, requires the CFP® professional to help the client identify goals, discuss the effect of selecting one goal on others, and help the client select and prioritize goals. Weighing early retirement against the cabin purchase is that prioritization.

Question 2

Prudence Hargreaves, a salaried engineer with a stable job, has built a $36,000 emergency reserve (six months of expenses) in a checking account paying no interest. She wants a better yield without weakening the reserve. Which arrangement best meets her aim?

1. A Contribute the reserve to a Roth IRA invested in stocks, since contributions can be withdrawn at any time
2. B Keep two months of expenses in high-yield savings and ladder the rest in Treasury bills or short CDs
3. C Invest the whole reserve in an intermediate-term bond fund, since bonds are less volatile than stocks
4. D Move the whole reserve into a five-year bank CD with a penalty of twelve months' interest for early withdrawal

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Answer: B. An emergency reserve must be safe and quickly available. A tiered approach (immediate cash in insured savings or a money market account, plus a short ladder of T-bills or CDs) raises the yield while keeping principal stable and money maturing regularly. Long CDs with heavy penalties, bond funds and stock investments trade away liquidity or stability.

Question 3

A client hears that the Treasury yield curve has inverted and asks what that means. Which statement is most accurate?

1. A Long-term Treasury yields are well above short-term yields because investors expect strong growth and rising inflation
2. B The Federal Reserve has cut short-term rates sharply to stimulate the economy, pushing them close to zero
3. C Locking in a 10-year Treasury now will pay a higher yield than rolling over 3-month Treasury bills at today's rates
4. D Short-term Treasury yields are above long-term yields, a pattern that has often preceded US recessions

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Answer: D. The yield curve plots Treasury yields against maturity. It normally slopes upward. When short-term yields rise above long-term yields (often after Fed tightening, with markets expecting future rate cuts), the curve is inverted; this has preceded most US recessions, though not with reliable timing.

Question 4

Aiyana Whitehorse's son starts college in 10 years. The annual cost is $24,000 in today's dollars, paid at the start of each of four school years, and costs are expected to rise 6% a year before and during college. The education fund will earn 8% a year. How much must the fund hold on the day her son starts college?

1. A $93,366
2. B $153,745
3. C $164,108
4. D $167,204

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Answer: D. 1. First-year cost in 10 years: $24,000 x 1.06^10 = $42,980.
2. Inflation-adjusted rate: (1.08 / 1.06) - 1 = 1.8868%.
3. Fund needed at the start of college (BEG mode): PMT 42,980, N 4, I/YR 1.8868, FV 0, solve PV = $167,204.

The inflation-adjusted rate is used because each later year's cost grows by 6% while the remaining fund earns 8%.

Question 5

Terrence and Simone Whitaker file jointly with 2026 MAGI of $166,000. They paid $5,000 of qualified tuition and fees for their son, a full-time sophomore. (2026 AOTC: 100% of the first $2,000 and 25% of the next $2,000 of expenses; phase-out MAGI $160,000-$180,000 for joint filers.) What American Opportunity Tax Credit can they claim?

1. A $700
2. B $750
3. C $1,750
4. D $2,500

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Answer: C. Tentative AOTC: 100% x $2,000 + 25% x $2,000 = $2,500 (expenses above $4,000 do not count).

Phase-out: ($166,000 - $160,000) / $20,000 = 30% reduction.

Allowed credit = $2,500 x (1 - 0.30) = $1,750, of which 40% is refundable.

Question 6

Jovana Petrescu keeps a $30,000 emergency reserve, six months of her expenses, in a checking account that pays no interest. She wants a better yield and accepts that some of the money may be needed within a few months. Which proposed change would most weaken the reserve's ability to meet an emergency?

1. A Moving $10,000 into a high-yield online savings account at an FDIC-insured bank
2. B Moving $10,000 into Series I savings bonds bought this month
3. C Moving $10,000 into a Treasury money market fund that offers same-day liquidity
4. D Moving $10,000 into an 11-month no-penalty CD that allows withdrawal after the first week

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Answer: B. An emergency reserve must be liquid (available quickly) and stable in value.

- Series I savings bonds cannot be redeemed during the first 12 months after purchase, and redemption before five years costs the last three months' interest. Money she may need in a few months should not go there, though I bonds can suit the part of a reserve that will not be needed for at least a year.
- High-yield savings, a Treasury money market fund and a no-penalty CD all keep the money available with little or no loss.