A couple spends $7,500 per month on essential household expenses, has $9,000 in accessible cash, a variable commission-based income, and no other near-term liquidity. They want to make a $25,000 illiquid investment. Which recommendation is most defensible?

Prioritize building a suitable emergency reserve before committing additional funds to an illiquid asset.

A borrower considering a $400,000 mortgage can pay 1.5 discount points at closing to reduce the monthly payment by $100. Ignore taxes, opportunity cost and differences in principal balance. The borrower expects to refinance or sell in 36 months. Which assessment is strongest?

The $6,000 upfront cost has a 60-month simple break-even and is unlikely to pay for itself over the expected 36-month horizon.

Which statement about Section 529 college savings plans is correct?

Qualified distributions for eligible education expenses are exempt from federal income tax on the earnings portion

A household has $12,000 credit-card debt at 24% APR, $15,000 cash reserves, and essential expenses of $4,000 per month. They expect uncertain income next quarter. What is the strongest initial recommendation?

Weigh high-interest repayment against an adequate emergency reserve and short-term income risk

What is the primary purpose of a client's net worth statement in the financial planning process?

To show a snapshot of the client's assets and liabilities at a specific point in time

CFP Financial Planning Process Practice Questions

Official outline: CFP Board Principal Knowledge Topics (2021 practice analysis)
Questions on this page: 6
Updated: Nov 3, 2026

Question 1, hard
A client wants to accumulate $100,000 in 8 years by making equal end-of-month deposits into an account earning a nominal 6% annual rate, compounded monthly. Approximately how much must the client deposit each month?
- A.$652
- B.$1,042
- C.$953
- D.$814
Show answer and explanationHide answer
Correct answer: D. $814
With n = 96 months, i = 0.5% monthly, and FV = $100,000, the ordinary annuity future value factor is [(1.005)^96 − 1] / 0.005 ≈ 122.83. Solving for payment: $100,000 / 122.83 ≈ $814 per month.
- A. This understates the required deposit, consistent with assuming more growth (a longer horizon or higher effective rate) than the actual 8-year, 6%-monthly-compounding schedule provides.
- B. This matches a naive $100,000 ÷ 96 months calculation that ignores compounding interest entirely, overstating the deposit needed since accumulated interest does part of the work.
- C. This is close to the answer you'd get using only 7 years (84 months) of deposits instead of the full 8-year (96-month) horizon, so it overstates the required monthly amount.
- D. Correct. Using the future value of an ordinary annuity formula with i = 0.5% monthly and n = 96 months, the required deposit is approximately $814.
- Source: Exam outline: CFP Board Principal Knowledge Topics (2021 practice analysis), accessed October 2026
Question 2, easy
A couple spends $7,500 per month on essential household expenses, has $9,000 in accessible cash, a variable commission-based income, and no other near-term liquidity. They want to make a $25,000 illiquid investment. Which recommendation is most defensible?
- A.Prioritize building a suitable emergency reserve before committing additional funds to an illiquid asset.
- B.Invest now because the expected investment return exceeds the cost of holding extra cash, so a larger reserve is unnecessary for the couple.
- C.Borrow $25,000 on credit cards to preserve the cash balance, since the investment's expected return can cover the card interest cost.
- D.Treat available home equity as equivalent to immediately accessible cash, since it can be borrowed against when income falls short.
Show answer and explanationHide answer
Correct answer: A. Prioritize building a suitable emergency reserve before committing additional funds to an illiquid asset.
Their cash covers only about 1.2 months of essential expenses, and variable income argues for a larger reserve. Illiquid assets, credit cards or home equity do not substitute for readily available emergency cash.
- A. Correct: the reserve is thin for variable income and should be built before locking up funds.
- B. Expected returns are uncertain and do not remove the need for liquidity when income is variable.
- C. Revolving credit is expensive and unreliable, and using it to fund an investment adds risk.
- D. Home equity credit can be frozen or reduced when income falls, so it is not equivalent to cash on hand.
- Source: Exam outline: CFP Board Principal Knowledge Topics (2021 practice analysis), accessed October 2026
Question 3, medium
A borrower considering a $400,000 mortgage can pay 1.5 discount points at closing to reduce the monthly payment by $100. Ignore taxes, opportunity cost and differences in principal balance. The borrower expects to refinance or sell in 36 months. Which assessment is strongest?
- A.The $6,000 upfront cost has a 60-month simple break-even and is unlikely to pay for itself over the expected 36-month horizon.
- B.The points are largely recovered because the lender refunds the unamortized portion when the loan is paid off early.
- C.The simple break-even is about 6 months because the $6,000 cost is spread across the 36-month holding period, so the points pay for themselves.
- D.Mortgage discount points reduce the interest rate but are a tax-only item that does not change the monthly cash payment.
Show answer and explanationHide answer
Correct answer: A. The $6,000 upfront cost has a 60-month simple break-even and is unlikely to pay for itself over the expected 36-month horizon.
The points cost 1.5% x $400,000 = $6,000. At $100 saved per month the simple break-even is 60 months, so a 36-month horizon recovers only $3,600 of the cost.
- A. Correct: $6,000 divided by $100 per month is 60 months, longer than the 36-month horizon.
- B. Fails: lenders do not refund points when a loan is repaid early; the cost is sunk.
- C. Fails: the break-even is the cost divided by monthly savings, 60 months, not a few months.
- D. Fails: the stated purpose of the points is a lower monthly payment, a $100 monthly cash saving.
- Source: Exam outline: CFP Board Principal Knowledge Topics (2021 practice analysis), accessed October 2026
Question 4, medium
Which statement about Section 529 college savings plans is correct?
- A.Contributions are deductible on the contributor's federal income tax return up to the annual gift tax exclusion amount
- B.Changing the designated beneficiary to another family member is treated as a taxable distribution of the earnings to the account owner
- C.Annual contributions are capped at the same dollar limit that applies to a Coverdell ESA
- D.Qualified distributions for eligible education expenses are exempt from federal income tax on the earnings portion
Show answer and explanationHide answer
Correct answer: D. Qualified distributions for eligible education expenses are exempt from federal income tax on the earnings portion
529 plan contributions are never federally deductible (though some states offer a state income tax deduction or credit). Qualified withdrawals for eligible education expenses are exempt from federal income tax on the earnings portion, contribution limits are far higher than Coverdell's, and beneficiaries can generally be changed to another qualifying family member.
- A. 529 contributions are not deductible on the federal return, at any amount; some states offer a state income tax deduction, but there is no federal deduction.
- B. Account owners can generally change the designated beneficiary to another qualifying family member without income tax or penalty.
- C. Wrong. A Coverdell ESA has a low annual per-beneficiary contribution cap. 529 plans instead have aggregate per-beneficiary limits set by each state's plan, which are typically far higher. The two do not share the same cap.
- D. Correct. Qualified distributions used for eligible education expenses are exempt from federal income tax on the earnings portion.
- Source: 26 U.S.C. § 529, accessed October 2026
Question 5, medium
A household has $12,000 credit-card debt at 24% APR, $15,000 cash reserves, and essential expenses of $4,000 per month. They expect uncertain income next quarter. What is the strongest initial recommendation?
- A.Refinance the house to consolidate the card debt, treating closing costs as a minor detail
- B.Apply the full reserve to the card now, since 24% interest outweighs the value of holding cash
- C.Invest the reserves in speculative securities because their expected returns may exceed 24%
- D.Weigh high-interest repayment against an adequate emergency reserve and short-term income risk
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Correct answer: D. Weigh high-interest repayment against an adequate emergency reserve and short-term income risk
Paying down 24% debt is valuable, but with uncertain income and under four months of essential expenses in reserve, the plan must balance repayment against a liquidity floor.
- A. Refinancing adds closing costs and secures unsecured debt with the home, and is not the best initial step.
- B. Draining the reserve leaves no cushion against the uncertain income next quarter.
- C. Speculative returns are uncertain and unlikely to reliably beat a 24% guaranteed cost.
- D. Correct: balance the high-rate payoff against reserve adequacy and income risk.
- Source: Exam outline: CFP Board Principal Knowledge Topics (2021 practice analysis), accessed October 2026
Question 6, easy
What is the primary purpose of a client's net worth statement in the financial planning process?
- A.To show a snapshot of the client's assets and liabilities at a specific point in time
- B.To track the client's income and expenses over a period of time
- C.To project the client's retirement income needs
- D.To calculate the client's life insurance need
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Correct answer: A. To show a snapshot of the client's assets and liabilities at a specific point in time
A net worth statement (personal balance sheet) presents a point-in-time snapshot of assets minus liabilities. Tracking income and expenses over time (B) is the function of a cash flow statement, while retirement projections (C) and insurance needs analysis (D) are separate planning analyses that use net worth and cash flow data as inputs, not the net worth statement's primary purpose.
- A. Correct. A net worth statement is a point-in-time snapshot listing the client's assets and liabilities as of a specific date.
- B. Tracking income and expenses over time describes the cash flow statement, not the net worth statement.
- C. Projecting retirement income needs is a separate retirement planning analysis, not the function of a net worth statement.
- D. Calculating a life insurance need is a distinct risk-management calculation, not what a net worth statement is for.
- Source: Exam outline: CFP Board Principal Knowledge Topics (2021 practice analysis), accessed October 2026

Sources

26 U.S.C. § 529, checked October 2026

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CFP Financial Planning Process Practice Questions

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