1 General Financial Principles Flashcards
What value does a Statement of Financial Position use?
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Personal bal sheet: FMV
Biz bal sheet: Lower of FMV or cost
Flow of Terminology from Revenue to Net Profit
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Revenue (Sales/”Top Line”)
– COGS (Cost of Goods Sold)
= Gross Profit (Gross Income, Gross Earnings)
– OpEx (Operating Expenses)
= Operating Profit (Operating Income, EBIT)
– Interest Expenses
= EBT (Earnings Before Taxes)
– Taxes (Income Taxes)
= Net Profit (Net Income, EAT, Net Earnings, “Bottom Line”)
How big should emergency fund be?
It should cover 3-6 months of living expenses:
- One earner: 6 months
- Two earners: 3 months (unless they’re at the same company)
Emergency funds can include cash value life insurance, lines of credit, HELOCs etc.
What account ownership categories get their own FDIC coverage?
Less obvious categories:
- Certain retirement accounts (including IRAs)
- Employee Benefit Plan accounts
- Corporation, Partnership, Unincorporated Association
- Government Accounts (one per official)
More obvious categories:
- Single (including sole proprietor
- Joint (only your % interest; doesn’t matter who it’s with - still only one category, Jtwros or TOC all the same)
- Revocable Trust
- Irrevocable Trust (if substantially similar)
$250K max per category per bank (so you can get unlimited if you use unlimited banks)
What are the 3 credit bureaus?
- TransUnion
- Experian
- Equifax
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What are the inputs of FICO scores?
- Payment history: 35%
- Amounts owed: 30% (aka “credit utilization”)
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10% (they like variety)
Remember HULNM
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What do FICO scores mean?
- 300–579: Poor
- 580–669: Fair
- 670–749: Good
- 750–799: Very Good
- 800–850: Exceptional
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Private Mortgage Insurance:
- When is PMI required?
- When can PMI be eliminated?
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- Required if downpayment < 20% of home value
- Can be eliminated after you reach 20% equity following 2 years of on-time payments
Jumbo Mortgages
vs Conventional Mortgages
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- Mortgages > $766,550 (in 2024)
- Higher interest rates
Three Home-Buying (Mortgage Qualification) Ratios
Synonyms & Limits
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- Housing Cost Ratio aka Front-End Ratio or Mortgage Debt Service Ratio = PITI ÷ Gross Income ≤ 28%
- Total Debt Ratio aka Back-End Ratio or Debt Repayment Ratio = (PITI + Other Debt) ÷ Gross Income ≤ 36%
- Consumer Debt Ratio = Other Debt ÷ Net Income ≤ 20%
General Financial Planning Priorities
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If you have young children:
- Establish guardianship via a will
- Life Insurance
If single/sole earner:
- Disability insurance
Then save for an emergency fund!
- If you have too much debt, pay that off first
IDS = 1st Income (via disability & life insur), 2nd Dependents (via will), 3rd Standard of Living
Structure of Markets
Origination Points
(for a mortgage)
Fees paid to the lender for processing the loan (does NOT reduce interest rate).
Discount Points
(for a mortgage)
Voluntary additional amounts paid to the lender to lower the interest rate, reducing the monthly mortgage payment (also called “buying down the rate”).
