Budget and Cashflow

Question 1

How do you find what payment you can afford on a car loan?

Answer 1

Allowable TDSR x [gross monthly family income - (mortgage PMT + prop tax + heat + 50% condo fees + all consumer loan PMTS)]

Note* Pay attention to Annual or Monthly make sure all are in the same vein.

Question 2

What kind of a lease do you have if you can walk at the end if there were no major alterations?

Answer 2

Closed-End Lease

• May have to pay inflation on longer lease
• May pay higher payment on this type of lease

Question 3

What kind of a lease has lower payment but may have additional payments at the end?

Answer 3

Open-End Lease

• Open lease has lower payments with possible additional payments at the end of the lease if not leased out again or sold

Question 4

What is the main purpose of a budget?

Answer 4

To control spending
allow for future savings towards a goal

Question 5

What are the main goals of money management?

Answer 5

• You should account for expenditures first.
• Pay yourself first,
• control spending,
• use credit wisely and
• watch the interest payments paying high interest down first.
• also swapping deductible interest for non-deductible interest

Question 6

How many months of income for an emergency fund?

Where should the money come from?

Answer 6

• 3 to 6 months (for fixed and variable expenses)
• From low-interest yield accounts.
• No need to liquidate assets
• From very liquid sources.
• Look at the client’s risk.
• Di on the higher income earner for example?

Question 7

What is the Equity Ratio Formula?

Answer 7

TA-TL/TA

*Do not use Net worth

Question 8

Calculation:

Cost to carry interest on a credit card debt amount for the year?

Answer 8

Before-tax income is required to carry credit card debt.

• Outstanding Amount x the interest
• Eg. $4800 x 16.5%= $792. Total Interest
• Then calculate the before-tax amount required to carry the interest amount for the year
• $792/ 1 - 30% MTR.
• $1131.43 plus the principle of $4800.
• TOTAL $5931.43

Question 9

Using the last example how do we adjust the formula to find the before-tax rate of return on credit card debt?

Answer 9

Flipside of the last question as now we are looking for the rate, not the $ amt.

• So the % rate occupies the numerator in the equation.
• 18.5%/1-30% = 26.43% is required ROR to service this debt.
• The equivalent before-tax rate of return to figure out what rate of return would they have to attain before it would make sense to invest rather than paying off any credit card debt.
• Very good to know for clients. So use $100 for easy math x 21.8% and get $21.80 as the interest expense on $100.
• So now we plug into the formula
• 21.80/ 1-46.6% MTR = $42.41 would need to be earned….next
• 42.41/100 = 0.4241 42.41% is the answer.

Question 10

When are you considered insolvent?

Answer 10

• If debts are >$1000
• stopped paying creditors
• debts > assets
• You can either declare yourself bankrupt or creditors may get a receiving order against you…but not against you if you are farming or fishing.
• Creditors may force you if you commit an act of bankruptcy. Assigning assets to a trustee, transferring assets to a third party, paying off one preferential creditor, failing to give up goods, departing secretly and suddenly, and failing to meet liabilities as they come due.

Question 11

What is the Net Worth Statement consist of and what are some of the extras to look out for?

Answer 11

Net Worth Statement: Assets, Liabilities, and net worth at the start and end of the year.

• Includes deferred income taxes,
• unrealized appreciation or depreciation,
• and affected by capital transactions.
• As the Mortgage goes down the asset increases to increase net worth.

Question 12

What does the Cash Flow Statement consist of?

Answer 12

Cash Flow Statement:

• cash from sources of income,
• cash outlay for expenses,
• cash from net investments and
• cashflow from net personal assets.
• Lifestyle and capital transactions included.

Question 13

What does the Statement of Lifestyle Expenditures show us and what does it include?

Answer 13

Statement of Lifestyle Expenditures:

• Shows the cost of sustaining clients’ lifestyles.
• Includes non-taxable interest expenses, car loans, and personal loans. No income taxes, no deductible interest expenses, and no capital transactions like payments on a mort.

Question 14

On a Networth statement back taxes are listed under which category?

Answer 14

Liabilities

Question 15

On a Cash flow statement, how would you treat Income tax if given gross salaries?

Answer 15

I would calculate taxes owing if given average tax for the couple or individually if given the tax rate for both.

Question 16

With Net Worth Statement and Cashflow statements, how do you treat RRSP savings?

Answer 16

I would treat them as an expense in the cash flow calculation.
Not an asset…the keyword is savings, not RRSPs.

When given a figure for RRSPs and one is for RRSP savings it means yearly contributions so a cash flow item.

Question 17

Servicing a Loan given the available cash flow. How do you calculate that?

Answer 17

• Use the TVM and Find the PMT
• It is an annuity calculation
• FV=0
• If given 8% compounded monthly remember to /12
• Also N x 12
• Pyr 1 of course
• The given annual cash flow /12 provides the monthly amount available to service the loan

Question 18

What are the risks of borrowing from your mortgage?

Answer 18

You will have to consider or make the client aware that they would have to re-qualify using the STRESS TEST

• also for refinance, taking out LOC, changing lenders*
• renewing with the same lender will not have to undergo the stress test*

Question 19

How does the Stress test work when qualifying for a mortgage?

Answer 19

• DP > or equal to 20%: [5.25% or interest rate offered by the bank] + 2%
• DP <20%: [5.25% or interest rate offered by the bank] HIGHER OF

Question 20

Given questions about debt or comparing loans to LOC for example, what key hints might you look at that might give clues to the solution?

Answer 20

• Look for assets that are underperforming
• Idle cash /underperforming…use against debt
• Use RRSP assets in low income earning years
• Use TFSA and get the room back.

Question 21

What is the advantage of a LOC over a Loan?

Answer 21

• A loan is funded in full immediately which means you are paying interest on the entire amount from Day 1.
• A LOC only requires you to pay interest only on the outstanding balance only

Question 22

TDSR Formula and Limit

Answer 22

TDSR = Mort PMT + prop tax + heat + 50% condo fees + Min Credit card PMT +all consumer loan PMTS)]

​Limit 40-42%

if you have a Outstanding Consumer debt like LOC…
Full amount x 3% x 12 months

Question 23

GDSR Formula and Limit

Answer 23

GDSR = Mort PMT + prop tax + heat + 50% condo fees
Gross Family Income

​Limit 32-53%

Question 24

Solvency Ratio Formula

Answer 24

Solvency Ratio = Net Worth/ Total Assets

Question 25

Savings Ratio Formula

Answer 25

Savings Ration = Cash Surplus/ After-Tax Income