Business Cycles, Consumer Protection Flashcards
7 steps of the financial planning process
- understanding the client’s personal and financial circumstances
- identifying and selecting goals
- analyzing the client’s current course of action and potential alternative courses of action
- developing the financial planning recommendations
- presenting the financial planning recommendations
- implementing the financial planning recommendations
- monitoring progress and updating
examples of quantitative information
client’s age, dependents, other professional advisors, income, expenses, cash flow, savings, assets, liabilities, available resources, liquidity, taxes, employee benefits, government benefits, insurance coverage, estate plans, education and retirement accounts and benefits, capacity for risk
examples of qualitative information
client’s health, life expectancy, family circumstances, values, attitudes, expectations, earnings potential, risk tolerance, goals, needs, priorities, current course of action
life insurance risk benchmark
10-16 x gross income
health insurance risk benchmark
at least $1 million lifetime cap (pre-ACA)
disability insurance risk benchmark
if a client is paying premiums with after-tax dollars, then a policy paying about 60-70% of gross income is necessary
property insurance risk benchmark
policy that covers both home and auto for FMV
long-term care insurance risk benchmark
policy that provides a daily benefit for nursing home care, home health care or help with ADLs, with inflation protection
personal liability umbrella policy (PLUP) risk benchmark
$1-3 million in liability protection
emergency fund savings benchmark
3-6 months of non-discretionary expenses
housing ratio
a client’s primary mortgage (PITI) should not exceed 28% of gross income
housing plus all other debt ratio
a client’s primary mortgage (PITI) plus all other recurring debt payments should not exceed 36% of gross income
education funding savings benchmark
$3,000/year (for public state university), $6,000/year (for semi-private), or $9,000/year (for competitive private) savings for 18 years
retirement savings benchmark
at age 62-65, an individual should have 16 times the amount of income needed annually saved for retirement
savings rate towards retirement goal benchmark
an individual should save 10-12% towards a retirement goal assuming savings starts at an early age
return on investments benchmark
an investor should expect a return on investments of 8-10% assuming a long-term time horizon
standard deviation of diversified portfolio benchmark
8-14%
“big three” legacy documents
- will
- durable power of attorney for healthcare
- advanced medical directive
factors of economic environment
interest rates, taxes, inflation, unemployment, monetary and fiscal policy
demand
reflects the quantity of a good or service that consumers are willing to purchase
heavily dependent upon prices
as prices increase, demand … ?
as prices increase, demand decreases
as prices decrease, demand …?
as prices decrease, demand increases
quantity demanded
how much consumers are willing to demand at certain price levels
the demand curve will shift and thus create a change in demand due to an increase or decrease in … ?
incomes, taxes, savings rate, disposable income
what makes the demand curve shift up and to the right?
anything that causes discretionary income to increase
what makes the demand curve shift down and to the left?
anything that causes discretionary income to decrease
supply
reflects the quantity of a good or service that businesses are willing to supply at a given price
the higher the price, supply … ?
the higher the price, the more suppliers are willing to supply
the lower the price, supply … ?
the lower the price, the less suppliers are willing to supply
the supply curve will shift to the left or right because of a change in … ?
technology, competition, anything other than price
what makes the supply curve shift down and to the right?
anything that causes production to improve
what makes the supply curve shift up and to the left?
anything that causes production to decrease (anything that increases production costs)
equilibrium
the price at which the quantity demanded equals the quantity supplied
substitutes
products that serve similar purposes
a price change in one product changes the quantity demanded for another product
complements
products that are consumed jointly
a price change in one product changes the quantity demanded for another product
elastic demand
quantity demanded responds SIGNIFICANTLY to changes in price
examples of elastic demand
airline tickets, movie tickets, alcohol, luxury goods
shape of elastic demand curve
almost horizontal, sloping down and to the right
inelastic demand
quantity demanded changes VERY LITTLE to changes in price
examples of inelastic demand
milk, gasoline, insulin
shape of inelastic demand curve
almost vertical, sloping down and to the right
expansion phase of business life cycle
increasing GDP, increasing inflation, increasing interest rates, decreasing unemployment rate
peak phase of business life cycle
GDP at its highest, inflation at its highest, interest rates at their highest, unemployment rate at its lowest
recession phase of business life cycle
GDP slowing, inflation decreasing, interest rates decreasing, unemployment rate increasing
trough phase of business life cycle
GDP at its lowest, inflation at its lowest, interest rates at their lowest, unemployment rate at its highest
4 phases of business life cycle
- expansion
- peak
- recession
- trough
what does GDP stand for?
Gross Domestic Product
what does GDP measure?
measures the amount of goods and services produced in the US, regardless of ownership
what does GNP stand for?
Gross National Product
what does GNP measure?
measures the amount of goods and services produced by a country’s citizens, regardless of where the goods and services are produced
recession definition
6 consecutive months (2 quarters) of declining GDP
depression definition
18 months (6 quarters) of consecutive declining GDP
inflation definition
an increase in prices
a loss of purchasing power is the risk that inflation impacts
moderate inflation
when prices are slowly increasing
1-2% per year
galloping inflation
when money loses value very quickly
deflation
the opposite of inflation, where prices are falling
disinflation
a decline or slowdown in the rate of inflation
what does CPI stand for?
Consumer Price Index
what does CPI measure?
measures the price changes in a basket of goods and services at the retail level
historically 2-3% per year
what does PPI stand for?
Producer Price Index
what does PPI measure?
measures price changes in the wholesale and manufacturing sectors
monetary policy
the policy and means by which the Federal Reserve controls the money supply and influences interest rates
3 goals of the Federal Reserve
- maintain long-term economic growth
- maintain price levels supported by the economy
- maintain full employment
how does the Federal Reserve ease monetary policy?
increasing money supply and decreasing interest rates
how does the Federal Reserve tighten monetary policy?
decreasing money supply and increasing interest rates
4 tools the Federal Reserve uses to influence the money supply and interest rates
- reserve requirement
- discount rate
- open market operations
- excess reserves
reserve requirement
a percentage of deposits a bank must maintain in cash
what happens when the reserve requirement is increased?
there’s less cash available (bank must keep a higher amount deposited), therefore there’s less cash to lend and the money supply decreases and interest rates increase
what happens when the reserve requirement is decreased?
there’s more cash available (banks don’t need to hold as much deposited), therefore there’s more cash to lend and the money supply increases and interest rates decrease
discount rate
the overnight interest rate at which member banks can borrow from the Federal Reserve to meet their reserve requirements
what happens when the discount rate increases?
short-term interest rates increase
what happens when the discount rate decreases?
short-term interest rates decrease
open market operations
as the Federal Reserve buys/sells government securities, the money supply is influenced and places pressure on interest rates
what happens when the Federal Reserve buys treasuries?
money supply increases and interest rates decrease
what happens when the Federal Reserve sells treasuries?
money supply decreases and interest rates increase
excess reserves
monies that a bank holds at the Federal Reserve (or central bank) in excess of the required reserve amount
fiscal policy
the policy and means by which Congress controls spending and taxation, which influences the money supply and interest rates
3 goals of Congress related to fiscal policy
- maintain economic growth
- maintain price stability
- maintain full employment
3 tools Congress uses to influence fiscal policy
- taxation
- spending
- debt management
impact of increasing tax rates on money supply and interest rates
increasing tax rates will reduce money available for spending thereby increasing interest rates
impact of decreasing tax rates on money supply and interest rates
decreasing tax rates will increase money available for spending thereby decreasing interest rates
how does government spending impact the money supply and interest rates?
through government spending, Congress can increase the money supply and decrease interest rates
how does government cutting spending impact the money supply and interest rates?
Congress can cut spending which increases interest rates and decreases the money supply
deficit spending
when Congress spends more than tax revenues that are collected
what happens as Congress borrows money to continue deficit spending?
the amount of dollars available to be lent decreases, placing pressure on interest rates
yield curve
diagram that plots the current interest rates against the term to maturity for similar securities (such as treasuries)
how does expansionary policy impact the yield curve
will result in a normal yield curve
how does contractionary policy impact the yield curve?
will result in an inverted yield curve
Chapter 7
provides relief through liquidation
debts not discharged through Chapter 7
student and government loans, 3 years of back taxes, alimony and child support, monies owed due to malicious acts, drunk driving, criminal fines and penalties, or embezzlement
property exempt from Chapter 7
homestead, life insurance, qualified plans
how much exemption is there on qualified plans and IRA rollovers?
unlimited exemption
how much exemption is on Traditional IRAs and Roth IRAs
$1,362,800
Chapter 11
provides relief through reorganization for businesses or the self-employed
Chapter 13
provides relief through adjusting debts
what is the max number of weeks someone can receive unemployment compensation?
39 (26 weeks of regular benefits, plus 13 additional weeks in periods of high unemployment)
what does ERISA do?
protects retirement plans of employees
Securities Act of 1933
regulates new issues of securities in the primary market
primary market
securities market where new issues are sold to the public for the first time (IPOs)
Securities Act of 1934
regulates secondary markets, established the SEC
secondary markets
buying/selling of securities that were previously sold in the primary markets
Securities Investor Protection Act of 1970
created Securities Investor Protection Corporation (SIPC), provides coverage if a broker-dealer becomes insolvent or if there is unauthorized trading in an investor’s accounts
