Cash Flow Management Flashcards
Assisting clients in their financial life, planners must expect to discuss what?
Lifestyle and spending patterns
For what time frame should a client have liquid assets available for an emergency fund?
Generally, three to six months:
One-income household = 6 months
Two-income household = 3 months
One of the best ways someone can reduce insurance expenses is by doing what?
Raise the deductibles on homeowner’s and auto insurance once an emergency fund is established.
Explain the use of CDs as an appropriate emergency fund vehicle.
May provide a higher interest rate than a savings account.
For purposes of the exam, CDs are not as liquid as savings accounts.
- CDs incur a penalty equal to three months’ worth of interest when surrendered early (this will vary across banks and term of CD).
- This makes CDs a less-than-optimal option if the funds are needed in an emergency.
Laddering CD maturities is also an option and provides greater liquidity.
Describe changes to cash flow that will reduce tax liability.
- Making HSA/FSA contributions
- Meeting charitable goals through appreciated stock or Qualified Charitable Distributions (QCDs)
- Increasing pretax contributions to retirement plans
To reduce existing liabilities more quickly, a client should consider the following strategies?
Paying off the highest-interest debt, adjusted for any tax benefits
Refinancing debt to a lower interest rate
What type of loans and lines of credit can be readily available for an emergency fund?
Home equity line of credit (HELOC)
The cash value in life insurance policy (accessible via loan or surrender)
Credit cards
Why are high-yield savings accounts or money market accounts a safe and effective vehicle for holding an emergency fund?
FDIC insured up to $250,000 per account Easily accessed in an emergency No penalty for withdrawing funds Typically pays higher interest than a standard checking or savings account Typically, no or low fees
