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Personal Financial Planning > Ch. 3 > Flashcards

Ch. 3 Flashcards

1
Q

Which of the following best describes the financial approach that provides a visual representation of how a client distributes resources?

A

Pie chart approach

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2
Q

George age 40, is married with 2 daughters. His primary goals include saving for retirement, paying down the mortgage on his new home, managing his risks and education funding for his daughters. Which phases of the lifecycle is George most likely in?

A

Asset Accumulation and Conservation/Risk Management Phases

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3
Q

Which of the following best describes the financial approach that uses quantitative benchmarks that provide guidelines of where the client’s financial profile should be.

A

Metrics approach

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4
Q

Evaluating your client’s emergency fund will fall into which of the following panels of the Three Panel Approach?

A

Panel 2

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5
Q

Which of the following insurance recommendations will result in positive cashflow?

A

Raise insurance deductibles

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6
Q

Which of the following is most likely considered a discretionary cash flow?

A

Netflix Subscription

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7
Q

Megan purchased a new vehicle for $40,000. She put $5,000 down and financed the $35,000 balance over 5 years. What is the impact of this transaction on her net worth?

A

Her net worth remains the same

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8
Q

List first 4 of 8 approaches to financial planning and analysis

A

1 life cycle approach
2 pie chart approach
3 financial statement and ratio analysis approach
4 two step three panel approach

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9
Q

List last 4 of eight financial planning analysis…

A

1 present value of goals approach
2 metrics approach
3 cash flow approach
4 strategic approach

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10
Q

Life cycle approach is used early in financial planning engagement and is a…

A

Brief overview of client’s financial profile

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11
Q

Pie chart approach is a pictorial representation of the client’s…

A

Financial profile based on the client’s balance sheet and statement of income and expenses

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12
Q

The financial statement and ratio analysis approach uses ratios derived from the client’s financial statements that are compared to…

A

Benchmark metrics for evaluation of strengths, weaknesses and deficiencies

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13
Q

The two step/three step panel approach stresses the management of risk and promotes…

A

Financial independence through savings and investing

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14
Q

The present value of goals approach determines the present value of each of the short term, intermediate term and long term goals and compares the sum to the currently available resources. This comparison will generally yield a deficit that can be amortized over the work life expectancy and compared to the current savings rate. If the deficit amount is in excess of current savings…

A

Then savings need to be increased

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15
Q

The metrics approach uses benchmarks for the measurement of where a client’s financial profile should be as compared to…

A

The client actual

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16
Q

The cash flow approach analyzes the income statement to evaluate and prioritize the…

A

Purchase of financial planning recommendations driving down discretionary cash flow

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17
Q

The strategic approach is a mission, goal and objective driven financial plan that considers’…

A

A client’s needs versus wants

18
Q

3 phases of life cycle approach

A

1 asset accumulation phase

2 conservation/risk management phase

3 distribution/gifting phase

19
Q

The asset accumulation phase usually occurs in the early twenties to late 50s when…

A

Cash flow for investing is low and debt to net worth is high

20
Q

The conservation/ risk management phase occurs from late 20s to early 70s where cash flow and net worth have increased and debt has…

A

Deceased somewhat

21
Q

The distribution/gifting phase is from the late 40/ to end of life and usually is characterized by high additional…

A

Cash flow, low debt and high net worth

22
Q

The pie charts are effective for assisting client’s to visualize their financial situation including…3

A

1 where their assets are deployed in cash

2 for long term goals

3 maintaining their current lifestyle

23
Q

Liquidity ratios measure the ability to meet short term objectives including…2

A

1 emergency fund ratio

2 current ratio

24
Q

Discretionary cash flows are expenses that can be…

A

Avoided in event of loss of income

25
Q

3 examples of discretionary cash flows are costs of…

A

1 entertainment

2 vacations

3 cable services

26
Q

Nondiscretionary cash flows are…

A

Fixed expenses that must be met regardless of loss of income

27
Q

Examples of Nondiscretionary payments include 3

A

1 debt payments (mortgage loan, auto loan, credit cards)

2 insurance payments (life, health, property)

3 food and clothing

28
Q

Housing ratio 1

A

= housing costs/gross pay

29
Q

Housing ratio 2

A

= (housing costs + other debt pmts)/gross pay

30
Q

Debt to total assets =

A

Total debt/total assets

31
Q

Net worth to total assets =

A

Net worth/total assets

32
Q

The average savings rate to reach the retirement goal is…

A

10-13% for every 25 to 35 year old

33
Q

Return on investments =

A

I1 - (I0 + savings)/I0

34
Q

Return on Assets =

A

A1 - (A0 + savings)/A0

35
Q

Return on net worth =

A

NW1 - (NW0 + savings)/ NW0

36
Q

The 2 step approach focuses on covering…

A

1 covering the client’s risk

2 and improving saving and investing

37
Q

The 3 panels guide the client and financial planner toward the goals of…

A

Covering risks, saving and investing

38
Q

Panel 1 evaluates the risks and the client portfolio of insurance to determine…

A

The adequacy of coverage

39
Q

Panel 2 evaluates…

A

Short term savings, investments and debt management

40
Q

In panel 2 the emergency fund ration and housing ratios 1 and 2 are all calculated to…

A

Discover ability to meet short term obligations and manage debt

41
Q

Panel 3 focuses on long term savings and investments and determines the level of savings required for…

A

Long term savings including lump sum goals

42
Q

Capital gains, dividends, interest and other portfolio income should not be part of the savings ratio since these are…

A

Are components of investment return

Personal Financial Planning (12 decks)

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