Chapter 2 - Budgeting and Consumer Lending Flashcards
What 3 essential questions does a cash flow statement answer to create a budget?
- How much money is there?
- Where does it come from?
- Where does it go?
What is a personal cash flow statement?
A record of a client’s cash flow over a specific period, usually one year. Consists of two main parts: net income received, expenses paid.
What is the purpose of a cash flow statement?
Assess a client’s ability to increase their net worth by decreasing expenses.
What are the 12 expenditure categories/clusters?
- Housing
- Groceries
- Clothing
- Transportation
- Health care
- Child or parental care
- Personal grooming
- Leisure
- Education
- Savings and investments
- Debt reduction
- Miscellaneous
What are the 2 types of expenses?
Basic and discretionary.
What are examples of discretionary expenses?
Flexible expenses that include leisure, private education, non-essential home renovation, savings and investments, some debt reduction and some miscellaneous items. Some basic expenses may be discretionary in the amount that the client spends.
What is true of someone who spends most of their income on basic expenses rather than discretionary?
They will have a lowered ability to reduce their expenses.
What are the 3 steps in creating a budget?
- Record income, expenses, to determine cash flow and set a savings goal
- Identify basic and discretionary expenses to determine which expenses can be cut, then adjust expenses accordingly
- Review your budget monthly
What are the 14 tips for making a good budget?
- Set goals
- Overestimate expenses, underestimate income
- Know how much is in your account at all times
- Make debt payment a priority
- Pay yourself first
- Trim your expenses
- Share what you can
- Keep separate accounts (spending vs savings)
- Implement savings and investment plans for short and long term goals
- Reduce insurance coverage
- Pay with cash
- Match funds
- Save unexpected cash
- Do not skimp on health care
What are the two main reason that the consumer credit industry has gone through changes?
Changes in technology.
Changes to regulations.
What are the 5 Cs of credit?
- Character - client’s honesty, reliability, and intention to repay credit
- Capacity - client’s ability to repay the loan
- Credit - past credit history
- Collateral - property that can be used to secure a loan
- Capital - net worth
Who determines credit history?
A credit bureau.
What is a beacon score?
Another name for a credit score which is provided by credit-reporting agencies. It’s a numerical value based on a statistical analysis of the borrower’s information.
What 4 types of information are generally included on a credit report?
- Personal information
- Account history
- Inquiries
- Public record information
What is a debt service ratio?
Ratio of 2 numerical values selected from a borrower’s financial statements that are used as a guideline to help lenders evaluate a client’s financial situation.
What is the GDS and TDS?
Gross debt service - all housing costs as a % of annual gross income.
Total debt service - all housing costs and other annual debt payments as a % of annual gross income.
What is considered an acceptable GDS ratio?
Generally a ratio of 32% or less.
What is considered an acceptable TDS ratio?
Generally a ratio of 40% or less.
What are the pitfalls of the GDS and TDS ratios?
- Only highlight a client’s current situation, does not consider the future
- Do not provide information on a client’s short-term liquidity or long-term solvency
- Based on gross income, not net income
- Only applicable for average family incomes
What is a charge account?
Account that allows customers to purchase goods and services on credit up to a specified limit with payment made at a later date. Typically have high fees and interest rates. Can be a charge card, open account credit, or conditional sales contract.
What is the typical repayment on a line of credit?
Typically either a minimum monthly payment or a percentage of the limit.
What is a HELOC?
Home-equity line of credit. Secured line of credit where a portion of a borrower’s equity in a home is used as collateral. Can borrow a larger amount (up to a maximum of 65% of the home’s value less any outstanding mortgage) at a lower interest rate.
If a client wishes to have a HELOC for 80% of a home’s value, the extra 15% must be done as a mortgage segment under the HELOC plan,
What is a debt consolidation loan?
A way to consolidate multiple debts into one loan with one monthly payment at a lower interest rate.
