Chapter 4 Flashcards
The purpose of net worth planning is fourfold:
- It helps to establish financial discipline.
2.sets out a strategy to achieve a future financial target.
3.provides a means to measure financial progress at regular intervals.
4.It provides reassurance about future financial security.
This type of statement shows how much money flows in and out of a household or business over a set period (generally not exceeding one year)
Cash Flow Statement
This type of statement determines the value of assets and liabilities at a specific point
The net worth statement
If total savings during a given year are not enough to achieve the targeted growth in net worth, the client must act to correct the situation. The two options are
to reduce spending or increase income.
Flexible expenses that can be reduced without seriously affecting the desired lifestyle are called
discretionary expenses.
These types of expenses may include clothing, personal care, and entertainment
discretionary expenses.
Fixed expenses that may affect the desired lifestyle if reduced are called
non-discretionary expenses.
This method of expense control requires some restraint in spending on largely discretionary expenses.
Current Expense Control
It refers to the techniques that can be used to reduce an individual’s debt burden, such as consolidation, refinancing, and deferring the purchase of big-ticket items
Debt Restructuring
The key to long-range financial success is the development of a
systematic savings plan
A systematic savings plan can be used for two purposes;
- To generate necessary savings to achieve set goals
- To systematically direct these savings toward targeted areas to achieve specific financial goals.
The ______________________________, which is based on a client’s current cash flow statement, provides a comprehensive forecast of future income and expenses
Projected cash flow statement
A projected cash flow statement can be used as a planning tool to help clients in the following areas:
- Control Spending
- Ensure Liquidity
- Implement the financial plan
A client’s current ___ ________is the base on which a savings plan is built
current net worth
As for the size of the emergency fund, many advisors recommend the equivalent of _____to _____months of living expenses.
3 to 6 months of living expenses
Part of the premium paid on this type of policy is set aside in a policy reserve (or cash value), which can be withdrawn upon surrendering the policy
permanent life insurance policy
This means that a dollar held or received today is worth more than a dollar received at a later date, given that today’s dollars can be invested to generate some type of return.
time value of money (TVM).
Making contributions (PMT) at the Beginning of each year on an annuity is called
annuity due
During calculations, if the contributions are “starting today” or they contribute “at the beginning” you need to set your calculator in this mode
BGN
Right away, you should recognize this as an annuity problem. However, there is one difference that distinguishes this problem from the others we have seen so far: the payments do not begin for another five years. As you should recall, this type of cash flow pattern is known as a
deferred annuity.
The four main reasons for undertaking net worth planning are to:
- Establish financial discipline (discipline)
- Have a strategy to achieve a future financial target (strategize)
- Measure financial progress on a regular basis (Measure Progress)
- Feel financially secure about the future. (Security )
The value of a defined benefit pension plan should be recorded at its _______ value.
Commuted (reduced)
