Core Curriculum Chapter 3 Flashcards
PERSONAL FINANCE & OBJECTIVES - What are common financial objectives individuals might set?
Buying a home, purchasing a car, starting a business, family planning, education savings, travel, and retirement.
PERSONAL FINANCE & OBJECTIVES - Why is defining financial objectives in detail important?
It allows for better goal-setting, financial planning, and tracking progress.
Example: setting a clear home-buying timeline and savings target.
PERSONAL FINANCE & OBJECTIVES - What are the two primary ways to fund financial goals?
Using savings/investments or borrowing (credit).
NEEDS, VALUES & FINANCIAL SOPHISTICATION - How do financial needs and values impact a financial plan?
They shape decisions about savings, spending, and investment priorities.
NEEDS, VALUES & FINANCIAL SOPHISTICATION - How can a planner assess a client’s financial sophistication?
By evaluating their use of financial tools, education level, financial history, employment, and net worth.
INTEREST & BANKING - What is the difference between simple and compound interest?
Simple interest is calculated only on the principal, while compound interest accrues on both the principal and previously earned interest.
INTEREST & BANKING - What are the two main types of bank accounts?
Chequing accounts (for daily transactions) and savings accounts (for storing funds with limited transactions).
CREDIT ADJUDICATION & 5 CS OF CREDIT - What are the 5 Cs of credit?
Collateral, Capacity, Character, Capital, and Conditions.
CREDIT ADJUDICATION & 5 CS OF CREDIT - How does GDS (Gross Debt Service) ratio impact lending?
It measures housing costs relative to gross income; lenders prefer GDS to be under 35%.
CREDIT ADJUDICATION & 5 CS OF CREDIT - How does TDS (Total Debt Service) ratio differ from GDS?
TDS includes all debt obligations (e.g., loans, car payments) in addition to housing costs; it should ideally be under 42%.
CREDIT ADJUDICATION & 5 CS OF CREDIT - What is the impact of a poor credit score on borrowing?
It results in higher interest rates, stricter lending conditions, and potential loan denials.
TYPES OF FINANCING - What is an installment loan?
A loan repaid in fixed payments over time, often used for car loans or debt consolidation.
TYPES OF FINANCING - What is revolving credit, and how does it work?
A flexible credit line (e.g., credit card, line of credit) that allows borrowing up to a set limit with varying repayment schedules.
TYPES OF FINANCING - What is a lease, and how does it differ from buying?
Leasing allows access to assets (e.g., cars, equipment) without ownership; payments are made regularly, and the asset is returned or bought at the end.
TYPES OF FINANCING - What is a payday loan, and why is it risky?
A short-term, high-interest loan designed for urgent cash needs, often leading to debt cycles due to high fees.
DEBT MANAGEMENT & BUDGETING - What are common debt repayment strategies?
Snowball method (paying off smallest debts first) and avalanche method (paying off highest interest debt first).
DEBT MANAGEMENT & BUDGETING - Why is an emergency fund important?
It provides financial security for unexpected expenses, reducing reliance on credit.
DEBT MANAGEMENT & BUDGETING - What are key components of a personal budget?
Income, fixed expenses (e.g., rent, mortgage), variable expenses (e.g., groceries, entertainment), and savings.
EDUCATION & RETIREMENT PLANNING - What is an RESP, and how does it help with education planning?
A Registered Education Savings Plan allows tax-deferred savings for a child’s post-secondary education, often with government grants.
EDUCATION & RETIREMENT PLANNING - Why is retirement planning crucial?
It ensures financial independence post-employment, covering expenses like travel, healthcare, and daily living.
NET WORTH & CASH FLOW - How is net worth calculated?
Net Worth = Total Assets - Total Liabilities.
NET WORTH & CASH FLOW - How can a cash flow worksheet improve financial management?
It tracks income and expenses, helping identify areas to save or reallocate funds.
