Financial Planning General Flashcards
Principles
Integrity Objectivity Competence Fairness Confidentiality Professionalism Diligence
Financial planning process
Establish the client/planner relationship
Gather client data
Analyze and evaluate client’s financial status
Develop and present financial planning recommendations
Implement financial plan
Monitor plan
Life cycle approach
Takes into account client: age, martial status, children, income, net worth, employment status: Accumulation Phase, Conservation Phase, Distribution Phase
Pie chart approach
income and expense pie chart; assets, liabilities and net worth
Emergency fund ratio
Cash and cash equivalents (current assets)/monthly non-discretionary spending.
Should be 3-6 depending on job security, single income/dual income.
Current Ratio
current assets (cash and cash equivalents)/current liabilities (due within 12 months, including 12 months of mortgage principal) The higher the better
Housing Ratio 1
Front-end ratio
(Principal + Interest + Tax + Insurance)/monthly gross income
should be ≤28%
Housing Ratio 2
Back-end ratio
(Principal + Interest + Tax + Insurance + other debt payments)/monthly gross income
should be ≤36%
Consumer Debt Ratio
monthly debt payments/monthly net income
should be ≤20%
Savings Rate
(savings + employer match + reinvestments)/gross pay
Investment Assets to Gross Pay
Benchmarks: 25 y.o. - .02 : 1 30 y.o. - .06-.08 : 1 35 y.o - 1.6-1.8 : 1 45 y.o. - 3-4 : 1 55 y.o. - 8-10 : 1 65 y.o. - 16-20 : 1
ROI
Return on Investments:
invested worth today - (invested worth, 1 year ago + savings)/ invested worth, 1 year ago
Benchmark 8-10%
Balance sheet
Assets:
Cash and cash equivalents
Investment assets
personal use assets
Liabilities:
Current liabilities
Long-term liabilities
Net Worth
Cash flow approach
Adjusts the cash flow by forecasting impact of recommendations.
Limitations of balance sheet
Does not explain:
why or how an asset increased
why or how an asset/liability appears
changes in net worth
Statement of income and expenses
shows a period of time
all forms of income
savings
expenses (both variable and fixed)
Budget process
Determine income and expenses (both fixed and variable); determine if net discretionary income is positive or negative
Net present value
Present value of future cash flows - cost of the investment
0 or positive investment returns are good.
negative, dont invest
FAFSA
Free Application for Federal Student Aid. Determines EFC (Expected Family Contribution)
Pell Grant
Awarded on the basis of need
Undergraduate only
FSEOG
Federal Supplementary Educational Opportunity Grant
Exceptional financial need
Students already received Pell Grant
Stafford Loan
can be subsidized - need-based- (accrues interest while in school) or unsubsidized - not need-based - (does not accrue interest until repayment starts)
forgiven after 20 years
undergraduate and graduate students
full and part time students
Perkins Loan
Federal loan for students with exceptional need
undergraduate and graduate students
PLUS Loan
Parents Loan for Undergraduate Students
Based on credit history, not on need
Interest begins to accrue immediately
Prepaid Tuition
Prepaid Tuition -
Purchase college credits today for use later
Must be in-state
529 Savings Plan
- Contribute up to 5 times the gift tax exclusion amount
- Amounts based on funder, not beneficiary
- Can be used for: tuition and fees, books, supplies and equipment, room & board if at least 50% student
- No income phase-outs
- Distributions are fed/state tax free for qualified expenses
- If not, 10% penalty plus tax
- Considered parental assets
- If scholarship received, equivalent amt can be distributed w/out penalty
Coverdell Education Savings Account
- Up 2K per beneficiary per year
- Income phase-out
- Can be used for private school
- Must be distributed by age 30
EE and I Bonds
- can be redeemed to pay qualified education expenses
- NOT room and board
- must be purchased in name of parent
- must be redeemed in year of payment
- can be converted to another plan
- income phase-outs
Student Loan Interest Deduction
- up to $2,500/year
- first 5 years of repayment
- must have been used for qualified expenses
American Opportunity Tax Credit
- up to $2,500 in expenses for the first 4 years of qualified expenses
- 100% of first $2000, 25% of 2nd $2,000
- per student
- includes tuition, fees and books as long as paid directly to university
- income phase-outs
- can’t use in same year as LLC
Lifetime Learning Credits
- 20% of first 10,000 per family
- unlimited number of years
- expenses must be paid to university
- can’t use in same year as AOTC
- income phase-outs
Scholarships/Fellowships
- paid to student
- fellowships: generally involve work
- scholarships generally tax free as long as recipient is: a candidate for a degree and proceeds are used for qualified expenses
UGMA/UTMA
Uniform Gift to Minors Act/Uniform Transfer to Minors Act
- assets in minors’ name
- when reaches to age of majority, total control
- kiddie tax (taxed at parental rate with 2K or more income)
GDP
- measures value of goods/services made on US soil
- C+I+G+(X-M)
- Consumption + Investment + Government Spending + Net exports
- nominal GDP is inflation adjusted
- nominal GDP/Real GPD = GDP Deflator
Inflation
- increase in the general level of prices of goods and services
- decline in the real value of money
- measures using CPI and PPI
Disinflation
*slowdown in rate of inflation
Deflation
- decrease in the general price level of goods and services
* increases in the real value of money
Unemployment
- individuals ≥16 actively looking for work
* full employment = 95%
Business Cycle
Based on: GDP, Inflation, Interest Rates and Unemployment (Unemployment inversely related to others)
Expansion
Peak
Contraction
Trough
Leading Economic Indicators
Predicts changes in economy
Average weekly hours (manufacturing)
Average weekly jobless claims for unemployment insurance
Manufacturers’ new orders for consumer goods/materials
Vendor performance (slower deliveries diffusion index)
Manufacturers’ new orders for non-defense capital goods
Building permits for new private housing units.
The Standard & Poor’s 500 stock index
Money Supply (M2)
Interest rate spread (10-year Treasury vs. Federal Funds target)
Index of consumer expectations
Lagging Economic Indicators
Summarizes past performance:
The average duration of unemployment (inverted)
The value of outstanding commercial and industrial loans
The change in the Consumer Price Index for services
The change in labour cost per unit of output
The ratio of manufacturing and trade inventories to sales
The ratio of consumer credit outstanding to personal income
The average prime rate charged by banks
Coincident Economic Indicators
Change along with business cycle: Number of employees on non-agricultural payrolls Personal income less transfer payments Industrial production Manufacturing and trade sale Nonfarm payroll employment Average hours worked in manufacturing Unemployment rate Wage and salary disbursements deflated by the consumer price index (U.S. city average)
Monetary Policy
Executed by Federal Reserve:
- Change reserve requirement
- Open market operations: buy/Sell government bonds
- Change discount rate
- Change excess reserve deposit rate
Tighten policy: increase reserve req.; sell gov’t bonds; decrease discount rate; increase excess reserve rate
Decrease in M2 = increase in interest rates
(tightening, increases interest rates)
Fiscal Policy
Executed by Congress
- taxation
- gov’t spending
- deficit management
Goals of Fed/Congress
- maintain price levels
- maintain long-term economic growth
- maintain full employment
Demand
As prices increase, quantity demanded decreases
Factors that cause demand curve to shift up/to the right
Those that result in more consumer income
- increase in disposable income
- decrease in taxes
- decrease in U
- decrease in savings rate
- increase in price of substitute
Substitutes/Compliments
Substitutes - items purchased instead of something else (chicken, pork)
Complements - items purchased with something else (iPhones and cases)
Elasticity of demand
Small price change causes large change in demand
Elastic - flat demand curve (luxury items)
Inelastic - vertical demand curve (gasoline)
Supply
Higher the price, the more supplied
Opportunity Cost
The value of the best forgone alternative
Bankruptcy
Chapter 7 (most common) - Discharges debts
Chapter 11 - for companies
Chapter 13 - wage earners; repay some amount over time
Bankruptcy-exempt assets
- traditional/Roth IRA’s up to $1M
- rollover IRA’s unlimited
- qualified retirement plans, deferred comp, tax-deferred annuities
- some personal property
- education funds in qualified plan
Bankruptcy non-dischargeable debts
- child support
- alimony
- 3 years of back taxes
- student loans
- debts obtained through fraud
- property liens
FDIC
Federal Deposit Insurance Corporation
*up to $250K per depositor, per account ownership, per institution
SIPC
Securities Investor Protection Corporation
- up to 500K in securities for broker-dealer insolvency
- up to 250K in cash
Third Party (Family) Special Needs Trust
- preserves government benefits
- parent/guardian funds trust to provide medical treatments, education, and transportation (no living expenses)
- remainder beneficiary can be anyone
Letter of Intent
letter that outlines goals, wishes, and relevant information for special needs dependent after death of parent/guardian.
Special Needs Trusts Under 42 USC Sec. 1396p(d)(4)(A)
- avoids disqualification of benefits
- established by parent/guardian/court
- can be proceeds of settlement or inheritance or other funds
- State received remainder up to the amount paid out during lifetime
Pooled Trust
- administered by nonprofit with each beneficiary havinh own account
- funded by anyone
- established solely for benefit of disabled person
- remainder may go to State up to amt. paid out during lifetime.
ERISA
protects employer-sponsored retirement plans
Exceptions to Registered Investment Advisor
TABLEs are incidental
If investment advice is incidental to conduct of business
Teachers Accountants Brokers whose advisory services are incidental Lawyers Engineers
Exemptions from RIA registration
VIP’s are SaFE
Advisors to:
Venture capitalists
Insurance companies
Private funds of less than $150M
advisors whose clients are all in home State and do not provide advice about nationally listed securities
Foreign advisors
advisors not providing advice about securities listed on a national Exchange.
FINRA registration form
U-4
3 Panel Approach
Risks
Short-term savings and investments
Long-term savings and investments
Life insurance coverage amount
10-16 times gross pay
Disability coverage amount
60-70% of gross pay
Long-term care insurance coverage amount
Inflation protection - 36-60 months
PLUP coverage amount
1-3M
Education amount savings amount
1K annually for public
3K annually for semi-private
6K annually for private
Retirement benchmark at age 62-65
16 times income necessary
Savings rate benchmark
10-12% saved toward retirement if started at early age.
Risk benchmark
Standard deviation of 8-14% for diversified portfolio.
Reserve liability account
When preparing financial statements out aside a reserve liability account for taxes owed on the sale of assets
Income Based Repayment
Stafford loans and most other Fed. loans.
Monthly payment of 15% of discretionary income with forgiveness after 25 yrs.
RIA Exceptions
TABLE’s are incidental
Teachers
Accountants
Brokers
Lawyers
Engineers
whose investment advice is incidental to profession
Banks that are not investment companies
Publisher of bona fide newspaper/publication
Advisors who advise solely about US gov’t securities
RIA Exemptions
VIP’s are SaFE
Advisors to Venture capitalists
Advisors whose only clients are Insurance companies
Advisors to Private funds w/less than 150M
Advisors whose clients live in home State and don’t give advice on nationally listed securities
Foreign advisors
Advisors who give advice on securities not on a nat’l Exchange
Chapter 13 Bankruptcy
For wage earners; debt restructuring
