FP 511-Gen FP- module 3 ratios

Question 1

Consumer Debt Ratio

Answer 1

Monthly net income

• Includes debt other than mortgage
• Should not exceed 20%

Question 2

Housing Cost Ratio

Answer 2

Monthly gross income

(Aka Front end test)

-Should not exceed 28% of gross monthly income

Question 3

Total Debt Ratio

Answer 3

Monthly gross income

(aka back end test)

-Should not exceed 36% of gross mo income

Question 4

Current Ratio

Answer 4

Current Ratio
_______________
Current short term liabilities

• Higher ratio is good (>1)
• Shows liquidity- represents ability to service ST liab’s in case of emergency

Question 5

Net Investment Assets to Net Worth Ratio

Answer 5

Net investment assets
___________________
Net worth

• excludes home equity
• Ratio should be at least 50%
• % should get higher as retirement approaches
• younger clients may have < 20% ratio b/c they haven’t had time to build up a portfolio