Fundamentals of Financial Planning

Question 1

What is the FP Process?

Answer 1

1. Establish engagement
2. Gather client data (goals / expectations)
3. Clarify financial status (identify areas and opportunities)
4. Develop and Present Financial Plan
5. Implement
6. Monitor and Review

Question 2

What is a personal Net Worth Statement?

Answer 2

Summarizes a clients assets and debts of a specific date

Question 3

What is a Statement Of Cash Flow?

Answer 3

Tallies clients income and expenses over a period of time

Question 4

What is Solvency Ratio?

Answer 4

= Net Worth / Total Assets

Question 5

What is Savings Ratio?

Answer 5

Cash Surplus / After - Tax Income

Question 6

How much to have for Emergency Fund?

Answer 6

3-6 months of SALARY (MMF, CSBs & cashable GICs are acceptable)

Question 7

Strategy Recommendations for low Cash Flow

Answer 7

1. Reduce discretionary expenses (refinance high interest debt)
2. Reorganize Investments
3. Seek to increase income

Question 8

What is a conventional Mortgage?

Answer 8

Mortgage loan does not exceed 80% of purchase price, mortgage that exceeds this must be insured

Question 9

Closed Mortgage

Answer 9

Provides lower rates, remains unchanged and allows small prepayments of 10-15% annually

Question 10

Open Mortgage

Answer 10

May be repaid at any time without penalty, provides flexibility without penalty

Question 11

How do lenders determine a clients capacity to repay a loan?

Answer 11

GDSR (32-35%) or TDSR (40-42%)

Question 12

Gross Debt Service Ratio

Answer 12

(Mortgage pmts +

Question 13

EAP Max for full time students

Answer 13

$5,000 for first 13 consecutive weeks, once 13 weeks up no limit, unless there is 12 month period student is not enrolled… then 13 weeks $5K max applies again and starts process over

Question 14

EAP for part time students

Answer 14

$2,500 for 13 weeks

Question 15

RESP max lifetime contribution limit

Answer 15

$50,000

Question 16

What is the CESG?

Answer 16

RESP Government Grants
For example, with the Canada Education Savings Grant (CESG), the government matches 20% of your contributions, up to $2,500 (max $500 on $2,500) each year – and up to a lifetime maximum grant amount of $7,200 per beneficiary

Question 17

What is maximum term for RESP?

Answer 17

36 years and withdrawals are taxed in students lower tax bracket

Question 18

How are EAPs taxed?

Answer 18

Contributions are paid tax free to beneficiaries (they include the EAPS in the year they use them on t4)

Question 19

What is a Canada Learning Bond

Answer 19

Savings grant from low income families (under $36K) - gov’t adds to childs RESP. Lifetime limit is $2,000. Can be used for full or part time students. CLB cannot be used by another child and must be returned if not used by specified child. CLB and CESG received tax free and do not require repayment.

Question 20

Home Buyers Plan facts

Answer 20

-$35,000 each or ($70,000 per couple)
- you or your spouse can not have owned a home in last 4 years
-must acquire home by October of year following
-you can withdraw money tax free as long as it was deposited 90 days prior minimum
-RRSP must be repaid equally over 15 years annually
Repayments begin 2nd year after withdrawal was made

Question 21

RESP extra facts

Answer 21

• Estate of deceased subscriber can continue to make contributions
• CESGs do not take away from lifetime contribution limits
• EAPs are taxable to plan bene’s names (aka student)
• RESP INCOME ONLY , not the balance, can be transferred to the SUBSCRIBERS RRSP, within limits, NOT the BENE’s RESP.

Question 22

Engagement Letter

Answer 22

CLient needs to:
- Fully disclose their situation
- Outline all parties involved
- Agree with respect to compensation to financial planner

Advisor:
- Any conflicts of interest
- All fees / compensation structure / referral etc
- Timelines
- Full disclosure of services