General Financial Planning Flashcards
Recessions vs Depression
Recession - 2 or more consecutive quarters. Depression - 6 or more.
Discount Rate
Rate the fed reserve charges for banks to meet the reserve requirement.. This should not be confused with the prime rate. (Often an answer on the exam and wrong)
Prime Rate is the rate commercial banks charge their most creditworthy customers.
American Opportunity Credit
$2,000 of first expenses + 25% of next $2,000 ($2,500 total) *subject to MAGI phaseouts on tax sheet
*Cannot be used (on same dollars) if distributions from coverdell are excluded from income
Real Rate Return
(1 + after tax return / 1 + inflation rate) - 1 x 100
Whenever a question asks to use today’s dollars, use the real rate.
What should housing debt ratio be? Total debt? Consumer debt?
28% for housing, 36% for total, and 20% for consumer.
Housing included PITI (Principal, Interest, Property Taxes, and Insurance)
How many days do you have to report a charge or conviction?
30
Does the financial planning agreement need to be written?
Yes.
Qualitative vs Quantitative Data
Quantitative information is factual while qualitative info addresses attitudes, emotions, and desires. (Health status can be subjective) (Ages, addresses, SSN, investments, wills/trusts, names of trustees/advisors are all quantitative.)
When do you act as a fiduciary?
Whenever you provide financial advice.
How long do you have to appeal a DEC ruling?
30 days
(max suspension is 5 years)
What has to be in writing to client?
privacy policy, how it will be compensated, terms of engagement with client, services, and any bankruptcy/disciplinary history relating to yourself or firm.
material conflicts can be provided orally.
What does fee based planner mean?
Fees and commissions only
Capitalization Value formula?
Annual Income / Capitalization Rate
Pro Forma Statement
This projects the expected profitability or return over the next year or longer.
Current Ratio
Current Assets / Current Liabilities
Don’t use taxes in equation unless material says they are due or payable. use mortgage info unless they tell you the current amount of mortgage due.
Muni bond is an asset
Don’t use 401k (subject to 10% penalty and ordinary income)
Fixed Outflows
Does not include FICA, federal, or state taxes. Does include property taxes
Net worth
assets - liabilities
(use investments including retirement, value of home, ect in assets) (liabilities include mortgage amount)
*life insurance doesn’t count if no cash value
*don’t count interest earned or cash dividends as an asset. These get counted as income and gets added to salary
Debt on cash flow statement
Does not include taxes and insurance.
College Funding
Determine how much first year of college will be.
Determine amount that must be available when 18. (Use Real rate here and put in beg mode)
Determine how much parents need to save. (This could be beg or end depending on the question.) (Don’t use real rate here)
Education funding strategies
UGMA/UTMA - Subject to kiddie tax for children under 24.
EE Bonds - Owned by parents
Coverdell - Limited $2,000 a year
529 - $16,000 a year. or $80,000 if contributing the 5 year
lifetime learning credit
$2,000 (MAGI phaseouts)
Coverdell
Contributions are a gift of present interest
Must be used before you are 30 (MAGI phaseouts)
Coverdell AKA ESA
529
No MAGI phaseouts. 2 different types: College savings and prepaid tuition. Prepaid tuition tracks tuition inflation.
5 year gifting not allowed if trust makes the contributions to the 529
*If there are any non-parent contributions to 529, make sure to use in junior/senior year so it doesn’t mess with fafsa
UGMA/UTMA
assets owned by child
UTMA can have real estate or LP
Kiddie tax
1) $1,150 of unearned income is tax free
2) Next $1,150 is taxed at child’s tax rate (10%)
3) anything else gets taxed at parents marginal rate
*If child has earned income greater than the standard deduction ($1,150), the amount of eanred income plus $400 is used in step 1
Lifetime learning credit
20% of first $10,000 qualified ed expenses ($2,000 max)
*Cannot be used (on same dollars) if distributions from coverdell are excluded from income
Unsubsidized loan
interest accrues immediately
They are available to graduate students.
Federal Funds Rate
Rate banks charge one another to borrow.
Trough vs peak
Right before economy begins to recover from trough cyclical industries tend to outperform. (durable goods, cars, apploances). Leading economic indicators (stock prices, ect) would begin to turn up in trough.
Peak - Right before economy enters recession/contraction, defensive industries will out perform. (food producers, pharmaceutical, utilities.)
Anchoring
Attachment to specific price as the fair value.
Attachment Bias
Holding onto an investment for emotional reasons
Endowment Bias
The feeling that because you own an asset, it is more valuable and special since it is yours. In reality, you may not even purchase the asset if you didn’t already own it.
Ex. You inherit family home and wont sell it even though it is money pit.
Cognitive Dissonance
The challenge of reconciling two opposing beliefs.
Ex. Remembering the positive part of an experience but forgetting the negative.
Confirmation Bias
Natural human tendency to accept any new info that confirms our preconceived position or opinion to disregard any info that does not support that preconceived notion.
Fear of Regret
tendency to take no action rather than risk making the wrong one.
Gamblers Fallacy
An individual incorrectly that the onset of a certain random event is likely to happen following an event.
Herd Behavior
individuals mimic actions of a larger group.
Hindsight Bias
The 20/20 vision we have when looking at a past event and thinking we understand it, when it reality we may not.
Inappropriate Extrapolation
Tendency to look at recent events (or market performance) and assume those events or conditions will continue indefinitely,
Loss Aversion or Risk Taking
Investors find losses twice as hard to take then gains are pleasurable. Investors will have a strong tendency to hang on to losers.
Prospect Theory
(similar to loss aversion/risk taking). Describes the different ways people evaluate losses and gains. Researchers found that losses have a much greater negative impact.
Mental accounting
entails looking at sums of money differently.
Outcome Bias
Tendency to make a decision based on desired outcome rather than the probability of that outcome.
Overconfidence
Often works hand in hand with confirmation bias. It is the tendency to place too much emphasis on one’s own abilities.
Overreaction
Investors emotionally react to new market information.
Self-Affirmation Bias
Belief that when something goes right, it is because you were smart and made the right decision. If it does not work out it was someone else fails or bad luck.
Status Quo
tendency of investor to do nothing when action is actually called for.
A financial planning agreement must be written
If monthly fixed and variable outflows are more than what’s in the checking account, then you cannot use it as part of their emergency fund.
If question asks what the yearly amount of debt is, use mortgage payments, and auto payments. (no taxes and insurance.)
When question asks how much money are they saving, make sure to read foot notes. Often times the employer has a match for retirement that gets included.
If the question asks to prioritize goals, if they have high debt, they can’t establish emergency fund before they reduced the debt
When NPV is zero, the IRR matches the required rate of return
FDIC insurance categories
Individual accounts, joint account, revocable, trust, and IRAs and Keoughs
States court system
They determine a decision on meaning of policy term.
State commissioner
Enforces day to day application of laws
Education problems
Determine cost us first year: inflate current college cost to determine first years cost
Determine what’s available once child is 18. Take step 1’s FV and use it as PMT for 4 years. Solve for PV (use BEG mode)
Determine how much parents need to save
Any payments made to maintain property owned by payor are not alimony (even if the wife uses it)
Fiscal policy
Fiscal policy activities include expenditures, taxation, and debt management.
Not money supply (fed controls that)
if you receive commissions you must register with FINRA. If you recommend products, you must register as Investment Advisor.
Series 6
can sell variable annuity and UIT (Unit Investment Trust) (an initial offering)
if it says they have all applicable state licenses then can trade variable life insurance as well.
Ch 7 bankruptcy
Child support, alimony, and government loans are not cancelable
Expressed authority
Written, explicit direction from the insurance company to the agent
Bankruptcy
Only traditional and Roth IRA’s are protected up to $1 million. SEPS, simples, ERISA plans, and deferred compensation plans are generally protected.
ESA and 529 plans must be opened more than two years before filing to be exempt.
Everyone must complete a consumer credit counseling program prior to the filing
