General Financial Planning Principles Sections 1-5

Question 1

How is Financial Planning defined?

Answer 1

It is a collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Clients personal and financial circumstances

Question 2

What is Step 1 of the financial planning process?

Answer 2

Understanding the clients personal and financial circumstances

Question 3

What is Step 2 of the Financial Planning Process?

Answer 3

Identifying and selecting goals

Question 4

What is step 3 of the Financial planning process?

Answer 4

Analyzing the client’s current course of action and potential alternative course(s) of action.

Question 5

What is step 4 of the Financial planning process?

Answer 5

Developing the financial planning recommendations

Question 6

What is step 5 of the Financial planning process?

Answer 6

Presenting the Financial planning recommendations

Question 7

What is step 6 of the Financial planning process?

Answer 7

Implementing the financial planning recommendations

Question 8

What is step 7 of the Financial planning process?

Answer 8

Monitoring progress and updating

Question 9

How is quantitative data (objective data) measured and what are some examples of it?(3)

Answer 9

It is measurable or expressed as a quantity or number. Examples include: current financial status (e.g. , assets and liabilities), copies of wills and trust and a list of current investments

Question 10

Qualitative data (or subjective data) is related to the ___, _____, and ______. What are some examples of it?

Answer 10

quality of one’s life which represents a client’s feelings, opinions, and attitudes. Examples include;: financial goals and objectives, health status, and risk tolerance level

Question 11

What phase begins at age 20 and 25 and lasts until approximately age 45 or later if the client’s children are not yet independent? How is the beginning of this phase characterized? (4)

Answer 11

Asset Accumulation Phase which is characterized by;

1. Limited funds for investing
2. A lot of debt
3. Low net worth
4. Lack of concern for risk

Question 12

What phase begins around age 45 to 60 or immediately proceeding the client’s planned retirement date?

Answer 12

Conservation/protection phase

Question 13

What phase begins around age 60 or the planned retirement date and the primary focus is often estate planning.

Answer 13

Distribution/gifting phase

Question 14

What does a Statement of Financial Position (balance sheet) show?

Answer 14

A clients net worth. It provides a shapshot of a client’s status.

Question 15

How are assets on a on a Statement of Financial Position categorize? (3)

Answer 15

- Cash and cash 
  equivalents (maturity of 
   less than 1 year)
  - Investments
   - Personal used assets (residence, furniture and autos)

Question 16

How are the liabilities categorize on a State of Financial Position?

Answer 16

Current liabilities - due in less and one year and

Long-term liabilities - due in one year or more

Question 17

The Statement of cash flows reflex what for a client?

Answer 17

The cash flow statement reflects the client’s financial activity over a period of time. It shows the inflows and outflows over a certain period (e.g. January 1, 20XX - December 31, 20XX)

Question 18

What is the difference between non-discretionary expenses vs discretionary expenses?

Answer 18

Non-discretionary expenses are essential (e.g. mortgage, medical, food) and discretionary expenses aren’t essential (e.g. Netflix, concerts, )

Question 19

What is the formula for current ratio?

Answer 19

current assets / current liabilities = current ratio

Question 20

A current ratio of _____ or greater indicates that the client can….

Answer 20

1.0 / indicates that the client can pay off existing, short-term liabilities with available liquid assets. Appropriate target should be 1.0 - 2.0.

Question 21

What is the formula for housing cost ratio and what shouldn’t it exceed?

Answer 21

all monthly non-discretionary housing cost / monthly gross income = housing cost ratio which shouldn’t exceed 28%

Question 22

What is the formula for savings ratio?

Answer 22

savings per year / gross income = savings ratio. Generally, this ratio should be higher for older clients.

Question 23

What are some areas of focus when determining a client’s strengths and weakness? (9)

Answer 23

1. Savings (particularly for retirement)
2. Investments given risk tolerance and
   goals
3. Risk coverage (e.g. insurance)
4. Net worth given client goals
5. Emergency fund
6. Estate planning documentation (e.g.
   wills) and asset transfer plans
7. Articulation of goals
8. Cash flow management skills (including
   proper debt management)
9. Employment status.

Question 24

What is the primary attribute of Federal Housing Administration (FHA) loans?

Answer 24

FHA mortgage has a very low initial down payment and, sometimes, a lower interest rate, given the federal government’s guarantee of repayment.

Question 25

What is required for a homeowner to get in in order to have a FHA loan?

Answer 25

Mortgage insurance is required for any borrower making a down payment of less than 20%.

Question 26

Describe VA (Veterans Administration) loans.

Answer 26

They feature the same federal guarantee of repayment as that for FHA mortgages, but VA mortgages are for service members and veterans of the U.S. armed services. There isn’t a mortgage insurance or down payment requirement.

Question 27

When is the interest of a home equity loans tax deductible?

Answer 27

When the loan is is used for buying, building, or substantially improving a home

Question 28

Total interest paid is determined by…

Answer 28

multiplying the amount of the payment by the number of payments and then subtracting the principal borrowed.

Question 29

What are the four components of mortgage payments?

Answer 29

PITI

Principal (P)
Interest (I)
Taxes (T)
Insurance (I)

Question 30

How does FDIC insurance work for trust accounts?

Answer 30

Generally, $250,000 of coverage is afforded per owner, per beneficiary up to $1,250,000 (five beneficiaries)