General Financial Planning Principles Sections 1-5 Flashcards
How is Financial Planning defined?
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
What is Step 1 of the financial planning process?
Understanding the clients personal and financial circumstances
What is Step 2 of the Financial Planning Process?
Identifying and selecting goals
What is step 3 of the Financial planning process?
Analyzing the client’s current course of action and potential alternative course(s) of action.
What is step 4 of the Financial planning process?
Developing the financial planning recommendations
What is step 5 of the Financial planning process?
Presenting the Financial planning recommendations
What is step 6 of the Financial planning process?
Implementing the financial planning recommendations
What is step 7 of the Financial planning process?
Monitoring progress and updating
How is quantitative data (objective data) measured and what are some examples of it?(3)
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
Qualitative data (or subjective data) is related to the ___, _____, and ______. What are some examples of it?
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
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)
Asset Accumulation Phase which is characterized by;
- Limited funds for investing
- A lot of debt
- Low net worth
- Lack of concern for risk
What phase begins around age 45 to 60 or immediately proceeding the client’s planned retirement date?
Conservation/protection phase
What phase begins around age 60 or the planned retirement date and the primary focus is often estate planning.
Distribution/gifting phase
What does a Statement of Financial Position (balance sheet) show?
A clients net worth. It provides a shapshot of a client’s status.
How are assets on a on a Statement of Financial Position categorize? (3)
- Cash and cash equivalents (maturity of less than 1 year) - Investments - Personal used assets (residence, furniture and autos)
How are the liabilities categorize on a State of Financial Position?
Current liabilities - due in less and one year and
Long-term liabilities - due in one year or more
The Statement of cash flows reflex what for a client?
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)
What is the difference between non-discretionary expenses vs discretionary expenses?
Non-discretionary expenses are essential (e.g. mortgage, medical, food) and discretionary expenses aren’t essential (e.g. Netflix, concerts, )
What is the formula for current ratio?
current assets / current liabilities = current ratio
A current ratio of _____ or greater indicates that the client can….
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.
What is the formula for housing cost ratio and what shouldn’t it exceed?
all monthly non-discretionary housing cost / monthly gross income = housing cost ratio which shouldn’t exceed 28%
What is the formula for savings ratio?
savings per year / gross income = savings ratio. Generally, this ratio should be higher for older clients.
What are some areas of focus when determining a client’s strengths and weakness? (9)
- Savings (particularly for retirement)
- Investments given risk tolerance and
goals - Risk coverage (e.g. insurance)
- Net worth given client goals
- Emergency fund
- Estate planning documentation (e.g.
wills) and asset transfer plans - Articulation of goals
- Cash flow management skills (including
proper debt management) - Employment status.
What is the primary attribute of Federal Housing Administration (FHA) loans?
FHA mortgage has a very low initial down payment and, sometimes, a lower interest rate, given the federal government’s guarantee of repayment.
What is required for a homeowner to get in in order to have a FHA loan?
Mortgage insurance is required for any borrower making a down payment of less than 20%.
Describe VA (Veterans Administration) loans.
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.
When is the interest of a home equity loans tax deductible?
When the loan is is used for buying, building, or substantially improving a home
Total interest paid is determined by…
multiplying the amount of the payment by the number of payments and then subtracting the principal borrowed.
What are the four components of mortgage payments?
PITI
Principal (P)
Interest (I)
Taxes (T)
Insurance (I)
How does FDIC insurance work for trust accounts?
Generally, $250,000 of coverage is afforded per owner, per beneficiary up to $1,250,000 (five beneficiaries)
