General Principals & Behavioral Finance

Question 1

Confirmation Bias

Answer 1

paying attention to information that supports a preconceived opinion and poorly made decision, while disregarding accurate, unsupportive information.

Question 2

Anchoring

Answer 2

paying attention to information that should have no influence on the decision at hand.

Question 3

Mental Accounting

Answer 3

putting money into separate “accounts” based on the function of these accounts.

Question 4

Ratio Analysis of Financial Statements

Answer 4

Current Ratio = current assets (cash equivalents, accts receivable, inventory) ÷ current liabilities (accts payable, annual debt pmt, tax)
- target: 1-2
- indicates ability to meet ST obligations

Consumer Debt Ratio = non-housing debt pmts/month ÷ monthly net income
- target < 20%

Housing Cost Ratio = all housing cost/month ÷ monthly gross income
-target ≤ 28%

Debt to Income/Total Debt Ratio = all debt and housing pmts/month ÷ gross monthly income
-target ≤ 36%

Savings Ratio = annual savings ÷ gross income
- target: depends on client, but higher is better

Question 5

Relevant Elements for Financial Planning

Answer 5

A) developing Client goals;
B) managing assets and liabilities;
C) managing cash flow;
D) identifying and managing risks;
E) identifying and managing the financial effect of health
considerations;
F) providing for educational needs;
G) achieving financial security;
H) preserving or increasing wealth;
I) identifying tax considerations;
J) preparing for retirement;
K) pursuing philanthropic interests; and
L) addressing estate and legacy matters.

Question 6

Financial Planning Process

Answer 6

Umbrellas In A Downpour Prevent Immense Mess

1. Understanding the Client’s Personal and Financial Circumstances
   2.** Identifying and Selecting Goals
   3. A**nalyzing the Client’s Current Course of Action and Potential Alternative Course(s)
   of Action
2. Developing the Financial Planning Recommendation(s)
3. Presenting the Financial Planning Recommendation(s)
4. Implementing the Financial Planning Recommendation(s)
   7.** M**onitoring Progress and Updating

Question 7

Education Tax Credits

Possible Things to Memorize for CFP® Certification Examination

Answer 7

AOTC:
-max amount: $2,500 annually/student
-eligible expenses: tuition, enrollment, materials, computers/internet
-eligible education: first 4 years undergrad (min. 1/2 time enrollment)
AGI Phaseout: 80-90k single; 160-180k MFJ

LLC
-max amount: $2,000 annually/family
-eligible expenses: tuition, enrollment
-eligible education: all grad and undergrad
AGI Phaseout: 80-90k single; 160-180k MFJ

Question 8

Education Funding Vehicles

Answer 8

Coverdell:
- benefit: tax-free earnings
- max amount: 2k contribution/yr (each bene)
- eligible expenses: tuition, enrollment, books/supplies/equipment, room/board (min 1/2 time enrollment), pmts to state tuition program
- eligible education: grad, undergrad, k-12
- conditions: must w/d assets by 30 (ex. special needs)

IRAs
- benefit: no 10% penalty
- max amount: qualifying expense
- eligible expenses: tuition, enrollment, b/s/e, r/b (min 1/2 time enrollment)
- eligible education: grad, undergrad

529
- benefit: tax-free earnings
- max amount: sponsor limits
- eligible expenses: tuition, enrollment, b/s/e, r/b (min 1/2 time enrollment), pmts to state tuition program
- eligible education: grad, undergrad, k-12 ≤ 10k (lifetime)
- conditions: can use in same year as AOTC and LLC

Education Savings Bond
- benefit: tax-free interest
- max amount: qualifying expense
- eligible expenses: tuition, enrollment, pmts to state tuition program; pmts to Coverdell
- eligible education: grad, undergrad
- conditions: only series EE (post 1989) and series I
- AGI phaseout: 85.8-100.8k single, 128,650-158,650 MFJ

Employer Education Assistance:
- benefit: tax-free benefit
- max amount: $5,250/y
- eligible expenses: tuition, enrollment, b/s/e
- eligible education: grad, undergrad

Question 9

EE/HH/I Bonds

Possible Things to Memorize for CFP® Certification Examination

Question 10

Education Loans & Grants

Possible Things to Memorize for CFP® Certification Examination

Answer 10

PLUS loan
-not need based (mid/upper income)
-direct Grad Plus program for graduate/professional students

Stafford Loans
-subsidized = need based (gov. pays interest during college)
-unsubsidized = don’t qualify for subsidy/need additional funding (no gov. interest pmt + repayment begins ASAP after grad)

Pell Grants
-need based (outright gov gift)
-for 1st time unfergrad students (PT or FT)

Federal Supplemental Ed. Opportunity Grant (SEOG)
-need based, managed by university
-PT or FT

Best for…
Wealthier: Parent loan, Plus loan, Unsubsidized Stafford
Lower Income: Pell grant, Subsidized Stafford, SEOG

Question 11

Financial Aid

Answer 11

Financial Aid Includes:
- grants (no repayment)
- scholorships (merit, no repayment)
- federal loans
- credits/deductions
- work study

FAFSA: 1 of 3 forms/tables (2-year lookback)
- dependent students
- independent students w/ spouse dependent
- independent students w/ non-spouse dependent

EFC (expected family contribution):
- parent income: 22%-47% of MAGI > protected amount; parent owned accounts not included (protected amount varies)
- student income: 50% > protected amount (proected amount = $7,040)
- parental assets (ex. retirement/home assets): 5.64% included
- student assets: 20% included
- relative owned w/ student bene: 0% initial inclusion but distributions for college = 50% EFC reduction after 2 years (ie. best to distribute later in expense period)
- parent owned education accounts: parents rate (Coverdell, 529)
- student owned accounts: students rate (UGMA/UTMA, Trusts