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Intro To Financial Planning Process > Module 1 > Flashcards

Module 1 Flashcards

1
Q

What are the six steps to financial planning process? (EGAD I M ade it)

A
  1. Establish the client-planner relationship
  2. Gather Goals
  3. Analyze and review financial status
  4. Develop financial planning recommendations
  5. Implement the recommendations.
  6. Monitor the plan and its recommendations
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2
Q

Statement of financial position

A
  1. Assets and liabilities

2. Networth

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3
Q

What is acceptable for an emergency fund?

A
  1. 3-6 months of expenses
  2. Checking account
  3. Savings Account
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4
Q

What is not acceptable for an emergency fund?

A
  1. Cash Value Life Insurance
  2. Equity Lines of Credit
  3. Other Credit Sources
  4. CDs greater than 90 days
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5
Q

What is a closed-end lease?

A

Sometimes referred to as a fixed-cost lease

It is a short-term lease with a fixed payment through out the use of the asset’s duration.

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6
Q

Who would benefit most from a closed-end lease?

A
  1. Companies that are trying to acquire equipment for use of business
  2. A consumer who is considering or wanting a new car
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7
Q

What is an open-end lease?

A
  • Usually referred to as Finance or equity lease
  • Usually grants for smaller payments compared to closed-end leases. However, there is a financial obligation due at the end of the lease if the car is valued less than what the dealership/lessor expected for that particular year.
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8
Q

What are 5 instances that a person should consider renting/leasing an automobile?

A
  1. If you want to have a new car every 2 to 3 years
  2. If you don’t have the funds for a 20% or more down payment
  3. Will not drive the car more than 12,000 to 15,000 miles per year
  4. Uses his or her car for business
  5. Needs a lower monthly car payment and is willing to give up ownership for the lower payment.
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9
Q

When should a person consider leasing/renting a home?

A
  1. Does not have the funds for down payment.
  2. Has a temporary housing need (move to new city for job change)
  3. Expects his or her housing needs to change substantially in the foreseeable future and does not own a home.
  4. Is looking for a job or changing careers, which would most likely require you to move in the next few years.
  5. If you aren’t willing to deal with the general maintenance of owning a home.
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10
Q

When should a person consider buying a car?

A
  1. You plan on keeping the car for many years.
  2. You drive well over 15,000 miles a year
  3. Wants to eventually stop making payments.
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11
Q

When should a person consider buying a home?

A
  1. You intend on living in the area for many years.
  2. You want to improve the structure of your residence.
  3. You can benefit from the income tax advantages of owning a home.
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12
Q

What are two college savings plans?

A
  1. Coverdell ESA

2. Section 529 Plans

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13
Q

What kind of financial aid is available for college funding?

A
  1. Scholarships
  2. Grants
  3. Loans
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14
Q

What are 3 stipulations for the Coverdell ESAs?

A
  1. Contribution limit is $2,000/year
  2. There’s an AGI phaseout
  3. The funds must be used prior to the age of 30
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15
Q

Where can you utilize a Coverdell ESA?

A
  1. Elementary schools
  2. Secondary schools
  3. College
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16
Q

What are 5 characteristics of 529 plans?

A
  1. Contributions are limited by state. However, clients aren’t limited to residential state.
  2. Funds accumulate tax free
  3. Withdrawals for qualified expenses are tax free.
  4. There may be a state tax deduction for contributions
  5. The account can be transferred to other beneficiaries.
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17
Q

What is a disadvantage for 529 plans?

A

If the funds are not utilized for qualified education expenses, the earnings will be taxed and subject to a penalty

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18
Q

What are the characteristics of a Coverdell Educational Savings Account?

A
  1. Limited to $2,000 per beneficiary
  2. Can be used for elementary, secondary, and college expenses.
  3. Funds accumulate tax-free
  4. Distributions are tax-free if used for qualified expenses.
  5. The funds must be disbursed to the beneficiary by age 30.
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19
Q

How can a qualified retirement plan be used to fund a child’s education?

A

If the parent has a pension or other type of qualified plan, they can begin taking substantially equal amounts of money from the plan on an annual basis for 5 years OR until reaching the age of 59 1/2, whichever is later

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20
Q

What are the 3 types of loans that may available for funding education?

A
  1. Perkins Loans
  2. Stafford Loans
  3. PLUS Loans
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21
Q

What are the 6 characteristics for the Perkins loans?

A
  1. Funded by the federal govt.
  2. Available to both undergraduate and graduate students
  3. Available to part time and full time students.
  4. Need-based loan
  5. Interest on the loan is 5%, which is deferred during the period of education
  6. Repayment begins 9 months after graduation.
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22
Q

What are the five characteristics of the Stafford loans?

A
  1. Available to undergraduate and graduate students.
  2. Not necessarily needs-based; interest subsidies during the period of schooling are available for students demonstrating a financial need.
  3. Available to full-time students and for some students enrolled in programs that take less than an academic year (for a reduced loan amount)
  4. Loans are made by private lenders or the federal govt.
  5. Repayment period is usually 10 years, but it can be extended.
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23
Q

List the five characteristics of the PLUS Loan?

A
  1. These loans are available to the parents of students
  2. Available through private lenders
  3. Available to undergraduate students
  4. The new program rules allow for loans to be made directly to graduate and professional students
  5. Not available to part-time students (but students who are enrolled in programs that are less than the academic year can be eligible for smaller loan amounts)
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24
Q

What are the 6 number of ways to plan for children’s education?

A
  1. Direct transfer of funds
  2. Custodianship
  3. Scholarships
  4. 529 plans
  5. Coverdell Educational Savings accounts
  6. Parents’ qualified retirement plans
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25
Q

What are the 3 characteristics of Pell grants?

A
  1. Available to part-time students
  2. Available to full-time students
  3. Available to undergraduate students ONLY
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26
Q

What are the five function in step 1 of the financial planning process (Establishing and defining the client-planner relationship)?

A
  1. Go over issues and process related to financial planning
  2. Explain the services provided and documentation required.
  3. Clarify the client’s and planner’s responsibilities
  4. Provide the necessary disclosures
  5. Complete signed scope of engagement.
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27
Q

List the five functions that are involved in step 2 of the FP process (Gathering client data, including goals)

A
  1. Obtain information through the use of the interview/questionnaire
  2. Help my client identify and determine goals, needs, and priorities.
  3. Asses my client’s values, attitudes, and expectations
  4. Determine my client’s time horizon and risk tolerance level
  5. Collect all my client’s applicable records and documents.
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28
Q

Identify the functions in step 3 of the financial planning process (Analyzing and evaluating the client’s financial status).

A
  1. Develop Financial Statements for my clients
  2. Analyze and evaluate my client’s current:
    • general financial status
    • emergency reserves
    • risk/insurance gap
    • retirement planning
    • education & goal achievement
    • investments
    • taxation
    • appropriate employee benefits use
    • estate planning
    • How the efficiency of my client’s plan can be improved.
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29
Q

Identify the functions in step 4 of the financial planning process (Developing & Presenting Financial Planning Recommendations and/or Alternatives)

A
  1. Prepare & present a financial plan tailored to my client-based on the conversation we discussed when we agreed on the scope of engagement.
  2. Prioritize each area in the comprehensive financial plan tailored to my client’s planning interest.
  3. Work with my clients to make sure that the plan meets their identified goals and objectives.
30
Q

Identify the functions involved in step 5 of the financial planning process (Implement financial planning recommendations).

A
  1. Assist with the implementation of my client’s plan

2. Coordinate a meeting with their other professionals, if necessary.

31
Q

Identify the functions of step 6 in the financial planning process (Monitoring the financial planning recommendations).

A
  1. Regularly monitor and evaluate the progress of the plan and changes based on my client’s lifestyle changes.
  2. Review what changes in law that would impact my client’s plans
  3. Update my client’s information regularly and recommend changes to the plan as required.
32
Q

How do the goals of my clients affect the nature of information gathered in the data gathering process?

A
  • the quantity and type of information gathered is directed by the goals of the client.
  • If my client wishes to have a comprehensive plan developed, then the information gathered would be very extensive, which covers all areas in a CP.
  • If my client wants advice specific to one or few areas in the financial planning, then quantity of data collected would me related to the areas of their concerns.
33
Q

What areas might you want to discuss with your clients in a comprehensive plan (12 areas).

A
  1. Retirement
  2. Education and other accumulation goals
  3. Emergency reserve
  4. Debt management goals and concerns
  5. Investment management concerns
  6. Health insurance
  7. Disability contingency planning
  8. Loss of life contingency planning
  9. Long-term care needs for contingency-planning.
  10. Property and liability concerns
  11. Legal documents and estate planning distribution plan
  12. Anticipated changes in lifestyles, family, health or other concern.
34
Q

What is the significance of including the words “As of December 31, 201X” in the heading of the statement of financial position?

A

It indicates that the statement is a profile of my client’s assets, liabilities, and net-worth on a specific date.

35
Q

Describe each of the 3 major components of the statement of financial position.

A

A. Assets
-what the client owns.

B. Liabilities
- what the client owes

C. Net worth
-residual value after subtracting liabilities from assets.

36
Q

Using a simple formula(s), describe the relationship that exist among the 3 major components of the statement of financial position.

A

Assets-Liabilities=Net worth

Assets= Liabilities + Assets

37
Q

What is placed under the statement of financial position under CASH/CASH EQUIVALENTS (6 items)?

A
  1. Cash
  2. Checking Account
  3. Savings Account
  4. Money Market Fund
  5. Cash Surrender Value of Life Insurance policy (If Variable Life, can be categorized as invested assets)
  6. Certificates of deposit (if close to maturity or if penalty withdrawal is low)
38
Q

What items go under the INVESTED ASSETS category in the statement of financial position (11 items)

A
  1. Stocks
  2. Bonds
  3. Collectibles for investment purposes
  4. Real estate (rental property) other than primary residence or place for personal use
  5. IRAs
  6. Vested Pension Benefits
  7. Mutual Funds
  8. Notes carried from others
  9. Business
  10. Certificates of deposits.
  11. Life Insurance cash value (if variable)
39
Q

What goes under the category USE ASSETS under statement of financial position (8 items)?

A
  1. Residence
  2. Automobiles
  3. Boats
  4. Campers
  5. Personal Property
  6. Antiques
  7. Jewelry
  8. Collectibles for personal enjoyment
40
Q

At what value are assets usually shown on the statement of financial position?

A

Assets are shown at CURRENT fair market value.

41
Q

What goes under the inflows category of the cash flow statement (7 items)

A
  1. Gross Salaries
  2. Interest Income
  3. Dividend Income
  4. WITHDRAWALS from savings accounts.
  5. Liquidation of investments
  6. Funds received as a result of borrowing
  7. Insurance proceeds received
42
Q

What is under the FIXED OUTFLOWS category of the cash flow statement (5 items (3 of 5 are necessary)

A
  1. Predictable, recurring outflows
  2. Mortgage note payments
  3. Insurance premiums
  4. Car loan payments
  5. Some income taxes can be put here.
43
Q

What goes under the VARIABLE OUTFLOWS category of the cash flow statement (6 items)

A
  1. Food
  2. Transportation
  3. Entertainment
  4. Household expenses
  5. Clothing
  6. Some income taxes can be put here
44
Q

What are the TWO purposes of footnotes in personal financial statements?

A
  1. To clarify items listed in the statement

2. To list values or circumstances not disclosed in body of statement

45
Q

What is the purpose of an emergency fund?

A

To ensure that EASILY, ACCESSIBLE funds are available for financial emergencies.

46
Q

What are 4 suitable types of emergency funds?

A

A. Cash/Cash Equivalents
1. Checking accounts (excluding the funds for current
Expenses).

2. Savings Accounts
3. Money Market mutual funds
4. Money market deposit accounts
47
Q

What are the general guidelines of an emergency savings fund?

A

Three to six months of fixed and variable expenses (excluding income-related taxes; savings; and investments)

48
Q

When it comes to having an emergency fund, what should you avoid doing?

A
  1. Liquidate investments and assets (non-liquid)

2. Borrow funds for financial emergencies.

49
Q

How might stability of income and number of income sources affect a client’s overall financial condition?

A
  • The greater the stability of income and the greater the number of sources of income makes the client more financially stable.
  • The amount needed for emergency fund planing reflects that stability of the client’s income sources
  • The more diverse the income, the more flexibility there is in budgeting
50
Q

What 4 symptoms are frequently present if clients are not living within their means?

A
  1. Heavy consumer debt and/or borrowing to make ends meet.
  2. Withdrawals from savings to meet regular living expenses
  3. High miscellaneous expenditures
  4. Inability to save
51
Q

What is the current ratio and how is it used?

A

Current Assets (cash/cash equivalents, receivables, and inventory DIVIDED BY Current Liabilities.

-The current ratio measures a firm’s abilities to satisfy current liabilities with current assets.

52
Q

What is the acid test ratio and how is it used?

A

(Cash/cash equivalents and receivables) DIVIDED BY (Current liabilities)

-The acid test ratio measures a client’s ability to satisfy current liabilities with its most liquid assets (i.e., without liquidating inventory)

53
Q

What are some uses of budgeting (4 items)?

A
  1. To control and monitor household expenses
  2. To pay down debt
  3. To accomplish wealth accumulation and savings goals
  4. To monitor investment performance
54
Q

What are 7 advantages of budgeting?

A
  1. Coordinates activities of my client and I by developing objectives.
  2. Reveals inefficient, ineffective, or unusual utilization of resources.
  3. Enhances awareness of resource conservation
  4. Provides a means of self-evaluation
  5. Allows recognition and anticipation of problems before they occur.
  6. Highlights the need for alternative courses of action.
  7. Provides motivation for achieving goals.
55
Q

What are the 3 disadvantages of budgeting?

A
  1. Conclusions may be misleading
  2. Record keeping may be difficult for some clients
  3. May stifle risk taking
56
Q

What are the 6 steps in constructing an income/expenditure budget?

A
  1. Estimate family income from all sources
  2. Estimate expenditures
  3. Determine excess/shortfall of income
  4. Consider methods of increasing income or decreasing expenses
  5. Calculate both income and expenses in each area as a percentage of the total income to determine if there is a preferable allocation of resources.
  6. Compare actual expenses to the budget MONTHLY.
57
Q

How does debt affect a client’s financial situation?

A
  1. Debt enables my client to obtain items that he or she otherwise may not be able to obtain.
  2. Creates an obligation to repay (which may be difficult during periods of financial stress)
  3. Limits cash outflows that otherwise may be available for other consumption or savings, and increases expenses (due to finance charges)
58
Q

What is consumer debt?

A

Short-term debt used to acquire consumer goods

59
Q

What is secured debt?

A

Debt that is backed by collateral

60
Q

What is unsecured debt?

A

Debt that is only backed by the debtor’s promise to repay.

  • Interest rates tend to be higher for unsecured debt than for secured debt because of higher potential risk to the lender
  • No collateral is involved.
61
Q

What are some of the tax implications of home mortgages?

A
  1. Points paid are tax deductible for the buyer of a home, in addition to mortgage interest.
  2. Capital gains may be income tax free.
62
Q

What is a fixed rate mortgage?

A
  • Has fixed interest rate
  • Repayment usually takes place over 15 to 30 years on a monthly basis
  • Payments consists of repayment of interest and principal
  • Earlier payments consists of a larger percent of interest
  • Later payments consists of larger percent of principal
63
Q

What is an adjustable rate mortgage?

A
  • Interest rate changes with prevailing rate of interest in the economy
  • The interest changes are limited in how much they vary based on the initial mortgage agreement
  • The borrower bears a greater risk with this type of mortgage.
64
Q

What is a balloon mortgage?

A
  • A mortgage where the monthly payment is calculated based upon a long-term mortgage at a given interest rate.
  • Payment is usually made for a shorter period of 5-7 years (at the end of that time the mortgage is paid in full)
  • The interest rate for a balloon mortgage is lower than the standard-rate mortgage due to the shorter repayment period and smaller expected change of interest rates in the economy.
65
Q

What is a conventional mortgage?

A

A mortgage made by a commercial lender in the private sector.

66
Q

What is a VA mortgage?

A
  • mortgage guarantee by the department of Veterans Affairs.

- Available to eligible veterans, Active Duty Military, and members of the National Guard/Reserve Components.

67
Q

What is a FHA mortgage?

A

-Mortgage guaranteed by the Federal Housing Administration

68
Q

What is a reverse mortgage?

A
  • A means of accessing equity in a home
  • The home-owner is able to remain in the home and the lender makes a lump-sum payment or monthly payments to him or her based upon a percentage of equity in the home, a stated interest rate,and specified payment period.
  • As long as the senior remains in the home, there is no debt repayment.
69
Q

What is the cost of refinancing a mortgage?

A
  1. If interest rates are higher at time of Refi, interest costs will increase-but monthly payment may be lower due to a LONGER financing period.
70
Q

What is the benefit of refinancing a mortgage?

A

-benefits ate greatest when interest rates are lower because not only would the monthly payment be reduced-the interest costs will reduce as well.

Intro To Financial Planning Process (1 decks)

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