Module 2: Business Ownership, Cash Mgmt, & Use of Debt Flashcards
Are taxes a fixed outflow or variable outflow?
variable outflow
How much of disposable income should go to savings?
10%
What does the basic liquidity ratio show?
the # of months a household can continue to meet its expenses from existing cash/cash equivalents
How much of liquid assets should you have in an emergency fund?
3 to 6 months…6 months if only one spouse is bringing in income
What does the savings ratio show?
indicator of what % of gross income a family/individual sets aside for future consumption. 10% or more is considered healthy.
What does front-end ratio show?
Indicates % of income that goes toward housing costs . Includes PITI, and homeowner’s association dues.
should not exceed 28% of gross monthly income.
What does the back-end ratio show?
Identifies the % of income that goes toward paying all recurring debt payments (including those covered by front-end ratio) and includes credit cards, car loans, student loans, child support, alimony.
Max measure - no greater than 36% of gross monthly income.
What does the consumer Debt-to-Income ratio show?
compares annual payment to service debt. uses NET INCOME. a ratio of 20% or less is healthy.
Why does the debt-to-income calculations use gross income?
Because of the tax-favored status afforded mortgage interest payments.
What are the six major areas to evaluate for a client?
Emergency fund, level of debt, level of savings, diversification of assets, preparation for retirement, tax issues.
What are five areas most lenders consider in evaluating a potential borrower? (five C’s)
character (honesty & reliability - how previous financial responsibilities are handled.
capital (net worth)
capacity ( income available to pay off debt)
conditions (general economic environment - less may be available to lend)
What is risk based pricing in regard to credit?
Risk based pricing is when the borrower is charged a higher interest rate due to credit report problems.
Two most important pieces of info when qualifying for credit?
How well person pays off debts and the amount owed (proportion of credit used to credit available).
What act allows consumers one free credit report per year?
The Fair and Accurate Credit Transactions Act (FACT)
What are the two types of credit?
installment (closed-end) and revolving (open-end)
What is installment credit?
It is closed end credit - installment loans- and are for a longer period of time. Mortgages, car loans, appliances, furniture
What is a chattel mortgage?
a mortage on personal property such as tools or machines
What is FNMA?
Federal National Mortgage Association (Fannie Mae)
not gov’t guaranteed but federally chartered (government sponsored) and mortgages are implicitly backed by taxpayers
Offers lower rates to lower income borrowers
What is FHLMC?
Federal Home loan Mortgage Corporation (Freddie Mac) same as Fannie Mae loans not government guaranteed
What is a bridge loan?
allows borrower to buy a new home before old one is sold. Either through two mortgages (home equity loan) or HELOC
What is an affinity card?
Credit card that is with a particular organization (i.e. Delta for airline miles)
What act is a credit card holder protected by?
Fair Credit Billing Act
What act is a debit card hold protected by?
Electronic Funds Transfer Act
What is a secured credit card?
person with poor or no credit puts a deposit in a bank account and the credit limit is equal to the deposit in account. Usually higher interest rates.
What is a pell grant?
A Pell Grant is a subsidy the U.S. federal government provides for students who need it to pay for college. Federal Pell Grants are limited to students with financial need, who have not earned their first bachelor’s degree, or who are enrolled in certain post-baccalaureate programs, through participating institutions
What is a Federal Supplemental Educational Opportunity Grant?
The Federal Supplemental Educational Opportunity Grant, more commonly known by its acronym SEOG, is a federal assistance grant reserved for college students with the greatest need for financial aid to attend school.
What is the similarities and differences between direct subsidized and unsubsidized loans?
both are federal loans
subsidized are need-based only and only for undergraduate studies and may have lower rates than unsubsidized.
Subsidized loans do not accumulate any interest while student is in school at least 1/2 time or during deferrment periods.
Anyone can get Unsubsidized loans and can be used for graduate studies
What are PLUS loans?
Parent Loans to Undergraduate Students
for undergrad, parents are the borrowers
Grad students can get loans thru PLUS but they are the borrowers.
What are some pros and cons to leasing a car?
Tends to be better for businesses, monthly payments are lower
Cons- credit requirements are stricter and it may be difficult to end lease before end of contractual term.
What are the two types of leases?
- Closed End - At the end of the lease term, leasing agent takes back property. No additional charges
- Open End - lessee may need to make up difference between value and the amount for which it is sold by leasing agent.
What are advantages of home ownership?
More privacy
monthly housing costs tend to remain more stable (inflation has less of a negative effect)
Interest paid on mortgage and property taxes may be taken as itemized deductions on tax return.
may be an appreciating asset
creditors look more favorably on home owners
What does the Consumer Credit Protection Act do?
AKA Truth in Lending Act
requires full disclosure of costs of borrowing (APR and dollar amount of finance charges)
Prohibits companies from sending unrequested cards
Limits liability of unauthorized user to $50 per card
every card must contain some form of ID (picture or signature)
What does the Consumer Credit Reporting Reform Act do?
regulates use of credit reports
gives consumer access to credit file and allows consumer to report any errors
law requires person be informed as to why they were denied credit within 30 days
What does Fair Credit Billing Act do?
established procedures to follow when revolving account billing errors occur. allows consumer to withhold payment for faulty or defective goods/services when purchased with a credit card. Complaint must be made within 60 days after date of first bill containing error. Lender has 30 days to acknowledge and has 90 days to fix or prove it was correct.
What does the Tax Cuts and Jobs Act do?
gives sole proprietors and owners of pass-thru businesses a deduction of up to 20% to bring tax rate lower for qualified business income.
What is a sole proprietorship?
business owned by one individual
no formal organizational docs or annual registrations required
all profits/losses flow thru personal tax return using Schedule C
Personally liable - can be sued personally for any products/services
must profit 3 out of last 5 years NOT to be considered a filer’s hobby
