Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

FP- Block 1 > Week 2 > Flashcards

Week 2 Flashcards

1
Q

Finance lifestyle 3 stages, commences when you become financially independent

A

1) Early years (wealth accumulation)
2) Transition years (the “golden years”)
3) Retirement years (enjoying your savings)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Essence of financial planning

A

To ensure that you can meet the differences in earnings and expenditure through appropriate borrowing and saving.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

The statements- Net-worth statement

A

1) Net worth statement is a snapshot of an individual / family’s assets/liabilities at a particular point in time
2) It is important for 2 reasons
- How we are progressing towards our goals (types of assets + net worth)

  • Can be useful as a comparison point – e.g if saving for retirement compare with previous NWSs
  • Also useful as it shows you what you have to manage (could be useful for insurance purposes)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Net worth statement- Who goes in?

A

1) May be straightforward if an individual or a couple with no children
2) May be extended family if appropriate (eg older children living at home or grandparents)
3) To some extent it will be defined for whom one is preparing the plan
4) Can be a bit blurred at the boundaries

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Net worth statement- What do we include?

A

1) All assets, split into different categories (see handout) incl pensions.
2) Most important are the valuable ones and the ones that can be controlled / used for future planning.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Net worth statement- Liabilities

A

1) Could be split between current (eg domestic bills / taxes / credit cards
2) And long-term – mortgage / student loan / personal loan > 1 yr element)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Net worth statement- Valuation

A

1) Could be contentious in accounting
2) Value at MV for any financial asset (investment etc) – POSSIBLY NET OF TAX if material
3) Personal use assets = MV or replacement cost (eg clothes)
4) Value liabilities at the amount you owe

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Income and Expenditure account

A

1) I&E shows us how we are moving towards our goals (summary of in- and outgoings)
2) Also provides basis for the budget – i.e. the plan for next year
3) Effectively a cash flow statement (no things like depreciation as with accounting)
4) Gross – obvious
5) Net = net of taxes deducted at source / pension contributions and so forth

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Income and Expenditure contd

A

1) Could split expenses between discretionary and non-discretionary
- May be quite a bit of guesswork unless keep detailed records
- Might be worth doing this (eg for a 3 months and then extrapolate)
2) Note that the “annual surplus” is not what money has been saved, as will have put money towards pension, mortgage etc..

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

How to use financial statements- 3 ratios

A

There are three key concepts attached to this:

  1. Control
  2. Liquidity
  3. Planning
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How to use financial statements- Control

A
  • Benchmark to compare actual and planned spending
  • Need to keep careful track of income and expenditure
  • Liquidity =Ability to pay current liabilities
  • Needs to be monitored to ensure that sufficient funds are available not to have to borrow money
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How to use financial statements- Planning

A
  • Budget may focus on goals, both long and short-term
  • E.g. funding next year’s holiday or in the long term retirement funding
  • Helps to determine how much is needed to be saved to meet those goals
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

How to use financial statements- Liquidity

A
  • Everyone may have a different method no right or wrong
  • Needs monitoring e.g. could use envelope system or pay yourself first
  • Envelope – money (or paper) in an actual envelope – once runs out no money left to spend
  • Pay yourself first – take 10% out to save then rest is left to spend
  • Can use debit / credit cards to help – but care!
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Current Ratio

A
  • Current ratio = monetary assets / current liabilities = useful for liquidity (ideally should be in excess of 2)
  • Trend analysis very useful
  • BUT – weakness is that it excludes long-term debt payments (e.g. mortgage)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Living expense ratio

A
  • Living expenses covered ratio = monetary assets / annual living expenses/12.
  • Rule of thumb cover 3-6 months (note set up long before credit cards became the norm).
  • Useful to set up emergency fund for this – so don’t need to liquidate investments.
  • NOTE – if you have sufficient credit / insurance -protection you can reduce emergency fund and have money invested at a much better rate!!
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Debt ratio

A

Debt ratio = total debt/total assets
Shows what percentage of of asssets financed by debt
Should get lower as you get older

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Long-term debt coverage ratio

A
  • Long-term debt coverage ratio = income available for living expenses / total long-term debt payments
  • Number of times you can manage debt with current income
  • Should be more than 2.5 times – v. general rule
  • These ratios answer the question ” do you have the money to meet your debt obligations”
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Savings ratio

A

-Savings ratio = income available for savings & investments / income available for living expenses
Look at trends!

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

consumer credit is an important aspect of personal financial planning as it impacts on:

A

Our ability to achieve financial objectives

Cash budgeting

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

How to establish credit

A

A prospective lender will look at your creditworthiness, that is:

  • Net worth
  • Earnings
  • Credit history
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

How do lenders assess creditworthiness?

A

Gross debt service ratio and total debt service ratio
Credit scoring and the credit file

Will depend on a case-buy-case basis but normal rules are;
1) GDS – not over 30%
= annual mortgage payments + prop taxes 9council tax + home insurance) / gross annual income
2) TDS – not over 40%
= as above + other debt payments / gross family income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Credit management cont; One of the most important questions to ask is: how much debt can I afford? This depends on a number of matters, but the first thing to consider is one’s debt capacity:

A
  • Most useful tool for this is a budget
  • Include liquidity and solvency issues
  • Risk tolerance will also need to be considered
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Credit management cont: It is therefore useful if you use those measures when budgeting for a loan

A
  • Will give you an idea of how much you can borrow
  • Another useful tip is to consider matching the loan term with the useful life of the asset to be purchased.
  • Consider also: debt safety ratio = Total monthly consumer credit payments / monthly take-home pay
  • Aim for 10 – 15%
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

4 common features of a credit card

A
  • Annual fee
  • Grace period
  • Interest rate on unpaid balance
  • Additional features (e.g. freebies)
  • If you pay balance off regularly 3 is irrelevant and can be very high if 1 or 2 are favourable.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Other types of finance

A

1) Unsecured credit
- Could be a credit line or a loan
- Usually much cheaper than credit cards

2)Secured credit
As above, but usually cheaper as the lender’s risk is offset by having some form of collateral

26
Q

Other types of finance

A

1) Overdraft
- Usually carry a high rate of interest
- Pay off as soon as possible / use only in an emergency
- Repayable on demand

2)Payday loans
Borrow a small amount between 1 and 31 days
Very high interest rates , e.g. wonga.com

27
Q

Why do we use credit?

A

-To meet financial emergencies
For convenience
-To afford large / expensive items without the need for cash
-To invest

28
Q

Accordingly, avoid using a credit card for the following:

A
  • Basic living expenses
  • Making (expensive) impulse purchases
  • Purchasing short-lived goods and services
29
Q

Options for paying off debt: Debt Respite Scheme (1)

A

1) Temporary Protection from your creditors
2) Lasts up to 60 days
3) Will give struggling households a legal freeze on interest, charges, collections and enforcement action while they seek advice and find a suitable and sustainable solution.
4) Will help stop the cycle of worsening debt

30
Q

Options for paying off debt: Debt Respite Scheme (2)

A

1) Will help people manage short-term shocks to their finances and regain control of their situation.
If you get it:
-Enforcement action cannot be taken against you
-Your creditors cannot contact you about debts included in your Breathing Space
-Your creditors cannot add interest or charges to your debt

31
Q

Debt Management Plans (1)

A

1) A Debt Management Plan is an agreement between the individual and their creditors to pay all of their debts.
2) Debt management plans are usually used when either:
- someone can only afford to pay creditors a small amount each month
- they have debt problems but will be able to make repayments in a few months

32
Q

Debt Management Plans (2)

A

1) A plan can be arranged with the creditors directly or through a licensed debt management company for a fee.
If an arrangement is made with a company:
- regular payments are made to the company
- the company shares the money out between the creditors

33
Q

Debt Management Plan; Three steps to setting up a plan:

A

ONE – set up a plan with a debt management company authorised by the FCA
TWO – the company works out your monthly payments. The individual will need to give details about their financial situation, for example assets, debts, income and creditors.
THREE – The company contacts the creditors and asks them to agree to the plan – the company does not have to agree!

34
Q

Debt Management Plan cont

A

1) Some companies will charge:
-A set up fee
-A handling fee each time you make a payment
2) Eligibility:
Debt Management Plans can only be used to pay ‘unsecured’ debts, ie those that have not been guaranteed against your property.
3) Responsibilities
The plan can be cancelled if repayments are not kept up with.

35
Q

Administration Order (1)

A

1) An administration order is a way to deal with debt if an individual has a county court or High Court judgment against them and they cannot pay in full.
- The debt must be less than £5,000.
- 1 payment a month must be made to their local court. The court will divide this money between their creditors.

36
Q

Administration Order (2)

A

1) Creditors listed on the administration order cannot take any further action against them without the court’s permission.
2) The court decides:
- how much of the debt the individual has to repay, for example all or just part of it
- how much their monthly repayments will be
- how long the arrangement lasts

37
Q

Administration Order: Eligibility

A

The individual must:

  • Owe less than £5,000, including any interest and charges
  • Owe money to at least 2 creditors
  • Prove they can afford regular repayments, for example by giving details of their income
  • Have a county court or High Court judgment against them, which they cannot pay in full
38
Q

Administration Order- Responsibilities

A

1) The individual must keep up their repayments or the court can:
- ask their employer take money from their wages – known as an ‘attachment of earnings order’
- Cancel the arrangement
- An individual is still be able to keep their business running, if they have one.

39
Q

Administration Order- How to get one

A

The court decides:

  • How much of the debt the individual will have to repay
  • How much their monthly repayment will be
  • How long the arrangement lasts
    2) A court fee is charged each time a payment is made. This cannot be more than 10% of the debt.
40
Q

Administration Order- Public order

A
  • Added to Register of Judgements, Orders and Fines
  • Removed 6 years after date order was made
  • Entry is ‘satisfied’ if debts are repaid in full
41
Q

Individual Voluntary Arrangements (1)

A
  • An agreement with an individual’s creditors to pay all or part of their debts
  • The individual agrees to make regular payments to an insolvency practitioner, who will divide money between their creditors.
  • Gives more control of assets than bankruptcy.
42
Q

Individual Voluntary Arrangement (2)

A

1) IVA starts if the creditors holding 75% of the individual debts agree to it. Applies to all, even those who disagreed.
2) Costs
- A setup fee and a handling fee each time a payment is made.

43
Q

IVA responsibilities

A
  • Can be cancelled if repayments are not kept up and the individual can be made bankrupt
  • IVA is added to the Individual Insolvency Register. Removed 3 months after IVA ends.
44
Q

DROs (1)

A

1) Can use these if the individual:
- Owes less than £30,000
- Does not have much spare income – less than £75 a month
- Has less than £2,000 of assets
- Does not own a vehicle worth more than £2,000
- Does not own their own home

45
Q

DROs (2)

A

1) If an individual has a DRO
- Creditors cannot recover money without the court’s permission
- Individuals are free from debts after 12 months

46
Q

DROs- Restrictions

A
  • Cannot borrow more than £500 without telling lender
  • Act as the director of a company
  • Create, manage or promote a company without courts permission
  • Need to tell bank if you open an account
  • Restrictions last 12 months
47
Q

DROs cont

A

1) If an individual has a DRO they still have to pay:
- Rent and bills
- Certain debts such as student loans and court fines

2) They can be cancelled if:
- Finances improve
- The individual does not co-operate with the official receiver

48
Q

DROs cont (2)

A

1) If new debt is taken after your DRO is approved the individual could get:
- Get a bankruptcy order
- Be prosecuted if the individual does not tell the new creditors about your DRO
2) DRO is added to the Individual Insolvency Register - removed 3 months after DRO ends
3) DRO will stay on credit record for 6 years

49
Q

CGT- Gain/Loss calculation

A

Gross sale proceeds

  • Incidental costs of sale

= Net sale proceeds

Acquisition costs

  • Incidental costs of acquisition
  • Enhancement expenditure

= Net sale proceeds - costs

50
Q

CGT: Exempt assets

A
  • Cash
  • Cars
  • Gilts and Qualifying Corporate Bonds (QCBs)
  • National Savings Certificates (NSC)
  • Prizes and gambling winnings
  • ISAs
  • Wasting Chattels
  • Non-Wasting Chattels bought & sold < £6k
51
Q

CGT incidental costs of sale

A

E.g. legal costs, delivery costs, advertising costs

52
Q

Incidental cost of acquisition

A

legal costs, stamp duty, auction fees

53
Q

CGT points to note

A

-Separate Gain / Loss calculation for EACH disposal
-Individuals are subject to CGT on NET gains (i.e. after capital losses)
-After calculating NET gains, deduct the Annual Exempt Amount (AEA) to reach taxable gains
AEA is £12,300 for 2021/22

54
Q

Valuation of quoted shares

A

One half of the way up from the lowest to the highest closing prices of the day

Value for CGT:
366p plus
1/2 x (372p-366p)
i.e. 369p

55
Q

Chatel

A

Antiques, machinery, paintings, furniture, animals…

Exempt assets for CGT: Wasting chatel: <50 years e.g. greyhounds, yachts, machinery, motorbikes, racehorses.

Non- wasting chatel- >50 years e.g. vases, statues, paintings, manuscripts

CGT- £6,000 rule

56
Q

Non-wasting Chatel 5/3 rule

A 
5/3 x (Gross proceeds - £6,000)
Proceeds > £6,000
Cost < £6,000
Chargeable Gain= lower of
Normal gain calculation- Proceeds - cost
57
Q

Deemed Proceeds Rule

A

Proceeds < £6k

Cost > £6k

58
Q

Exempt

A

Cost < £6k

Proceeds < £6k

59
Q

Normal Gain Calculation

A

Proceeds > £6k

Cost > £6k

60
Q

Principal Private Residence Relief

A

1) If the house is, or has been, your only or main residence
2) The gain/loss qualifies for exemption from CGT
3) If you have always occupied the house as your main residence- the full gain is exempt!

61
Q

Principal Private Residence conditions

A

1) House must be a ‘dwelling’ house to qualify
2) Taxpayer must have occupied the property as a residence rather than just as temporary accommodation.
3) Restrictions occur where the property:
- Has periods of non-occupation
- Is let
- Is used wholly or partly for business purposes (won’t be examined)

62
Q

Rate of CGT depends on two factors

A

1) Available Basic Rate Band- BRB 20/21- £37,500, available BRB: £37,500 less taxable income income for 2020/21.
2) Is the asset sold residential property? Basic rate- 18%, Higher rate- 28%

FP- Block 1 (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions