101-4 Cash Flow Management & Financing Flashcards
(34 cards)
Current Ratio
Current Assets / Current Liabilities
Current assets: cash and cash equivalents
Current liabilities: current debts (those due within one year
Target: 1.0 to 2.0
Higher is preferable
Ratio >1 indicates the client can pay off existing, short-term liabilities with readily available liquid assets
Emergency Fund time frame
3-6 months
Cash and cash equivalents
Emergency Ratio
Liquid assets / non discretionary monthly expenses
Housing Payment Ratio
All monthly nondiscretionary housing costs (PITI) / monthly gross income
Target: Less than or equal to 28%
PITI: principal interest taxes and insurance
Total Payments Ratios
All monthly debt payments + housing costs / gross monthly income
Target: Less than or equal to 36%
Solvency Ratio
Total assets / total debt
Target: greater than or equal to 1.1
Savings Ratio
Savings per year / gross income
Target: 8-25% depending on age
Debt-to-income ratio
Annual debt payment / gross income
Target: less than or equal to 30%
Discretionary expense
Recurring or nonrecurring expense for an item that is either nonessential or more expensive than necessary
Examples: Vacations Club dues Entertainment Gifts
Nondiscretionary expense
Recurring or nonrecurring expense that is essential for an individual to maintain his lifestyle
Examples: Rent Mortgage payments Loan repayments Food Utilities Taxes
Emergency fund
An amount equal to 3 to 6 months of fixed and variable monthly expenses is considered adequate
Consumer debt ratio
The ratio of monthly consumer debt payments to monthly income
Net income = gross income - taxes
Does not include mortgage
Should not exceed 20%
Housing cost ratio
Should not exceed 28% of gross monthly income
Includes rent or monthly mortgage payment, principal and interest payments on the mortgage, property taxes, homeowners insurance premium
Total debt ratio
Includes monthly housing costs and consumer debt payments
36% of gross monthly income
Secured loan
A loan for which the creditor maintains a security interest in property, such as personal property, which serves as collateral for the debt
Unsecured (signature) loan
A loan for which the client merely promises to repay the debt in exchange for borrowed funds
In the event of default, lenders can take legal action but most often will attempt to settle the debt for less than the amount owed. However, this will negatively affect an individual’s credit rating.
Fixed rate loan
A loan with an interest rate that remains constant until paid in full
Initial interest rates are higher than those of variable (adjustable) rate loans
Variable (adjustable) rate loan
The interest rate on this type of loan adjusts at various intervals throughout loan term; thus, they are riskier
Short-term loan
A loan that is due in less than 1 year
Long-term loan
A loan due one year or more from a specified date
Installment loan
A loan for which the client borrows a single amount of money and repays the balance with interest at a stated interval
Single payment (bridge) loan
A loan which provides short-term, temporary financing which is repaid with interest in one lump sum at the end of the term
Example: for the purchase of one house and the subsequent sale of another
Conventional fixed-rate mortgage
Have a level interest rate for the term of the loan (the shorter the loan term, the higher the monthly payment) and a fixed payment amortization schedule
Adjustable rate mortgages (ARMs)
The initial rate and payment may change every month, quarter, year, 3 years, or 5 years
Interest rate changes are usually tied to a specific index such as the one-year LIBOR (London Inter-Bank Offer Rate)
Good for a client who wants lower initial monthly payments and does not anticipate remaining in the home for a long time
