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Jenn's CFP Exam Prep > General Principles of Financial Planning > Flashcards

General Principles of Financial Planning Flashcards

1
Q

Fair Market Value (FMV)

A

The price at which a willing and knowledgeable buyer would purchase an asset from a willing and knowledgeable seller

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2
Q

Consumer Debt %

Rule of Thumb

A

20% or less of NET monthly income

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3
Q

Housing Costs (PITI) Debt %

rule of thumb

A

28% or less of GROSS monthly income

(Front-End Ratio)

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4
Q

Total debt %

rule of thumb

A

Consumer debt + Housing (PITI) = 36% or less of GROSS monthly income (Back-End Ratio)

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5
Q

Net-Investment-Assets : Net Worth

Ratio

A

Compares value of investment assets (Excludes equity in a home) with net worth.

How well are you advancing toward cap accumulation goals?

50% + is good and should increase the closer you get to retirement.

Younger ind = 20%.

If 18% or lower, not progressing well.

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6
Q

Liquidity Ratios

A

Use: For analysis of financial statements.

  1. Current Ratio
  2. Acid Test/Quick Ratio
  3. Emergency Fund of cash to expenses
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7
Q

Current Ratio

A

A type of Liquidity Ratio

Current Assets (Cash/Cash Equiv, receivables, inventory) : Current Liabilities (due within 1 yr)

The higher the ratio, the greater the firm’s ability to satisfy current debts with current assets.

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8
Q

Acid Test

(or Quick Ratio)

A

A type of Liquidity Ratio

Cash/Cash Equivalents + Accounts Receivable : Current Liabilities

*Note that inventory is not included in the Quick Ratio like it is in the Current Ratio

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9
Q

Emergency Fund Ratio

A

A type of Liquidity Ration

Cash/Cash Equivalents : Annual Expenses

3-6 months is suggested

3 Months = 1/4 of a year = .25 or 25%

6 Months = 1/2 of a year = .50 or 50%

So a ratio less than 25% means the individual isn’t yet prepared for an emergency

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10
Q

Consumer Debt

A

Short-term debt

credit cards, auto loans, personal line of credit

Revolving Credit (Credit Cards, HELOC)

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11
Q

1 Point (in mortgages)

A
  • 1% of amount borrowed
  • A fee charged by the lender … in exchange for a lower interest rate
  • income tax deductible for home buyer
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12
Q

Lien

A

The legal right to repossess the property (collateral) in the event the borrower defaults on the loan.

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13
Q

GNMA Mortgage

A

Government National Mortgage Association

“Ginne Mae”

Type of federal gov’t guaranteed mortgage

US gov’t agency fully guaranteeing mortgage

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14
Q

FHA Mortgage

A

Fed Gov’t guaranteed mortgage

Insured by FHA

Sets max IR, limit of insurance and loan term

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15
Q

VA Mortgage

A

type of fed gov’t guaranteed mortgage

Guaranteed by VA in event of default

honorably discharged military vets are eligible

VA sets max amt of guarantees, interest rates, maturities

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16
Q

FNMA

A

Federal National Mortgage Association

“Fanny Mae”

A mortgage lendor/guarantor

Not gov’t guaranteed

Federally chartered

Implicitly taxpayer backed

Lower rates available

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17
Q

FHLMC

A

Federal Home Loan Mortgage Corporation

“Freddie Mac”

A Mortgage Lendor/Guarantor

Similar to FNMA

Implicitly taxpayer backed

Not gov’t guaranteed

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18
Q

Conventional Lender/Loan

A

Involves only lender and borrower

No outside agency guaranteeing or insuring the mortgage

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19
Q

Types of IR for mortgage

A

Fixed

Adjustable

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20
Q

Reverse Mortgage

A

AKA HECM (Home equity conversion mortgage)

Allows seniors to receive money from their homes without having to make any repayments for as long as they remain in the home and maintain property taxes, HO Insurance, HOA Fees, Utilities, and general upkeep

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21
Q

Reverse Mortgage Eligibility

A
  • Borrower must:
    • be 62 + (married couples must both be 62)
    • own the home (not necessarily paid off completely)
    • occupy the home as primary residence
    • attend a 3rd party counseling session
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22
Q

Properties that qualify for reverse mortgage

A
  • Single family homes
  • 1-4 unit homes with one unit occupied by borrower
  • HUD-approved condos or townhomes
  • manufactured homes that meet FHA requirements

All properties must meet FHA property standards and flood requirements

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23
Q

Reverse Mortgage Amount is based on …

A
  • Age of youngest borrower
  • current interest rate
  • lesser of appraised value or FHA insurance limit
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24
Q

Reverse Mortgage

6 funds release plans

A
  1. Tenure
    1. equal monthly payments as long as at least one borrower lives and continues to occupy property as primary residence
  2. Term
    1. equal monthly payments for a fixed period of months selected
  3. Line of Credit
    1. unscheduled payments or installments at times and in an amt of borrower’s choosing until LOC exhausted.
  4. Modified Tenure
    1. combo of LOC w/monthly payments for as long as borrower remains in home
  5. Modified Term
    1. combo of LOC w/monthly payments for a fixed period of months selected by borrower
  6. Purchase
    1. The purchase of a new home
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25
Q

When must a Reverse Mortgage be repaid

A
  • Death of borrower
  • Borrower leaving residence for 12+ consecutive months
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26
Q

How is a Credit Score Calculated?

A
  1. Payment History (35%)
  2. Amount Owed (30%)
  3. Length of Credit History (15%)
  4. New Credit (10%)
  5. Credit Mix (10%)
27
Q

American Opportunity Tax Credit

A

$2500 MAXIMUM tax credit

  • 100% of first $2,000 of qualified expenses = $2,000
  • 25% of next $2,000 of qualified expenses = $500

Refundable

  • up to lesser of 40% of total credit or $1,000

Min ½-time student

Undergrad only

MAGI phase out

28
Q

Lifetime Learning Tax Credit

A

Undergrad, grad, professional

Not refundable (as opposed to AOTC which is refundable)

20% of qualified education expenses up to $10,000 for a ….

maximum of $2,000 per tax return

29
Q

Educational Tax Credits

A
  1. American Opportunities Tax Credit (AOTC)
  • $2,500/year
  • Refundable
  • Undergrad only
  • Min ½ time student
  1. Lifetime Learning Tax Credit (LLTC)
  • 20% of qual expenses up to $10,000
  • undergrad, grad, professional

Can’t claim both in same year for same student.

30
Q

Savings Bond Education Tax Exclusion

A

Permits qualified taxpayers to exclude from their gross income all or a portion of the interest earned on the redemption of eligible Series EE and I bonds issued after 1989

  • bondholder must be at least 24 y/o
  • MAGI limits apply
  • Series EE can be converted tax-free to a 529
  • Eligible expenses must be incurred during the same tax year in which eligible bonds are redeemed
31
Q

Custodial Education Savings Accounts

A
  1. UGMA
  2. UTMA
  • Child/bene gains access to funds upon reaching age of majority (usually 18)
  • Does not have to be used for educational expenses
  • Doesn’t avoid kiddie tax
32
Q

Trusts used in education funding

A
  1. 2503 © Minor’s Trust
  2. 2503 (b) Current Income Trust
  3. A demand, or Crummey invasion, trust
33
Q

2503 © Trust - Minor’s Trust

A

Used for educational funding

  • Designed to use the annual gift tax exclusion
  • Based on IRC Section 2503© that says a gift to an individual under 21 will NOT be considered a gift of future interest as long as the property and its income are payable to the child at age 21
  • Income escapes kiddie tax
34
Q

2503(b) or Current Income Trust

A

Used for educational funding

  • Income must be paid out at least annually
  • Income must be paid to the beneficiary
  • TTEE has no discretion to accumulate income
  • Typically presents problems in avoiding the kiddie tax
  • Trust assets not required to be distributed to the child at any specified age
35
Q

Crummey Invasion Trust

A

Used for educational funding

  • Effective mix of minor’s (2503c) and current income (2503b) trusts
  • Avoids gift taxes
  • Keeps money out of the estate of ind making the gift
  • Permits bene to w/d from the trust an amount equal to the lesser of the annual addition to the trust or the annual gift tax exclusion
  • Allows dist at any age chosen by grantor
36
Q

Substantially Equal Periodic Payment

(SEPP)

A
  • exception under 72(t)
  • turn some or all of retirement account funds into a period certain or life annuity for preretirement use at any time WITHOUT 10% penalty
  • Must w/d (roughly) equal amounts…
  • … For at least 5 yrs following commencement or until reaching age 59 ½ (whichever is later)
  • Money can be used for anything (ie education funding)
  • not recommended unless client is over funded for retirement
37
Q

Federal Grants

for education

A
  1. Pell Grants
  2. Federal Supplemental Educational Opportunity Grants (FSEOG)
  3. Teacher Education Assistance for College and Higher Education (TEACH) Grant Program
38
Q

Federally Funded Loans

for education

A
  1. Perkins Loan
  2. Stafford Loans (subsidized or unsubsidized)
  3. PLUS (Parent Loans to Undergraduate Students)
  4. Direct Consolidation Loans
39
Q

Mortgages guaranteed by the

Federal Government

A
  1. GNMA
  2. FHA
  3. VA
40
Q

Mortgage Lenders & Guarantors

A
  1. FNMA
  2. FHLMC
  3. Conventional
41
Q

Types of Mortgage Interest Rates

A
  1. Fixed
  2. Adjustable
42
Q

Types of Mortgage Payments/Payoffs

A
  1. Monthly
  2. Bi-Weekly
  3. Graduated
  4. Interest Only
  5. Balloon
  6. Reverse
43
Q

Basis Point

A
  • Measurement of a bond’s yield
  • 1/100 of 1% (.01%)
44
Q

Maturity Date of a bond

A

The date when the principal of the bond will be repaid.

  1. Short-Term: 1-5 years
  2. Intermediate-Term: 5 - 10 years
  3. Long-Term: >10 years
45
Q

Bond Ratings

A

Standard & Poors Moody’s

Investment Grade

High Grade AAA - AA Aaa - Aa

Medium Grade A - BBB- A - Baa

Noninvestment Grade (junk)

Speculative BB+ - B Ba - B

Default CCC - D Caa - C

OVERALL RATINGS. AAA - D Aaa - C

46
Q

Rule of 72

A

How long will it take for an investment to double?

72 / Interest Rate

Ex:

If the I/YR is 10%, it will take an investment (of any amount) 7.2 years to double.

72/10% = 7.2 years

47
Q

Use of BEGIN Mode

A

Think … Annuity DUE (NOW) … beginning of period

  • College tuition paid (due at start of school year)
  • Retirement benefits received
  • Family Needs
48
Q

Use of END Mode

A

Think … ORDINARY Annuity … end of period

  • 401(d) deferrals
  • Profit-sharing contributions
  • Bond interest payments
  • Mortgage payments
49
Q

Inflation-Adjusted Interest Rate

is also known as …

A
  • Real Rate of Return
  • Nominal Rate of Return adjusted for inflation
50
Q

Real Rate of Return Equation

(aka inflation adjusted IR)

A
  • Use when question asks for “TODAY’S DOLLARS”

= ((1+after-tax return/1+ inflation rate) - 1) X 100

OR

1 + After-Tax Return

______________________. - 1 X 100

1 + Inflation Rate

51
Q

Set Decimal Places on Calc to 4

A
  • Shift
  • = (DISP)
  • 4
52
Q

Current Assets

(as part of Current Ratio equation)

A
  • Cash
  • Cash Equivalents
  • Marketable Securities
  • Accounts Receivable
  • Inventory

*Ex: a 401(k) is NOT included because it is not considered a marketable security (due to taxes/penalties due is liquidated).

53
Q

Current Liabilities

(as part of Current Ratio equation)

A

Generally due within 1 year

  • Cash owed
  • Accounts Payable
  • Credit Card Debt (even if paid off in full each month)
  • Taxes Payable
54
Q

Coverdell Education Savings Plan

A

Max $2,000/year contribution

Must be used before student is 30 y/o

MAGI Phase outs

55
Q

Amortization Calculator Key Strokes

A

END Mode (because first payment is due at end of month (in arrears)

Set to 12 P/YR

Find PMT through TVM calc

SHIFT, AMORT (the FV key)

to change period enter range (ie months 1 -360 for full 30 year mortgage)

1 INPUT 360 , SHIFT, AMORT

= key 3 times to see princ, interest, balance

56
Q

Types of Bankruptcy

A

Chapter 7 (highly testable) - federal or state exemptions

Chapter 11 - those who don’t meet chpt 13 requirements

Chapter 13 - Reorganization. Smaller payments, not usually required to relinquish assets

57
Q

Chapter 7 (Straight) Bankruptcy

(most testable)

A
  • Allows creditor to walk away from all his debt

Must satisfy a “means test”

  • If avg monthly income for 60 mos:
    • >$10K - NOT ALLOWED
    • <$6K - ALLOWED

Complete consumer credit counseling within 6 mos of filing

Must provide tex returns, income projections, savings

58
Q

Are funds in a traditional or Roth IRA exempt from bankruptcy proceedings?

A

Yes, up to $1M

for rollover IRAs, exemption is unlimited

If IRA income exceeds debtor’s needs, it is NOT exempt

59
Q

Fair Credit Reporting Act

A
  • Consumers entitled to one free report per year per reporting agency (but available anytime for a fee)
  • If consumers denied credit, they have a right to receive a free copy of their file
  • Info retained up to 7 years
  • Only interested parties can access the file
60
Q

Consumer Credit Protection Act

A
  • Interest must be reported as APR
  • Credit terms must be disclosed including fees, points, prepayment penalties, etc
  • Lost or stolen credit cards have limited liability of $50/card
61
Q

State Law Exemptions for Chpt 7 Bankruptcy

A
  • Homestead
  • Personal property (limited amt)
  • Wages for HOH, including anyone providing more than ½ support for dependent
  • Equity in car (limited)
  • Pension & retirement plan rights
    • ERISA plans
    • Trad or Roth IRAs (contributory) exempt up to $1M
    • Rollover IRA - exemption is unlimited
    • No exemption if IRA income > debtor’s needs
  • Cash value of LI/proceeds of annuity contract
  • Disability benefits/unemployment/worker’s comp
  • Property held in TE
62
Q

Misc Federal Exemptions for Chpt 7 Bankruptcy

A
  • Civil service retirement benefits
  • Railroad pensions
  • Veteran’s benefits
63
Q

Debts not generally cancelable by bankruptcy

A
  • Student Loans
  • Gov’t Loans
  • Wage withholding & FICA obligations
  • Recent income taxes due
  • Child Support
  • Alimony

Jenn's CFP Exam Prep (9 decks)

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