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Flashcards in Financial Planning General Deck (78)
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Financial planning process

Establish the client/planner relationship
Gather client data
Analyze and evaluate client's financial status
Develop and present financial planning recommendations
Implement financial plan
Monitor plan

1

Principles

Integrity
Objectivity
Competence
Fairness
Confidentiality
Professionalism
Diligence

2

Life cycle approach

Takes into account client: age, martial status, children, income, net worth, employment status: Accumulation Phase, Conservation Phase, Distribution Phase

3

Pie chart approach

income and expense pie chart; assets, liabilities and net worth

4

Emergency fund ratio

Cash and cash equivalents (current assets)/monthly non-discretionary spending.
Should be 3-6 depending on job security, single income/dual income.

5

Current Ratio

current assets (cash and cash equivalents)/current liabilities (due within 12 months, including 12 months of mortgage principal)
The higher the better

6

Housing Ratio 1

Front-end ratio
(Principal + Interest + Tax + Insurance)/monthly gross income
should be ≤28%

7

Housing Ratio 2

Back-end ratio
(Principal + Interest + Tax + Insurance + other debt payments)/monthly gross income
should be ≤36%

8

Consumer Debt Ratio

monthly debt payments/monthly net income
should be ≤20%

9

Savings Rate

(savings + employer match + reinvestments)/gross pay

10

Investment Assets to Gross Pay

Benchmarks:
25 y.o. - .02 : 1
30 y.o. - .06-.08 : 1
35 y.o - 1.6-1.8 : 1
45 y.o. - 3-4 : 1
55 y.o. - 8-10 : 1
65 y.o. - 16-20 : 1

11

ROI

Return on Investments:
invested worth today - (invested worth, 1 year ago + savings)/ invested worth, 1 year ago
Benchmark 8-10%

12

Balance sheet

Assets:
Cash and cash equivalents
Investment assets
personal use assets

Liabilities:
Current liabilities
Long-term liabilities

Net Worth

13

Cash flow approach

Adjusts the cash flow by forecasting impact of recommendations.

14

Limitations of balance sheet

Does not explain:
why or how an asset increased
why or how an asset/liability appears
changes in net worth

15

Statement of income and expenses

shows a period of time
all forms of income
savings
expenses (both variable and fixed)

16

Budget process

Determine income and expenses (both fixed and variable); determine if net discretionary income is positive or negative

17

Net present value

Present value of future cash flows - cost of the investment
0 or positive investment returns are good.
negative, dont invest

18

FAFSA

Free Application for Federal Student Aid. Determines EFC (Expected Family Contribution)

20

Pell Grant

Awarded on the basis of need
Undergraduate only

21

FSEOG

Federal Supplementary Educational Opportunity Grant
Exceptional financial need
Students already received Pell Grant

22

Stafford Loan

can be subsidized - need-based- (accrues interest while in school) or unsubsidized - not need-based - (does not accrue interest until repayment starts)
forgiven after 20 years
undergraduate and graduate students
full and part time students

23

Perkins Loan

Federal loan for students with exceptional need
undergraduate and graduate students

24

PLUS Loan

Parents Loan for Undergraduate Students
Based on credit history, not on need
Interest begins to accrue immediately

25

Prepaid Tuition

Prepaid Tuition -
Purchase college credits today for use later
Must be in-state

26

529 Savings Plan

*Contribute up to 5 times the gift tax exclusion amount
*Amounts based on funder, not beneficiary
*Can be used for: tuition and fees, books, supplies and equipment, room & board if at least 50% student
*No income phase-outs
*Distributions are fed/state tax free for qualified expenses
*If not, 10% penalty plus tax
*Considered parental assets
*If scholarship received, equivalent amt can be distributed w/out penalty

27

Coverdell Education Savings Account

*Up 2K per beneficiary per year
*Income phase-out
*Can be used for private school
*Must be distributed by age 30

28

EE and I Bonds

*can be redeemed to pay qualified education expenses
*NOT room and board
*must be purchased in name of parent
*must be redeemed in year of payment
*can be converted to another plan
*income phase-outs

29

Student Loan Interest Deduction

*up to $2,500/year
*first 5 years of repayment
*must have been used for qualified expenses

30

American Opportunity Tax Credit

*up to $2,500 in expenses for the first 4 years of qualified expenses
*100% of first $2000, 25% of 2nd $2,000
*per student
*includes tuition, fees and books as long as paid directly to university
*income phase-outs
*can't use in same year as LLC