General Principles

Question 1

Emergency Fund

Answer 1

Months of FIXED and VARIABLE expense

3 Months: single and 2 sources of income / married and both have SIMILAR income / married (1 spouse works) and have 2nd source of income

6 Months: everything else (significant alimony from divorce, trust fund, financially well off)

Watch out for one spouse PLANNING on going back to work

If savings is in checking account add additional month; checking account is used to pay current months expenses

Question 2

Buying vs. Leasing Home/Car

Answer 2

Time & Taxes

Buying: typically high tax bracket individual, property tax deduction, capital gain exclusion, and living in the home for extended period

Rent: moving or potentially moving quickly, rent or lease may be lower, no closing or maintenance costs

Question 3

Opportunity Cost Question (Buy vs. Rent)

Answer 3

PV: - Lump Sum
FV: Ending Cost
PMT: Payment Amount (positive)
N: Time
I/Y: ?

If can earn more than required rate, lease

Question 4

Types of Mortgages

Answer 4

• FHA: Govt guarantees mortgages through FHA insurance. NOT Securities - Max Mortgage = $1,089,300
• Veterans Administration (VA Loans): ex-military
• Adjustable Rate Mortgage (ARM): Typically offer lower initial rates and can rise after a period of time. pay off loan quickly

Question 5

Mortgage Interest Deductibility (Mortgage Debt & HELOC)

Answer 5

Allows homeowners to deduct the interest on a combined $750k (both the mortgage and HELOC combined) when a taxpayer itemizes.
- HELOC must be used to buy, build, and improve the underlying residence (the one taken out on, not buying a new house) for the interest to be deducted

Married Filing SEPARATELY is cut in half; MFJ and Single is $750k

Question 6

PITI % of Gross Income

Answer 6

Under 28% of Gross Income

PITI = Principal, Interest, Taxes, and Insurance or Rent

Question 7

Mortgage Calculation Tips

Answer 7

• ALWAYS put the calculator in 12 P/YR unless told otherwise
• Only time PV is positive; payments are negative
• Amortization key strokes (monthly)

Question 8

Effective Annual Rate (low test probability)

Answer 8

Formula Provided
- Purpose of the formula is to compare interest rates with different compounding periods (comparing loans from same lender, one compounded semi-annual and the other monthly)

Question 9

Reverse Mortgage

Answer 9

Provides a means for homeowners (62+) to convert their home equity into cash:
- Must be repaid upon death of the individual or both spouses, end of term of years, or absence of elder from home for a minimum of 1 year
- Not a barrier to Medicaid eligibility
- Max amount = $1,089,300
- 62+
- Non-recourse loan: heirs never owe more than the house is worth (even if the balance on the loan is more)
- Proceeds income tax free
- Must get mandatory counseling from HUD

Question 10

FisCAl Policy

Answer 10

Tax and Expenditures
Policy enacted by congress to control economy. Same goal as Monetary Policy.

Question 11

Monetary Policy

Answer 11

FOMC/Federal Reserve Board

Tools:
- Reserve Requirement: increase reserve = tight money / decrease reserve = easy money
- Discount Rate (not the federal funds rate): increase rate = tight money / decrease rate = easy money
- Open Market Operations:
- Repurchase Agreement = Buying Securities = Easy Money (injecting cash into economy)
- Reverse Repurchase Agreement = Selling Securities = Tight Money (taking money out of economy)

Question 12

FINRA / SEC Regulations

Answer 12

Investment Advisor with less than $100 million = register with state

Investment Advisor with $90 million may register with SEC, $100 million are expected to register with SEC, and $110 million + must register with SEC

Exceptions to registering:
- Banks that are also investment company’s
- LATE: Lawyer, Accountant, Teacher, Engineer when advice is incidental to job
- BD’s when advice is incidental to job and don’t receive special compensation for recommending products (advice)
- Advisors whose only clients are insurance companies
- Family Office

Question 13

ADV Part 2 (SEC Regulation)

Answer 13

Required to deliver prospective clients a brochure disclosing information about firm and supervised persons

1. Narrative Format: disclosure requirements are written in narrative format
2. Plain English: typically tailored to client sophistication
3. Disclosure of Conflicts of Interest: RIA’s are fiduciaries and must disclose conflicts of interest
4. Truthful Disclosure: any material facts must not be omitted

No 48 hour rule; ADV Brochure must be delivered before engagement
Firms privacy notice must be delivered in writing as outlined in the Investment Advisor Act

Question 14

FINRA Exams/Licensing

Answer 14

SIE: Pre-requisite exam (6 and 7)
Series 6: Non-exchange traded securities (Mutual funds, New UIT’s (UIT’s have a thin secondary market), and variables with the appropriate state license
Series 7: Securities on an exchange (stocks, bonds, secondary UIT’s)
Series 63: State law exam - Blue Sky
Series 65: Investment Advisors law exam
Series 66: 63 & 65

Question 15

Bankruptcy (chapter 7)

Answer 15

can claim the federal exemptions (below) or the state law

Protected Items:
- Home
- limited personal property and equity in motor vehicle
- Head of family’s wages
- ERISA plans (pension and savings plan)
- Permanent life insurance / annuity proceeds / disability benefits
- 529 or Coverdale held in the account for at least two years is creditor protected

Debts not cancelable:
- Student Loans
- Alimony / Child Support
- Federal Taxes
- Government Loans

Question 16

College Funding Years: Account Types

Answer 16

UGMA/UTMA:
- Asset of the child, becomes their account at age of majority
- Kiddie tax applies to age 24; place low income, high growth assets in this account
- EE Education/ I Bonds do not receive qualified tax status in this account
- The account will own the bonds, not the child
- The bond will be labeled EE Bond not EE Education Bond in an UGMA/UTMA account

EE Education / I Bonds:
- Parents own bonds (anyone age 24+) at the time of issue
- Pays for tuition and fees only (not room and board)
- Parents must be under threshold (provided) in year of distribution

Coverdall ESA:
- $2,000 limit per beneficiary; person contributing must be under phaseout threshold
- Can be used for any type of expenses
- Eligible for K-12 expenses (may be a good answer choice if need to fund elementary expense)
- Irrevocable gift; can not reclaim assets
- Can not make contributions after age 18
- Account needs to be distributed by age 30
- Asset of the parent

529 Savings Plan
- Two types: 529 savings plan or tuition plan
- $17,000 per year per donor (special 5 year rule); only can pay for tuition and fees
- $10,000 for K-12 tuition expenses per year
- Account can stay open forever
- Asset of the parent
- $10,000 maximum to pay off student loans
- Can now cover apprenticeship expenses

Question 17

College Funding: Undergraduate Years (while attending school)

Answer 17

Wealthy Parents (AGI: $60K+)
- PLUS Loan

Poorish Parents (watch out for AGI limits)
- Pell Grants
- Federal maximum of $7,395
- Based on need
- Generally tax free unless used for room and board
- Subsidized Stanford Loans
- Supplemental Education Opportunity Grant (SEOG)

Coordination Rules: Can only use one of the below for specific source of income
- American Opportunity Credit: $2,500 per student for first 4 years of college (use this first) no felony drug charge
- 100% of first $2,000 and 25% of next $2,000 (phaseout)
- Enrolled half time
- Lifetime Learning Credit: $2,000 total; unlimited years
- 20% of first $10,000 (phaseout)
- Coverdall Withdrawal
- 529 Withdrawal

Question 18

College Funding: Graduate Years (while attending school)

Answer 18

• Lifetime Learning Credit
• Unsubsdized Stanford Loans
• Fulbright Scholarship (study abroad)

Question 19

Expected Family Contribution

Answer 19

The calculation included within the FAFSA form (re-calculated every year). The calculation represents what the family is expected to pay.

Children Assets
- 20% of children’s assets are included
- 529 plans are counted as a parent asset
- Look out for UGMA/UTMA’s

Parents Assets
- 5.64% of assets are expected to be used toward college
- Protected assets (primary home and retirement savings) are not counted
- contributions and distributions from these account must be reported for that year if they occurred

2 year look back when transferring assets

Question 20

Student Loan Debt Relief

Answer 20

• Income Driven Repayment Plan: Typically used for low income individuals. If balance left after 20-25 years it is forgiven. Forgiven amounts are generally realized as taxable income.
• Public Service Loan Forgiveness (PSLF): Public service for 10 years, 30 hours a week, and 120 qualifying payments
• Perkins Loan Cancelation: If you have a Perkins loan you may be able to get out of paying
• Teacher Loan Forgiveness: $17,500 of Stanford Loan or Direct Loan may be forgiven for teaching in low income school. 5 year time frame, and payments are suspended for those 5 years
• DEATH & DISABILITY: student loans are discharged