Mod 3: Financial Statements, Cash Flow Management, and Financing Strategies Flashcards
(35 cards)
Three major asset categories
1) Cash and Cash Equivalents
2) Invested Assets
3) Personal Use Assets
What items do “Inflows” include?
- gross salaries and wages
- interest and dividend income
- rental income
- tax refunds
- other amounts received by the client
How should “Outflows” be divided?
- savings and investments
- fixed outflows
- variable outflows
A planning tool that projects the anticipated inflows and outflows for a future period
Pro Forma Cash Flow Statement
The ratio of monthly consumer debt payments to monthly net income.
Consumer Debt Ratio
1) Monthly consumer debt payments should not exceed ______% of net monthly income.
2) What is this benchmark known as?
1) 20%
2) Nonmortgage debt-to-income ratio
Housing Cost Ratio (Equation)
= monthly housing costs / monthly gross income
What do “housing costs” include? (debt ratio purposes)
- rent or mortgage payment (P+I+taxes+insurance)
- association fees
1) Monthly housing costs should not exceed ______% of gross monthly income.
2) What is this benchmark known as?
1) 28%
2) Front-end Ratio
Consumer Debt Ratio (Equation)
= monthly consumer debt payments / monthly net income
Total Debt Ratio (Equation)
= total monthly debt / monthly gross income
What does “total debt” include for the purposes of the total debt ratio?
*recurring debts
- monthly housing costs
- consumer debt payments
- monthly alimony
- child support
- maintenance payments
1) Total debt should not exceed _____% of gross monthly income.
2) What is this benchmark known as?
1) 36%
2) Back-end Ratio
This ratio represents the ability of an individual to service short-term liabilities in case of a financial emergency.
Current Ratio
Current Ratio (Equation)
= current assets / current (short-term) liabilities
This ratio compares the value of investment assets (excluding equity in a home) with net worth.
Net-Investment-Assets-to-Net-Worth Ratio
What is a purpose of the Net-Investment-Assets-to-Net-Worth Ratio?
To show how well a client is advancing toward their capital accumulation goals.
9 Common Financial Strengths
Financial Strengths & Weaknesses
1) Adequate savings (particularly for retirement)
2) Appropriate emergency fund
3) Appropriate net worth–given client goals
4) Well-defined financial goals
5) Excellent cash flow management skills (including proper debt management skills)
6) Appropriate investments given client risk tolerance, time horizon, and goals
7) Appropriate insurance coverage
8) Valid and current estate planning documents
9) Employment status stable or promising
9 Common Financial Weaknesses
Financial Strengths & Weaknesses
1) Insufficient savings (particularly for retirement)
2) Inadequate emergency fund
3) Low net worth–given client goals
4) Financial goals that are not defined or are unrealistic
5) Poor or improper cashflow management skills
6) Investments that are not aligned with risk tolerance, time horizon, and goals
7) Insufficient amount or no insurance coverage
8) Lack of estate planning documents
9) Unfavorable employment status
7 Common Steps in Developing a Budget
1) Identify financial goals and determine what is required to meet them
2) Estimate income
3) Estimate expenses
4) Compare income and expenses to determine if expected expenses are equal to or less than expected income.
5) If expenses are too high, attempt to identify potential sources of additional income or areas in which expenses may be reduced.
6) Present each category of income and expense as a percentage of the total for ease in year to year comparisons.
7) Establish a process at the end of each month to review the budget and make adjustments.
2 Popular Debt Reduction Strategies
1) The Snowball Technique
2) The Avalanche Technique
5 Credit Score Categories and Their Weightings
1) Payment History: 35%
2) Amounts Owed: 30%
3) Length of Credit History: 15%
4) New Credit: 10%
5) Credit Mix: 10%
Under a “leasing option” what 3 costs are generally involved?
1) Periodic rent obligation
2) Cost of the renter’s insurance policy on his personal property (if renter chooses to purchase such as policy)
3) Cost of utilities
What is a key feature to an FHA mortgage?
A very low initial down payment, and sometimes lower interest rates because of the federal government’s guarantee of repayment.
