Personal Financial Planning

Question 1

Personal financial planning process

Answer 1

Collect client’s information
Analyse information

lead to appropriate recommendations on debt reduction and financial management strategies

Question 2

collection of client information

Answer 2

Personal financial statements
Cash flow
Debt levels
Assets and liabilities
Education and emergency fund provisions

Question 3

Analysing information

Answer 3

Living within their means
Emergency fund adequate
Demands on cash flow

Question 4

Importance of Personal Financial Planning

Answer 4

1. Trends can be identified by gathering and recording client information year-on-year
2. Allows financial planner and client to identify areas of excessive spending and to rectify situation
3. Identifies cash available for new investments
4. Enables effective debt management
5. Client can determine whether they are on track to meet long-term financial goals and objectives

Question 5

What is Budgeting?

Answer 5

1. Reflects spending decisions made by an individual or household, usually on an annual basis.
2. Allows client to identify areas of overspending
3. Provides client with a sense of control and insight over their current financial affairs

Question 6

Budget vs Cash flow statement

Answer 6

1. A cash flow statement reflects the actual income received and expenses incurred by the client.
2. A budget is an estimate of future income and expenditure by client

Question 7

Benefits of budgeting

Answer 7

1. Facilitates accurate and effective financial planning.
2. Encourage involvement from all family members and identifies each individual’s personal objectives.
3. Plan for current needs and make provision for future.
4. Client more conscious of what is spent ,how it is spent and how it can be controlled.
5. Identifies problems at early stage.
6. Identifies available financial resources.
7. Assists in identifying priorities and ranking expenses according to level of importance.
8. Develops a sense of financial responsibility.
9. Plays a role in educating children from a young age on how to handle money and financial responsibility.

Question 8

Drawing up a budget

Answer 8

1. Prepare a budget
2. Calculate the estimated income from all source
3. Calculate expenses
4. Compare income and expenses
5. Suggest a bi­annual review process

Question 9

Emergency fund planning

Answer 9

You can have the best financial plan and budget and all it takes is one unforeseen event

Question 10

Reasons for emergency fund planning

Answer 10

Loss of employment
Disability
Car accident
Theft
Unforeseen medical expenses
Legal costs

Question 11

What every individual needs to have in place is an emergency fund.

Answer 11

3 – 6 times monthly expenses
Funds MUST be liquid
Invested in low risk investments

Question 12

Alternatives to an emergency fund

Answer 12

Credit card – will have an influence on budget
Personal loan – also an influence on budget

Question 13

Solvency Ratio

Answer 13

Relative to individuals stage in a life cycle

Question 14

Liquidity ratio

Answer 14

Compares the amount of liquid assets (cash) with current debt
multiply ratio by 12 months

Question 15

savings ratio

Answer 15

Level of savings as a percentage of total income
Depends on circumstances of individuals

Question 16

Debt service ratio

Answer 16

used to indicate the effect of any debt management strategies
Debt commitments (taxes)
gross income (income besides salary)

Question 17

Debt management consists of

Answer 17

Credit
Debt

Question 18

Credit

Answer 18

The National Credit Act of 34 of 2005 defines credit as the “deferral of payment owed to a person, or a promise to defer such payment”.
Credit is the power to buy or borrow on trust.

Question 19

Debit

Answer 19

Something that is owed” or a “state of obligation to pay something owed.”

Question 20

Reasons why individuals go into debt.

Answer 20

Mismanagement of funds
Undisciplined buying habits
Poor advice
Excessive lifestyle
Retrenchment
Unexpected medical expenses.

Question 21

Debt Management Strategies

Answer 21

1. Determine the interest rates that are being charged on the credit, pay off the debt with the highest interest rate first
2. If possible transfer most expensive debt to debt with a lower interest rate.
3. Consolidate smaller loans into one larger loan.
4. In certain cases liquidate investments.
5. Sell non-essential assets and use the proceeds to pay off debts.
6. If possible pay any additional amounts of money received into a mortgage bond.
7. Communicate with creditors and keep them informed of the situation.
8. In severe situations apply for a loan to repay original debt. This may allow for a longer period of time to repay debt.
9. If all else fails declare insolvency!

Question 22

Debt consolidation

Answer 22

Paying all your short-term/medium term debt by increasing your bond amount.

Question 23

Advantage and disadvantage of debt consolidation

Answer 23

A: can improve the cash flow situation.
D: interest cost is generally higher

Question 24

How to know if debt consolidation should be used

Answer 24

compare the monthly payments before and after and compare interest paid before and after