Unit 1 The Personal Financial Planning Process Flashcards Preview

Course 101 General Financial Planning, Principles, Professional Conduct, and Regulation > Unit 1 The Personal Financial Planning Process > Flashcards

Flashcards in Unit 1 The Personal Financial Planning Process Deck (27)
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The Financial Planning Process allows...

a client to get a realistic overview of his current financial status, set and analyze goals, develop a plan to meet those goals, and follow the plan to accomplish his goals.


When does a financial planning engagement exists?

when a CFP performs any type of mutually agreed-upon financial planning services for a client.


Who is a financial planning practitioner?

is a person who engages in financial planning using the financial planning process when working with a client.


What are the 6 steps of the financial planning process?

1. Establishing and Defining the Client planner relationship.
2. Gather Information from the client.
3. Analyzing and Evaluation the client's current Financial status.
4. Develop and Communicate the Recommendations.
5. Implementing the Recommendations.
6. Monitor the Recommendations.


What is the letter of engagement?

Defines the legal relationship between the planner and client.


What is Qualitative Data?

subjective data...concerned with a clients quality of life, health status or risk tolerance.


What is Quantitative Data?

Objective data...are measurable or conveyed as a quantity...financial statements or list of current assets.


A sound Financial plan should be customized with a recommendations based on...

clients needs, objectives, time horizons, risk tolerance, and goals.


What are the 3 phases of a clients life cycle?

1. Asset accumulation phase - up until age 45 or later if children are still dependent.
2. Conservation or protection phase - 45 - 60 or immediately proceeding retirement.
3. Distribution or gifting phase - after retirement

remember the lines do blur here


Risk Tolerance

involves the tradeoffs clients are willing to make between potential risks and rewards.


Risk Perceptions

is the clients' assessment of the magnitude of risks being traded off.


Risk Capacity

is the degree to which a clients financial resources can cushion risks.


What are the 3 major types of learning styles?

Visual, Auditory, Kinesthetic


What is the formula for Net Worth?

Assets - Liabilities = Net Worth

or Liabilities + Net Worth = Assets



cash or cash equivalents, investments, and personal use assets.


Current liabilities

those due less than one year from the statement date


Long-term Liabilities

those due one year or more from the statement date


What are the general rules of thumb for an emergency fund?

amount equal to 3 to 6 months of fixed and variable monthly expenses. 3 mos if a single wage earner with 2nd source of income or both spouses are employed or one spouse works but they have a second income.


What is the consumer debt ratio? What is the formula and what is the max amount you can have?

compares monthly consumer debt payments to monthly net income. (gross income minus all income taxes and FICA)

Monthly Consumer Debt Payments / Monthly net income

- Net income is mos income minus taxes includes dividends and interest.

- Consumer debt is other than mortgage

Max ratio is 20%


What is the Housing cost ratio?
What is the Formula?
What is the maximum percentage?

How much mortgage or rent debt you have.

Monthly Housing cost / Monthly Gross Income

- Monthly Housing cost = Mortgage Pmt, property taxes, homeowners insurance.

- Monthly Gross Income = Total of all income sources before taxes

Max is 28%


What is the Total Debt Ratio?
What is the Formula?
What is the Max percentage?

Is total debt

Total Monthly Debt. / Monthly Gross Income

- Total Monthly Debt = consumer debt plus mort payment and all housing cost.

Max is 36%


What is the current ration?
What is the Formula?
What is the expectable ratio?

compares current assets to current liabilities

Current Assets / Current Labilities

* Current Assets are cash and other assets that are expected to be converted to cash within one year.
*Current Labilities are less than one year.

want a ratio greater than one


What should be deciding factors when determining to lease or buy a home?

Home prices, interest rates, potential for increases/ decreases in homes value, how long the client intends to live in the home, income tax benefits of home ownership.


What is a Federal Housing Administrative loan? FHA

Appeals to buyers who may not meet the underwriting requirements for a conventional home loan. they may also have a down payment of less than 20%


What is an Interest only mortgage?

Try to keep mortgage payment at a minimum hoping that the fair market value of the home will increase so that the principle amount will be paid off by the sale proceeds.


What is a reverse Mortgage?

Lender makes payments to the home owner on the basis of the FMV of the home and the age of the home borrower at the time the loan is made?


What is Discounting?

the value today of a single amount that will be received in the future when discounted for a given number of periods at a given interest rate.

is the present value. it is used to determine how much a future sum is worth in terms of its present value. (PV of a single amount)