Unit 3 - Cash Flow Management and Financing Strategies Flashcards Preview

CFP 1 - Fundamentals and Ethical Considerations > Unit 3 - Cash Flow Management and Financing Strategies > Flashcards

Flashcards in Unit 3 - Cash Flow Management and Financing Strategies Deck (21):

What is the current ratio?

Current Ratio (CR) = Current assets/current liabilities

Target is 1 or higher.  1 or higher indicates that the client can pay off existing short-term liabilites with readily available liquid assets such as cash.


What is the Housing Cost Ratio

Total housing costs/Monthly GROSS INCOME= less that or equal to 28%

***Housing costs include Mortgage, insurance and taxes


Discretionary Expense

Recurring or nonrecurring expense for an item or service that is wither nonessentail or more expensive than necessary. Examples: Vacations club dues entertainment gifts


What is the consumer debt ratio?

Ratio of monthly consumer debt payments to monthly NET INCOME. Consumer debt most often includes auto loans and credit cardsConsumer debt ratio should not exceed 20%


Nondiscretionary expens

Recurring or nonrecurring expense that is essential for an individual to maintain his lifestyle.

Examples Rent Mortgage Loan repayments Food Utilititles Taxes


As a general rule, the total debt-to-income ratio should not exceed what percentage?

Housing costs+other monthly debt payments/monthly GROSS INCOME= less than or equal to 36%


Emergency Fund - When should you save for 3 Month of Expenses

-single wage earner with a second source of income

-Married and both spouses are employed outside the home

-Married with one spouse employed outside the home but there is a second source of considerable income


Emergency Fund - When should you save for 6 Months of Expenses

-Client is single wage earner

-Married but only one spouse is employed outside the home


What kind of assets should an emergency fund be kept in?

Liquid assets

-Checking accounts

-Savings accounts

-money market deposit accounts

-time deposits (Bank CD's that are going to mature withing one year)


Savings Strategies

-Be Practical when using credit cards. Limit purchases to what you can pay off at the end of the month.

-Reducing Credit Card Debt by as little as $1000 can save clients $150 to 200 per year in interest.

-Increase dedcutibles on auto and homeowners insurance. Paying slightly more when a claim is made can result in sgnificant premium savings.

-Make sure you are not overpaying for cell phone service -Forgo premium cable channels. Chances are clients are not watching enough movies to justify the cost.


Define Short Term Debt

Debt that is due withing one year


Define Long Term Debt

Debt that is due at least one year from the specified date


Define Secured Debt

Debt in which the creditor maintans a security interest in personal property such as a house or automobile.


Define Unsecured Debt

Debt in which an individual merely promises to repay the debt in exchange for borrowed funds.

*** Creditors can take legal action if loan is defaulted on but most likely will settle for a lesser amount.


List the factors to be considered in determining whether to buy or rent/lease a home or asset

-The Price of existing homes and the level of mortgage interest rates in a particular area

-the extent to which home prices increase or decrease over the anticipated period that the client will own the home

-the length of time the client expects to live in the home and the degree of uncertainty associate dwith this issue

-the perceived income tax benefits of home ownership


Conventional Fixed Rate Mortgage Facts

-Level interest rate for the term of the loan

-fixed amortization schedule

-A client who has stable cash flow now (and anticipates this to continue) who wants to have a predictible payment each month should use a fixed 15 or 30 year mortgage.

-30 year loans have lower payments

-15 year loans have lower ineterest rates



Adjustable Rate Mortgage Facts (ARM)

-Interest rates may change on a monthly or annual basis according to a specific benchmark i.e. 10 year Treasury note.

-May ARM's limit the amount by which the intereest rate and accordingly the payment can change.  Also known as a Cap.

-Clients who want lower monthly payments and anticipate being in the home for a shorter amount of time should consider an ARM



Interest only Mortgage

The homeowner tries to keep the payments low while hoping that the fair market value of the home will increase so that the principal may be paid of by the proceeds. 


Federal Housing Administration (FHA) loan facts

-Guaranteed by the federal government

-Appeal to buyers who might not meet the requirements for a conventional home loan.

-Very low down payments

-Lower interest rates at times

-Federal government guarantees the loan

-Mortgage insurance is required


Veterans Administration (VA) mortgage Facts

-Federal Guarantee of payment

-For Veterans fo the US Armed forces only

-In Certain cases no down payment is requried

-No Private Mortgage Insurance is required


Home equity loans  Lines of Credit Facts Interest Deduction facts.

Qualifying home equity debt for which interest may be deducted is the lesser of

(1) $100,000 married filing jointly or single filer, ($50,000 if the taxpayer files married filing separatley), or

(2) the fair market value of the primary residence reduced by the amount fo the current acquistion indebtedness.