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66 Cards in this Set

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Explain personal financial planning
process in which
coordinated, comprehensive strategies are
developed and implemented for the
achievement of an individual’s or a family’s financial goals
Identify the functions of the six steps in the financial planning process
ESTABLISHING / DEFINING the client –planner relationship
GATHERING client data including goals
ANALYZING / EVALUATING client’s financial status
DEVELOPING / PRESENTING recommendations & alternatives
IMPLEMENTING recommendations
MONITORING recommendations
How do the goals of the client affect the nature of info gather in the data gathering form?
quantity and type of info gathered is directed by goals
comphrensive – extensive
narrowly defined – smaller
In addition to the information requested on the data survey form, what types of documents typically are gathered from the client before constructing a comprehensive financial plan? And why obtain them?
Instructions to executor
Trust agreements

Tax returns (Past three)
Insurance policies
Employee benefit booklets

Bank statements/cancelled checks
Retirement plans
Investment statements
What is the significance of including the words “As of December 31 20XX” in the heading of the statement of financial position?
They indicate that the statement is a profile of the client’s assets, liabilities, and net worth on a specific date.
Describe briefly each of the three major components of the statement of financial position.
Assets: What the client owns
Liabilities: What the client owes
Net worth: Residual value after subtracting liabilities from assets
Using a simple formula(s), describe the relationship that exists among the three major components of the statement of financial position.
Assets = Liabilities + Net worth
Assets – Liabilities = Net worth
Identify items that typically are placed under each of the asset categories on the statement of financial position.
(Items not inherently obvious...)

Cash/cash equivalents: cash surrender value of life insurance
Invested assets: collectibles for investment purposes
At what value are assets usually shown on the statement of financial position?
fair market value
What is the significance of including the words “For the Year Ending December 31, 20XX” in the heading of the cash flow statement?
indicates that the statement summarizes client’s cash inflows and outflows over the past year (or other specified period of time).
Identify items that typically are placed under each of the following categories on the cash flow statement.
Inflows: ...also includes liquidation of investments, funds received as a result of borrowing
Fixed outflows: Predictable, recurring outflows
Variable outflows: Food, transportation, household expenses
Under what circumstances would the category “Savings and Investments” appear as an inflow on the cash flow statement?
Whenever funds are withdrawn from savings or when assets are liquidated.
What is the purpose of footnotes to personal financial statements?
To clarify items listed in the statement
To list values or circumstances not disclosed in body of statement
Identify guidelines for and the purposes of the emergency fund
To ensure: that easily accessible funds are available for financial emergencies
To avoid: Having to liquidate investments and assets (nonliquid) or borrow funds for financial emergencies.
How might the stability of income and number of sources of income affect a client’s overall financial condition?
Greater stability + sources of income = stronger client financially.
The rule of thumb suggested in regard to saving and investing income:
5–10% of gross income.
What symptoms frequently are present if clients are not living within their means?
consumer debt high
miscellaneous expenditures high
savings withdrawls for living expenses
saving impossible
What is the current ratio, and how is it used?
The current ratio measures a firm’s ability to satisfy current liabilities with current assets.

Current liabilities / Current assets (cash/cash equivalents, receivables, and inventory)
What is the acid test ratio, and how is it used?
Current liabilities / Cash & cash equivalents + receivables
The acid test ratio measures a firm’s ability to satisfy current liabilities with its most liquid assets (i.e., without liquidating inventory).
What are the advantages and disadvantages of budgeting?
coordinates client and planner
reveals poor use of resources
enhances awareness of conservation
means of self-evaluation
highlights the need for alternative courses of action
id's problems before they occur
motivates for achieving goals

conclusions may be misleading
record keeping may be difficult
may stifle risk taking
Enumerate the guidelines for implementing a budget.
Consistent from year to year

Short enough to minimize guesswork
Long enough to set a proper investment or planning course
Extra info eliminated
Absolute accuracy not attempted
Variables considered in advance

What are the steps in constructing an income-expenditure budget?
Estimate income
Estimate expenditures
Determine excess / shortfall of income
Increase income / decrease expenses
Calculate percentages to reallocate resources.
Describe the following rules of thumb that may be used to assess whether debt is excessive.
Total monthly payments <= 36% of gross
Housing (piti) <= 28% of gross
Consumer debt payments <= 20% of net
How does debt affect a client’s financial situation?
enables a client to obtain unobtainable items

creates an obligation to repay,
limits cash outflow
increases expenses.
Define consumer debt
Short-term debt used to acquire consumer goods
Define Secured debt
Debt backed by collateral.
Define Unsecured debt
Debt backed only by the debtor’s promise to repay.

Higher interest rates than secured debt.
Define Grace period:
(credit card) A specified period for which no interest is charged on a new purchase.
Define Points
Prepayment of mortgage interest
one point is usually 1% of the original mortgage amount.
What are the potential benefits of consumer debt and home mortgages?
Consumer debt:
ability to purchase products and services immediately

Home mortgages:
allows people who would not otherwise afford a home
tax benefits
may appreciate in value
What are the potential costs of consumer debt and home mortgages?
loan origination fees
appraisal fees
credit reporting costs
title search costs
interest charges
What are some tax implications of home mortgages?
Points paid are tax deductible
home mortgage interest is (generally) tax deductable
Capital gains may be income tax free
fixed-rate mortgage
fixed interest rate
PMT unchanged
Typically 15 to 30 years on a monthly basis
Consist of repayment of principal and payment of interest
Early pmts larger percentage of interest
Later pmt larger percentage of principal.
biweekly mortgage
fixed-rate mortgage
PMT every two weeks; 26 pmts / yr
PMT half of the monthly amt
Full repayment occurs more quickly,
Interest costs lower.
adjustable rate mortgage
int rate changes w/ prevailing int rate in the economy
Rate tied to changes in a specified economic series
Rates typically limited in the initial mortgage agreement
Borrower bears a greater degree of risk
interest-only mortgage
variation of the adjustable rate mortgage
occasionally has fixed rate for the life of the loan
int rate usually tied to an index (LIBOR = London Interbank Offered Rate)
most loans, borrowers make only int payments for some predet per 5/10/20 yrs
then begin making additional payments to reduce the principal.
Balloon mortgage
monthly payment is calculated based upon a long-term mortgage at a given interest rate.
Initial payment is made for a relatively short period, such as five or seven years.
At the end of that time, the principal balance of the mortgage is payable in full.
The interest rate for a balloon mortgage is typically lower than that for a standard fixed-rate mortgage because of the shorter repayment period and the smaller expected variance of interest rates in the economy during a shorter period.
Graduated payment mortgage
payable over a long time period
fixed rate
pmt lower for the first few years of repayment
adjust to higher amount that remains fixed over the duration
Because early payments are lower there typically is negative amortization
payments during the second period typically are larger than those that would have been required using a standard fixed-rate mortgage.
A conventional mortgage
made by a commercial lender in the private sector.
VA mortgage
guaranteed VA
only to eligible veterans.
FHA mortgage
guaranteed by the Federal Housing Administration.
reverse mortgage
a means of accessing equity in a home
homeowner remains in home
lender makes a lump-sum payment or monthly payments
based upon a percentage of home equity / stated interest rate / specified payment period.
What are the potential costs of refinancing a mortgage?
typically the same as those involved when obtaining the original mortgage
if interest rates higher, int costs increase,
monthly payment may be lower due to a longer financing period.
What are the potential benefits of refinancing a mortgage?
if interest rates are lower monthly payments be reduced
Home equity is one potential source of funding for financial goals. What means may be used to access home equity?
a home equity loan
a reverse mortgage
selling the home
The decision whether to buy or lease a home may be important to the budgeting process. What factors must be considered when comparing leasing a home with owning a home?
The costs of leasing must be compared with the costs of owning.
Identical time frames must be considered for both options.
Potential changes in costs for each option over the time frame must be considered.
Explain the difference between open-end and closed-end leases.
open-end lease:
possibility that the lessee may face additional expense at the termination if the actual value of the leased item were different from the value projected at the inception of the lease

Closed-end lease:
lessee generally is free to walk away from the leased asset at the end of the lease
Some protections for the lessor might trigger additional payments by the lessee.
With regard to college funding, what are some characteristics of Direct transfer of funds
simple, inexpensive, avoids taxation of income at parents’ rate (with the exception of the kiddie tax)
works best using investment vehicles that defer taxation, i.e.,Series EE bonds
With regard to college funding, what are some characteristics of CUSTODIANSHIP
no administrative costs
involves naming manager of property for minor
nearly any type of property may be involved (though some restrictions may apply in states that have adopted only the UGMA)
child has right to receive property upon attaining the age of majority, to use as he or she chooses
does not avoid kiddie tax
designed to use annual gift tax exclusion ($13,000 for individuals $26,000 for married couples)
gift to individual under age 21 is not considered a gift of a future interest if property and income are payable to child at age 21
escapes kiddie tax but is taxed at trust’s rate, which is unfortunately a punitive one
With regard to college funding, what are some characteristics of a CURRENT INCOME TRUST
income must be paid out to beneficiary at least annually
trustee has no discretion regarding accumulation of income
more difficult to avoid kiddie tax
trust property need not be distributed to child at a specified age
With regard to college funding, what are some characteristics of a CRUMNEY INVASION TRUST
beneficiary may withdraw an amount equal to the annual addition to the trust or the annual gift tax exclusion, whichever is less,during intervals specified in the trust agreement
trust property is distributed to the beneficiary at the age chosen by the grantor
accumulated income is taxed at the trust’s rates
With regard to college funding, what are some characteristics of Scholarships
generally for academically or athletically gifted students, but may be need-based
available through colleges, businesses, foundations, community groups, etc.
continued receipt of monies may be contingent upon fulfilling requirements of provider
receipt of scholarship monies may reduce funds that may be available from other sources, such as the federal government
How might a parent’s qualified retirement plan be used to fund a child’s college education?
Under some plans, funds may be borrowed without a premature distribution penalty
funds distributed from a pension plan in the form of a life annuity may avoid a premature distribution penalty tax, even if distributions begin before the plan participant attains age 59½.
must withdraw roughly equal amounts from the pension plan on an annual basis for at least five years, or until reaching age 59½, to avoid the penalty tax. (Additional rules apply.)
How does the “kiddie tax” affect funding of investment vehicles for a child’s education?
The kiddie tax applies to unearned (i.e., investment) income greater than $1,900 (indexed annually for inflation) received by children under age 19 (or under age 24 if a full-time student).
First $950 of unearned income is not taxed (offset by the standard deduction)
second $950 of unearned income is taxed at the child’s marginal tax rate
all unearned income exceeding $1,900 is taxed at the parents’ marginal rate
College funding strategies for a child subject to the kiddie tax may differ from strategies used for a child who is not subject to the tax (and this now includes almost all college funding scenarios)
Investment vehicles selected for education funding when the child is subject to the kiddie tax should, perhaps, be structured for growth rather than income to avoid the tax.
Describe characteristics of a PELL GRANT
federal grant available to undergraduates only
students who are less than full time receive a partial grant
criteria for receipt are financial need and availability of federal funds
receipt of other grants and loans is sometimes contingent upon applying for or receiving a Pell grant
funded by federal government
administered by individual schools available to both part-time and full-time undergraduates
need-based grant
Describe characteristics of a ACADEMIC COMPETITIVENESS GRANT
Funded by the federal government
For full-time Pell grant recipients
Pays up to $750 first undergraduate year
up to $1,300 for second undergraduate year
Requires both financial and academic eligibility
Describe characteristics of a SMART Grant
Available to full-time Pell grant recipients in their third and fourth years of college
Pays up to $4,000 for undergraduate years three and four
Specific majors and GPA required
Describe characteristics of a TEACH Grant
Available to full-time undergraduate or graduate students enrolled in a program leading to teacher certification
Applicants must agree to teach in specified schools and programs
Students enrolled less than full-time will have grant amounts reduced.
Describe characteristics of a Perkins loan
funded by federal government; administered by individual schools
available to graduate and undergraduate students
available to half-time and full-time students (a temporary drop to part-time status may or may not require repayment to begin)
need-based loan
interest on loans is 5%, which is deferred during the period of education
repayment begins nine months following graduation
Describe characteristics of a Stafford loan
available to graduate and undergraduate students
not necessarily need-based, but interest subsidies during the period of schooling (and the six months following completion) are available for students demonstrating financial need
available for full-time students and for some students enrolled in programs that take less than an academic year (for a reduced loan amount)
loans are made by private lenders or the federal government
interest rates are fixed at 6.80%
repayment period is normally 10 years, but may be extended
Describe characteristics of a PLUS loan
available for parents of students
available through private lenders
available for undergraduate students
new program rules allow for loans to be made directly to graduate and professional students
not available to part-time students (but students enrolled in programs that are shorter than an academic year may be eligible for reduced loan amounts)
interest rate is fixed at 8.50%
Describe college work study programs
funded by federal government; administered by individual schools
eligibility based upon financial need
available to graduate and undergraduate students
available to part-time and full-time students
students are provided employment to earn money while attending school
number of hours worked limited by class schedule and academic progress
What are key issues that arise when planning is due to a divorce?
property distribution
child custody
other issues relating to insurance planning, budgeting, other transition plans, prenuptial agreements
What are key issues that arise when planning for a permanently disabled child or adult?
financial support
living arrangement
physical support

With regard to college funding what are some characteristics of a MINOR'S TRUST?
- uses $13k (26k married) annual gift tax exclusion
- many permit accum of income on behalf of child
- not considered a gift of future interest as long as property & income ar payable to kid at 21
- escapes kiddie tax, but taxed at trust rate