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168 Cards in this Set
- Front
- Back
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The Personal Financial Planning Process |
1.Evaluate your financial health 2. Define your financial goals 3. Develop a plan of action 4. Implement your plan 5. Review your progress, reevaluate, and revise your plan |
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This text will allow you to accomplish the following: |
1. Manage for the unplanned 2. Accumulate wealth for special expenses 3. Save for retirement 4. Cover your assets 5. Invest intelligently 6. Minimize your payments to Uncle Sam |
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Components for Step 3: Plan of action |
Flexibility Liquidity Protection Minimization of taxes |
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Financial goals cover 3 time horizons |
Short term: Within 1 year period Intermediate term: 1-10 years Long term: 10+ years to accomplish |
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Liquidity |
The relative ease and speed with which you can convert noncash assets into cash. In effect, it involves having access to your money when you need it. |
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Estate Planning |
Planning for your eventual death and the passage of your wealth to your heirs |
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Inflation |
An economic condition in which rising prices reduce the purchasing power of money |
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Ten Principals of Personal Finance |
1. The best protection is Knowledge 2. Nothing happens without a plan 3. The time value of money 4. Taxes affect personal finance decisions 5. Stuff happens, or the importance of liquidity 6. Waste not, want not smart spending matters 7. Protect yourself against major catastrophes 8. Risk and return go hand in hand 9. Mind games, your financial personality, and your money 10. Just do it |
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Who achieves financial security better? Men or Women |
Men |
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Step 1: Evaluate Your Financial Health |
Examine your current financial Situation. (How much you make or how much you are spending) Use a recording keeping to track finances and spending |
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Step 2: Define Your Financial Goals |
Write or formalize your goals Attach a cost to each one When will you need the money by Analyze and revise goals |
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Step 3: Develop a plan of action |
Flexibility: Plan for life changes and the unexpected happens Liquidity: Immediate use of cash by quickly and easily converting assets Protection: Prepare for the unexpected with insurance Minimize taxes: Keep more of what you earn |
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Step 4: Implement your plan |
Stick to it Use your financial plan as a roadmap to achieve goals Keep goals in mind and work towards them |
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Step 5: Review, Reevaluate, and revise |
Review progress Reevaluate and revise for changes in your life Be prepared to formulate a different plan to meet your goals |
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Short term goals |
Accumulate Emergency Funds Equaling at least 3 Months’ Living ExpensesPay Off Bills and Credit CardsPurchase InsurancePurchase a smallish Major ItemFinance a Vacation
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Intermediate goals |
Save for Older Child’s College Save for a Down PaymentPay Off Major DebtFinance Large Items (Weddings)Purchase a Vacation Home
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Long term goals |
Save for Younger Child’s CollegePurchase Retirement HomeCreate a Retirement Fund to Maintain Current Standard of LivingTake Care of Elderly Family Members Start a Business
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Individuals Life Cycle |
Early years (54), Approaching retirement (55-64), retirement(65+) |
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Stage 1: The early years |
Prior to age 54
Develop a regular savings pattern:How much can be saved?Is that enough? Where should the savings be invested? Cost of raising children |
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Stage 2: Approaching retirement (the golden years) |
Transition years between ages 55-64.
Depends on preparation for retirement. Reassess financial goals and decisions—retirement, insurance protection and estate planning. |
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Stage 3: The retirement years |
After age 65, live off savings
Retirement age depends on savings. Less risky investment strategy Consider extended nursing home protection. Estate planning decisions and documents are critical. |
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How long should your emergency fund cover? |
3-6 months |
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Why women have tough time with finances |
Tougher to achieve financial security.
Generally earn less. Less likely to have pensions. Qualify for less Social Security. Live longer than men. Planning for financial independent more difficult for them than it is for men. Need to take charge of their money and financial future.Acquire knowledge.Make things happen—need a plan.See a financial planner about specific concerns. |
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How does a balance sheet measure your wealth? |
A snapshot of your financial status at a particular time.
Assets you own Debt or liabilities you’ve incurred Your net worth or equity |
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Assets |
What you own They are possessions even if you owe money on them List assets using their fair market value All values must be current |
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What is included in an asset? |
Monetary: Cash or liquid asset Investments Retirement plans Tangible assets:House, car, furniture etc |
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Liabilities |
Liability is debt that must be repaid in the future.
Current liabilities must be paid off within the next year. Long-term liabilities come due beyond a year.List only the unpaid balances. |
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What is a current vs long term liability |
Current bills—utility bills, insurance premiums, credit card balances.
Long-term liabilities—home, car, or student loans. Other loans—other installment loans, bank loans, insurance policy loans. |
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Net worth |
Total assets-total debt |
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Income: Where your money comes from |
Inflow: Wages, salary, bonuses, tips, commissions, before tax or automatic investments, family income, gov payments, investment income Subtract federal, state, social security taxes from earning to calculate take home |
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Do I gave enough liquidity to meet emergencies? |
Current ratio:
monetary assets divided by current liabilitiesShould be greater than 1.0Aim for above 2.0 Month’s Living Expenses Covered Ratio: monetary assets divided by annual living expenditures divided by 12Should aim for 3 to 6 months of liquid assetsLess if enough credit and insurance |
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Can I meet my debt obligations |
Debt Ratio: total debt or liabilities divided by total assetsShould decrease as you get older.
Long-term Debt Coverage Ratio: total income available for living expenses divided by total long-term debt payments Less than 2.5 is a red flag |
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Am I saving as much as I think I am? |
Savings Ratio: income available for saving and investments divided by income available for living expenses
Effective saving is achieved by paying yourself first |
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Putting it all together: Budgeting |
Evaluate your financial health by using a balance sheet (Set financial goals and how to achieve them) Develop a plan of action Monitor |
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Choosing a pro planner |
Check accreditation's: Personal Financial Specialist (PFS) Certified Financial Planner (CFP) Chartered Financial Consultant (ChFC) |
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Cash Management |
The management of cash and near cash (Liquid) assets |
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Pay yourself first |
Have savings automatically deducted from your savings Pay yourself first |
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Financial Institutions (Deposit type) |
Banks or deposit type financial institutions. Financial institutions that provide traditional checking and savings accounts Commercial banks, credit unions, savings banks, Savings and loan associations |
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Financial Institutions (Non deposit type) |
Nondeposit-type financial institutions—mutual fund companies, brokerage firms, insurance companies offer similar services as those offered by banks.
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What can you do with online banking? |
Access to your accounts to:check balances, transfer funds, paying bills, and view your financial information through the internet, a mobile phone, or other electronic device.
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Pros and cons of checking accounts |
Adv: Liquid, safe, low min balance, convenient Non interest bearing-Demand deposits Interest bearing- NOW accounts Disadv: Min balance required, monthly fee, opportunity cost, interest less than alternatives |
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Pros and cons of savings accounts |
Pro: Liquid, Safe-federally insured, earns higher interest than a checking account Con: May be a min. holding time, May be charges or fees, relatively low interest rate, inconvenient |
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What is a Money Market Deposit account and the pros and cons (MMDA) |
Alternative to savings account, variable interest rates, check and ATM access.
Advantages: Safe, Earns interest, Check writing privileges Disadvantages: High minimum balances/penalties, interest rates below alternatives |
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What is a CD (Certificate of Deposit) and its pros and cons |
Pays a fixed rate of interest while funds are on deposit for a period of time (30 days to years).
Advantages:Safe, fixed interest rate, convenient. Disadvantages:Early withdrawal penalty, fixed interest rate, minimum deposit required. |
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What is a Market Mutual Fund (MMMF) and its pros and cons |
Investors receive interest on a pool of investments less an administrative fee (usually less than 1% of total investment)
Advantages: High interest rates, check writing, limited risk, convenient. Disadvantages:Administrative fees, minimum initial investment, not insured, minimum checks. |
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Asset Management Account and its pros and cons |
A comprehensive financial services package (checking account, credit card, MMMFs, etc.) offered by a brokerage firm.
Advantages:Monthly statements, coordination of money management, checks, high return, convenient. Disadvantages:Costly, minimum initial investment, not insured. |
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U.S. Treasury Bills (T bills) what are they and its pros and cons |
T-bills—short-term debt issued by the federal government with maturities from 3-12 months.
Advantages:Risk-free, exempt from state and local taxes, federal tax vary with current rates. Disadvantages:Low rate of return |
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U.S. Savings Bonds what are they and the pros and cons |
Series EE and I bonds are safe, low risk savings products issued by the Treasury with low denominations.
Advantages:Safe, affordable, no taxes, convenient, redeem at any bank, no commissions or fees. Disadvantages:Low liquidity, long maturity, semi-annual compounding. |
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Different ways institutions are federally insured? |
FDIC deposits at commercial banks
NCUA deposits at credit unions MMMF—not insured but diversified |
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What to consider when choosing a financial institution |
Cost Convenience Consideration Safety |
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What are the types of checks? |
Cashier’s Check – Drawn on a financial institution
Certified Check – Personal check, funds to cover check are frozen by bank Money Order – Similar to Cashier’s check but issued by nonbanking institution Traveler’s Checks – Similar to Cashier’s check without specific payee |
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Electronic Funds Transfer (EFT) |
Any financial transaction that takes place electronically
ADV: Take place immediately, Dont have to carry cash or write a check, pay all kinds of bills this way Examples include ATM, debit card, smart cards, store valued cards |
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What are the different types of store valued cards? |
Merchant gift cards and prepaid phone cards are examples of stored value cards.
Single purpose or “closed-loop” cards which can be used at only one store. Multi-purpose or “open-loop” cards which can be used just like a credit card and can be reloaded. |
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Consumer Credit |
Credit purchases for personal needs other than for home mortgages, this can include anything from an auto loan to a credit card debt |
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What is open credit or revolving credit? |
A line of credit that you can use and then pay back at whatever pace you like so long as you pay a minimum balance each month, paying interest on the unpaid balance |
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Annual percentage rate (APR) |
The true simple interest rate paid over the life of the loan |
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Methods of determining the balance |
Average daily balance Previous balance method Adjusted balance method Variations0include new purchases or exclude |
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What is the average daily balance method |
A method of calculating the balance on which interest is paid by summing the outstanding balances owed each day during the billing period |
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What is the previous balance method? |
A method of calculating interest payments on outstanding credit using the balance at the end of the previous billing period |
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What is the adjusted balance method? |
A method of calculating interest payments on outstanding credit in which interest payments are charged against the balance at the end of the previous billing period less any payments and returns made |
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What is a cash advance |
At ATMs its like taking a loan High interest rates charged immediately on cash advances Up front fee of 2-4 percent of the amount advanced |
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What is the grace period |
The length of time given to make a payment before interest is charged against the outstanding balance on a credit card 20-25 days from date of bill No grade period with cash advances Grace period can be canceled if there is unpaid balance from previous month |
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What is an annual fee |
A fixed annual charge imposed by a credit card Over 70% of biggest credit card issuers do not charge |
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Merchant discount fee
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The % of the sale that the merchant pays to the credit card issuer |
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What are some of the additional fees |
Cash advance fees Late fees Over the limit fee Penalty rate |
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Pros of credit cards? |
Convenience
Used as identification Phone and internet purchases Temporary funds Use product before paying for it Bill consolidation Pay less today and earn interest elsewhere Extended warranties, travel insurance, and rewards. |
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Cons of credit cards |
Too easy to spend money Too easy to lose track of spending High interest rates Obligating future income heavy budgetary problems with uncontrolled spending |
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Undergraduate payment behavior |
38% make more than min payment 14% pay off some cards each month but make min payment on others 22% make the monthly min payment on all cards 17% pay off all credit card balances each month 7% make less than min payment on some or all cards 1% someone else pays the bill |
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What the credit card accountability, responsibility and disclosure act (Card) means for you |
Your credit card company has to tell you when they plan to increase your rate or other fees.Your credit card company has to tell you how long it will take to pay off your balance.
No interest rate increases for the first year. Increased rates apply to new charges. Restrictions on over-the-limit transactions.Caps on high-fee cards.Protections for underage consumers. Standard payment dates and times. Payments directed to highest interest balances first. Your credit card company cannot charge you a fee of more than $25 in most cases. |
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What are bank credit cards? |
Credit card issued by bank or large corp. Usually visa or mastercard |
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What are bank card variations |
Different classes of bank credit cards Premium or prestige Affinity card secured credit card |
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What are Travel and entertainment cards |
(T&E)—do not offer revolving credit and require full payment of balance each month.
Interest-free grace period. Issuers receive annual fee and merchant’s discount fee. American Express, Diners Club, and Carte Blanche are the primary issuers. |
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What are Single purpose cards |
Can be used only at a specific company.
Companies issue their own cards to avoid merchant’s discount fees. Terms vary, some offer revolving credit. Typically, no annual fee. |
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What are traditional charge accounts? |
can be used to make purchases or get services only at the issuing company such as utility companies and doctors who provide services and bill later.
Convenient for both issuer and payee. Pay monthly bill in full or pay interest/fee. Les Shuab |
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What kind of credit card user are you? |
Credit user—carries an unpaid balance from month to month.(Low APR)
Convenience user—pays off the credit card balance each month (avoids interest).(Long grace period, low annual fees, free benefits) Convenience and credit user—generally pays off all the balance (All the above) |
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What are the 5 C's of Credit? |
Character Capacity Capital Collateral Conditions |
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What is a credit bureau? |
Gathers information on consumers financial history, including payment history and sells to consumers. They compile credit report and assign a credit score |
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Credit report |
Info on financial situation and dealings. Can impact whether you get a loan and it affects your interest rate |
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What is credit scoring? |
Numerical evaluation of scoring of applicants based on their credit history
reduces the lenders uncertainty |
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What does your credit score affect? |
Affects rates you pay on credit cards
Affects size of credit line Affects insurance rates Affects mortgage rate Strong credit score—lower interest rate |
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How is your credit score computed? |
Based on models developed by Fair Isaac Corporation.
FICO Score but name and your score varies with bureau. Scores range from 300-850.(If low it doesn't mean you won't get a loan you just might pay higher rates etc.) Visit www.myfico.com/ficocreditscoreestimator to get an estimate of your score. |
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What is in my credit report? |
Identifying information Trade lines or credit accounts Inquires Public record and collection items |
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Factors that determine your credit score? |
Your Payment History (35%)
Amount You Owe and Your Available Credit (30%) Length of Credit History (15%) Types of Credit Used (10%) New Credit (10%) |
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FACTA |
You can request one free copy of your credit report from national bureaus and contact them for inaccuracies Bureau must investigate and correct |
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FCRA |
Negative information remains on report for 7-10 years |
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What to do if your credit card app is rejected |
Apply for a card with another financial institution Find out why you have been rejected. (Set up an app with credit card manager, address problem) |
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FCBA |
Procedures for correcting billing errors |
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Identity Theft |
Use of your name, address, Social Security number, bank or credit card account number, or other identifying information by someone other than you without your knowledge to commit fraud and other crimes.
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How to know if you've been a victim of identity theft? |
Receive a credit card you didn’t apply for.
Denied credit or offered less favorable terms.Calls or letters from debt collectors. Fail to receive bills or other mail. |
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What to do if you have had your identity stolen? |
Put fraud alert on credit file.
Close accounts that have been tampered with or you didn’t open. File police report. File report with the FTC. |
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Six steps in the financial planning process (EGADIM) |
Establish and define the relationship Gather client data (Goals and objectives) Analyze information Develop the plan Implement the plan Monitor the plan |
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Step 1: Establish the client planner relationship |
Identifying the services that will be provided
Describing how the planner will be compensated Identifying the specific responsibilities of both the planner and the client Deciding on the time frame of the engagement Discussing any other matters needed to define or limit the engagement’s scope |
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Four factors used by CFP Board to determine if a planner is practicing financial planning or the material elements of financial planning
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Client’s understanding and intent
Comprehensiveness of data-gathering Breadth and depth of recommendations Degree to which multiple subject areas are involved |
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Rule 1.3 |
If the services include financial planning or the material elements of the financial planning process, the certificant or the certificant’s employer shall enter into a written agreement governing the financial planning services (“Agreement”). The Agreement shall specify: The parties to the Agreement The date of the Agreement and its duration How and on what terms each party can terminate the Agreement The services to be provided as part of the Agreement
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Rule 2.2 |
A certificant shall disclose to a prospective client or client the following information: Description of compensation, including the terms under which the certificant or certificant’s employer may receive any other sources of compensation and what those payments are based on Conflicts of interest Material information that could reasonably be expected to affect the client’s decision to engage the certificant, including information about the certificant’s areas of expertise Contact information for certificant and employer If the services include financial planning or the material elements of financial planning, these disclosures must be in writing The certificant shall timely disclose to the client any material changes to the above information
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Step 2: Establishing the clients goals and objectives and gathering information |
Quantify specific financial goals in dollar terms and within definite time frames
General aspirations must be specified in detail Rank the objectives according to the client’s priorities Examine the objectives with due regard to the client’s limited resources and other constraints |
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Typical info gathered in step 2 |
Assets - FMV, basis, date acquired, and related debts Liabilities - Debts, alimony and support Life insurance - Policy amounts, beneficiary designations, and premium payments Income - Wages, salary and other income Expenditures - Current budget, savings and investments Investments - Risk-tolerance and investment objectives Estate planning - Wills, trusts, gifts, inheritances, and impact of future earnings Retirement planning - Retirement age, travel goals, and part-time consulting Miscellaneous - Disability income, medical expenses, education, and hobbies |
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Step 3: Steps for analyzing and evaluating the information gathered |
Review Financial statements Cash flow statements Insurance policies Wills Trusts Buy-sell agreements
Analyze the information To determine the strengths and weaknesses in the client’s financial position Evaluate The client’s objectives in view of available resources The economic conditions as they relate to future resources and cash flow for the client |
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Step 4: Developing the plan |
Identify the strategies and products available for achieving the client’s objectives
Educate the client as to the alternatives and advantages and disadvantages of each alternative, including maintaining the status quo Select the most appropriate strategies and products from those available Provide additional disclosures based on product recommendations |
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Step 5: Implementing the plan |
Work closely with other professionals to carry out the financial plan designed for the client Define what the planner will do and when, and what the client will do and when |
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Step 6: Monitor the plan |
Periodically review the plan to determine the significance of any changes in: Federal tax laws Economic conditions Available investment techniques Client’s goals and objectives
If new areas of planning arise that were not part of the original scope of the engagement, the planner and client will need to go back to step 1 and redefine the scope of the engagement |
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The client is responsible for: |
Providing all of the necessary info Reviewing the plan Some of the implementation Monitoring the plan |
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Single purpose view |
A single financial product or service can be considered financial planning |
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Multiple purpose view |
Financial planning must deal with a broad range of financial concerns such as investments, insurance and taxes |
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Comprehensive view |
True financial planning must cover all of the clients financial concerns and goals |
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Purist view |
Comprehensive planning done in a single client engagement with ongoing monitoring on a fee only basis |
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Compliance vs ethics |
Compliance is upholding the law whereas ethics is doing what is morally correct and legally acceptable |
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Four life situations involving risk |
Monetary Physical Social Ethical |
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Risk averter vs risk taker |
me vs evil kinevel |
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Balance sheet |
A snapshot of the clients financial position on a given date. Includes: Assets, liabilities, net wroth Assets=Liabilities + Net worth |
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Statement of cash flows |
Presents the cash receipts and cash disbursements over a period of time Example: For the year ended in Dec 31 1999 For the six months ended in Dec 31 1999 |
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Pro forma statements |
A projection of cash flow numbers to determine whether and how the client can continue to reach the financial objectives from the existing financial information that was previously relied upon
Can be used in used in step 4 of the planning process in conducting scenario analysis to communicate to the client what the results might look like under various circumstances |
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Ratio analysis |
Used to identify strengths and weaknesses of the current financial position Liquidity ratios Savings ratios Solvency and debt ratios Asset allocation ratios |
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Liquidity Ratios |
Current assets/Current Liabilities .25 to .5 or higher Current assets/annual net income (.25 to .5) 3-6 months Total Debt/Total assets <50% determines how insolvent you are |
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Savings ratio |
Savings and investments/Gross income >10% |
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Solvent and debt ratios |
Net worth/total assets example .82 would indicate that assets could decline by 82% before net worth would be reduced to zero non-mortgage debt payments/net income= <15% PITI Payments (principal, interest, taxes, and insurance) /gross income <28% PITi + consumer debt payments/gross income= <36% |
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Stages of cash flow management |
Cash flow analysis Cash flow planning Budgeting |
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What goes into a cash flow analysis |
Gather data on income and expenses and organize it within the Statement of Cash Flow
Analyze for strengths, weaknesses, opportunities, and threats (SWOT) May reveal situations where resources are being used ineffectively or inefficiently Makes clients more aware of saving and spending habits |
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Net cash flow |
Income - Expenses |
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Pros and cons of budgeting |
Advantages Reveals inefficient uses of resources Provides a way of measuring progress Helps motivate the client
Disadvantages May lead to wrong decisions May stifle creativity May be boring and tedious Suggestions Keep it flexible Keep it short and simple Begin with estimate of income Use it to understand actual versus planned results (see example page 3.14) |
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Debt management ratios. What you should not exceed |
Consumer debt payments should not exceed 15% of take-home pay
Monthly mortgage payments should not exceed 28% of gross income or one week’s take-home pay Monthly payments on all debt should not exceed 36% of monthly gross income |
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What percentage of savings should be planned as part of the budget? |
5-10% of annual income |
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Various life cycles |
Starting out: 18-25 Career building: 25-40 Prime earning years: 40-55 Wealth accumulation: 55-65 Retirement years: 65+ |
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Secured debt is... |
Backed by an asset. Example is a mortgage |
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Unsecured debt is... |
A credit card. Not backed by anything but your word |
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Best rates are offered to you with a credit score of... |
760
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Which card do you pay off first if you have multiple cards? |
Pay more than the minimum required on the loan with the highest rate first, while paying the minimum on loans with lower rates When highest rate loan is paid off, allocate the total being paid on that loan toward the loan with the next highest rate
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Closing costs are typically between... |
3-5% |
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When do you need Private Mortgage insurance? |
When the amount put down is less than 20% |
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Conventional mortgage is... |
Fixed rate for the duration of the loan |
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Adjustable rate mortgage is... |
Interest rate changes More risk Lower initial interest than fixed rate |
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Home equity loan line of credit |
Second mortgage taken on the home equal to some percentage, such as 80% of the homeowners equity Interest on first 100,000 of debt is deductible |
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Reverse mortgage is... |
With a reverse mortgage, an owner (age 62 or older) of a home that is fully paid for receives periodic income from a mortgage lender for a period of years or for life At the homeowner’s death, the lender can sell the home to generate the cash to repay the loan Any proceeds remaining after paying off the loan go to the homeowner’s estate
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Functions and purpose of financial institutions |
Financial institutions serve as an intermediary between those who have savings and those who have productive needs for capital Direct funds to those who have the highest potential for productivity Contributes to economic growth Improves standard of living
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Banks vs credit unions |
Commercial banks are corporations with a state or federal charter authorizing the bank to accept deposits, make business and consumer loans, invest in government and private securities, and provide other financial services (including trust department services)
The credit union is owned by its members and is a nonprofit entity offering a wide variety of consumer financial services |
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Brokerage companies are... |
large corporate organizations that have grown to enormous size by merger, purchase, and the use of other acquisition techniques, and that offer a wide variety of financial services
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Insurance companies are... |
both life and property-liability companies, obtain most of their funds from policy owners and they invest those funds until expenses and claims become payable
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Mutual fund companies are... |
companies invest funds in a portfolio of stocks or bonds, depending on the type of mutual fund
Example S&P500, international stocks, high quality corporate bonds |
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Trust companies are |
manage trust assets which can include cash, stocks, bonds, business and real estate The trust companies can serve as the corporate trustee of the trust or they can assist an individual trustee in managing the trust assets
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Regulations to assure safety of funds |
FDIC Insurance
SIPC Insurance PBGC NCUSIF |
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FDIC insurance |
The FDIC insures depositor accounts in banks and most types of nonbank thrift institutions up to $250,000 $250,000 insurance per depositor Joint account can be insured up to $500,000 Retirement accounts are also insured up to $250,000
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SIPC insurance |
The SIPC insures depositor accounts in brokerage firms up to $500,000 Limited to $250,000 in cash held in the account Insurance does not cover losses due to market fluctuations
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PBGC Pension benefit guranty corp |
Does not insure defined contribution plans |
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NAtional credit union share fund (NCUSIF) |
Insures credit unions accounts |
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Securities act 1933 |
Requires registration and full disclosure concerning all new securities so investors can make informed decisions when investing
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Securities act 1934 |
Created the SEC to enforce laws pertaining to the securities industry Requires the registration and regulation of broker/dealers
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The banking act of 1933 (Glass steagall act) |
Created the Federal Deposit Insurance Corporation (FDIC) to insure investor deposits
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The investment company act of 1940 |
Granted the SEC power over the investment or security transactions of publicly owned investment companies, such as mutual funds
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The investment advisers act of 1940 |
Requires investment advisers to register with the SEC if they are in the business of providing advice or analyses about securities for compensation
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The Mccarran ferguson act of 1945 |
Determined that the insurance industry would be regulated at the state level, rather than at the federal level
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The securities investor protection act of 1970 |
Created the Securities Investor Protection Corporation (SPIC) to insure investors against losses arising from the failure of a brokerage firm
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The employee retirement income security act of 1974 (ERISA) |
Created minimum funding standards for pension plans and established the Pension Benefit Guaranty Corporation to insure employee pension benefits up to certain levels
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The insider trading and securities fraud enforcement act of 1988 |
prohibits insider trading |
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The gramm leach bliley act of 1999 |
Allows banks and insurance companies to join together to serve clients and also requires giving customers the right to stop the sharing of their information with unrelated third parties
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What is needs analysis? |
Planning for education funding will typically require calculating the amount that will be needed to pay for four years of expenses at a college or university and then determining the amount that must be saved annually to reach that goal
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American opportunity tax credit |
Formerly called Hope Scholarship Credit Up to a $2,500 tax credit Only eligible during first 4 years of college AGI phaseout starts at $80,000 and $160,000 for single and married taxpayers, respectively in 2015
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Lifetime learning credit |
Up to a $2,000 tax credit Do not need to be a full-time student AGI phaseout starts at $55,000 in 2015 for single taxpayers $110,000 in 2015 for married taxpayers
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Most common ways for parents to fund childrens college |
Transferring assets to a child or a trust
529 plans ESAs UGMAs and UTMAs Savings bonds |
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Kiddie tax rule |
which cause any unearned income above $2,100 (2015) for a child under the age of 19 (24 if a student) to be taxed at the parents’ marginal tax bracket
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529 Plans |
Money can be set aside in special accounts, usually in mutual funds, to grow on a tax-deferred basis Can front load account with 5 years of annual gift tax exclusions
Money can be taken out tax-free if used to pay qualified education expenses, including tuition, room and board, travel, and other costs Monies withdrawn for purposes other than education are taxable and carry a 10% penalty tax If the child named as beneficiary of the plan elects not to go to college, the money can be rolled over to a 529 plan for another child |
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ESA Coverdell education savings accounts |
Coverdell education savings accounts (ESAs) allow for nondeductible contributions up to $2,000 per year per child Phased out for married taxpayers filing jointly with a modified adjusted gross income of $190,000 - $220,000 Contributions can be made in any year until the time the child reaches age 18 After age 18 for children with special educational needs
Distributions from the account are tax-free if used to pay any of a wide variety of “qualified education expenses” Includes K-12 expenses |
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Uniform transfer to minors act UTMA Uniform gifts to minors act UGMA |
ADV: funds are held in a custodial account DIS: Kiddie tax rule applies, the child will have access to the account at age 18 or 10 depending on state law |
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Savings bonds |
The interest earnings on EE bonds purchased after 1989 are federally income-tax-free if an amount equal to the proceeds is used to pay college tuition and fees Bonds must have been purchased after 1989 and the purchaser must have been at least 24 years old when the bonds were purchased Parental income must be below specified levels to take full advantage of the deduction (in 2015, $77,200 for single parents and $115,750 for joint filers) the income that determines the availability of the deduction is in the year the bonds are redeemed If a parent is using the bonds for a child’s education they cannot be registered in the name of the child It is permissible for the child to be listed as a beneficiary on the bond, but the child cannot be a co-owner
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Pell Grant and SEOGs supplemental educational opportunity grants |
Both are grants rather than loans
Available for undergraduate students only Students must show financial need |
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Perkins Loans |
Federal loans administered by the child’s college Available for graduate and undergraduate students
Students must show financial need No interest is charged while the student is in school and for nine months after graduation until required payments begin |
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Stafford Loans |
Subsidized loans Based upon need Federal government pays the interest while the student is in school and for six months after graduation
Unsubsidized loan Interest accrues from the date of loan; however, payments may be deferred |
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Parent Loans |
Loans not based upon need
Available only for parents of undergraduate students or for professional / graduate students Interest accrues from the date of loan; however, payments may be deferred |
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Nonfinancial planning for higher education |
High school courses for college credits
Take challenging and appropriate classes in high school Extracurricular activities Paid and/or volunteer work Taking PSAT, SAT, and ACT exams Researching scholarships Learning to manage money and live on a budget |
