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81 Cards in this Set

  • Front
  • Back
The Financial Planning Process
1. Determine your current financial situation
2. Develop financial goals
3. Identify alternative courses of action
4. Evaluate alternatives/risks
5. Create and implement a financial action plan
6. Reevaluate and revise your plan
Types of Financial Risks
1.Inflation risk-
Rising prices cause lost buying power
2. Interest-rate risk-
Effects cost of borrowing and rate of return
3. Income risk-
The loss of a job
4. Personal risk-
Health, safety, or costs
5. Liquidity risk-
Higher return may mean less liquidity
Influences on Personal Financial Planning
See Exhibit 1-6 pg. 13
Simple Interest
Principal X Rate X Time
Rule of 72
72/Annual rate of return= the num. of years it takes to double your $
Opportunity Cost
What you give up by making a choice
Time Value of Money
Study HW
Components of Personal Financial Planning
1. Obtaining
2. Planning
3. Saving
4. Borrowing
5. Spending
6. Managing Risk
7. Investing
8. Retirement and estate planning
Money Principle #1
When dealing with the financial services industry and third party financial advice, be highly skeptical and aware of potential conflicts of interest.
If it's too good to be true, the it probably is.
Mistakes in Financial Planning
1. Delaying decisions
2. Spending more than you earn/not saving enough
3. Not paying off high interest credit cards
4. Looking for the big kill, chasing latest trend
5. Letting emotions interfere
6. Trying to time the market
7. Failing to diversify
8. Not taking enough risk
CFP's see these Financial Planning Mistakes
1. Don’t set measurable goals
2. Make decisions without understanding the effect on other financial issues
3. Confuse financial planning with investing or tax planning
4. Neglect to reevaluate financial “plant”
5. Think planning is for the wealthy, or older people, or only for retirement
6. Wait for a crisis before planning
7. Having unrealistic investment expectations
Financial Aspects of Career Selection
1. Trade-offs of career decisions
-Overtime vs. family time?
-Company moves (spouse transfer)?
-Two income household?
2. Career training and development
-Get trained by the best if possible
-Continue to upgrade your skills
Economic Conditions Influence Jobs
1. Competition in other geographic regions
2. Automated Production
Resume Parts
1. The personal data section
2. The career objective section
3. The education section
4. The experience sections
5. The related information section
6. The references section
Provided on request
Prep your references!
6. Cover letter/email
Types of Resumes
1. Chronological
Focuses on experience in reverse order
2. Functional
Focuses on your skills
3. Targeted
Modified for a specific position
4. E-resumes for applying for a job online
Pre-Tax and After
Tax Benefits
1. Pre-Tax benefits X (1-tax rate) = After Tax Value

2. After Tax benefit divided by (1-tax rate) = Pre-Tax benefit value
401-K Plan
1. Allows employees to save for retirement and get a tax break
2. Allows employers to match employee contributions with no immediate tax due
3. All savings grow tax deferred
4. Amounts saved are taxed when withdrawn at retirement
5. Early withdrawal will trigger tax due
6. Early withdrawal results in 10% penalty (except 457 Plans)
Cost of Living and Salary Formula
Index Num. X Salery/ Index Num. = $ buying power
Money Principle #2
A dollar today is worth more than a dollar received in the future.
Tax Deferred Liabilities
Better because you are worth more now and are borrowing on a 0% interest rate.
Money Principle #3
If you don’t measure it, you can’t manage it.
Basic Financial Statements
Balance sheet, income statement, and cash flow.
Review Excel Files
Balance Sheet
Assets= liabilities + net worth
Income Statement
Revenues or income minus expenses = net income or loss, which either increases or decreases net worth
Cash Flow Statement
Reflects cash flow generated, less casg used for (or from) investments, and cash used for (or from) financing. It reconciles beginning and ending cash balances
(Types of) Assets
Cash or other property with monetary value.
1. liquid- things that can easily be turned into cash including checking and savings acct., money market accts., investments (stocks and bonds), cash value of life insurance.
2. Illiquid- real estate, personal possessions, cars, investments assets (retirement).
(Types of) Liabilities
Ammounts owed not including items not due yet.
1. Current or short term-medical bills, tax payments, insurance premiums, cash loans, and charge accts.
2. Long Term- Mortgage, home improvement loan, and a student loan.
Net Worth
assets - liabilities
liabilities exceed assets/can't pay debts when they are due
Fixed vs. Variable Expenses
Fixed- don't vary from month to month
Variable- change every month
Financial Ratios
1. Net worth = Total assets – total liabilities
2. Debt ratio = Liabilities/net worth
3. Liquidity ratio = Liquid assets/monthly expenses
4. Debt payments ratio = Monthly credit pmts/take home pay
5. Savings ratio = Monthly savings/gross monthly pay
Money Principle #4
Understanding taxes is critical to wealth accumulation.
Tax Forms
Study form 1040 and Schedule A
Taxable Income
net amount of income, after allowable deductions. on which income tax is computed.
gross income
-standard or itemized deduction
taxable income
Tax Exempt Income
Income that can't be taxed
1. Employer paid accident and health insurance premiums
2. Employer paid company parking
3. Athletic facilities provided by employer on site
4. Damage awards: personal physical injuries or sickness
5. Gifts and inheritances received
6. Scholarships and fellowships: degree programs
7. Payments under workers compensation acts
Tax Deferred Income
not included in gross income.
Income that will be taxed at a later date, such as earnings from an traditional individual retirement account (IRA) or interest on a U.S. Savings Bond
Adjusted Gross Income
is gross income after certain reductions have been made. These reductions are called adjustments to income, and include the following
1. Contributions to a traditional IRA or Keogh
2. Alimony payments
3. Student loan interest up to $2,500
4. Moving expenses
Deductions from AGI to get Taxable Income
Itemize deductions on Schedule A
1. Medical and dental expenses >7.5% of AGI
2. Taxes, contributions and theft loses
3. Mortgage interest, investment interest
4. Charitable contributions
5. Moving and job-related expenses
Marginal vs. Average Tax Rates
Marginal is used to make all financial descisions.
Tax Credit
an amount subtracted directly from the amount of taxes owed
Capital Gains and Losses
Investments are called capital assets.
Gross Income includes net capital gaines.
Long-term capital gains are taxed at more favorable rates.
Tax Free Investments
1. Interest on municipal bonds
2. Interest on Roth IRAs
3. Interest from Sec. 529 college savings plan
Dividends are paid by corporations to shareholders from after tax profits (most pay 35% tax)
Individuals also pay taxes on these dividends, thus they are taxed twice
Types of Taxes
1. Taxes on purchases
Sales tax & excise tax (regressive)
2. Taxes on property
Real estate tax
Personal property tax
3. Taxes on wealth
Federal estate and gift taxes
$13,000 per person per year exclusion (2010) for gifts
State inheritance tax
4. Taxes on earnings
Income tax (progressive)
Employment taxes
5. Use taxes
Toll roads
Airport landing fees
Money Market Accounts and funds
Money market accounts ARE covered by the FDIC, but money market mutual funds previously were not
Money Market Mutual Fund
Money market mutual funds are offered by your broker or even your bank
Mutual funds pool money and invest in
U.S. treasuries (very safe)
Consider buying Treasury bills directly from the government
Short term commercial paper (CP) issued by major corporations (widely diversified investments) with low risk of default
Some covered by temporary government insurance
Money Market Account
savings acct. that requires a min. balance and has earning based on market interest rates
Foreign Currency
Fee at market rate or no fee at a higher rate.
Liquidity vs. Safety
Higher Return = lower liquidity
Interest Rates and Variables on investments
Actions if Interest Rates Are Increasing
Investors: Keep short term horizon e.g. short term CD
Borrowers: Lock in long term rates e.g. mortgage

Actions if Interest Rates Are Decreasing
Investors: Lock in long term rates e.g. long CD or bonds
Borrowers: Borrow short term, wait for fall to lock in
After Tax Rate of Return on SAvings
Yield on savings times (1 minus tax rate)
6% times (1 - .25)
.06 times .75
= .045 or 4.5%
So even if you are earning 6%, after you pay taxes on the interest you earn you are actually earning only 4.5% after you pay taxes on the interest
Treasury Yield Curve
The treasury yield curve is normally “positive”…short term rates
are lower than long term rates. When long term rates are lower than
short term rates, the curve is “negative” or inverted, often forecasting a recession
Base Points
represent 1/100th of a percent

100 basis points = 1% (.01)
50 basis points = ½% (.005)
25 basis points = ¼% (.0025)

Example: 30 year fixed rate mortgages are currently 245 basis points above the 10 year treasury note
APR = Periodic interest rate times number of periods
Annual interest rate of 10% paid annually = 10% APR (.10 x 1)
Annual interest rate of 10% paid monthly; the periodic rate is .10/12 or .00833/month. The APR is .00833 x 12 or 10%
Which scenario is best for investors????
1,000 invested for one year at 10% APR with:
Annual compounding = $100.00 of interest
Monthly compounding = $104.71 of interest
Daily compounding = $105.16 of interest
APY indicates effective rate
APY = (1 + periodic rate) - 1
Daily APY = (1 + (.10/365)) -1 or 10.516%
You should know how to compute PV and FV using your HP (the I key represents APR interest)
The more frequent of the compounding, the higher the APY or effective interest rate will be (good for the investor, bad for the borrower)
APY is the appropriate measure of effective interest earnings or cost
Bank Reconciliations
To reconcile the bank statement:
Balance per bank statement
Deposits in transit not clearing
Outstanding checks not clearing
Correct balance in your checkbook
Check Endorsements
Checks are negotiable instruments
Checks can be signed over to another person
Restrictive endorsements provide protection
For deposit only
Be careful of special endorsements for promotional items, for example
Cell phone promotional check obligates you to 2 year commitment
Insurance settlement checks
Appropriate Debt
Home mortgages – equity loans for improvements
Loans for capital or long term durable goods (e.g. autos)
Student loans if needed, within a limited time period
Medical emergencies
Inappropriate Debt
Credit card
High cost finance companies
Paycheck advances
Pawn shops
Borrowing to pay current expenses
Home equity loans to pay off credit cards
Saves interest, but are you risking your house?
401-K Borrowing vs. Home Equity Loan
Home equity loan is better: interest is deductable
payback longer
no double tax
Credit capacity is a function of the home’s value less the mortgage outstanding; most lenders target 75% - 85% of fair market value (FMV)
FICO Score Impacts
Types of credit accounts
Mortgage, car loan, and limited cc best
Length of credit history
The longer the better
Number of recently opened accounts
More than 1 or 2 = trouble
How much you owe
Timeliness of payments
FICO Score Improvements
Stop paying bills late!!!
Reduce credit card/account applications (reduces your FICO score by 3 to 12 pts.)
Pay down credit cards evenly *
Don’t use a new credit card to lower other balances *
* These actions may not be in your best economic interest if you can save money with a lower rate
Debit Cards vs. Credit Cards
Don’t have to carry cash or checks
Can prevent credit card debt and bad checks
Consumer protections weaker if lost
No stop payment ability
Loss of float
Rewards/points not as good as credit cards
Debit cards are not considered “best practice”
but may be appropriate for spenders
Credit Cards:
Used by 8 out of 10 Americans
One-third are convenience users
The other two-thirds are borrowers
Co-branding - linking a credit card with a business offering rebates on products and services
$50 exposure for lost card
Money Principle #5
You will never get ahead financially if you are paying interest on credit card debt…and paying off credit card debt is a great investment.
Credit Card Interest Calculation Methods
Average daily balance excluding new purchases
Average daily balance including new purchases
Better (typical)
Two cycle daily balance excluding new purchases
Bad (now illegal)
Two cycle daily balance including new purchases
Worst (now illegal)
Advantages of Credit
You get to buy now
Even when funds are low
Use for financial emergencies
Convenient when shopping
Safer than cash
Can take advantage of float time
May get cash rebates, airline miles, etc.
Demonstrates financial stability
Disadvantages of Credit
Purchases are more expensive
Temptation to overspend
Ties up future income
Possible financial difficulties
Marital issues
Potential loss of merchandise due to late or non-payment
Closed Ended Credit
Repaid at maturity
Mortgage loan
Automobile loans
Installment and some home equity loans
Open-Ended Loans
Use as needed until reaching line of credit
You pay interest and finance charges if you do not pay the bill in full when due
Revolving check credit - prearranged loan
Open end home equity loan
Cosigning Loans
Before cosigning a loan consider...
If the person doesn’t pay, you will have to
Can you afford to pay if the person does not?
It can affect your credit report
Request that a copy of overdue payment notices be sent to you

Cosigning loans is a very BAD idea!
Five C's of Credit
Character - Do you pay bills on time?
Capacity - Can you repay the loan?
Capital - What are your assets and net worth?
Collateral - What do you have of value that the lender can take if you don’t repay?
Conditions - What economic conditions could affect your repayment of the loan?
Fair Credit Billing Act
Notify creditor of error in writing within 60 days
They must respond within 30 days
Credit card company has 90 days to resolve the problem or tell you why they think the bill is correct
Won’t affect your credit rating while in dispute
You can withhold payment on shoddy goods if you have paid for them with a credit card
The Truth in Lending Act
The Truth In Lending Act requires creditors to provide you with accurate and complete credit costs and terms (APR)
Creditors must disclose
credit terms and information...
In a clear and conspicuous manner
In a form you can keep
Fair Credit Reporting Act
Is your credit report accurate?
If you are denied credit based on your report, you can get a copy free within 60 days
Inaccurate information must be corrected within 30 days
Only authorized persons have access to your report
Adverse data can be reported for seven years and bankruptcy for ten years
Other Acts/Laws
Consumer Leasing Act
Equal Credit Opportunity Act
Fair Credit Billing Act
Fair Credit Reporting Act
Consumer Credit Reporting Reform Act
Fair and Accurate Reporting Act
Sources of Consumer Credit
Inexpensive loans
Parents and family members
Loans based on assets, such as a CD
Medium-priced loans
Commercial banks, savings and loans
Credit unions
Expensive loans
Finance companies
Retailers such as car or appliance dealers
Bank credit cards and cash advances
Trade-Offs of Getting a Loan
Lowers Interest Rate

Loan term Short term
Interest rate Variable rate
Down payment High down pmt.
Collateral Good collateral

Raises Interest Rate

Long term
Fixed rate
Low down pmt.
No collateral
Debt Capacity
Debt Payments-to-Income Ratio
Should Be < 20%

monthly payments*/monthly after tax income

*Not including housing
Debt to Equity Ratio
total liabilities/net worth*=
should be less than 1

*Excluding home value
periodic rate x number of periods

Borrow $100 and pay 10% due in one year
APR = 10% x 1 or 10%
APY = (1 + .10) - 1 or 10%
Borrow $100 and pay 10% ($10) interest, in 12 equal installments. $110/12 = $9.17/mo
Solve for APR (i) using HP End Mode
PV = -100 Pmt/yr = 12 n = 12 Pmt = 9.17 FV = 0 Solve for I = 17.97% APR Periodic rate = .1797/12 = .014976/mo
APY = (1 + .014976) -1 = .1952
How to Fix a Credit Problem
Notify creditors if you can’t make a payment
Debt collection practices require
If a debt collector calls you, within five days they must send you a written notice of amount owed
You can dispute the debt
The debt collector has 30 days to verify the debt
Consolidate loans if it makes sense
Consumer Credit Counseling Service
If you can’t pay your bills, postpone further credit purchases, talk with your creditors, or seek help from a non-profit credit counseling service
Non-profit (CCCS recommended)
Make an appointment
Businesses pay for its operation
Provides education about credit
Provides help with spending plan
Provides debt counseling services for those with serious financial problems
Bankruptcy Types
Chapter 13
Plan to pay a portion of your debt
Trustee distributes money to your creditors
Can keep most of your property
Must have a regular income
Chapter 7
Submit a petition and pay a fee
Lawyers charge +-$500, including court costs
Can keep some property
Idea is a fresh start
Congress just made Chapter 7 more difficult if you have some source of income to partially repay debts