Module 3
Which of the following statements regarding a financial planner's analysis of a client's cash flow statement is CORRECT? 1The analysis of the client's cash flow statement can help the planner determine whether the client is living within his financial means. 2Typically, the financial planner will encourage the client to reduce the variable expenses reported on the cash flow statement. 3The analysis of the client's cash flow statement helps determine the client's savings level, or total cash surplus, by tracking cash inflows and outflows over a period of time.
all
Which of the following types of information are important to gather from a client prior to developing financial planning recommendations? His or her desired age of retirement Current asset mix within 401(k) or 403(b) plan Potential inheritance from parents Number of children client and spouse intend to have
all The age of retirement is required for determining investment and life insurance needs. The current asset mix is necessary to know when developing an investment strategy based on other information provided by the client. A potential inheritance should not generally be counted on for financial planning, but it can be a warning that estate tax problems may crop up in the future. The number of children a couple may have gives an indication as to what may be needed for education expenses, how children will affect family income, and creates the need for other forms of planning such as trusts and guardianship issues.
Which one of the following client goals is stated appropriately? A) A comfortable retirement B) $14,000 in current dollars, per year, for each child's education C) Enough life insurance to keep the family in its "own world" D) An adequate emergency fund
b The answer is $14,000 in current dollars, per year, for each child's education. A specified dollar amount to be accumulated for education is a goal that can be attained. The other goals/targets are ambiguous and require more specificity to be of any use.
Which of the following are reasons for analyzing a client's cash flow? To determine the client's ability to save and invest. To reveal problem areas in the client's spending patterns that will show the inability to save.
both
Robert Smith asks for your help in preparing his cash flow statement. He tells you that his salary before taxes is $250,000 and that he has no mortgage on his home. Which of the following statements is true about Robert's cash flow statement? A) The taxes on his salary would be a liability. B) The value of the home would be an income source since there is no mortgage. C) The taxes on his salary would be an expense. D) The value of the home would be an asset.
c Cash flow statements show income and debt payments (i.e., inflows and outflows). Assets and liabilities are shown on a statement of financial position or net worth statement. The home's value by itself would be recorded as an asset on a statement of financial position, rather than as an income source on a cash flow statement. Again, income rather than income sources are shown on cash flow statements.
Your clients have several long-term goals that will require a fairly significant amount of capital. What is the most effective recommendation you can make to help your clients work toward their long-term goals?
recommend that they implement an ongoing saving and investing plan. Saving and investing is what ultimately builds a client's net worth which provides them with flexibility and the financial ability to meet their goals. Saving and investing should be an important focus when developing a cash flow statement.
Categorize the following items appearing on a statement of cash flows: Food expenses Clothing expenses Utilities expenses Travel and entertainment expenses
variable outflows. All of these are variable outflows. Variable outflows are considered as such because there is some variation in occurrence and amount.
Emergency Fund - 6 months
-single wage earners -married with one spouse gainfully employed
Which of the following items are normally included in a cash flow statement? 1Dividend income 2Money market account balance 3Mortgage note balance 4Vested pension benefits
1 The answer is I only. The remaining items are asset values, correctly shown on a statement of financial position or balance sheet. Income items (e.g., dividend income) are on the cash flow statement.
Which of the following guidelines are used to determine whether a client has excessive debt? 1Payments on housing should be no greater than 28% of gross income. 2Total monthly payment on all debts should be no greater than 36% of gross monthly income. 3Total monthly payment on all debts should be no greater than 28% of gross monthly income. 4Consumer debt payments should be no greater than 30% of net income.
1,3 Consumer debt payments should be no greater than 20% of net income.
Which of the following are good savings strategies? 1Use an overdraft feature on debit cards 2Choose an economical cell phone plan 3Increase deductibles on automobile insurance policies 4Limit credit card purchases to those that can be paid off in full in six month
2-3 Using an overdraft feature on debit cards may entice individuals to spend money they do not have available in their accounts. Increasing insurance deductibles decreases premiums, which is a good savings strategy. Another good plan is to choose an economical cell phone plan (and limiting texting and calls). If credit cards are used, they should be paid off in full at the end of each month.
Given the following data for Daphne Jones: Checking account$1,000 Jewelry$5,000 Mutual funds$60,000 Vested 401(k)$55,000 Mortgage balance$95,000 Auto loan balance$20,000 Money market account$10,000 Personal assets$50,000 Sailboat$7,000 Credit card balance$5,000 Stock portfolio$10,000 90-day CD$2,000 Automobile$35,000 Personal residence$150,000 What is the total value of her investment assets?
The answer is $125,000. Daphne's investment assets include the following: Mutual funds$60,000 Stock portfolio$10,000 Vested 401(k)$55,000 $125,000
Given the following data for Daphne Jones: Checking account$1,000 Jewelry$5,000 Mutual funds$60,000 Vested 401(k)$55,000 Mortgage balance$95,000 Auto loan balance$20,000 Money market account$10,000 Personal assets$50,000 Sailboat$7,000 Credit card balance$5,000 Stock portfolio$10,000 90-day CD$2,00 Automobile$35,000 Personal residence$150,000 What is the total value of her investment assets?
The answer is $125,000. Daphne's investment assets include the following: Mutual funds$60,000Stock portfolio$10,000Vested 401(k)$55,000$125,000
Before any of the transactions below, Sid had a net worth of $200,000. Took out a $24,000 loan to pay for a European vacation Paid off his student loan of $8,000 using funds from his money market deposit account Purchased an antique car valued at $18,000 for $15,000 with checking account funds What is Sid's net worth after these transactions?
The answer is $179,000. Sid's $24,000 loan for travel increases his liabilities and does not affect his assets. Payment of his student loan will reduce debt by $8,000. However, the use of his money market deposit account to pay off the debt will reduce his assets by $8,000. The net effect of this transaction on his net worth is zero. Purchasing the antique car for $15,000 with funds from his checking account decreases assets by $15,000; however, assets are increased by $18,000 (the value of the car) for a net asset increase of $3,000. Therefore, after the transactions, his net worth decreases to $179,000 ($200,000 - $24,000 + $3,000).
Jennifer has the following debts and would like to start a process to pay them off, starting with the debt with the lowest balance. She currently has $70 in excess monthly cash flow to start this process. Using the snowball technique, what would she be able to pay on Credit Card 4 once the smaller loans have been paid off? Debt Balance Minimum Payment Credit Card 1 $225 $25 Credit Card 2 $575 $35 Credit Card 3 $1,000 $50 Credit Card 4 $3,200 $120 Auto loan $12,000 $300
The answer is $300. Jennifer would have the $70 she can start with, plus $110 once Credit Cards 1, 2, and 3 are paid off, plus the $120 she has been paying all along on Credit Card 4 for a total of $300.
Before any of the transactions below, June had a net worth of $100,000. Took out a home equity loan of $12,000 to pay for a trip abroad Paid off her auto loan of $4,000 using funds from her money market deposit account Purchased her deceased aunt's romance novels for $2,000 with personal savings account funds, even though the books were of no economic value What is June's net worth after these transactions?
The answer is $86,000. June's $12,000 home equity loan for travel increases her liabilities and does not affect her assets. Payment of her credit card balance will reduce debt by $4,000. However, the use of her money market deposit account to pay off the debt will reduce assets by $4,000. The net effect of this transaction on her net worth is zero. Purchasing her aunt's books for $2,000 with funds from her personal savings account decreases her assets by $2,000. Therefore, after the transactions, her net worth decreases to $86,000 ($100,000 - $12,000 - $2,000).
Which of these are savings strategies a financial planner can recommend to clients? Forgo premium cable channels Use an overdraft feature on debit cards Choose an economical cell phone plan Decrease deductibles on automobile insurance policies
The answer is I and III. Using an overdraft feature on debit cards may entice individuals to spend money they do not have available in their accounts. Decreasing insurance deductibles increases premiums, which is not a savings strategy.
Allyson would like to pay off her debt, reducing the debt with the highest interest rate first. Compared to the snowball approach of debt reduction, which of the following statements are CORRECT? Compared to the snowball approach, it is relatively more difficult to pay off the first debt with a high balance quickly. This approach increases the total amount of interest paid during the debt reduction process.
The answer is I only. With Allyson's approach, it often takes longer to pay off the first debt when the highest interest rate has a considerable balance. Less interest paid during the debt reduction process is an advantage of paying off debt in order of interest rate.
Which of these are tax implications of owning a personal residence? The points paid are tax deductible for the buyer Mortgage interest is generally tax deductible for the buyer Capital gains may be nontaxable within specific limits Homeowners may depreciate their personal residence
The answer is I, II, and III. Although I, II, and III are tax implications of home ownership, exceptions and restrictions apply to these benefits. A taxpayer of any age can exclude $250,000 of gain ($500,000 for joint filers) from the sale of a home owned and used by the taxpayer as a principal residence for at least two of the five years immediately preceding the sale. Generally, an individual cannot claim depreciation on a personal residence.
Which of these are reasons a client should consider purchasing a home rather than renting one? I. Mortgage interest is generally income tax deductible II. Adequate liquid assets are available for a down paymentIII. Client plans to live in the home five years or longer
The answer is I, II, and III. The deductibility of mortgage interest when a client itemizes deductions is a definite tax advantage in purchasing a home as opposed to renting one. If clients intend to live in their residences for several years (more than five) and have enough money for a down payment (without depleting the emergency fund), they should consider purchasing a home.
Andy and Debbie are working with their financial planner to develop a budget. The financial planner told them to list all their discretionary and nondiscretionary expenses. Which of the following would be considered a nondiscretionary cash outflow for planning purposes? Utility bills Loan payments Mortgage payments Travel and entertainment expenses
The answer is I, II, and III. Utility bills, loan payments, and mortgage payments are considered nondiscretionary expenses. Travel and entertainment expenses, along with gifts, premium cable TV channels, and club dues are considered discretionary expenses.
Which components of the FICO credit score calculation have the greatest impact on the total score? Credit mix Payment history Amounts owed Length of credit history
The answer is II and III. Payment history and amounts owed have the greatest impact on total score of the FICO credit score calculation.
Which of the following financial statements provides a snapshot of a client's net worth at any given point in time, usually at the end of a calendar year? Statement of cash flows Statement of financial position Personal tax return Net worth statement
The answer is II and IV. The statement of financial position, also known as a personal balance sheet or net worth statement, provides a snapshot of the client's net worth (wealth) at any given point in time.
Which of the following statements regarding the identification of financial strengths and weaknesses is CORRECT? This process is primarily objective. A planner may rely on financial ratios to assist in making this determination.
The answer is II only. Although a planner may rely on financial ratios to assist in identifying financial strengths and weaknesses, this analysis is generally subjective.
Which of the following statements regarding a client's credit score is CORRECT? Using a high percentage of available credit will positively affect a credit score. Considering a client's credit history only, the longer the history, the higher credit score.
The answer is II only. When considering a client's credit history and no other FICO categories, in general, the longer the credit history, the higher the credit score. Using a high percentage of available credit will negatively affect a client's credit score.
Which components of the FICO credit score calculation have the greatest impact on the total score? New credit Length of credit history Amounts owed Payment history
The answer is III and IV. Payment history (35% of credit score) and amounts owed (30% of credit score) have the greatest impacts on the total FICO score.
Which of the following assets is appropriate to include in an emergency fund for a family with $500 per month in discretionary income?
The answer is a money market deposit account. The only liquid and time-appropriate asset listed is a money market deposit account. An S&P 500 Index mutual fund should not be used for emergency fund purposes because its value may decline and any sale of shares may result in a taxable event.
Brandon and Jessica are in their mid-30s. Both are employed and they have no children. They enjoy international travel and own luxury automobiles. To afford their lifestyle, the couple has accumulated significant debt. In addition to their large car loans, Brandon and Jessica have balances on multiple credit cards and a substantial private loan used to pay for a Mediterranean cruise. Within the next few months, they intend to purchase a home. Both Brandon and Jessica are aware of their need to plan for retirement, but their current debt makes it difficult for them to consistently save money. After meeting with the couple and analyzing their financial statements, you recommend they adopt a savings plan. Assuming they accept your recommendation, which of the following steps would help Brandon and Jessica maximize their savings potential? Begin paying off their debts, giving priority to the debt with the highest interest rate Monitor their spending to ensure they are not using debt to finance a lifestyle they cannot afford
The answer is both I and II. Both of these steps should be implemented as part of the Brandon and Jessica's savings plan.
Which of the following statements regarding the identification of financial strengths and weaknesses is CORRECT? This process is primarily subjective. A planner may rely on financial ratios to assist in making this determination.
The answer is both I and II. During this subjective process, a planner may rely on financial ratios to assist in identifying financial strengths and weaknesses.
Bette and Bob are purchasing a new home and are evaluating financing alternatives. They have heard that using a graduated equity mortgage may be disadvantageous. You can tell them that
The answer is negative amortization may occur. The payment amounts may change and are unpredictable. Principal is repaid in each payment over the mortgage term, not in a lump sum. Selling the home is unnecessary to repay the mortgage.
Which of the following statements regarding liabilities on the statement of financial position is CORRECT? They are categorized as fixed or variable. Any outstanding mortgage balance is reported as its original amount.
The answer is neither I nor II. Liabilities are categorized as current (short-term) liabilities or long-term on the statement of financial position. The current outstanding mortgage balance as of the date of the statement of financial position, not the original mortgage amount, is reported on this statement.
While reviewing the finances of the Stewarts, Ms. Brown, a CFP® certificant, is calculating a variety of financial ratios. The Stewarts have provided the following information: Principal and interest $1,200 per month Property insurance $600 per year Property taxes $2,400 per year Gross income $5,000 per month Based on the information provided, calculate the Stewarts' housing cost ratio. A) 0.29 B) 3.45 C) 0.84 D) 0.50
a The answer is 0.29. The formula for the housing cost ratio is as follows: housing cost ratio = all monthly nondiscretionary housing costs ÷ monthly gross income ≤ 28%. All monthly nondiscretionary housing costs include the following: principal, interest, taxes, and insurance. To compute the Stewarts' housing cost ratio, the property insurance and property taxes provided need to be adjusted to monthly expenses ($600 ÷ 12 = $50; $2,400 ÷ 12 = $200). Therefore, the Stewarts' ratio equals 0.29, or 29% ($1,450 ÷ $5,000) and this would be very close to the acceptable range.
Which of the following guidelines are used to determine whether a client has excessive debt? Payments on housing should be no greater than 28% of gross income. Total monthly payment on all debts should be no greater than 36% of gross monthly income. Total monthly payment on all debts should be no greater than 28% of gross monthly income. Consumer debt payments should be no greater than 30% of net income. A) I and II B) I, II, III, and IV C) I, II, and III D) III only
a The answer is I and II. Consumer debt payments should be no greater than 20% of net income.
Which of the following are good savings strategies? Use an overdraft feature on debit cards Choose an economical cell phone plan Increase deductibles on automobile insurance policies Limit credit card purchases to those that can be paid off in full in six month A) II and III B) II and IV C) I, II, III D) III and IV
a The answer is II and III. Using an overdraft feature on debit cards may entice individuals to spend money they do not have available in their accounts. Increasing insurance deductibles decreases premiums, which is a good savings strategy. Another good plan is to choose an economical cell phone plan (and limiting texting and calls). If credit cards are used, they should be paid off in full at the end of each month.
Which of the following has the least impact on a client's total FICO score? A) Credit mix B) Length of credit history C) Payment history D) Amounts owed
a The answer is credit mix. These categories affect credit scores in the following percentages: credit mix, 10%; length of credit history, 15%; amounts owed, 30%; and payment history, 35%
When preparing a cash flow statement for a client, what is the correct way to indicate the period covered? A) For the period January 1, 20XX, to December 31, 20XX B) For the period January to December 20XX C) From January 20XX to December 20XX D) As of December 31, 20XX
a The answer is for the period January 1, 20XX, to December 31, 20XX. Usually the cash flow statement is prepared for the calendar year period.
Which one of the following generally is used to determine the amount of emergency funds required? A) Number of sources of income B) Types of assets held (regardless of income-producing capabilities) C) Net income D) Gross income
a The answer is number of sources of income. The number of a client's sources of income is a factor in determining the amount of emergency funds needed. If income comes from several different sources, the amount of emergency funds required is lower than if all income is from one person's earnings. Possession of substantial income-producing assets could affect the amount of emergency funds a client requires. However, this is generally not the situation. Income from the assets would have a direct effect on the recommended level of emergency funds, but the assets themselves would not. The emergency fund amount is a function of expenses, not income. The number of a client's sources of income is a factor in determining the amount of emergency funds needed.
Your client, Andy, is in need of assistance in preparing his statement of financial position and statement of cash flows. He earns $150,000 annually and pays $1,000 monthly in alimony to his ex-wife, Debbie. Andy owns a condo valued at $230,000, which currently has an outstanding mortgage balance of $100,000. He pays annual property taxes of $3,000, and the condo insurance costs $180 per month. All of the following statements are CORRECT except A) taxes paid on his property would be a liability on his statement of financial position. B) the alimony Andy pays would be a cash inflow on Debbie's statement of cash flows. C) the condo insurance payments would be a fixed outflow on Andy's statement of cash flows. D) Andy's salary would be considered a cash inflow on his statement of cash flows.
a The answer is taxes paid on his property would be a liability on his statement of financial position. The property taxes Andy pays would be considered a fixed outflow on his statement of cash flows. Such tax payments would not be an entry on a statement of financial position.
`Prior to making recommendations to a client, it is necessary for the financial planning practitioner to assess the client's financial situation and determine the likelihood of reaching the stated objectives by continuing present activities. The practitioner will utilize client-specified, mutually agreed upon, and/or other reasonable assumptions. Both personal and economic assumptions must be considered in this step of the process. These assumptions include all of the following except A) the unemployment rate. B) the tax rates. C) the inflation rate. D) life expectancy.
a The answer is the unemployment rate. Tax rates, inflation rate, and client life expectancy are all relevant information and are necessary assumptions to further the planning process. The rate of unemployment is not.
Some rule-of-thumb ratios are helpful in understanding how a client's debt will be assessed by lenders, which can determine interest rates. Which of these is NOT correct regarding ratio descriptions and the related benchmark? A) Total monthly payment on all debts should be no more than 36% of gross monthly income. B) Monthly housing costs include principal, interest, taxes, fees, and insurance, and should be no more than 28% of the prospective borrower's net income. C) Consumer debt is all nonmortgage debt. It should be no more than 20% of monthly net income. D) The minimum required payments should be used in the calculation.
b Monthly housing costs include principal, interest, taxes, fees, and insurance, and should be no more than 36% of the prospective borrower's net income. Keeping all debt payments under 36% is important in order to qualify for reasonable rates on credit. Helping clients understand what will make future debt more costly can give them motivation to stay within the guidelines. Monthly housing costs should be no more than 28% of the prospective borrower's gross, not net, income.
Which of the following is considered a strength in a client's financial plan? Well-defined financial goals Promising employment status Inadequate emergency fund Lack of estate planning documents A) I, III, and IV B) I and II C) II only D) III and IV
b The answer is I and II. Statements I and II are financial strengths. Other examples of strengths are appropriate investments given a client's risk tolerance, appropriate savings, and an adequate emergency fund. An inadequate emergency fund and lack of estate planning documents are considered weaknesses.
Which of the following items are normally included in a cash flow statement? Dividend income Money market account balance Mortgage note balance Vested pension benefits A) II, III, and IV B) I only C) I and IV D) II and III
b The answer is I only. The remaining items are asset values, correctly shown on a statement of financial position or balance sheet. Income items (e.g., dividend income) are on the cash flow statement.
What assets should typically NOT be used to establish an emergency fund? A) A money market deposit account B) U.S. government bonds C) Checking accounts D)
b The answer is U.S. government bonds. Bonds are not as liquid as other assets and are therefore not typically a good source of emergency funds. Money market deposit accounts are a good source for emergency funds. To the extent that they exceed the regular expenses of the client, checking account balances can be a good source for emergency funds.
All of the following are ways to improve one's credit score except A) always make payments on time. B) close paid-off accounts on which there is a solid payment record. C) leave good, older debt on your report. D) pay down credit card balances and keep them low.
b The answer is close paid-off accounts on which there is a solid payment record. A mistake people often make is trying to eliminate debt off their credit report once it's paid off. Older debt that has a solid payment history is good for your credit rating. Of course, making payments on time and keeping balances low are good ways to improve a credit score also.
What is the appropriate date to identify the statement of financial position of a calendar-year client for the year 2021? A) For the period beginning January 1, 2021 B) On December 31, 2021 C) For the period from January 1 to December 31, 2021 D) On January 1, 2022
b The answer is on December 31, 2021. The statement of financial position (personal balance sheet) is presented as of a specific date in time (i.e., a snapshot). The answer choice "For the period beginning January 1, 2022" could be correct, but the question specified the date was for a calendar-year client.
Alex has a personal emergency requiring him to immediately access $50,000. He expects this need will last for several months. Which of the following assets shown on his statement of financial position is the best choice to pay for his emergency? A) A life insurance cash surrender value in the amount of $55,000 B) A credit union account totaling $60,000 C) Aggressive stocks currently trading at a market value of $65,000 D) A money market mutual fund worth $35,000
b The answer is a credit union account totaling $60,000. Although both the credit union account and the money market mutual fund reflect liquid assets, the best asset to use is the credit union account because it sufficiently covers Alex's needs.
What is the key to successfully using the snowball technique to eliminate debt? A) Start with the debt that has the highest account balance B) Begin with the debt that has the highest interest rate C) Developing a plan that the client can commit to executing D) Begin with the debt that has the highest payment
c The answer is developing a plan that the client can commit to executing. The key to the effectiveness of using the snowball technique is developing a plan that the client can commit to and execute. The goal is eliminating debt, and the client needs to agree to the process to make that happen. Beginning a debt reduction plan with the debt that has the highest payment is not a typical debt reduction technique.
Bette and Bob are purchasing a new home and are evaluating financing alternatives. They have heard that using a graduated equity mortgage may be disadvantageous. You can tell them that A) the home must be sold to repay the mortgage. B) the principal amount must be paid in a lump sum. C) negative amortization may occur. D) payment amounts are predictable
c The answer is negative amortization may occur. The payment amounts may change and are unpredictable. Principal is repaid in each payment over the mortgage term, not in a lump sum. Selling the home is unnecessary to repay the mortgage.
Which of the following areas is the most important to focus on with clients when developing a cash flow statement that will ultimately enable them to meet their long-term goals and objectives? A) Variable expenses B) Insurance costs C) Savings and investments D) Fixed expenses
c The answer is savings and investments. Although controlling expenses is important when developing the cash flow statement, the most important area to focus on that will ultimately give clients more flexibility and the ability to achieve their goals and objectives is making sure that they are committed to saving and investing over time.
Which of the following statements concerning a client's level of savings is CORRECT? A budget should consider the client's financial goals and serve as a control document for future cash flows, including cash available for savings. If future spending exceeds budget projections, the cash actually saved will be more than anticipated. A) II only B) Both I and II C) Neither I nor II D) I only
d The answer is I only. Statement I is correct. A budget should consider the client's financial goals and serve as a control document for future cash flows, including cash available for savings. Statement II is incorrect. If future spending exceeds budget projections, the cash actually saved will be less than anticipated.
Which of the following assets is appropriate to include in an emergency fund for a family with $500 per month in discretionary income? A) A certificate of deposit with a 2-year maturity B) An S&P 500 Index mutual fund C) Cash advance limit on consumer lines of credit D) A money market deposit account
d The answer is a money market deposit account. The only liquid and time-appropriate asset listed is a money market deposit account. An S&P 500 Index mutual fund should not be used for emergency fund purposes because its value may decline and any sale of shares may result in a taxable event.
Jake and Ashley are working with their financial planner to develop a budget. The financial planner told them to list all their fixed cash outflows and variable cash outflows on a questionnaire. Which of the following would be considered a fixed cash outflow for planning purposes? A) Utilities B) Travel and entertainment C) Food D) Mortgage payments
d The answer is mortgage payments. Only mortgage payments are considered a fixed cash outflow. Other examples of fixed cash outflows are car payments, insurance premiums, and property taxes.
Which of the following actions would most likely decrease an individual's credit score? A) Have several different types of credit accounts, such as a car loan, a mortgage, and credit cards B) Pay off a balance on a credit card that the individual has had for 10 years C) Make just the minimum payment on time each month D) Take advantage of several offers for new credit cards
d The answer is take advantage of several offers for new credit cards. Taking advantage of several offers for new credit cards would decrease an individual's credit score.
Which one of the following arguments provides the best support for a decision to buy a car rather than lease one? A) The average annual distance driven will be less than 10,000 miles. B) The client needs the lowest monthly payment for a specific car. C) The client does not have 20% or more for a down payment. D) The client does not want to regularly make monthly payments.
d The answer is the client does not want to regularly make monthly payments. If an individual leases a vehicle, there will be a monthly payment as long as he or she is leasing. If an individual purchases a car, there is an end to the payments. A lease may be the better option in the other scenarios.
Which is a true statement about reducing debt? A) It is always better to pay off a mortgage as soon as possible. B) It is always better to maintain a mortgage over the normal life of the loan in order to take advantage of other investment opportunities that may arise. C) Increasing income is more important than reducing debt. D) The client's desires and wishes will determine which course of action to take.
d The answer is the client's desires and wishes will determine which course of action to take. There are occasions when you as a planner may have a strong opinion as to which is the best course of action to pursue for a client; however, a client-first philosophy is the cornerstone to financial planning ethics. That may require you to set aside what you think is best in order to help clients achieve what they believe is best.
Martin and Pamela Ash have a combined gross income of $76,000. After taxes, their income is $62,300. Currently their housing payments (PITI) total $1,510 monthly. Their car loans and credit card payments total $1,150. They have no other debt. Which of the following is a CORRECT statement? A) No determination can be made from the information given. B) Their housing costs are too high relative to the standard rules of thumb. C) Their consumer debt is within the acceptable range. D) Their total debt is too high relative to the standard rules of thumb.
d The answer is their total debt is too high relative to the standard rules of thumb. With these totals, the Ashes' total debt is too high in that it exceeds 36% of gross income. Housing costs are less than 28% of gross income, but consumer debt is in excess of 20% of net income, leading to an excessive debt burden.
Joe and Mary believe in stress management. Several times each year, they take a short vacation to relax and recharge as part of their overall approach to maintaining good health. Their regularly planned vacations are an example of what type of expense? A) Fixed discretionary expense B) Fixed nondiscretionary expense C) Variable nondiscretionary expense D) Variable discretionary expense
d The answer is variable discretionary expense. Although Joe and Mary believe the vacations to be important for good health, the vacations are considered a variable discretionary expense.
Which of the following statements regarding a client's credit score is CORRECT? Too many credit inquiries may lower a credit score, but likely not by much. Opening several new accounts in a short amount of time reflects a good use of credit and therefore can increase a credit score.
The answer is I only. Opening several new accounts over a short period can lower, not increase, a client's credit score. Too many credit inquiries may lower a client's credit score but will likely not have a great impact.
Which of the following items should NOT be included in an individual's statement of cash flows? Home value Mortgage balance Mortgage payment Mutual fund balance
The answer is I, II, and IV. The mortgage balance should be shown as a liability on the statement of financial position. The value of a home and the balance of a mutual fund should be listed as assets on the statement of financial position. Only the mortgage payment, which is considered a fixed outflow, is included in the statement of cash flows.
Which of these is characteristic of the snowball technique of debt reduction? The debt with the lowest balance is eliminated first. Clients are encouraged by paying off the first debt quickly.
The answer is both I and II. The snowball technique of debt reduction involves eliminating the debt with the lowest balance first. Clients are often encouraged by paying off the first debt quickly, which motivates them to continue the process.
One way to free up cash flow is for the client to
The answer is consolidate or eliminate consumer debt. Acquiring more debt will not improve a client's cash flow unless the new debt restructures old debt into a lower monthly payment. Using a home equity line of credit or a home equity loan merely adds an additional liability against an asset and incurs an additional outflow when payments are due. Additional credit cards reduce cash flow when used, as they create an additional monthly payment. Consolidating or eliminating consumer debt frees up cash flow.
Martin and Pamela Ash have a combined gross income of $76,000. After taxes, their income is $62,300. Currently their housing payments (PITI) total $1,510 monthly. Their car loans and credit card payments total $1,150. They have no other debt. Which of the following is a CORRECT statement?
The answer is their total debt is too high relative to the standard rules of thumb. With these totals, the Ashes' total debt is too high in that it exceeds 36% of gross income. Housing costs are less than 28% of gross income, but consumer debt is in excess of 20% of net income, leading to an excessive debt burden.
All of the following are debt management ratios except A) P/E ratio. B) consumer debt ratio. C) housing cost ratio. D) total debt ratio.
a The answer is P/E ratio. The consumer debt ratio is the ratio of monthly consumer debt payments to monthly net income. The housing cost ratio measures the relationship of housing costs to gross income. The total debt ratio, which includes monthly housing costs and consumer debt payments, should not exceed 36% of gross monthly income. The P/E ratio is used in stock analysis and is not used for debt management.
One way to free up cash flow is for the client to A) consolidate or eliminate consumer debt. B) use a home equity loan for home improvements rather than savings. C) acquire a home equity line of credit. D) obtain an cash-back credit card.
a The answer is consolidate or eliminate consumer debt. Acquiring more debt will not improve a client's cash flow unless the new debt restructures old debt into a lower monthly payment. Using a home equity line of credit or a home equity loan merely adds an additional liability against an asset and incurs an additional outflow when payments are due. Additional credit cards reduce cash flow when used, as they create an additional monthly payment. Consolidating or eliminating consumer debt frees up cash flow.
What purpose do footnotes serve on personal financial statements? Used to describe details of assets and liabilities listed on the client's financial statement. Lists values or circumstances not disclosed in the body of the client's financial statements Totals the cash balance on the client's financial statements Totals the investment balance on the client's financial statements A) I, II, and III B) II and III C) I and II D) II, III, and IV
c The answer is I and II. Footnotes should be used to describe details of both assets and liabilities on a client's financial statements. They may also be used to describe values and circumstances not disclosed in the body of the financial statements. Cash and Investments are two categories found in financial statements.
All of the following items should be included on an individual's statement of financial position except A) mortgage balance. B) mutual fund balance. C) mortgage payment. D) fair market value of a home.
c The answer is mortgage payment. The mortgage payment, which is considered a fixed outflow, is included on the statement of cash flows, not the statement of financial position. The mortgage balance should be shown as a liability on the statement of financial position. The fair market value of a home and the balance of a mutual fund should be listed as assets on the statement of financial position.
A client provides a current personal balance sheet to the financial planner during the initial data gathering phase of the financial planning process. This financial statement will enable the financial planner to gain an understanding of all of the following except A) the client's liquidity position. B) the diversification of the client's assets. C) the size of the client's net cash flow. D) the client's use of debt.
c The answer is the size of the client's net cash flow. A balance sheet (also called a statement of financial position or net worth statement) reports assets and liabilities. Cash flow information is reported on a cash flow statement.
Emergency Fund - 3 months
-Single wage earners with additional source of considerable income -marries and both spouses are gainfully employed -marries with one spouse gainfully employed, and there is a second source of significant income
