pie chart, present value of all goals, metric, and ratio analysis approaches

THE FINANCIAL-STATEMENT AND RATIO-ANALYSIS APPROACH

1.Liquidity ratios Ability to meet short-term obligations (e.g., 3- to 6-month emergency fund) 2.Debt ratios How well debt is managed 3.Ratios for financial security Determines client's progress toward long-term goals 4.Performance ratios Adequacy of investment returns relative to risk level

What is the first step in the Present-Value-of-All-Goals approach?

Determine individual present values of each short, intermediate, and long-term goal.

THE PIE-CHART APPROACH

Provides a visual display of the balance sheet and cash-flow statement once internal data is collected and financial statements prepared.

METRICS APPROACH

Provides quantitative benchmarks for clients to use as guidance for achieving comprehensive financial goals and objectives.

What is the third step in the Present-Value-of-All-Goals approach?

Reduce the summed present values by current resources (investment assets and cash and cash equivalents).

What do you do after determining the individual present values in the Present-Value-of-All-Goals approach?

Sum these present values together.

How is the net present value treated in the Present-Value-of-All-Goals approach?

The net PV is considered a 'debt' obligation to be retired over the remaining worklife expectancy at a discount rate equal to the expected portfolio rate of return.

Pie charts answer many questions, including

•What percentage of the client's gross pay is he saving? • What percentage of the client's gross pay is spent on basic housing costs (principal, interest, tax, and insurance or rent plus insurance)? • What percentage of the client's gross pay is spent on debt repayments both excluding housing costs and including housing costs? • What percentage of the client's gross pay is left to live on?