FPQP Exam Study Set Question Collection - Fully Updated Solutions

FPQP Exam Study Set Question Collection - Fully Updated Solutions Abbreviation for the Financial Planning process - answer - Umbrella's In A Downpour Prevent Immense Mess What are the steps in the Financial Planning process? - answer - - Understand the client's situation - Identify the goals of the clients - Analyze the client's course & potential alternative courses - Develop financial planning recommendations - Present recommendations - Implement the recommendations - Monitor progress & update the implemented recommendations Basic Liquidity Ratio - answer - = Liquid Assets/Monthly Expenses - should be 3% or above Savings Ratio - answer - = savings & investments / annual gross income - should have a minimum of 10% Front-End Debt-to-Income Ratio - answer - = PITI (housing costs) / annual gross income - housing cost ratio - should be maximum of 28% of gross income What is PITI in the front-end ratio? - answer - - Principle, Interest, Taxes, Insurance - Principle & Interest = mortgage loan payment Back-End Debt-to-Income Ratio - answer - = annual debt repayments / annual gross income - total debt ratio - debt repayment = any loan payment (home, auto, student, etc.) Nonmortgage Debt-to-Income Ratio - answer - = annual non-mortgage debt repayment / annual net income - consumer ratio - should be maximum of 20% of net income - non-mortgage = non-home (auto, student, etc.) Fair Credit Billing Act - answer - Provides consumers with a means to dispute a billing error on open-ended credit accounts (credit and charge cards) What is included on the Statement of Financial Position (SFP)? - answer - Assets, Liabilities & Net Worth What is the SFP also known as? - answer - Balance Sheet What is included in the Assets portion of the SFP? - answer - - cash/cash equivalents - invested assets - use assets What is an invested asset? - answer - Assets that are not for personal use of the family and cannot be readily converted into cash in case of an emergency. ex. stocks & bonds, 401k, IRA, vested pension benefits, investment real estate, etc. What is a use asset? - answer - Asset that is intended primarily for the personal use or enjoyment of the family. ex. personal property, automobiles, family residence, etc. What is included on the Cash Flow Statement (CFS)? - answer - Inflows & Outflows What are the different types of outflows on a CFS? - answer - - fixed (rent, alimony, child support, loan payments, etc.) - variable (utilities, food, transportation, entertainment, etc.) What are the types of personal risk? - answer - - Unemployment - Disability - Death - Divorce - Catastrophic Losses (medical expenses, natural disasters, etc.) - Negligence Rules of Risk Management - answer - - Don't risk more than you can afford to lose - Don't risk a lot for a little - Consider the odds What are the types of negligence in personal risk? - answer - In order to collect damages from negligence, all 4 must be proven: - existence of a legal duty - failure to perform a legal duty - actual damage is caused - proximate cause is established 2 Parts of the Risk Management Process - answer - - forecasting & evaluating financial risks - identifying ways to either avoid or minimize their impact Risk Management Techniques - answer - - Retention (keeping the risk for yourself) - Reduction (decreasing the amount of risk; ie, wearing a helmet) - Avoidance ( finding a way around the risk; ie, don't drive/ don't participate) - Transfer (transferring the risk; ie, insurance) Categories of Risk Management Techniques - answer - Risk Control (avoidance & reduction) Risk Financing (retention & transfer) 4 Scenarios of Evaluating Risk - answer - - High Severity, High Probability : Avoidance & Reduction ( leaving a really fancy bike outside & unchained in a sketchy area) - High Severity, Low Probability : Transfer (risks to buying & maintaining a home & using insurance) - Low Severity, High Probability : Retention & Reduction (leaving an old bike ou