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Guaranteed Success
Abbreviation for the Financial Planning process Umbrella's
In
A
Downpour
Prevent
Immense
Mess
What are the steps in the Financial Planning process? - 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 = Liquid Assets/Monthly Expenses
- should be 3% or above
Savings Ratio = savings & investments / annual gross income
- should have a minimum of 10%
Front-End Debt-to-Income Ratio = 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? - Principle, Interest, Taxes, Insurance
- Principle & Interest = mortgage loan payment
Back-End Debt-to-Income Ratio = annual debt repayments / annual gross income
- total debt ratio
- debt repayment = any loan payment (home, auto, student, etc.)
Nonmortgage Debt-to-Income Ratio = 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 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)? Assets, Liabilities & Net
Worth
What is the SFP also known as? Balance Sheet
What is included in the Assets portion of the SFP? - cash/cash equivalents
,- invested assets
- use assets
What is an invested asset? 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? 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)? Inflows & Outflows
What are the different types of outflows on a CFS? - fixed (rent, alimony, child support, loan
payments, etc.)
- variable (utilities, food, transportation, entertainment, etc.)
What are the types of personal risk? - Unemployment
- Disability
- Death
- Divorce
- Catastrophic Losses (medical expenses, natural disasters, etc.)
- Negligence
Rules of Risk Management - 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? 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 - forecasting & evaluating financial risks
- identifying ways to either avoid or minimize their impact
Risk Management Techniques - 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 Risk Control (avoidance & reduction)
Risk Financing (retention & transfer)
4 Scenarios of Evaluating Risk - 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)
Guaranteed Success
Abbreviation for the Financial Planning process Umbrella's
In
A
Downpour
Prevent
Immense
Mess
What are the steps in the Financial Planning process? - 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 = Liquid Assets/Monthly Expenses
- should be 3% or above
Savings Ratio = savings & investments / annual gross income
- should have a minimum of 10%
Front-End Debt-to-Income Ratio = 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? - Principle, Interest, Taxes, Insurance
- Principle & Interest = mortgage loan payment
Back-End Debt-to-Income Ratio = annual debt repayments / annual gross income
- total debt ratio
- debt repayment = any loan payment (home, auto, student, etc.)
Nonmortgage Debt-to-Income Ratio = 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 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)? Assets, Liabilities & Net
Worth
What is the SFP also known as? Balance Sheet
What is included in the Assets portion of the SFP? - cash/cash equivalents
,- invested assets
- use assets
What is an invested asset? 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? 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)? Inflows & Outflows
What are the different types of outflows on a CFS? - fixed (rent, alimony, child support, loan
payments, etc.)
- variable (utilities, food, transportation, entertainment, etc.)
What are the types of personal risk? - Unemployment
- Disability
- Death
- Divorce
- Catastrophic Losses (medical expenses, natural disasters, etc.)
- Negligence
Rules of Risk Management - 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? 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 - forecasting & evaluating financial risks
- identifying ways to either avoid or minimize their impact
Risk Management Techniques - 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 Risk Control (avoidance & reduction)
Risk Financing (retention & transfer)
4 Scenarios of Evaluating Risk - 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)
