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What are the five steps in the personal finance process?

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1. Decide 2. Educate 3. Commit 4. Believe 5. Achieve

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Decide

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Decide why you are doing this.

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Educate

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Educate yourself to the available options. This is the "what" - where we understand and prioritize the principles.

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Commit

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Determine the goals that will most likely take us to where we want to be.

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Believe

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We must believe that we can accomplish the things we set out to accomplish.

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Achieve

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We must work to achieve the goals that we set.

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What are the four key principles for using wealth wisely?

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1. Ownership - everything that we have or are is a gift from God. 2. Stewardship - We are stewards over the things the Lord has blessed us with. 3. Agency - the gift of "choice" is man's most precious inheritance. 4. Accountability - we are accountable for our choices.

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What are the six steps in the PFP process?

answer

1. Decide what you want 2. Evaluate your financial health 3. Define your personal and financial goals 4. Develop a plan of action 5. Implement your plan 6. Revise your plan as necessary

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What are the 4 objectives of finances?

answer

1. Know what you want out of life 2. Develop and live on a budget 3. Pay the Lord first, yourself second, and invest wisely 4. Learn to give

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What is financial planning?

answer

The process of planning how to make use of your available resources to achieve your personal and family goals.

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What are the three types of goals?

answer

1. Identity Goals - relate to our long-term view on how we see ourselves. 2. Integrity Goals - relate to the characteristics and standards you want to achieve in the work and services you provide. 3. Temporal goals - relate to the temporal measures of success that we hope to accomplish.

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9 Principals of Goal Setting

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1. Strive to learn what the Heavenly Father wants you to do or be. 2. Seek Heavenly Father's help in setting goals 3. Start with the end in mind 4. Write down your goals 5. Keep your goals SMART 6. Review your goals often 7. Remember your goals will change 8. Set fun goals 9. Remember, success is not measured by achievement, but by striving

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Goal Setting: Start with an end in mind

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How do you want to be remembered - Starting with an end in mind will help you prioritize your goals and realize what things are important to you.

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Goal Setting: Write down your goals

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A goal not written is only a wish. Write them down as you think about them

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Goal Setting: Keep your goals SMART

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S - Specific M - Measurable A - Achievable R - Reportable T - Time-bound

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Goal Setting: Review your goals often

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Review your goals will remind you what you want to accomplish and will make it more likely to be acheived

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Goal Setting: Your goals will change

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Keep your major goals in mind and remember things change and so might your goals.

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Goal Setting: Set fun goals

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Fun goals are important too

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Goal Setting: Success is not measured by Achievement, but by striving

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We should not make the achievement of goals our only criteria for success

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What are the principles of budgeting?

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1. Spend less than you earn 2. Keep good records for spending, taxes and other purposed 3. Use a budgeting method that meets your individual and family needs and objectives

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What are the 5 types of budgeting?

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1. The envelope method 2. The 60% Rule (Spend 60% or less of gross income...20% to taxes and 20% to savings) 3. Spreadsheets 4. Budgeting Software 5. Do nothing and hope

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Steps to creating an effective budget:

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1. Know what you want to accomplish 2. Track spending 3. Develop a cash budget 4. Implement your goal 5. Compare your budget to your actual expenses and make changes when necessary to achieve your goals.

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Liquidity Ratio: Current Ratio

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How many times you could pay off your current liabilities with your current cash on hand. Current Assets / Current Liabilities A ratio of >2 is recommended

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Liquidity Ratio: Month's living expense covered ratio

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How many months your could survive financially if you lost all current sources of income. Monetary assets / (annual living expenses/12) Living expenses do not include charity, taxes or paying yourself 3-6 months is recommended

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Debt Ratio: Debt Ratio

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Tells you whether or not you could pay off all your debts if you liquidated all of your assets. Total Liabilities / total assets Should be downward trending as you get older

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Debt Ratio: LT Debt Coverage

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Tells you how long you could continue to make payments on your LT debt based on the amount of money you available for living expenses Amount available for living expenses / the amount of your LT debt payments Should be upward trending

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Savings Ratio: Net Savings Ratio

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Tells you what proportion of your after tax income you are saving. amount of income saved / the amount of income you use to cover living expenses 10-20% is recommended

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Savings Ratio: Gross Savings Ratio

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Tell your what proportion of your before tax income you are saving. total savings / by total income 10-20% is recommended

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Four Strategies to minimize your tax liability

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1. Maximize your deductions 2. Maximize LT capital gains and stock dividend income 3. Earn Tax-exempt income 4. Defer taxes to the future or eliminate future taxes

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Three trade-offs of cash management

answer

1. Risk-return trade off - higher liquidity means less risk and lower returns 2. Spending investment risk trade off - cash on hand is easier to spend than other financial assets 3. Return time expended trade off - since returns are small, the amount of time spent on them is less

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Types of cash management investments

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1. Checking 2. Savings 3. Money Market 4. CDs 5. Money Market Mutual Funds 6. US Treasury Bills 7. US Series EE Bonds 8. US Series I Bonds

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Annual Percentage Yield

answer

(1+ [APR/Periods])Periods -1

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After Tax Returns

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Before Tax Returns * (1-Marginal Tax Rate)

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Equivalent Taxable yield

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After tax return / (1-Marginal Rate)

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Real Return

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[(1+nominal rate) / (1+ inflation)] - 1

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Main goal of cash management

answer

To give you sufficient liquidity to help you achieve your financial goals

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Considerations when choosing a financial institution

answer

Cost, Convenience, and Consideration

question

Comparing Cash Management Alternatives

answer

1. Interest Rates 2. After-tax Returns 3. Inflation 4. Safety 5. Maturity and interest rate adjustment periods

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Credit Evaluation

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The process potential creditors use to determine whether or not an individual deserves to be given credit

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Credit Score

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The result of that credit valuation

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Credit Score Determination

answer

35 % payment record, 30% amount owed as a percentage of available credit, 15 % length of credit history, 10 % application history, and 10 % on credit mix

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Credit Card Benefits

answer

Emergencies, Reservations, Convenience, Cash flow and Timing, and free services

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Using Credit cards effectively

answer

1. Know your personal and family goals 2. Spend money on things planned for in your budget 3. Don't go into debt 4. Use Wisdom in deciding what to buy

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Credit card factors

answer

1. Interest Rate 2. Compound Period 3. Balance Calculation Method 4. Cash Advances 5. Grace Period 6. Credit Card Philosophy (Credit users, convenience users, or combined users)

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Managing Credit Cards

answer

1. Reduce your balance 2. Protect yourself against Fraud 3. Be aware of signs of trouble in credit card spending 4. Control your spending 5. Opt Out

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Single Payment Loans

answer

Also known as balloon loans. Normally used for ST lending of one year or less. Sometimes called bridge or interim loans. Repaid in one lump sum and uses simple interest method.

question

Annual Percentage Rate

answer

[(Interest Payments + fees) / # of years] / Average Amount Borrowed

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Installment Loans

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Repaid in regular installments that include both principal and interest. It amortizes over the entire length of the loan and is based on simple interest

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Secured Loans

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Uses one of your assets as collateral to guarantee that the lending institution will get the amount of the loan back, even if you fail to make payments

question

Unsecured Loans and Signature Loans

answer

No Collateral and are generally offered only to borrowers with excellent credit histories. Typically higher interest rates

question

Fixed-Rate Loans

answer

These loans maintain the same interest rate for the duration of the loan. Generally interest rates are higher

question

Variable-Rate Loans

answer

These loans have an interest rate that is adjusted at different intervals over the life of the loan

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Convertible Loans

answer

Loans where the interest rate structure can change

question

Special types of Consumer Loans

answer

1. Home Equity Loans (2nd Mortgage) 2. Home Equity Lines of Credit 3. Student Loans 4. Automobile Loans 5. Payday Loans

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Types of Loans

answer

1. Conventional Loans - not insured or guaranteed 2. Jumbo Loans - Loans in excess of the maximum eligible for purchase by the two federal agencies 3. Piggyback Loans - two separate loans 4. Fixed Rate Mortgages 5. Variable or adjustable rate mortgages 6. Fixed or variable Interest only loans 7. Option Adjustable Rate Mortgages 8. Negative amortization mortgages 9. Balloon Mortgages 10. Reverse Mortgages 11. Special Loans

question

After-tax Lost return

answer

Nominal Interest Rate * (1-tax rate)

question

Reasons people accumulate debt

answer

Ignorance, Carelessness, Compulsiveness, Pride and Necessity

question

Debt Reduction Strategies

answer

1. Recognize and accept that you have a debt problem 2. Stop incurring debt 3. Make a list of all your bills 4. Look for many different ways to reduce debt, not just one. 5. Organize a debt repayment strategy and follow it

question

Types of Debt Strategies

answer

1. Personal 2. Counseling 3. Legal

question

Two types of debt that's ok to incur

answer

Educational debt and Mortgage Debt

question

Investment

answer

A current commitment of money or other resources with the expectation of reaping future benefits

question

Time

answer

The only tool that everyone has an equal amount of each day

question

Investing principle

answer

A dollar in hand is worth more than a dollar received in the future

question

Amortized Loan

answer

Loan paid off in equal installments (both Principal and interest)

question

Annuity

answer

A series of equal payments made at the end of a specific time period for a specified number of time periods

question

Compound Annuity

answer

An investment that involves depositing the same amount of money at the end of each year for a certain number of years

question

Compounding

answer

The # of periods during the year where interest is calculated

question

Effective interest rate

answer

The actual rate that is received after the effects of compounding are taken into account

question

Future value

answer

The value of an investment at some point in the future = PV * (1+I)^N

question

Interest or Discount Rate

answer

The stated rate you will receive for investing at a specified compounding period for a specified period of time

question

Nominal Rate

answer

The return on your investment before the impact of inflation and taxes is taken into account

question

Present Value

answer

The current value of a future sum of money = FV / (1+I)^N

question

Principal

answer

The money you have available to invest or save, or the stated amount on a bond or deposit instrument

question

Real Return

answer

The rate of return on an investment after the impact of inflation is accounted for. (1 + Nominal Return(rn)) = (1 + real return(rr)) * (1+ inflation)

question

Tax Adjusted Return

answer

The return on your investment after the impact of federal and state taxes have been taken into account

question

Effective Interest Rate

answer

[(1+(Nominal Rate or APR/periods))]^periods - 1

question

Inflation

answer

((FV/PV)^(I/n))-1

question

Insurance

answer

A legal contract between you and an insurance firm.

question

Risk

answer

The uncertainty concerning the occurrence of a specified loss

question

Managing Risks

answer

1. Avoid 2. Reduce 3. Assume 4. Transfer (insurance)

question

Analyzing Risk

answer

1. Frequency of potential loss 2. Severity of potential loss

question

Principles of Insurance Planning

answer

1. Know yourself and your goals 2. Know your budget and what you can afford 3. Understand in detail the costs and benefits of each insurance product 4. Insurance against High-cost, High-severity losses only 5. Work only with highly qualified individuals and firms 6. Review your insurance needs annually

question

5 Questions regarding life insurance

answer

1. Why should you have life insurance 2. How does life insurance work 3. Who needs life insurance 4. How much life insurance do you need 5. What type of life insurance

question

Approaches to determining life insurance needs

answer

1. Earnings Multiple Approach 2. Needs Approach

question

Earnings Multiple Approach

answer

The goal is income replacement. It replaces the annual salary of the breadwinner for a specified number of years. Normally 5-15x the gross salary. 1. Adjust the pre-incident salary down to compensate for the reduction in household expenses. 2. Choose the appropriate interest rate to match the assumed after-tax and after inflation earnings on a policy settlement. 3. Determine the income stream replacement and annuity.

question

Needs Approach

answer

The goal is to meet the total financial needs of the household after the death of the breadwinner. 1. Add up all funding needs (immediate needs, debt reduction, and transitional needs) 2. Subtract current insurance coverage and other available assets 3. Determine the income stream that would be needed to meet the family needs and then calculate the amount of money required to provide the needed annuity.

question

Term Life Insurance

answer

Life insurance is provided for a specified period of time. Premiums are generally lower. It's only valid if the insured dies within the specified period of time.

question

Annual Term Insurance

answer

The face or death benefit amount is constant throughout the selected term of coverage. Premiums increase with each renewal

question

Renewable Term Insurance

answer

Can be renewed for a specified # of years. Premiums increase at each renewal

question

Convertible Term Insurance

answer

A policy that can be exchanged for a permanent policy within a specific # of years after issuance, without evidence of insurability

question

Reasons why term is cheaper

answer

1. Only pay for a specified period of time - most policies lapse 2. Policies are generally for shorter time periods 3. The policies are less complex

question

Permanent Life Insurance

answer

A contract in which the premiums are divided between life and death protection and savings. Carrier Cannot be canceled.

question

Sources of cash to increase the value of permanent life insurance

answer

- Regular premium payments - The investment yield from the cash value portion - Receiving tax-free dividends from the insurance company as a legal return of premium

question

Investment Criteria for permanent life insurance

answer

- Mortality Risk - risk that insured dies within contract period and is covered by insurance - Investment Risk - Refers to who takes responsibility for the investment outcome - Policy Costs - Compares the costs of the policy to other life insurance products - Investment Choice - refers to the types of vehicles or assets the insured chooses to use to build his or her tax-deferred savings - Investment Flexibility - The degree of risk of flexibility the insured has regarding insurance products

question

Whole Life Insurance

answer

Lifelong coverage with a fixed premium based on your age at the time of purchase. Also called Straight Life or Ordinary Life. Ideal for those who want and can afford permanent life insurance protection with a savings element. Good for those who have low self-discipline or low tolerance for risk in saving and investing. Fixed Death Benefit, growing cash value, and potential growth from tax-deferred dividends.

question

Universal Life Insurance

answer

A mix between term insurance and savings. Mortality risk is eliminated and investment risk is low. There is a guaranteed minimum interest rate that is set for life of the insured. Monthly fee for insurance coverage. Premium and face amounts are flexible

question

Variable Life Insurance

answer

Allows you to direct the investment portion of your premium into one or more separate investment accounts. The investment risk is substantial. Appropriate for those who want to take risks, manage their own investments, manage their own investments, and have the opportunity for tax-deferred growth. You can lose money with this type of insurance.

question

Variable Universal Life Insurance

answer

This type of insurance combines the flexible features of universal life with the investment options and risks of variable life insurance. Can choose where to invest your premium and assume the risk. There is no guarantee on your cash value. May be the best option if you need a tax shelter and if you are comfortable with high-risk/high-reward investing.

question

Equity Indexed Universal Life Insurance

answer

Combines the flexible features of universal life insurance with the investment options and risks of a equity index mutual fund which offers a capped exposure to the major equity markets for the cash value portion of the policy.

question

Considerations when buying permanent life insurance

answer

-Can you commit to the premiums over the long term? -Do you need the tax benefits now? -Are the rates of return on these insurance products guaranteed? -Do I have a history of medical problems that would preclude my ability to get life insurance?

question

Sales Charges/Front-end Load

answer

Deductions for salesman distribution expenses (0-10%)

question

State Premium Taxes

answer

Vary by state (0-5%)

question

Deferred Acquisition Taxes

answer

A corporate federal income tax that is imposed on insurance company

question

First-year expenses

answer

First year admins fees which include the cost of setting up the policy

question

Monthly Administrative Fees

answer

Enable the insurance company to provide services company such as mailing confirmation notices

question

Mortality and expense charges

answer

Compensate the insurance company for certain mortality and expense risks and can range from .4 - 1.3% annually

question

Investment Management Fees

answer

Fees paid for the professional fees

question

12b-1 Fees

answer

Used to pay financial advisors and brokerage firms

question

Types of Health Insurance

answer

1. Basic Health Insurance - most policies that cover, hospital, surgical, and physician expenses 2. Major Medical Expense - Covers medical cost that are in excess of those covered by basic health insurance 3. Dental & Eye Insurance 4. Dread Disease and Accident Insurance - covers specific diseases and accidents

question

Fee for Service Plans

answer

Private health care plans where doctors bills the patient directly and the insurance company reimburses a specific percentage

question

Managed Healthcare Providers

answer

Prepaid healthcare plans for employers and individuals. -Health Maintenance Organizations - use of specified doctors, hospitals, and clinics - has flat fee -Preferred Provider Organization - cross between traditional fee for service plans and HMO plans. -Point of Service Plans - Many attributes of HMOs, PPOs, and Fee for Service plans -Exclusive Provider Organizations - Similar to HMOs , but they operate through an insurance company. Only covered by contracted providers , unless there is an emergent situation.

question

Government Sponsored Plans

answer

1. Worker's Compensation 2. Medicare 3. Medigap 4. Medicaid

question

Disability Insurance

answer

Provides payments to the insured individuals in the even that regular income is interrupted by illness or an accident.

question

Types of Disability Insurance

answer

1. Individual Disability Income 2. Group Disability Income 3. Social Security Disability Income 4. Worker's Compensation 5. Disability Overhead Expense 6. Key Person Disability

question

Parts of Auto Insurance

answer

- Liability - Medical Payment Coverage - Uninsured/underinsured motorists - Comprehensive Physical Damage Coverage

question

Types of Homeowner's Insurance

answer

1. HO-2 - general insurance and least expensive. Covers only named perils 2. HO-3 - includes open perils that cause direct physical damage to house. there is a list of exclusions 3. HO-4 - Renter's insurance covering only the personal property 4. HO-5 -includes open perils with an additional rider that covers personal property 5. HO-6 - Condo Owner's insurance. It covers any improvements made to the dwelling 6. HO-8 - Modified coverage for older homes

question

Homeowner's Insurance Parts

answer

-Main Dwelling -Other Structures -Personal Property -Loss of Use

question

Homeowner's insurance cost factors

answer

-Location of structures -Type of structure -Level of Coverage

question

Homeowner's insurance considerations

answer

1. Don't Underinsure - s/b insured within 80% of the replacement cost. 2. Select a financially sound insurance company 3. Get a CLUE report 4. Reduce the insurance company's risk 5. Know your coverage restrictions 6. Make your coverage work 7. Keep your credit score high

question

4 Options for Deciding on a home

answer

-Renting -Buying -Building -Renovating

question

Points

answer

1% of the loan

question

Investing Priorities

answer

1. Are your priorities in order and are you square with the lord? 2. Do you have adequate life and health insurance? 3. Are you out of high-interest credit card and consumer debt. 4. Have you written down your personal goals?

question

Investment Principles

answer

1. Know yourself 2. Understand Risk 3. Stay Diversified 4. Make Low cost and tax efficient investments 5. Investments for the Long run 6. Use Caution if you are investing in individual assets 7. Monitor portfolio performance against benchmarks 8. Do not waste too much time and energy trying to beat the market 9. Invest only with high quality, licensed, reputable people 10. Develop a good investment plan and follow it closely

question

Holding Period Return

answer

(Ending Price - Beginning Price + Dividends + Distributions) / Beginning price

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