HACE 3200 Exam 1

  1. Stages of Financial Planning
    • Stage 1: The Early Years (wealth accumulation)
    • Stage 2: The Golden Years (approaching retirement)
    • Stage 3: The Retirement Years
  2. The Early Years
    • First stage of financial planning
    • Develop your savings plan
    • Set your initial goals
    • Establish your long-range investment strategy
    • Lasts through age 54
  3. The Golden Years
    • Second stage of financial planning
    • Realize intermediate-term goals
    • Reevaluate the plan to match current goals
    • Plan for retirement
    • Age 55-64
  4. The Retirement Years
    • Third stage of financial planning
    • Reduce investment risk
    • Concentrate on preservation rather than growth of assets
    • Plan for the transfer of your estate
    • Age 65 and up
  5. The Personal Financial Planning Process
    • Step 1: Evaluate your financial health
    • Step 2: Define your financial goals
    • Step 3: Develop a plan of action
    • Step 4: Implement your plan
    • Step 5: Review your progress, reevaluate, and revise your plan
  6. Personal Financial Planning Process: Step 1
    • Evaluate your financial health
    • -Evaluate your current situation- income, spending, wealth
    • -Assess your whole financial picture
  7. Personal Financial Planning Process: Step 2
    • Define your financial goals
    • -Define and write down your goals to reflect your financial & life situation
    • -Attach a cost to each goal
    • -Set a date for when the money's needed to accomplish the goal
  8. Short-Term Goals
    Accomplished within a 1-year period
  9. Intermediate-Term Goals
    Take 1-10 years to accomplish
  10. Long-Term Goals
    Take more than 10 years to accomplish
  11. Personal Financial Planning Process: Step 3
    • Develop a plan of action
    • What must I do to achieve my goals??
  12. Flexibility
    The ability for your plan to change as your situation or goals change
  13. Liquidity
    • Your ability to convert noncash assets into cash with relative ease and speed (how quickly can you have the cash?)
    • Ex- savings
  14. Protection
    Your ability to meet the unexpected large expenses without destroying your plan
  15. Minimization of Taxes
    Your ability to pay as little as possible to Uncle Sam
  16. Personal Financial Planning Process: Step 4
    • Implement your plan
    • -Your plan is your road map
    • -Use common sense and moderation
    • -Remain positive about your plan
    • -Stay on track after any detours
  17. Personal Financial Planning Process: Step 5
    • Revise your plan
    • -Review your progress
    • -Match your plan to your goals
    • -Be prepared to start over if your plan no longer meets your needs
  18. What determines your income?
    • Education: Key factor in determining income
    • Earnings: Determine standard of living
    • 70% of wealthy householders finished college*
  19. Personal Balance Sheet
    • A statement of your financial position on a given date
    • The "financial polaroid" or "snapshot" of THE PRESENT
    • Lists your assets and your liabilities
  20. Assets
    What you own
  21. Monetary Assets
    • Cash or other assets that can be easily liquidated
    • Examples- cash, checking acct., savings acct.
  22. Investment Assets
    • Assets that are invested for the future
    • Examples- stocks, bonds, mutual funds, cash value life insurance
  23. Retirement Plans
    • Investments by you or your employer to save for retirement
    • Examples- pensions, IRAs, 401(k)
  24. Tangible Asset
    • A physical asset- something you can use, feel, and touch
    • Typically depreciate in value (not real estate though)
    • Examples- car, boat, real estate
  25. Real Estate
    • Tangible asset like land or a dwelling
    • Represents most of your savings
    • Normally appreciates in value
  26. Personal Property
    • Tangible assets that represent your lifestyle
    • Reported as fair market value
    • Normally depreciate in value
    • Examples- boats, furniture, jewelry, clothes
  27. Liabilities
    What you owe
  28. Current Liabilities
    • Liabilities that must be paid off within the next year
    • Examples- utility bills, credit cards
  29. Long-Term Liabilities
    • Liabilities that extend beyond one year
    • Examples- home mortgage, auto loans
  30. Net Worth
    • A measure of your wealth
    • Assets - Liabilities = Net Worth
  31. Insolvent
    When you owe more money than your assets are worth
  32. Personal Income Statement
    • Tells where your money came from and where it has gone
    • The "financial motion picture" of THE PAST
    • Based entirely on cash flow
  33. Expenditures
    • Where your money goes
    • Two major categories: Taxes and living expenses
  34. Fixed Expenditures
    • Expenses you don't directly control
    • Examples- mortgage, rent, cable
  35. Variable Expenses
    • Expenses you can control
    • Make your budget cuts here
    • Examples- food, entertainment, clothing
  36. Budget
    • A forward-looking plan for controlling cash inflows & outflows
    • Based on your goals & financial obligations
    • Limits spending in different categories
    • Always evolving- make changes as necessary!
    • Number one reason for failing to stick to a budget is attitude!!
  37. A nicer name for budget
    "Spending plan"
  38. Ratios
    • Answer the following questions:
    • Do you have adequate liquidity? (for unexpected expenses or for periods of reduced/eliminated earnings)
    • Can you meet debt obligations?
    • Are you saving as much as you think?
  39. Current Ratio
    Liquidity ratio

    • Monetary assets
    • Current liabilities

    • -Shows whether you have enough liquid assets to cover expenses currently due
    • -Greater than 2 is good
  40. Month's Living Expenses Covered Ratio
    Liquidity ratio

    • Monetary assets
    • Annual living expenses/12

    -3 to 6 months should be covered
  41. Debt ratio
    Debt ratio

    • Total liabilities
    • Total assets

    Tells you whether you could pay off all your liabilities if you liquidated all your assets
  42. Long-Term Debt Coverage Ratio
    Debt ratio

    • Total income avail. for living expenses
    • Total long-term debt payment

    • -Tells you how many times you could make your debt payments with your current annual income
    • -2.5 or higher is good
  43. Savings Ratio

    • Income avail. for savings
    • Income avail. for living expenses

    Tells you what proportion of your after-tax income is being saved
  44. Fee-Only Planners
    Derive income from charging the client for the service provided or for a financial plan
  45. Commission-Based Planners
    Derive income from the sale of financial products
  46. Interest
    • The return you receive for investing your money
    • (i)
  47. Compound Interest
    The interest that your investment earns on the interest it previously generated
  48. Inflation
    • When rising prices reduce the purchase power of money
    • (r)
  49. The Rule of 72
    • Estimates how many years an investment will take to double in value
    • 72/interest rate
  50. Future Value
    • The value, in the future, of a current investment
    • Hypothetically moving your money forward in time (see how interest affects the growth)
  51. Present Value
    • Today's value of an investment received in the future
    • "Inverse compounding" or "discount interest rate"
    • Words to look for: "due to"
  52. Annuities
    • Multiple payments
    • A periodic series of equal payments for a specific length of time
    • Examples- mortgages, lottery payments, life insurance payments
    • "PMT" button on calculator
  53. Compound Annuities
    • Depositing an equal sum of money at the end of each time period for a certain number of periods and allowing the money to grow
    • Examples- retirement accounts, Christmas funds
  54. Future Value of an Annuity (FVA)
    • The value, in the future, of a current stream of investments
    • PMT is known
    • CPT "FV"
  55. Present Value of an Annuity (PVA)
    • Used to determine the present value of a future stream of payments (like insurance benefits, pension fund, alimony)
    • PMT is known
    • CPT "PV"
  56. Amortized Loans
    • Loans that are repaid in equal periodic installments for a specific length of time
    • PV is known
    • CPT "PMT"
Card Set
HACE 3200 Exam 1
HACE 3200 Exam 1