HACE 3200 Exam 1

• Stage 1: The Early Years (wealth accumulation)
• Stage 2: The Golden Years (approaching retirement)
• Stage 3: The Retirement Years

• First stage of financial planning
• Develop your savings plan
• Set your initial goals
• Establish your long-range investment strategy
• Lasts through age 54

• Second stage of financial planning
• Realize intermediate-term goals
• Reevaluate the plan to match current goals
• Plan for retirement
• Age 55-64

• 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

• 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

• Evaluate your financial health
• -Evaluate your current situation- income, spending, wealth
• -Assess your whole financial picture

• 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

Accomplished within a 1-year period

Take 1-10 years to accomplish

Take more than 10 years to accomplish

• Develop a plan of action
• What must I do to achieve my goals??

The ability for your plan to change as your situation or goals change

• Your ability to convert noncash assets into cash with relative ease and speed (how quickly can you have the cash?)
• Ex- savings

Your ability to meet the unexpected large expenses without destroying your plan

Your ability to pay as little as possible to Uncle Sam

• 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

• 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

• Education: Key factor in determining income
• Earnings: Determine standard of living
• 70% of wealthy householders finished college*

• A statement of your financial position on a given date
• The "financial polaroid" or "snapshot" of THE PRESENT
• Lists your assets and your liabilities

What you own

• Cash or other assets that can be easily liquidated
• Examples- cash, checking acct., savings acct.

• Assets that are invested for the future
• Examples- stocks, bonds, mutual funds, cash value life insurance

• Investments by you or your employer to save for retirement
• Examples- pensions, IRAs, 401(k)

• A physical asset- something you can use, feel, and touch
• Typically depreciate in value (not real estate though)
• Examples- car, boat, real estate

• Tangible asset like land or a dwelling
• Represents most of your savings
• Normally appreciates in value

• Tangible assets that represent your lifestyle
• Reported as fair market value
• Normally depreciate in value
• Examples- boats, furniture, jewelry, clothes

What you owe

• Liabilities that must be paid off within the next year
• Examples- utility bills, credit cards

• Liabilities that extend beyond one year
• Examples- home mortgage, auto loans

• A measure of your wealth
• Assets - Liabilities = Net Worth

When you owe more money than your assets are worth

• Tells where your money came from and where it has gone
• The "financial motion picture" of THE PAST
• Based entirely on cash flow

• Where your money goes
• Two major categories: Taxes and living expenses

• Expenses you don't directly control
• Examples- mortgage, rent, cable

• Expenses you can control
• Make your budget cuts here
• Examples- food, entertainment, clothing

• 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!!

"Spending plan"

• 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?

Liquidity ratio

• Monetary assets
• Current liabilities

• -Shows whether you have enough liquid assets to cover expenses currently due
• -Greater than 2 is good

Liquidity ratio

• Monetary assets
• Annual living expenses/12

-3 to 6 months should be covered

Debt ratio

• Total liabilities
• Total assets

Tells you whether you could pay off all your liabilities if you liquidated all your assets

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

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

Tells you what proportion of your after-tax income is being saved

Derive income from charging the client for the service provided or for a financial plan

Derive income from the sale of financial products

• The return you receive for investing your money
• (i)

The interest that your investment earns on the interest it previously generated

• When rising prices reduce the purchase power of money
• (r)

• Estimates how many years an investment will take to double in value
• 72/interest rate

• The value, in the future, of a current investment
• Hypothetically moving your money forward in time (see how interest affects the growth)

• Today's value of an investment received in the future
• "Inverse compounding" or "discount interest rate"
• Words to look for: "due to"

• 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

• 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

• The value, in the future, of a current stream of investments
• PMT is known
• CPT "FV"

• Used to determine the present value of a future stream of payments (like insurance benefits, pension fund, alimony)
• PMT is known
• CPT "PV"

• Loans that are repaid in equal periodic installments for a specific length of time
• PV is known
• CPT "PMT"