Financial Planning Week 3- Analyzing your Client’s Current Financial Situation

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PITH ÷ Gross Monthly Income. Recommended benchmark is ≤ 35%.

Net Cash Flow

Indicates whether the client has a surplus or deficit; positive = financially sustainable, negative = risk; No specific benchmark

Debt Payments Ratio

Measures the portion of take-home pay used for non-mortgage debt; high ratio = risky; Recommended < 20%

Gross Debt Service Ratio (GDSR)

Measures % of gross income spent on housing costs; high = mortgage affordability risk; Recommended ≤ 35%

Total Debt Service Ratio (TDSR)

Measures % of gross income used to service all debts including housing; stricter than GDSR; Recommended ≤ 40%

Debt Ratio

Shows proportion of assets financed by debt; lower is better; Recommended ≤ 0.5

Savings Ratio

Measures portion of gross income being saved; indicates wealth-building and financial security; Recommended ≥ 10%

Emergency Fund Ratio (EFR)

Measures liquidity to cover unexpected events; low = risk of financial strain; Recommended 3–6 months of expenses

Current Ratio

Measures ability to pay short-term obligations using liquid assets; low ratio = liquidity risk; Recommended ≥ 2

Cash Flow

The movement of money in and out over a period of time

Cash Inflows

Income received (salary, gifts, refunds)

Cash Outflows

Expenses paid (rent, food, debt, subscriptions)

Net Cash Flow Formula

Cash Inflows − Cash Outflows = Net Cash Flow

Disposable Income

Income available after mandatory payroll deductions (income tax, CPP, EI)

Double-Counting Rule

Do NOT include payroll deductions again if using net income

Budget

A plan for how income will be spent

Seven-Step Budgeting Process

1. Set goals 2. Estimate income 3. Pay yourself first 4. Evaluate expenses 5. Record spending 6. Review patterns 7. Adjust

Common Budget Risks

Unrealistic budgets (too strict or too loose), Irregular expense risk (large periodic expenses)

Cash Flow Strategies

Surplus: Save, invest, pay down debt, TFSA; Deficit: Cut spending, increase income, restructure debt

Expense Types

Fixed: consistent costs, Variable: fluctuating costs, Discretionary: optional, Non-discretionary: essential, Irregular: periodic large expenses, Gray Area: lifestyle-dependent

Why distinguish expenses?

Helps manage spending, prioritize goals, and identify cuts if needed

Why track cash flow?

Determine surplus/deficit, assess financial sustainability, ensure bills can be paid on time

Why is surplus important?

Extra money available to save/invest, improve net worth, and achieve goals

Debt

Money that requires repayment with interest

Good Debt

Debt that builds long-term value (education, mortgage)

Mortgage Payment (PI)

Principal and Interest portions of the mortgage payment

Other Debt Payments

Car loans, credit cards, LOC, personal loans, student loans, recurring debt

Mortgage Qualification Rules

GDSR ≤ 35%, TDSR ≤ 40%

Net Worth Formula

Net Worth = Assets − Liabilities

Purpose of Net Worth Statement

Measure financial position, track wealth over time, ensure net worth grows faster than inflation

Asset Classes

Cash (chequing, savings), Fixed income (bonds, GICs), Equities (stocks, ETFs)

Asset Allocation Considerations

Balance growth vs stability, illiquid/at-risk assets, tax efficiency (RRSP, TFSA)

Lifecycle Stage Impact

Younger: higher debt, building assets; Older: lower debt, wealth preservation, retirement planning

Net Cash Flow

Indicates financial sustainability; surplus = positive, deficit = risk

Debt Payments Ratio

Monthly non-mortgage debt ÷ Take-Home Pay; recommended < 20%; shows portion of take-home pay used for debt; high ratio = risky

GDSR

PITH ÷ Gross Monthly Income; recommended ≤ 35%; % of income spent on housing; high = mortgage affordability risk

TDSR

(PITH + Other Debt Payments) ÷ Gross Monthly Income; recommended ≤ 40%; measures total debt burden; stricter than GDSR

Debt Ratio

Total Liabilities ÷ Total Assets; recommended ≤ 0.5; shows what proportion of assets is financed by debt; lower is better

Savings Ratio

Monthly Savings ÷ Gross Income; recommended ≥ 10%; measures portion of income being saved;

Emergency Fund Ratio (EFR)

Liquid Assets ÷ Monthly Non-Discretionary Expenses; recommended 3–6 months; measures liquidity; low = risk in emergencies

Current Ratio

Liquid Assets ÷ Current Liabilities; recommended ≥ 2; ability to pay short-term obligations;

Why track ratios?

Assess liquidity, debt management, affordability, savings, and financial risk

Why should debt ratio decline over time

Shows improving financial stability and increased asset ownership

RRSP Contributions & Cash Flow

Reduce take-home pay; treated like an expense for budgeting

Common Cash Flow Disruptions

Unexpected expenses, excessive credit, irregular payments, unrealistic budgets

Managing Disruptions

Emergency fund, credit control, realistic budgeting