ACE 240

midterm review

Financial Advisor- Commission Based

Takes some of the money you invest

HIDDEN FEES

Financial Advisor- Fee-Based

Multiple income streams

Direct client fees: charge you for their time

billed as an assest under management

they make 3rd party commission

Financial Advisor- Fee-Only

the best!

only direct payments from the client

NO 3rd party payouts

Objective focus is tied to their advice rather than volume of sale

Billed as annual %, flat rate, hourly rate, per project fees

Quantitive

Number and fact driven

Qualitative

hopes and dreams 😍

Cash Flow Statement

tracks income and expenses over a set period of time

Looks “backwards” at how money was received and spent

Fixed

Essential + occurs regularly

Consistent cost

Discretionary

Non essential + isn’t needed to live

Balance sheet/net worth statement

Lists all assets and liabilities at a set point in time

How do I calculate networth?

Assets-liabilities

Banks

Licensed to receive deposits and make loans

Objective → earn profit for owners

Credit Unions

Financial cooperative that provides banking services

Created, owned, and operated by participants

Tax-exempt

Higher savings interest rate, normally online

Checking account

Very liquid

little to no interest

good for day to day

Savings Account

Interest rates low, but safe for emergency fund and saving for mid expences

Money Market Account

Higher IR, insurance protection, check writing, and debit card

must keep balance above a certain level

Good for storing emergency fund

CD

Must leave in there for a certain period of time

good for a conservative IR and principal protection

Money Market Fund

Mutual fund

high liquidity w/ a very low level of risk

sponsored by an investment fund company

NEOT FDIC insured

Taxable brokerage account

Good for investments needed for goals before retirement

• no contribution limits

• no penalty for withdrawal

• and subject to taxes

Basic housing ration

Housing costs/Gross pay (pre-tax)

needs to be below 28%

Disability insurance

a contract between you and a company

You make premium payments; they help you when you meet the contract needs

Own-occupation disability

pays for when you cannot do your job now

• BETTER→ for your job now

• more expensive

• pricing on how likely it is to occur

Any-occupation

You can’t do any job… ever.

The probability of you being disabled.

25% AAAAHH

Elimination period

waiting period before your benefits hit

Cost of living Adjustment Rider

Helps policy keep pace w/ inflation

partial disability benefit rider

pays a partial amount of money for what you lost when you were disabled

Future increase option

the opportunity to up benefit without medical underwriting, only need to show income increase

Whole life insurance

remains for your entire life

premiums do NEOT increase

builds a cash value

Variable Life Insurance

premium payments remain level

minimum death benefit

portion can be invested, can increase or decrease- and you get to choose

Universal Life Insurance

Separates into 3 elements- protection|expense|cash value

build flexibility in policy

Variable Universal Life Insurance

Combo; can mod death benefit, can be invested by holder

Deductible

what you pay for a service

Copay

A fixed amount you pay for a covered health care service

your copay to go to the doctor might only be $20, pay before deductible is met!

Coinsurance

percentage of cost of a covered service you pay after the deductible

Return on investment (ROI)

growth of value in investment over a period of time

End value - (Start value + Savings)/Start value = ROI

Credit utilization rate

How much debt a consumer takes

Total balance/total limit

Credit score

# lenders use to determine risk of borrowers getting $

850- YAY!

300- BOOO

Credit report

detailed report of credit history

Debt Avalanche

excess cash used to pay debt with high interest rate

Debt snowball

pay debt with lowest remaining balance first

• gives more positive re-inforcement

Peril

cause of loss to property, health, or person

Contingent claim

contract that becomes valuable after an event has occured

Annuities

Contract between an investor + insurance company

• provides payments or a series of payments

• insurer invests the principal

• insurer pays investor in the future through a lump sum or series of payments

Help meet retirement and long term goals

Add to alongside IRA + 401(k)

Out of pocket maxium

The most you pay for covered services in a plan year

After you’ve met this, insurance covers

does not include: premiums, things spent not covered by plan, out of network services

Exclusive provider organization

COVERS IN SERVICE:

• docs

• specialists

• hospitals

Health Maintenance Org.

limits coverage to who works for or has a contract w HMO

won’t cover care in an emergency

must live in area the contracted people do

Preferred Provider Org

Pay less if you use prodivers in plan’s network

can go outside of network → more $$

Point of Service

Pay less if you use health care providers w/ plans network

Requires a referral from primary doc to see specialist

Flexible Spending Account/Arrangement

Pay out-of-pocket medical expenses tax free

• You decide how much to put in

• Employer normally owns

If $$ leftover:

• 2.5 months to spend

• Carry over up to $500 to spend next year

Health savings account

for those with high deductible plans

YOU OWN IT! Can take between jobs

• Triple Tax benefit

  • contributions are tax deductible + may be invested after reaching a certain threshold

  • growth is tax deferred

  • If funds are used to pay for health things, NO TAX on withdrawls

    • after 65, can be taken out w/o any penalty

Long term health care insurance

Coverage pays for costs of long term care

Kicks in when you can no longer do 2 of 6 daily activities

• bathing

• eating

• conscience

• dressing

• transferring

Dental insurance (tell about perks)

coverage for preventative care

Liability insurance

protects owner and driver for any damage they cause to people or property

#’s for the state-required coverage for liability insurance

$25,000 per person

$50,000 per accident

$20,000 property damage

Collision and comprehensive insurance

protection for the car

Collision pays for: damage, repair or replace car, pays reguardless of fault

Comprehensive pays for: theft, animal damage, hail, explosions, non-driving damage

Renters Insurance

HO4 - walls in coverage

will NOT cover building, only things inside

Replacement cost coverage

does NOT consider deprecation

Real property

buildings and structures

personal property

things inside

limited liability

If you hurt someone, it will help you when you get sued

HO-1

protects against fire or theft

HO-2

protects against 16 perils

HO-3 + HO-5

more common, overall better

“open” peril policies

cover damage from all perils not specifically excluded

HO-5 DOES NOT cover:

• wear and tear

• mold

• frozen pipes

• defective zoning

• war

• flooding

• volcanic accident

• terrorism

• nuclear accidents

Umbrella Insurance

cheap and can pick up where regular insurance leaves off

Income multiplier method

10x income

Human Life Value

present value of person’s future earnings used to support dependents

• investing to spit out money needed in the future

• eventually will use all of the benefit

Capital Retention

the principal sum received from LI is preserved + you use the interest

in theory, could be used forever

Time value of money

money is worth more today that in the future b/c of inflation

How do I build wealth?

1. invest in myself

2. start budgeting early

3. take time in investing in 401(k)

4. start an emergency fund

Value investing

looks for companies trading at prices below what the inventor believes is appropriate

makes profit when stocks increase to the appropriate value

Growth investing

companies w/ increasing earnings + stock prices

makes profit by selling when price goes up

Income investing

companies that pay dividends

profit when companies return surplus to investors in dividends

Bond

loan to a company, you function like a bank

fund

gives you an investment w/ hundreds of companies

What do you have no control over while investing?

investment returns, inflation, taxes

What do you have control over while investing?

savings rate, asset allocation, investment vehicles, accounts

Savings rate

How much I am saving

Asset Allocation

What percentage is in each thing

• 90 stocks, 10 bonds

IRA

available to anyone with income

• 6K limit

Trad. IRA

Tax deductible

• growth is tax deferred

• taking out $ pre 59 ½ are penalized and taxes

• minimum distributions begin at 72

Individual securities

you own securities

• you pick stocks + bonds

• actively manage your own stuff

mutual funds

money pooled into larger buying unit

professional monitors it

Unit investment trusts

Similar to mutual funds

• invest in tax-exempt bonds

• corporate bonds

• utility stocks

• or gov. backed mortgages

DIFFERENT

• holds onto OG securities for life of the trust

• DOES NOT TRADE

Limited Partnerships

Several investors pool $$ together to purchase income-producing properties

• Once breaks even, money is passed on to investors as dividend payments

• If they sell property, any capital gains are passed to investors

Real Estate Investment Trust

Mutual fund meets limited partnerships

• money pooled to buy income-producing properties

• write mortgages

• or both

How to open an account?

Financial advisor

Investment brokerage firm

Robo advisor

Investment Brokerage firm

more hands on

Robo advisor

a midway point between DIY + financial advisor

Target date mutual fund

Mutual fund of ETFs

mix of stock, bonds, other investments

long term investment

take more risks when young, conservative when older

Asset classes

What you invest in

Stocks out perform bonds, bonds are better for retaining capital

Asset Allocation

• how you balance risk + reward

• where you’re investing + when

Describe the role of a preferred shareholder

The preferred shareholder has ownership, but not control, in the company

• They hold an ownership interest in the net worth of the company

• they DO NOT have voting rights

Which type of security can be issued without diluting ownership in the company?

Preferred Stock

Common Stock

Bonds

Bonds

The company is borrowing money from the public

Common stock has:

Both control and ownership

Rebalancing

What investors do to bring their portfolio back to its original asset allocation mix. Rebalancing is needed because over time, some investments will grow faster than others.

Preferred stocks are generally purchased by investors seeking

Dividends

Dividends

portion of a company's net earnings or profits distributed to its shareholders as a reward for owning its stock

Do companies make money off of stocks sold on a secondary market?

When shares trade on the secondary market, investors complete the transaction directly.

The company that issued the stock does not receive any money from these trades.