Formulas

Net Worth Formula

Net Worth = Total Assets - Total Liabilities

Net Discretionary Cash Flow

Net Discretionary Cash Flow = Income - Savings - Expenses

Savings Rate

Savings Rate = (Client Savings + Employer Contributions) / Gross Pay

Emergency Fund Ratio

Emergency Fund Ratio = Cash and Cash Equivalents / Monthly Nondiscretionary Cash Flows

Current Ratio

Current Ratio = Cash and Cash Equivalents / Current Liabilities

Current Ratio Benchmark

Generally 1.0 to 2.0.

Housing Ratio 1

Housing Ratio 1 = Monthly PITI / Monthly Gross Pay

PITI

Principal + Interest + Property Taxes + Homeowners Insurance

Housing Ratio 2

Housing Ratio 2 = (Monthly PITI + Other Monthly Debt Payments) / Monthly Gross Pay

Investment Assets-to-Gross-Pay Ratio

IA/GP Ratio = (Investment Assets + Cash and Cash Equivalents) / Gross Pay

IA/GP Ratio at Age 25

Benchmark is approximately 0.20:1.

IA/GP Ratio at Age 30

Benchmark is approximately 0.6:1 to 0.8:1.

IA/GP Ratio at Age 35

Benchmark is approximately 1.6:1 to 1.8:1.

IA/GP Ratio at Age 45

Benchmark is approximately 3:1 to 4:1.

IA/GP Ratio at Age 55

Benchmark is approximately 8:1 to 10:1.

IA/GP Ratio at Age 65

Benchmark is approximately 16:1 to 20:1.

Return on Investment Ratio

ROI = (Ending Investment Balance - Beginning Investment Balance - Savings) / Beginning Investment Balance

ROI Savings Adjustment

Savings includes client contributions and employer contributions made during the measurement period.

ROI Benchmark

Generally 6% to 10%, depending on risk tolerance, asset allocation, and time horizon.

Long-Horizon ROI Benchmark

A portfolio with a time horizon of 10 years or more and greater equity exposure may have an expected return of approximately 8% to 10%.

Return on Assets Ratio

ROA = (Ending Total Assets - Beginning Total Assets - Savings) / Beginning Total Assets

ROA Benchmark

Generally 2% to 4%.

Leveraged Asset Adjustment for ROA

When a highly leveraged asset is added, the planner may use the asset's net equity rather than its full value in ending assets.

Horizontal Percentage Change

Percentage Change = (Current-Period Amount - Base-Period Amount) / Base-Period Amount

Vertical Analysis: Income Statement

Vertical Percentage = Individual Income-Statement Line Item / Total Income

Vertical Analysis: Balance Sheet

Vertical Percentage = Individual Balance-Sheet Line Item / Total Assets

Ordinary Annuity Timing

Equal payments occur at the end of each period; use END mode.

Annuity Due Timing

Equal payments occur at the beginning of each period; use BEGIN mode.

Annuity Due Comparison

An annuity due has one additional period of compounding, so its future value exceeds that of an otherwise identical ordinary annuity.

MLB Calculator Rule

Mortgages, loans, and bonds are generally calculated in END mode.

Rule of 72

Approximate Doubling Time = 72 / Annual Interest Rate Expressed as a Whole Number

Real Rate of Return

Real Return = [(1 + Nominal Return) / (1 + Inflation Rate)] - 1

Nominal Rate Relationship

Nominal Rate is approximately equal to Real Rate + Expected Inflation.

Inflation Rate

Inflation Rate = (Current Price Level - Prior Price Level) / Prior Price Level

Net Present Value

NPV = Present Value of Future Cash Inflows - Present Value of Cash Outflows

Internal Rate of Return

IRR is the discount rate that causes NPV to equal zero.

Final-Year Investment Cash Flow

Final-Year Cash Flow = Operating Cash Flow + Sale Proceeds - Selling Costs

Monthly Mortgage Payment Setup

N = Years x 12; I/YR = Annual Mortgage Rate; PV = Loan Amount; FV = 0; solve for PMT in END mode.

Mortgage-Point Cost

Point Cost = Mortgage Amount x Number of Points x 1%

Mortgage-Point Monthly Savings

Monthly Savings = Payment Without Points - Payment With Points

Mortgage-Point Break-Even in Months

Break-Even Months = Cost of Points / Monthly Payment Savings

Present Value of Education Costs Using Real Return

Calculate the real return, place the tuition payment in BEGIN mode, and solve for the present value of the education withdrawals.

Lower Student Aid Index

A lower SAI generally indicates greater financial need.

American Opportunity Tax Credit

AOTC = 100% of First $2,000 of Qualified Expenses + 25% of Next $2,000

Maximum AOTC

The maximum AOTC is $2,500 per eligible student per year.

AOTC Years Available

Available for the first four years of eligible postsecondary education.

Lifetime Learning Credit

LLC = 20% of Up to $10,000 of Qualified Expenses

Maximum Lifetime Learning Credit

The maximum LLC is $2,000 per tax return per year.

One-Tax-Benefit Rule

The same qualified education expense cannot be used for more than one education tax benefit.

Student Loan Interest Deduction

Above-the-line deduction of up to $2,500 of qualifying student-loan interest, subject to applicable income phaseouts.

529 Front-Loading Limit

Maximum Front-Loaded Contribution = 5 x Annual Gift-Tax Exclusion

529 Front-Loading Amount in 2025

$95,000 per donor, equal to 5 x the $19,000 annual exclusion.

529 Front-Loading with Gift Splitting in 2025

A married couple electing gift splitting could front-load up to $190,000 for one beneficiary.

529-to-Roth IRA Lifetime Limit

Up to $35,000 may be transferred over time, subject to the applicable requirements and annual Roth IRA contribution limits.

529 Student-Loan Repayment Limit

Up to $10,000 over a beneficiary's lifetime may be used for qualifying student-loan repayment.

529 K-12 Tuition Limit

Up to $10,000 per year may be used for eligible elementary or secondary school tuition under the rules described in the course materials.

Kiddie-Tax Threshold in 2025

The course slides identify $2,700 of unearned income as the 2025 threshold above which the kiddie-tax rules may apply.

401(k) Loan Maximum

Maximum Loan = Lesser of $50,000 or 50% of Vested Account Balance, subject to plan rules.

Employer-Provided Education Assistance

Up to $5,250 per year may be excluded from an employee's taxable income under a qualifying program.

Bachelor's Degree Earnings Premium

The course materials state that workers with bachelor's degrees earn approximately 40% more than workers with high-school diplomas.

GDP Deflator

GDP Deflator = Nominal GDP / Real GDP

GDP Deflator Index Form

GDP Deflator Index = (Nominal GDP / Real GDP) x 100

Price Elasticity of Demand

Price Elasticity of Demand = Percentage Change in Quantity Demanded / Percentage Change in Price

Unit Elasticity

Elasticity equals 1 when the percentage change in quantity demanded equals the percentage change in price.

Government Budget Deficit

Government Deficit = Government Spending - Government Revenue, when spending exceeds revenue.

FDIC Basic Coverage

$250,000 per depositor, per ownership category, per insured institution.

FDIC Joint-Account Ownership Share

Each co-owner's insured ownership share equals the account balance divided by the number of co-owners, aggregated with that owner's shares in other joint accounts at the same bank.

FDIC Trust Coverage

Trust Coverage = $250,000 x Number of Eligible Beneficiaries, limited to five beneficiaries per grantor under the course's stated rules.

Maximum FDIC Trust Coverage per Grantor

Maximum = $250,000 x 5 = $1,250,000.

SIPC Total Protection Limit

Up to $500,000 per qualifying customer, including a maximum of $250,000 for cash.

SIPC Coverage Limitation

SIPC protects customer cash and securities when a brokerage fails; it does not protect against market or investment losses.

Lost or Stolen Credit-Card Liability

Maximum federal liability described in the course = Lesser of Unauthorized Charges or $50 per Card per Incident.

FICO Payment-History Weight

35% of the FICO score.

FICO Credit-Utilization Weight

30% of the FICO score.

FICO Length-of-Credit-History Weight

15% of the FICO score.

FICO Credit-Mix Weight

10% of the FICO score.

FICO New-Credit Weight

10% of the FICO score.