Unit 3

Life-Cycle Approach

Matches financial goals to a client's life stage.

Asset Accumulation Phase

Early 20s to mid-50s; debt high and wealth building.

Conservation Phase

Late 20s to early 70s; focus on risk management.

Distribution Phase

Mid-40s through end-of-life; focus on gifting and transfer.

Life-Cycle Data Collected

Age, family status, income, employment, and net worth.

Two-Step Approach

Cover risks first, then save and invest.

Three-Panel Approach

Separates planning into risk, short-term, and long-term panels.

Panel 1

Risk management.

Panel 2

Short-term savings, debt management, emergency fund.

Panel 3

Long-term savings and investments.

Panel 1 Insurance Types

Life, health, disability, LTC, property, liability.

Panel 2 Focus

Emergency fund and debt management.

Panel 3 Focus

Retirement, education, large purchases, legacy goals.

Strategic Approach

Uses mission statement, goals, and objectives.

SWOT Analysis

Strengths, weaknesses, opportunities, threats.

Mission Statement

Codifies client goals and objectives.

Cash-Flow Approach

Prioritizes recommendations based on cash flow impact.

No Cash Flow Impact Recommendation

Changing a beneficiary designation.

Positive Cash Flow Recommendation

Raising insurance deductibles.

Negative Cash Flow Recommendation

Buying additional insurance coverage.

Statement of Income and Expenses

Measures income, savings, and expenses over time.

Net Discretionary Cash Flow

Income minus savings minus expenses.

Positive Cash Flow

Supports implementation of recommendations.

Negative Cash Flow

Requires increased income or reduced expenses.

Limitation of Cash Flow Statement

Excludes asset sales and inheritances.

Pie Chart Approach

Visual representation of spending and savings.

Present Value of All Goals Approach

Calculates current value of all future goals.

PV of Goals Approach Steps

Calculate goals, sum values, subtract resources, determine savings need.

Financial Statement Approach

Evaluates strengths and weaknesses using ratios.

Liquidity Ratio

Measures ability to meet short-term obligations.

Debt Ratio

Measures effectiveness of debt management.

Financial Security Ratio

Measures long-term goal progress.

Performance Ratio

Measures investment returns relative to risk.

Metrics Approach

Uses benchmarks and rules of thumb.

Emergency Fund Benchmark

3 to 6 months of non-discretionary expenses.

Housing Ratio 1 Benchmark

Less than 28% of gross income.

Housing Ratio 2 Benchmark

Less than 36% of gross income.

Financial Security Benchmark

Save approximately 10% to 13% of gross income.

Estate Planning Benchmark

Basic documents for all clients; trusts often needed later.

Budget Purpose

Tracks and controls cash flow.

Fixed Expense

Predictable recurring expense.

Variable Expense

Expense that fluctuates or occurs irregularly.

Budget Steps

Determine income.

Determine fixed and variable expenses.

Calculate expenses as a percentage of income.

Determine net discretionary cash flow.

Align goals and recommendations with cash flow.

Ways to Reduce Expenses

Eliminate subscriptions, reduce discretionary spending, increase deductibles.

Savings Rate Formula

(Savings + Employer Match) ÷ Gross Pay.

Retirement Savings Benchmark Age 25

Approximately 12% of gross pay.

Retirement Savings Benchmark Age 50

Approximately 20% of gross pay.

Credit Report

Record of borrowing and repayment history.

Major Credit Bureaus

Equifax, Experian, and TransUnion.

Fair Credit Reporting Act

Gives consumers access to free annual reports.

Credit Report Includes

Account history, balances, inquiries, and delinquencies.

Credit Report Excludes

Income, ethnicity, religion, medical records, criminal records.

FICO Score Range

300 to 850.

Largest FICO Factor

Payment history (35%).

Second Largest FICO Factor

Credit utilization (30%).

Positive Credit Factors

On-time payments, low utilization, long credit history.

Negative Credit Factors

Late payments, foreclosures, bankruptcies, excessive inquiries.

Hard Inquiry

Credit check by a lender for a credit decision.

Soft Inquiry

Credit check not related to a lending decision.