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What is a balance sheet?
Snapshot of where a client is financially at a point in time
What is another name for balance sheet?
Statement of financial position
Why aren’t life insurance cash values included as part of the investment assets or emergency fund?
There can be a 6 month delay in accessing cash value
How are use assets valued on the balance sheet?
Current FMV
Example of short term liability
Debt without schedule
credit cards or personal loans/lines of credit
What time period should a budget cover?
12 months or shorter (especially if annual income and expenses cannot be estimated)
What is the top tier priority in the financial planning process?
Establish positive cash flow
How to improve cashflow?
Examine overspending
Earn more money
Renegotiate debts
Increase deductible (lowers premium)
What should emergency fund be able to pay for?
3-6 months of real estate taxes, fixed and variable expenses, EXCLUDING federal taxes
How many months should an emergency fund be?
Should have current months expenses in checking account (so total 4-7 months)
If trying to pay down debt, what should be paid down first?
Highest interest rate paid first
What should housing expense be (PITI or rent)?
</ 28% gross income
What should total debt be?
</ 36% gross income
What should consumer debt be?
</ 20% net income
What does it mean if debt management ratios are exceeded?
Client struggling to maintain positive cash flow
How much should be saved from gross income?
5-8% but more is better
What is current ratio?
CA / CL
What is a current asset?
Cash equivalents, marketable security, accounts receivable, and inventory
What is current liability?
Accounts payable, credit card debt (even if paid off monthly), taxes payable (if due soon), mortgages (only if specifies payment due)
What is a marketable security?
Assets easily bought and sold on public markets
Examples of marketable security
Stocks, bonds, T-bills, preferred stock
What is a marketable debt security?
Expected to be sold within 1 year
If not, it’s considered a LT investment
What is the quick ratio formula?
cash equivalents/marketable securities/accounts receivable / CL
Removes inventory
Better for businesses
What does it mean if the quick ratio or current ratio is < 1?
Signals financial issues over the ST
Are income taxes and FICA included in fixed/variable expenses?
NO
Should you include federal taxes into your emergency fund equation?
NO
What is the purpose of a bank?
Financial intermediary
Who oversees federal/nationally chartered banks?
Comptroller of currency, Fed, FDIC
Who oversees a state chartered bank?
Regulatory authority of the state, FDIC
Single CD $100k
Single Savings $200k
IRA $300k
How much is FDIC coverage for me?
$250k aggregate for single CD and savings
$250k for IRA
Coverage per titling, not per account
Joint Savings with daughter $100k
Joint Savings with son $100k
Joint Checking with spouse $350k
How much is FDIC coverage for me and overall?
Me: $50k, $50k, and $150k because joint accounts are aggregated to a $250k limit
My spouse would get the full $175k from our joint account
What is the function of a mutual fund company?
Investment company that raises money from investors and invests it into stocks, bonds, options, commodities, or money market
What is the benefit of a mutual fund?
Diversification and professional management
Who regulates mutual funds?
SEC
What’s in a mutual fund prospectus?
I imagine riding majestic purple dragons and flying fast
I - investment strategies
Imagine - investment objectives
Riding - risks of investing
Majestic - may not include forward projections
Purple - past performance
Dragons - distribution policy
Flying - fees and expenses
Fast - fund management
What is a trust company?
Organization which is engaged as a trustee, fiduciary, custodian, executor, personal representative or agent for individuals to handle the administration of trusts, wills, estates and custodial arrangements
Who regulates trust companies?
State law
Another name for Securities Act of 1933
Primary Act, Paper Act, 1st Act
What is the Securities Act of 1933?
Requires purchasers of new issues be provided with a detailed prospectus before a transaction
Another name for Securities Act of 1934
Secondary Act or People Act
What is Securities Act of 1934?
Regulates the secondary market (trading of issued securities) and created the SEC to enforce securities laws
SECond Act, SECondary market, SEC
What is the Investment Company Act of 1940?
Authorized the SEC to regulate UITs, manage investment companies (open and closed end funds), variable life insurance and variable annuities
What is the Investment Advisors Act of 1940?
Also called 40 Act
What is considered investment advice
Who must register with state and federal regulators to deliver such advise
What is the Securities Investors Protection Act of 1970?
Established SIPC to supervise securities firms that get into financial difficulties from the failure of brokerage firms
Who does FDIC and SIPC coverage apply to?
Both foreign and domestic citizens investing in any US bank or investment company
What is supply?
Amount of good or service that producers are willing to sell
What does supply depend on?
Price, cost of production (labor costs), level of technology
What is demand?
Amount of good or service that buyers are willing to purchase
What does demand depend on?
Its price, prices of other goods (especially substitute goods), consumers’ income and taste
Initial claims for unemployment insurance
Leading
New manufacturing orders
Leading
New private housing units
Leading
Stock prices, 500 common stocks
Leading
Index of consumer expectations
Leading
Average weekly hours for production workers in manufacuring
Leading
Vendor performance measured as a percentage of companies reporting slower deliveries
Leading
Contracts and orders for plants and equipment
Leading
Interest rate spread
Leading
Money supply
Leading
Number of employees on non-ag payrolls
Coincident
Personal income less transfer payments (social security, welfare)
Coincident
Industrial production
Coincident
Average duration of unemployment
Lagging
Average prime rate charged by banks
Lagging
Commercial and industrial loans outstanding
Lagging
Ratio of consumer installment credit outstanding to personal income
Lagging
Change in the CPI for services
Lagging
What is CPI?
Market basket of selected goods and services in various cities across the country
What is CPI-U?
Number reported on news and reflects inflation for all urban consumers
What is CPI-W?
Statistic for urban wage earners and hourly workers
What is social security adjustment tied to?
CPI-W
What are the categories of CPI?
FART HOME
Food and beverage
Apparel
Recreation
Transportation
Housing
Other goods and services
Medical care
Education and communication
What does the business cycle reflect?
Movements in economic activity as defined by changed in real GDP
What outperforms at a trough, right before the economy begins to recover?
Cyclical
Purchases of these items are deferred during a contraction
What are defensive industries?
Little sensitivity to business cycle - recession proof
Food producers, pharmaceuticals and public utilities
What are durable goods and what do they include?
Goods that do not quickly wear out
Cyclical
Cars, appliances, home furnishings, recreational items, toys
What are nondurable goods and what do they include?
Consumables are defined as goods that are used up when used once or have a short life span
Not affected by recession
Cosmetics, food, fuel, paper, plastics, clothing, footwear
During a trough, what is the stock market doing?
Rising bull market
During expansion, what is the stock market doing?
Top of bull market
During a peak, what is the stock market doing?
Falling bear market
During contraction, what is the stock market doing?
Bottom of bear market
What industries outperform during trough?
Technology, basic materials, industrials
What industries outperform during expansion?
Basic materials, energy, consumer staples
What industries outperform during peak?
Energy, consumer staples, healthcare
What industries outperform during contraction?
Financials, technology, consumer cyclicals
What does GDP measure?
US economy’s total production of goods and services
Dollar value of all final goods and services newly produced within the country’s boundaries
How is GDP calculated?
By the sum of consumption, plus govt spending, plus investments into the economy plus net exports
What is the most important element of GDP and how much does it consist of?
Consumer spending 70%
What is the difference in nominal GDP and real GDP?
Real GDP takes price inflation into account
What is a recession?
At least two consecutive quarters of decline in real GDP
Significant decline in economic activity spread across the economy, lasting more than a few months
What is a depression?
Severe or long recession (6 quarters)
Who controls fiscal policy?
Congress
What does fiscal policy represent?
Federal taxation and spending
Designed to level out the business cycle and achieve full employment, price stability and sustained growth of the economy
What is the objective of fiscal and monetary policy?
Stable domestic economy with steady GDP growth
Who controls monetary policy?
The Fed
What are tools of monetary policy?
Reserve requirements
Discount rate
Open market operations
Margin
What is the prime rate?
What the bank may offer their best clients for loans
What is the fed funds rate?
Rate banks charge other banks to meet reserve requirements
Who sets the fed funds rate?
Banks
What does increasing the reserve requirement do to credit?
Tightens credit