HS 300 Flashcards – Module 3
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[h] HS300 – Module 3
[q] Life Cycle Approach
[a] An approach to financial planning that matches a client’s goals with their current stage in the life cycle.
[q] Stages of Life Cycle Approach
[a] Three stages:
Asset accumulation phase.
Conservation/risk management phase.
Distribution/gifting phase.
[q] Asset Accumulation Phase
[a] A phase of the life cycle approach to financial planning. Usually begins when client enters the workforce, and lasts until mid 50s. The primary focus during this phase is on accumulating assets.
[q] Wealth Conservation Phase
[a] A phase of the life cycle approach to financial planning. Also known as the risk management phase. Usually begins when the client is in their late 20s or early 30s, and lasts until early 70s.
[q] Wealth Distribution/Gifting Phase
[a] A phase of the life cycle approach to financial planning. Usually begins when the client is in their mid 50s, and lasts until end-of-life. The client is concerned with living off accumulated assets.
[q] Two-Step Approach
[a] An approach to financial planning that involves the following steps:
Step 1 – cover the risks.
Step 2 – save and invest.
[q] Three-Panel Approach
[a] An approach to financial planning that involves the following steps:
Panel 1 – cover catastrophic risks.
Panel 2 – meet short-term obligations and manage debt.
Panel 3 – meet financial security goals.
[q] Strategic Approach
[a] An approach to financial planning that combines big-picture goals and the external environment. Includes SWOT analysis.
[q] SWOT Analysis
[a] An analysis that is incorporated into the strategic approach to financial planning. The analysis reviews a clients strengths, weaknesses, opportunities, and threats.
[q] Mission Statement
[a] A brief, long-term statement of a financial plan’s overarching purpose.
[q] Cash Flow Approach
[a] An approach to financial planning that uses the Statement of Income and Expenses to make recommendations.
[q] Steps of the Cash Flow Approach
[a] Steps:
Recommendations with positive cash flow impact are prioritized and implemented.
Clients identify recommendations with a negative cash flow impact.
Positive cash flows are used to purchase the negative cash flow recommendations.
[q] Cash Flow Statement
[a] A statement used to determine how much income a client is receiving and how much they are spending. The statement is typically prepared on an annual basis.
[q] Net Cash Flow
[a] An amount determined using the following formula: Income – Savings – Expenses
[q] Taxable Savings Accounts
[a] Accounts in which any income earned within the account is taxable to the account owner in the year the income is earned. Includes savings accounts, checking accounts, and brokerage accounts.
[q] Tax-Deferred Savings Accounts
[a] Accounts that grow tax-deferred until the funds are distributed. Income earned on these accounts is not taxed in the year earned, but is taxed in the year distributed to the account owner. Includes 401(k) plans and traditional IRAs.
[q] Tax-Free Savings Accounts
[a] Accounts that offer tax-deferred growth and allow for tax-free withdrawals. Includes Section 529 plans and Roth IRAs.
[q] Discretionary Expenses
[a] Nonessential expenses that a household can survive without. Includes entertainment, vacations, hobbies, restaurants, and gym memberships.
[q] Non-discretionary Expenses
[a] Essential expenses for a household. Includes taxes, groceries, and debt payments.
[q] Pie Chart Approach
[a] An approach to financial planning that provides a visual display of the balance sheet and cash flow statement.
[q] Present Value Approach
[a] An approach to financial planning that gives clients a single dollar value to meet all their lifetime goals. This approach is used to quantify the amount the client would need to start saving today.
[q] Financial Statement and Ratio Analysis Approach
[a] An approach to financial planning that uses data within financial statements to determine ratios that are used to gauge financial health. Ratios include liquidity ratios, debt ratios, financial security ratios, and performance ratios.
[q] Metrics Approach
[a] An approach to financial planning that provides quantitative benchmarks as guidance for achieving goals.
[q] Tips for Successful Budgeting
[a] Tips:
Be realistic with spending behavior.
Include an expense line item for miscellaneous expenses and unforeseen expenses.
Being successful with a budget takes practice.
[q] Budgeting Process
[a] Steps:
Determine the client’s income for a time period.
Determine the fixed and variable expenses for the same time period.
Present expenses to the client.
Determine if net discretionary cash flow is positive or negative.
Rectify client’s goals and the planner’s recommendations with client’s cash flow.
[q] Savings Rate – Cash flow Approach
[a] An approach to determining a savings rate that uses the following formula: Income – Savings – Expenses
[q] Savings Rate – Ratio Approach
[a] An approach to determining a savings rate that uses the following formula: (Savings + Employer Match) / Gross Pay
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