Topic 5: Financial Assessment

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Flashcards by karen_v, updated more than 1 year ago
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Flashcards on Topic 5: Financial Assessment, created by karen_v on 06/02/2014.

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The balance sheet, also known as a net worth statement can provide information about a clients’ financial situation _________. (in the past, today, in the future) today
What is the formula to determine Net Worth? Assets – Liabilities
Does a positive net worth mean that a client is not in financial distress? no, not necessarily. It just means they have more assets than debt – does not consider monthly expenses
When categorizing assets, your client determines that they have over $5,000 in furniture and two vehicles, what type of assets are these, and how would you determine their value? Tangible or use assets – they are valued at fair market value, check craigslist or ebay for the furniture, and nada or Kelly blue book for the vehicles
Which type of asset do we also call a liquid asset because they can be liquidated pretty easily, give an example. Monetary – cash, money in a bank account, COD’s and money market accounts
Investment assets are tangible or intangible assets that generate income, like stocks, bonds or real estate. Would the home a client lives in be considered an investment asset? No, it would be considered a tangible asset – real estate is considered an investment asset if it generates income, if it is a rental property.
Liabilities listed on a balance sheet will include all debt a client is legally obligated to pay, this does not include monthly expenses. If your client has a credit card debt of $5,500 and pays $55 monthly which amount goes on the balance sheet? $5,500 – value is measured at the total payoff amount, not a monthly payment obligation
Liabilities are categorized as short term and long term, what is the time associated with each? - Short term: debt will be paid off w/in a year - Long Term: debt will take longer than a year to pay off
A cash flow statement, AKA income and expense statement is similar to a budget in that is notes a persons income and expenses, however the time period is different, how so? A cash flow statement looks at the past month; a budget projects the future
Utilizing a cash flow statement, it is determined that your client has a net loss, what is the next step? We will help our client determine if this was a rare issue (such as a vehicle registration that was paid last month), or if it is a common occurrence.
A cash flow statement shows all income and expenses for a period of time, what does this information tell us? it shows if a client was able to spend less than they earn
Income that is accounted for in a cash flow statement will include salary, alimony and child support. Give an example of another type of income that should be included that may be overlooked. gifts, bonuses, public assistance and interest
Expenses can be categorized into 3 types, list and describe each and give an example of each type of expense. - Fixed: stays the same from month to month – rent, car payment - Variable: fluctuate slightly from month to month – utilities, groceries, fuel - Periodic: occur on an irregular basis – vehicle registration, school supplies
We can utilize a cash flow statement to determine net loss or gain, what is the formula to determine net loss/gain? Income – Expenses
After completing a balance sheet and cash flow statement, we can use this information to calculate 3 types of helpful ratios. List these ratios. Asset to Debt, Basic Liquidity and Debt Service to Income
The Asset to Debt Ratio determines technical solvency by assessing if a client has more assets than debts. What is the recommended rate and what is the formula to determine this ratio? The recommended rate is over 1.0, and the formula is total assets/total debt
Is it possible to be technically insolvent and still be able to repay your debt? Yes, if your income source is high enough to cover your payments – the Asset to Debt ratio does not take into account income, just assets.
The Basic Liquidity Ratio can be used to determine what? how long a client can survive if they lost their income source
What is the formula to determine Basic Liquidity Ratio, and what is the recommended rate? Liquid assets/monthly expenses - at least 3 months
Is it possible to have a lower than recommended Basic Liquidity Ratio and still have disposable income every month? Yes, If you have less than 3 times your monthly expenses in savings your ratio would be less than recommended, however you could still have money left after your monthly bills are paid.
Loan officers often use the Debt Service-to-Income Ratio to determine if a client is a good credit risk, why – what does this ratio tell them? if a client has enough income to make their debt payments monthly
What is the formula to determine Debt Service-to-Income Ratio, and what is the recommended rate? Total monthly debt/gross income – 36% or less
We will include any recurring debt that will not be paid off w/in a year when determining a clients’ Debt Service-to-Income Ratio. Give an example of this kind of debt. Child support payments or rent
The process of setting goals, and planning income and expenditures over a period of time in the future is called what? budgeting process
What is one of the suggested control methods to determine if a client is sticking to their budget? checkbook register, notebook, spreadsheet, envelope or software
You help a client to devise a budget and quickly determine that their monthly expenses exceed their income, together you decide that they will need to look at reducing their expenses, what type of expense are the first to look at cutting? Variable, clients have more immediate control over these expenses
Some clients like to use subordinate budgets to keep track of specific spending budgets, give one example. Birthday, vacation, or Christmas budgets
When helping our clients prioritize their debt, we will consider the consequences of not paying. List one high priority, medium priority and low priority debt. - High: necessity – rent, car payment - Medium: difficult to live w/o – insurance, 2nd car payments - Low: can live w/o – credit cards, unsecured loans
According to the 16 rules of prioritizing debt, should you move a debt up in priority because the collector threatens to sue? No, many just threaten and don’t sue
A secured debt is backed by or secured by collateral, how would we typically prioritize this debt? High priority
Your client has two collection judgments against them, but their only income is social security, so they are collection proof, how would we typically prioritize this debt? Low, if they are collection proof, the collector cannot garnish their wage or tax refunds anyway.
When a person is upside down in their monthly budget, with more expenses than income, there are only two options; to increase their income or lower their expenses. List a couple ways to increase income. Second or side job, tap into public assistance programs, provide a needed service, adjust tax
Eligibility for work support and public assistance programs vary slightly, however, can a single person qualify for SNAP benefits, or do they have to have a child in the home? Eligibility is not determined by household size, there is no need to have a child in the home.
Groceries are likely a clients’ biggest variable expense, give one suggestion to cut this expense. Meal plan, buy generic products, use coupons and buy items on sale
Often clients are drawn to fly-by-night companies that promise services that seem too good to be true, we will encourage them to avoid these types of companies, give an example of one of these services. Consolidation loans, tax refund anticipation loans, pawn shops, car title loans, or pay day loans
Your client needs your assistance in setting up a workable debt repayment plan; together you prioritize their debt and determine who should get paid first, and create a plan to pay off a specific amount of debt each year. How do we determine how much money our client can comfortably put towards their debt monthly? by revising their budget
There are many things to consider when communicating or encouraging our clients to communicate with creditors, list two. - Keep lines of communication open - Negotiate with secured and high priority creditors first - Try to lower rent payments if possible - Ask creditor to re-age account - Consider debt settlement - Ask credit card companies to reduce interest rate - Ask charge cards like American Express for a monthly repayment plan - Keep a negotiation log
Potential creditors will look at a consumers’ credit report, score and application to determine credit worthiness. They look for the 3 C’s of credit, what are they? capacity, collateral and character
What are the three credit reporting agencies? Transunion, Experian, Equifax
Give an example of someone who cannot access your credit report. Ex-wife, teacher
Give an example of someone who can legally access your credit report. Creditors, employers, government agencies, insurance agencies and landlords
Where can you access a free credit report once a year? www.annualcreditreport.com
Who is responsible for the accuracy of a consumers’ credit report? the consumer
When dealing with bad debt, there are several options, one of which is to pay off worst accounts first. Put the following bad debts in order, worst first. Charge offs – Delinquent accounts – Bankruptcy – Judgments Bankruptcy – Judgments – Charge offs – Delinquent accounts
What are the two biggest factors used to determine the FICO credit score? Payment history and Ratio of Debt to Available Credit
Explain what Ratio of Debt to Available Credit means and what the recommended rate is. This is the amount of debt a consumer is carrying in relationship to their available credit. A consumer should never carry a balance on a credit card that is more than one third the available credit – as it would have a negative effect on their credit score.
What is considered an excellent credit score? anything above 760 – above 700 is great
Give some suggestions to rebuild credit. open bank accounts, open credit card, get a loan - Pay bills on time!
There are four types of identity theft, although most people think of someone stealing our credit card number and going shopping. List the 4 types and give an example of each. - Medical, to obtain procedures or prescriptions - Social Security, to receive public benefits or work under someone’s name - Driver’s License, to buy alcohol or drive across state lines - Criminal, to commit a crime, or giving someone else’s info to pin the crime on them
Clients should treat their personal information like they would treat cash, and should make a mental note when they have given out this information. Name two pieces of personal identification that should be protected. Full name, Social Security number, date of birth and driver’s license number
One of your clients comes to you; she recently found out that she has been a victim of identity theft. She called the police and filed a report and contacted the creditors in question and closed those accounts, what other steps should she take? Contact all 3 credit bureaus to set up a fraud alert and to place a security freeze, change all her account numbers and passwords, and file a report with the FTC.
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