Chapter 1 - Introduction to Financial Planning

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Chapter 1 - Introduction to Financial Planning Learning Objectives...2 Introduction...2 Personal Financial Planning...2 The Process...3 Contents of the Financial Plan.

1 Chapter 1 - Introduction to Financial Planning Learning Objectives...2 Introduction...2 Personal Financial Planning...2 The Process...3 Contents of the Financial Plan...4 Establish and Define the Client Relationship...5 Gather Client Data...10 Financial Planning Profession...16 The Benefits from Financial Planning...16 Why Use a Professional Financial Planner...17 The Practice of Financial Planning...17 Recognized Certifications in Financial Planning...18 Employment and Job Outlook...18 Key Terms...21 Discussion Questions...22 Multiple-Choice Problems...23 Quick Quiz Explanation...26 Chapter 2 - Interpersonal Communication & Behavioral Finance Learning Objectives...28 Introduction...29 Communication with Clients from a Counseling Perspective: Counseling Theories and Schools of Thought...29 The Developmental School of Thought...30 The Humanistic School of Thought...31 The Cognitive-Behavioral School of Thought...31 XIII

2 Communication Tools and Techniques for Financial Counselors...34 Elements of Communication Nonverbal Behavior or Body Language Active Listening Versus Passive Listening Using Open and Closed Questions Clarifying or Restating a Client s Statement Client Data Collection Concepts and Theories Behind Behavioral Finance...44 Introduction to Behavioral Finance Assumptions and Building Blocks of Traditional Finance Behavioral Finance What Makes Investors Normal Instead of Rational: Cognitive Biases, Errors and Being Human...51 Conclusion About Behavioral Finance Key Terms...62 Discussion Questions...64 Multiple-Choice Problems...65 Quick Quiz Explanations...69 Chapter 3 - Financial Planning Approaches: Analysis & Recommendations Learning Objectives...72 Introduction...72 Reasonable Assumptions...73 The Analysis...73 The Approaches to Financial Planning Analysis and Recommendations...74 The Life Cycle Approach...78 The Pie Chart Approach...80 Income Statement Pie Chart Balance Sheet Pie Chart Summary Regarding the Life Cycle and Pie Chart Approaches The Financial Statement and Ratio Analysis Approach...86 Liquidity Ratios Debt Ratios...88 Ratios for Financial Security Goals Performance Ratios Guide for Calculating Financial Ratios Hess Case Example of Applying the Pie Chart, Financial Statement, and Ratio Analysis Approach Financial Statements: Statement of Income and Expenses Pie Chart Analysis for Hess Case Financial Ratios for Hess Case XIV

3 The Two-Step / Three-Panel / Metrics Approach Two-Step Approach Three-Panel Approach Metrics Approach Risk Tolerance and Asset Allocation The Present Value of Goals Approach Presentation of the Present Value of all Goals Approach The Cash Flow Approach Risk Management Debt Management Savings and Investing Management The Strategic Approach Mission Statement (An Enduring Long-Term Statement) Goals (Broadly Conceived Goals) Objectives (Narrow Measurable Objectives) Investment Analysis Key Terms Discussion Questions Multiple-Choice Problems Quick Quiz Explanations Chapter 4 - Personal Financial Statements: Preparation and Analysis Learning Objectives Introduction Balance Sheet (Statement of Financial Position) Cash and Cash Equivalents Investment Assets Personal Use Assets Liabilities Valuing Assets and Liabilities Net Worth Sources of Information Account Ownership Footnotes to the Financial Statements Statement of Income and Expenses Income Savings Contributions Expenses Net Discretionary Cash Flows Sources of Information Projected Income Statements XV

4 Statement of Net Worth Cash Flow Statement Forecasting Importance of Budgeting Financial Statement Analysis Comparative Financial Statement Tools Ratio Analysis Financial Statement Analysis - The Bowdens Brandon and Jill Bowden Categories of Financial Ratios Liquidity Ratios Emergency Fund Ratio Current Ratio Debt Ratios Ratios for Financial Security Goals Performance Ratios Limitations of Financial Statement Analysis Key Terms Discussion Questions Multiple-Choice Problems Quick Quiz Explanations Chapter 5 - Risk Management for the Individual Client Learning Objectives Introduction The Personal Risk Management Process Causes of and Contributors to Losses Perils Hazards Insurable Losses Requisites for an Insurable Risk Insurance as a Legal Contract Elements of a Valid Contract Insurance on the Person Life Insurance Types of Life Insurance Health Insurance Long-Term Disability Long-Term Care Insurance Homeowners and Renters Insurance XVI

5 Automobile Insurance Exclusions Rates Personal Liability Insurance Conclusion Key Terms Discussion Questions Multiple-Choice Problems Quick Quiz Explanations Chapter 6 - John & Mary Burke Case and Case Analysis Learning Objectives John and Mary Burke Case Mike Mitchell s Preliminary Conclusions Regarding the Burkes Engagement Letter Personal Background and Information Collected The Family External Information Economic Information Bank Lending Rates Expected Investment Returns Internal Information Insurance Information Investment Information Financial Statements Income Tax Information Retirement Information Gifts, Estates, Trusts, and Will Information Information Regarding Assets and Liabilities Automobile Financial Goals Case Analysis Mike Mitchell s Preliminary Conclusions Regarding the Burkes Applying Financial Planning Approaches Pie Chart Approach Introduction Data for Pie Chart Approach - Balance Sheet Data for Pie Chart Approach - Income Statement Financial Statement Analysis - Ratio Analysis Approach Burkes Ratio Analysis XVII

6 The Two-Step / Three-Panel / Metrics Approach Introduction Home Purchase Analysis - Schedule A Savings Schedule - Schedule B Payment Schedule - Schedule C Auto Interest - Schedule D Comments on Three-Panel / Metrics Approach Analysis Risk Tolerance and Asset Allocation The Present Value of all Goals Approach The Summarization of the Present Value of Goals The Cash Flow Approach Burke Cash Flow Approach with Recommendations Assets Sold to Pay Off Credit Cards - Schedule A Strategic Approach Introduction Mission Statement (An Enduring Long-Term Statement) Goals Objectives Presentation to John and Mary Burke Comments on Strategic Approach Projected Financial Statements and Ratios Schedule A - Analysis of John s 401(k) Plan Schedule B - Analysis of Mary s 401(k) Plan Schedule C - Combined Savings Rate After Recommendations Schedule D - Income Tax Analysis Projected Statement of Financial Position Schedule E - Reconciliation of Year-End Net Worth Projected Statement of Income and Expenses Summary Projected Selected Ratios Schedule F - Projected Ratios Closing Engagement Letter Chapter 7 - Time Value of Money Learning Objectives Introduction Approach for Solving Time Value of Money Calculations Step One: Start with a Timeline Step Two: Write Down the TVM Variables Step Three: Clear all Registers in the Financial Calculator Step Four: Populate the TVM Variables in the Calculator XVIII

7 Time Value of Money Concepts Present Value of $ Future Value of $ Periods of Compounding Other than Annual Annuities Present Value of an Ordinary Annuity of $1 (Even Cash Flows) Present Value of an Annuity Due of $1 (Even Cash Flows) Future Value of an Ordinary Annuity of $1 (Even Cash Flows) Future Value of an Annuity Due of $1 (Even Cash Flows) Future Value of an Ordinary Annuity vs Annuity Due Comparison Ordinary Annuity Payments from a Lump-Sum Deposit Annuity Due Payments from a Lump-Sum Deposit Solving for Term (N) Solving for Interest Rate (i) Uneven Cash Flows Net Present Value Internal Rate of Return (IRR) Inflation Adjusted Rate of Return Serial Payments Debt Repayments Amortization Schedule Other Practical Applications Cash Rebate or Zero Percent Financing Payment of Points on a Mortgage Lottery Winnings - Lump Sum or Annuity Conclusion Key Terms Discussion Questions Multiple-Choice Problems Exercises Quick Quiz Explanations Chapter 8 - Education and Education Funding Learning Objectives Introduction Current Education Costs Other Costs Besides Tuition Future Tuition Costs Financial Aid Financial Aid Process Regular Formula: Income and Assets Simplified Method Automatically Assessed Formula XIX

8 Types of Financial Aid Grants Financial Aid - Loans Consequences of Defaulting on Student Loans Financial Aid - Federal Work Study Tax Deferred Savings, Deductions, Credits or Other Education Planning Benefits Qualified Tuition Plans Coverdell Education Savings Account U.S. Government Savings Bonds Tax Implications Tax Deductions for Education Expenses Student Loan Interest Deduction Loan Forgiveness Tax Credits for Education Related Expenses The American Opportunity Tax Credit (Formerly the Hope Scholarship Credit) Lifetime Learning Credit Other Education Sources of Funding Scholarships and Fellowships Expenses That Do Not Qualify Payment for Services Scholarship Prizes IRA Distributions Uniform Gift to Minors Act (UGMA) & Uniform Transfer to Minors Act (UTMA) Custodial Accounts 371 Employer Provided Education Assistance Education Funding Uneven Cash Flow Method Traditional Method Summary of Savings Options Account Balance Method Comparison of the Account Balance Method to the Traditional Method Hybrid Approach Conclusion Key Terms Discussion Questions Multiple-Choice Problems Quick Quiz Explanations Chapter 9 - Investments Learning Objectives Introduction XX

9 Investment Planning Risk Tolerance (Ability to Handle Risk) Risk Tolerance Questionnaire (Willingness to Take on Risk) The Investment Planning Process Investment Policy Statement Measuring Investment Returns The Holding Period Return (HPR) The Arithmetic (Average) Return (AR) The Geometric Return (GR) The Weighted Average (Expected) Return (WAR) The Internal Rate of Return (IRR) Dollar-Weighted and Time-Weighted Returns Types of Investment Risks and Measuring Investment Risks Types of Investment Risks Measuring Investment Risks Risk Adjusted Return Measures Modern Portfolio Theory Results of the Efficient Frontier Capital Market Line Portfolio Statistics Investment Alternatives Equity Debt Real Estate Derivatives Investment Companies Unit Investment Trusts Exchange Traded Funds Open-End Investment Companies Closed-End Investment Companies Types of Mutual Funds Performance Measures Jensen s Alpha Sharpe Ratio Treynor Ratio Information Ratio (IR) Asset Allocation Investment Analysis for an Individual Client Key Terms Discussion Questions Multiple-Choice Problems Quick Quiz Explanations XXI

10 Chapter 10 - David & Amy Rudolph Case and Case Analysis Part 1 Learning Objectives David & Amy Rudolph Case - Internal Data The Family Personal and Financial Objectives Summary of Initial Data Collected - Life Cycle Approach Preliminary Conclusions Regarding the Rudolphs (Life Cycle Approach) Rudolph Case File - Additional Data External Information Additional Internal Information Insurance Information Investment Information Income Tax Information Retirement Information Estate Information Other Information Regarding Assets and Liabilities Pie Chart Approach Introduction Data for Pie Chart Approach - Income Statement Data for Pie Chart Approach - Balance Sheet Financial Statement Analysis - Ratio Analysis Approach Introduction The Two-Step/Three-Panel/Metrics Approach Introduction Risk Management Data - Schedule A Short-Term Savings and Investments - Schedule B Long-Term Savings and Investments - Schedule C The Cash Flow Approach Cash Flow Approach with Recommendations - Schedule D Debt Management - Schedule E Strategic Approach Mission Statement Goals Personal and Financial Objectives of the Rudolphs Personal and Financial Objectives Recommended by the Financial Planner Presentation to David and Amy Rudolph - Financial Statements and Ratios Post Recommendations New Emergency Fund Ratio New Savings Rate (EE = employee, ER = employer) Housing Ratios Investment Analysis Investment Portfolio Analysis Change in Net Worth - Reconciliation XXII

11 Retirement Goal Education Goal Summary Strengths Weaknesses Recommendations - Implemented Unmet Goals Chapter 11 - Retirement Planning: Accumulations and Distributions Learning Objectives Factors Affecting Retirement Planning Remaining Work Life Expectancy (RWLE) Retirement Life Expectancy (RLE) The WLE and the RLE Relationship Savings and Investment Issues The Savings Amount Savings Rate Timing of Savings Investment Considerations Inflation Retirement Needs Analysis Planning for Retirement - Pretax or After-Tax Wage Replacement Ratio (WRR) Calculating the Wage Replacement Ratio Sources of Retirement Income Social Security Private Pension and Company-Sponsored Retirement Plans Personal Assets and Savings Qualitative Factors in Retirement Advising Clients Summary of Factors Affecting Retirement Planning Risks to Financial Independence Retirement Funding (Capital Needs Analysis) Accurate Assumptions Basic Planning Capital Needs Analysis / Annuity Method Advanced Financial Planning Capital Preservation Model Advanced Planning Purchasing Power Preservation Model Range Estimates, Sensitivity Analysis, Simulations, and Monte Carlo Analysis Alternatives to Compensate for Projected Cash-Flow Shortfalls Implications of Capital Needs Analysis XXIII

12 Managing Retirement Distributions Percent of Capital Balance Approach Money-for-Life Approach Key Terms Discussion Questions Multiple Choice Problems Quick Quiz Explanations Chapter 12 - Income Tax Planning Learning Objectives Income Taxes and the IRS The Three Tax Systems Three Types of Income Three Types of Tax Accounting Three Key Tax Principles Sources of Tax Law Interest and Penalties for Noncompliance Preparer Penalties Tax Formula for Individual Taxpayers Income Gross Income Exclusions Deductions Deductions for AGI (Above-the-Line) Itemized Deductions (Below-the-Line) Which Type of Deduction is Better Above or Below-the-Line Deductions? Adjusted Gross Income (AGI) Standard Deduction Calculation of the Standard Deduction for a Dependent Personal and Dependency Exemptions Tax on Taxable Income Filing Status Credit for Taxes Withheld Tax Credits Tax Credits vs. Tax Deductions Tax Credit Requirements Introduction to Basis Uses of Basis Determining Basis Adjustments to Basis Realization and Recognition XXIV

13 Capital Gain Holding Periods and Tax Rates Holding Periods Capital Gains Tax Rates Sale of Personal Residence (Section 121) Key Terms Discussion Questions Multiple-Choice Problems Quick Quiz Explanations Chapter 13 - Business Entity Selection and Taxation Learning Objectives Introduction Ease and Cost of Formation Complexity of Management and Governance Transferability and Dissolution Liability Protection for Owners Personal Assets Reporting Requirements and Taxation Sole Proprietorships Formation Interest, Disposal of Interest, and Dissolution Capital Liability Management/Operations Income Taxation and Payroll (Social Security) Taxes General Partnerships Formation Interest, Disposal of Interest, and Dissolution Capital Liability Management/Operations Income Taxation and Payroll (Social Security) Taxation Limited Partnerships (LP) Formation Interest, Disposal of Interest, and Dissolution Capital Liability Management/Operations Income Taxation and Payroll (Social Security) Taxes XXV

14 Limited Liability Partnerships (LLP) Formation Interest, Disposal of Interest, and Dissolution Capital Liability Management/Operations Income Taxation and Payroll (Social Security) Taxes Family Limited Partnerships (FLP) Formation Interest, Disposal of Interest, and Dissolution Capital Liability Taxation Limited Liability Companies (LLC) Formation Interest, Disposal of Interest, and Dissolution Capital Liability Management/Operations Income Taxation and Payroll (Social Security) Taxes C Corporations Formation Interest, Disposal of Interest, and Dissolution Capital Liability Management/Operations Income Taxation and Payroll (Social Security) Taxes S Corporations Interest, Disposal of Interest, and Dissolution Capital Liability Management/Operations Income Taxation and Payroll (Social Security) Taxes Comparison of S Corporations and LLCs Protecting Owners from Each Other Protecting Minority Shareholders/Members Elements of Shareholder/Partnership Agreements Issues Regarding Additional Capital Required Key Terms Discussion Questions Multiple Choice Problems Quick Quiz Explanations XXVI

15 Chapter 14 - Estate Planning Learning Objectives Introduction Estate Planning Defined Goals, Objectives, and Risks of Estate Planning The Estate Planning Process The Six Basic Steps Establish the Client/Planner Relationship Collecting Client Information and Defining Transfer Objectives Basic Documents Included in an Estate Plan Wills Side Instruction Letter Powers of Attorney and Powers of Appointment Directives Regarding Health Care Types of Property Interest Ownership and Transfer of Property Sole Ownership - Fee Simple Tenancy in Common (TIC) Joint Tenancy with Right of Survivorship (JTWROS) Tenancy by the Entirety (TE) Community Property and Separate Property in Community Regimes The Probate Process Defined Testate vs. Intestate Succession Advantages of Probate Disadvantages of the Probate Process Property Passing Through Probate Property Passing Outside of the Probate Process Trust Property Parties Why Use a Trust? Federal Estate and Gift Taxes The Gift Tax System Historical Background and Purpose Introduction to Gifts Characteristics of a Gift Valuation of a Gift Exclusions and Exemptions Estate Tax Estate Planning Limits Update for Estate, Gifts, and GST Tax Key Terms XXVII

16 Discussion Questions Multiple-Choice Problems Quick Quiz Explanations Chapter 15 - Economics and the External Environment Learning Objectives Introduction Macroeconomics Economic Output Inflation Interest Rates Unemployment Business Cycle Economic Indicators Monetary Policy Fiscal Policy Microeconomics Demand Supply Opportunity Costs and Diminishing Returns The External Legal Environment Consumer Protection Other Consumer Protection Laws and Agencies Investor Protection Dodd-Frank Wall Street Reform and Consumer Protection Act Worker Protection Conclusion Key Terms Discussion Questions Multiple-Choice Problems Quick Quiz Explanations XXVIII

17 Chapter 16 - Ethics & Standards of Professional Conduct Learning Objectives Introduction Code of Ethics and Professional Responsibility Principle 1 Integrity Principle 2 Objectivity Principle 3 Competence Principle 4 Fairness Principle 5 Confidentiality Principle 6 Professionalism Principle 7 Diligence Rules of Conduct Financial Planning Fiduciary Requirement Summary of Rules of Conduct Summary of Disclosure Obligations Financial Planning Practice Standards Description of Practice Standards Summary as to Practice Standards Compensation Definitions Disciplinary Rules and Procedures Investigation Hearing Process and Forms of Discipline Fitness Standards for Candidates and Professionals Eligible for Reinstatement (PER) Recent Amendments Including Addition of Professionals Eligible for Reinstatement to Fitness Standards.797 Differing Levels of Unacceptable Conduct Petitions for Reconsideration Anonymous Case Histories 799 Anonymous Case History # Anonymous Case History # Anonymous Case History # Anonymous Case History # Anonymous Case History # Anonymous Case History # Anonymous Case History # Summary Key Terms Discussion Questions Multiple-Choice Problems Quick Quiz Explanations XXIX

18 Chapter 17 - Planning for Special Circumstances Learning Objectives Introduction Planning for Special Needs dependent Typical Federal, State, and Other Benefits Non-Profit Organizations What Should a Caretaker Do Special Needs Trusts Letter of Intent Planning for Divorce Financial Planning Recommendations for Divorcing Couples Common Mistakes in Divorce Planning for Terminal Illness Financial Planning Recommendations for Terminal Illness Planning Planning for Non-Traditional Households Civil Unions and Registered Partners Property Transfers at Death Planning for Job Loss or Job Change Cash Flows Age as a Factor Health Insurance Financial Planning Advice Planning for a Financial Windfall Financial Planning Recommendations for a Financial Windfall Recipient Key Terms Discussion Questions Multiple-Choice Problems Quick Quiz Explanation Chapter 18 - David & Amy Rudolph Case and Case Analysis Part 2 Learning Objectives Introduction David & Amy Rudolph Case - Internal Data The Family Personal and Financial Objectives (Achieved Within the Last Year) Personal and Financial Objectives (Current) Updated Summary of Initial Data Collected - Life Cycle Approach XXX

19 External Data Economic Information Updated Internal Information Insurance Information Financial Statements Change in Net Worth - Reconciliation Investment Assets Personal Use Assets Other Financial Profile Information Financial Statement Analysis - Ratio Analysis Approach Introduction Liquidity and Debt Ratios - Schedule A Long-Term Savings and Investments - Schedule B Schedule B - Part Schedule B - Part Immediate and Long-Term Objectives and Analysis Personal and Financial Objectives (Current) Objective 1: Education Funding Savings Plan 2 for Trevor Jr Objective 2: Sale of DRI Objective 3: Retirement Capital Needs Analysis Objective 4: Estate Planning Objective 5: Business Entity Change for Amy s Sole Proprietorship Objective 6: Investment Analysis Investment Portfolio Analysis Objective 7: Long-Term Care Insurance Tax Analysis Implementation The Cash Flow Approach Restated Financial Statements Summary Strengths Weaknesses (and Responses) Recommendations - Implemented Unmet Goals Appendix Appendix A: Glossary Appendix B: Index XXXI

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TABLE OF CONTENTS. Simple will with residue pouring over to inter vivos trust

TABLE OF CONTENTS. Simple will with residue pouring over to inter vivos trust TABLE OF CONTENTS Preface Form I Form II Form III Form IIIA Form IV Form V Form VI Form VII Form VIII Form IX Form IXA Form X Form XI Form XII Form XIII Form XIV Form XV Form XVI Form XVII Form XVIII Form