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Advanced Financial Planning

Advanced Financial Planning. Week 2. Learning Objectives. Financial Planning Practice Comprehensive Financial Plan Financial Management Net Worth & evaluation Cash Flow & evaluation Calculate & evaluate Personal Financial Ratios Prioritized Financial Goals & Components.

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Advanced Financial Planning

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  1. Advanced Financial Planning Week 2

  2. Learning Objectives • Financial Planning Practice • Comprehensive Financial Plan • Financial Management • Net Worth & evaluation • Cash Flow & evaluation • Calculate & evaluate Personal Financial Ratios • Prioritized Financial Goals & Components

  3. Report on Disciplinary Action

  4. “Scandals will Prompt Questions from Clients” Implications for Financial Planners?

  5. What to Include in a Comprehensive Financial Plan?

  6. Comprehensive Financial Plan Process • Financial Plan worksheet • What is included in a Comprehensive Financial Plan? • Review key areas and prioritization of components  include most important areas in the plan • Sample Financial Plan

  7. Sample Plan • Provided for “layout” ONLY • Use charts or graphs • Provide explanation on the exhibit • Recommendations to improve • Consider the following S/B Recommendations • Conclusion S/B Action Plan

  8. Writing Financial Planning Recommendations • Begin the paragraph with an underlined summary “lead sentence” • Justify the lead sentence in the rest of the paragraph

  9. Sample Recommendation When Able and Alice begin receiving RRIF income they should split this income. • Spouses over 65 years old are allowed to split their RRIF income. • Since Alice has substantially more funds in her RRSP, splitting their RRIF income will help equalize their incomes and lower taxes.

  10. Personal Financial Ratios • Emergency Fund • Debt Position • Gross Debt Service Ratio • Total Debt Service Ratio • Savings Ratio

  11. 1. Do I have adequate liquidity to meet emergencies? Emergency Fund (number of months) = Liquid assets Annual living expenditures/12 Calculates the number of months living expenses can be covered with liquid assets Liquid assets includes all non-registered short term assets Suggested coverage is 3 to 6 months (covers expenses should client lose their job) High Net Worth clients may have less coverage and use personal credit (such as Line of Credit) to supplement

  12. 2. Do I have the ability to meet my debt obligations? Debt Ratio = Total Liabilities Total Assets • Percentage of assets financed by borrowing. • Usually decreases over time. • Young clients higher percentage, older clients usually have lower percentages. • To evaluate calculate the trend over a number of years

  13. 3. Mortgage Approval: Gross Debt Service Ratio • = housing costs • gross annual income • = mortgage (principal + interest) + taxes + heat • gross annual income • With mortgage lenders, new mortgage approval range is 25 - 35% of gross annual income (lower is better) • CMHC uses 32%

  14. 5. Am I saving as much as I think I am? Savings Ratio = Income Available for Savings & Investment + regular savings Gross Annual Income = Surplus/ Deficit (from Cash Flow) + regular annual savings (RRSP,etc) Gross Annual Income • Portion of gross income that is saved annually. • Recommendation is 10% of gross income

  15. 4a. Total Debt Service Ratio (no rental property) = housing costs + other debt annual payments gross annual income • TDSR should not exceed 40% of gross income • Used to evaluate current debt payment level and approve new loans • For new loans, the TDSR is recalculated including the new loan repayment

  16. Charles & Ann Gupta • Evaluate their Net Worth position • Evaluate their Cash Flow position • Calculate & evaluate their Personal Financial Ratios • Complete Financial Plan worksheet • Prepare 2009 Taxes • Develop recommendations to improve their taxes

  17. 4b. Total Debt Service Ratio with rental property = (housing costs + other debt annual payments) -80% rental income gross annual income • TDSR should not exceed 40% of gross income • Used to evaluate current debt payment level and approve new loans • For new loans, the TDSR is recalculated including the new loan repayment

  18. Next Class 1. Charles & Ann Gupta: • Prioritized Financial Goals & Components • 2009 Taxes & recommendations 2. Tax Planning & Minimization • Personal Income Tax • Tax Minimization Strategies

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