Deck 6: Cash Management, Savings, Credit, and Debt Planning

Question 1

Sarah and John Doane, who have two children, earn in excess of $300,000 per year. And yet, they have hard time making both ends meet. As their financial planner, how would you help them solve this continuing problem?

Answer 1

A systematic savings plan is the name of the game. The starting point is goal setting, followed by several steps like expense reduction, increase in income, interest bearing investment, and enhanced investment return.

Question 2

Is there a systematic way of calculating the debt limit of a family?

Answer 2

Yes. Table 6.11can be used to calculate the debt limit.

Question 3

What are the common sense types of strategies that help people increase their savings?

Answer 3

There are several common sense types of strategies that help people save money. These are explained next.
1. Goal Setting
Unrealistic goal setting is perhaps the most important reason for the failure of savings strategies. Imposition of a 20 percent a year savings goal on a family that is experiencing difficulty in making both ends meet is bound to fail. The best rule is to set a savings goal which the family does not consider burdensome.
2. Self-rewarding Plan
Saving for college education, retirement, vacation, or purchasing a big ticket item is a long and difficult undertaking. Consequently, if the family exceeds the targeted annual savings goal, it should reward itself by spending part of the extra savings. This will provide an added incentive for the family to meet the savings goal in the future.
3. Savings-first Approach
We live in a consumption-oriented society where it is easy to buy on credit. Few of us realize that our savings rate would dramatically increase if we avoid buying items on credit. The reason is that we would not only save the interest charges, but also could benefit from investing these savings.
4. Automatic Savings Plans
One of the painless ways of saving is to automatically deduct money right from the paycheck and invest it in an appropriate vehicle. Money saved this way has the tendency to grow to impressively large amounts over time.
Several vehicles are available for implementing automatic savings plans. One of these vehicles is Series EE savings bonds. If these bonds are held for five years or longer, the return is based on the average yield of five-year Treasury notes. The yield cannot dip below a minimum rate - which is adjusted from time to time.
Contributions to company-qualified plans are the second method of instituting an automatic savings plan. A qualified plan can take the form of a pension, profit sharing, thrift, or 401(k) plan. Many plans allow participants to choose among various investments, including stock and fixed-income funds, company shares, and guaranteed investment contracts. Earnings in qualified investments grow tax-deferred until the money is withdrawn.
A third technique for instituting an automatic savings plan is to instruct the bank to automatically switch every month a fixed amount from the money market fund into specified mutual funds and benefit from using dollar cost averaging. This will not only make the net worth grow faster but will also help the saver achieve more effectively the longer-term financial goals like educational funding and retirement.

Question 4

Explain in detail the essential features of cash management planning.

Question 5

What are the major factors influencing the credit history of an individual?

Question 6

What are the major sources of consumer credit existing in the marketplace? Which is the best source of credit?

Question 7

Explain the strategy of using goal setting as part of systematic savings planning.

Question 8

Discuss the six major criteria of determining where money should be saved.

Question 9

If available savings fall short of the amount required to meet the desired goals, what drastic steps can be taken to correct the situation?

Question 10

Is there a way to determine how much debt one can afford?

Question 11

David Israeli wants to buy a new car. He can get the loan from the auto dealer, his credit union, or a savings and loan association. Alternately, he can buy the car with cash. What should he do?

Question 12

What are some of the options open to families with inadequate savings?

Question 13

David Lent informs you that his financial situation is sound. And yet, his cash flow statement shows a significant deficit. How do you handle this discrepancy?

Question 14

Explain the net worth planning strategy.

Question 15

What are the tax rules regarding the deductibility of interest cost?

Question 16

Write an essay on the various categories of credit that exist today and the principal ways in which costs are calculated and expressed.

Question 17

Samuel Brock, an extremely conservative person, who earns $65,000 a year, wants to keep emergency funds in excess of $75,000. He understands that this is wasteful but is afraid of not being able to meet an emergency situation. What is your advice?

Question 18

Judy Clark was refused a Visa Card by AAA because of poor credit rating. Shocked by this revelation, Judy has asked you to help. How would you advise her?

Question 19

Discuss some of the proven methods of avoiding bankruptcy.

Question 20

Elaborate on the following statement: "In our credit-conscious society it is extremely important to protect your credit history."

Question 21

Question 7. Which of the following lending sources provide the best interest rates on loans?

A) Commercial banks
B) Credit unions
C) Savings and loans
D) Life insurance companies
E) No one source is better than another because in today's society the best lending source depends on the particular family's situation

Question 22

Question 12. Which of the following methods of determining interest are most beneficial to consumers?

A) FIFO
B) LIFO
C) Daily average balance
D) Low quarterly balance
E) Maximum balance

Question 23

Question 10. Which of the following types of sales credit does not offer the potential of no-finance charge?

A) Thirty-day, or regular charge accounts
B) Revolving and optimal charge accounts
C) Installment purchases or time payment plans
D) All of the above offer potential of no finance charge
E) None of the above offer potential of no finance charge

Question 24

Question 3. Which of the following types of investments are not insured by FDIC?

A) Passbook savings
B) Certificates of deposit
C) Checking accounts
D) Money market mutual funds
E) None of the above are insured

Question 25

Question 11. If the number of payments and loan duration are the same, which type of interest calculation method would have an effective interest rate higher than the nominal rate?

A) Add-on
B) Simple interest
C) Bank discount
D) Compound interest
E) Both A and C

Question 26

Question 2. Which of the following is not a major factor in determining where money should be put to work?

A) Safety
B) Liquidity
C) Return on savings
D) Simplicity/minimum balance requirements
E) All are relevant factors

Question 27

Question 9. Which of the following are categories of credit?

A) Sales credit
B) Single cost credit
C) Add-on credit
D) Cash credit
E) Both A and D

Question 28

Which of the following formulas is used for calculating the equivalent fully taxable yield?

A)
$\frac { \text { Taxable Yield } } { 1 -- \text { Marginal Federal Tax Rate } }$
B)
$\frac { \text { Taxable Yield } } { 1 + \text { Marginal Federal Tax Rate } }$
C)
$\frac { \text { Tax Exempt Yield } } { 1 + \text { Marginal Federal Tax Rate } }$
D)
$\frac{\text {Tax Exempt Yield }}{\text {1 - Marginal Federal Tax Rate }}$

Question 29

Question 14. Choose the best answer regarding consumer debt.

A) It should be avoided at all costs
B) If prudently used, it allows families to raise their standard of living and increase their productive capacities
C) It is taboo
D) Both A and C
E) None of the above

Question 30

The equation to determine the equivalent fully-taxable yield, ignoring state and local taxes, is:

A) Tax exempt yield / 1 - average federal tax rate
B) Tax exempt yield / 1 - marginal federal tax rate
C) Tax exempt yield / 1 + average federal tax rate
D) Tax exempt yield / 1 + marginal federal tax rate
E) None of the above

Question 31

Question 5. By using credit wisely, you minimize the drain on:

A) Securities
B) Liquid assets
C) Living conditions
D) Fixed assets
E) All of the above

Question 32

Question 8. The Fair Credit Reporting Act provides which of the following remedies if the applicant is turned down?

A) The right to inspect the credit report and receive detailed explanations
B) The right to remove all negative comments
C) The right to collect for damages to a person's reputation
D) All of the above
E) None of the above

Question 33

As a rule of thumb, consumer debt as a fixed percentage of monthly income based on experiences of financial planners is:

A) No more than 5% to 10%
B) Between 10% and 15%
C) No more than 5%
D) Between 10% and 20%
E) None of the above

Question 34

Question 6. Which of the following institutions require a person to become a member before an account can be opened?

A) Commercial banks
B) Consumer finance companies
C) Life insurance company
D) Credit union
E) Savings and loan association

Question 35

Question 1. Which of the following is true?

A) Assets plus liabilities = net worth
B) Liabilities minus assets = net worth
C) Assets minus liabilities = net worth
D) Liabilities plus net worth = assets
E) Both C and D