Stays on your credit report for 10 years. ... You can get

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FINANCIAL STATEMENTS AND CASH MANAGEMENT
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• What is the relationship between income and
  investment margin?
• What type of automotive vehicle is the most
  popular among U.S. millionaires?
• FROM DAVE RAMSEY.COM
• Proper financial management is 80 behavior and
  20 knowledge.
• (almost verbatim)
• Our budget always failed. The failures stemmed
  from the fact that we would create a budget and
  then try to live on it every month. That worked
  fine until life smacked us around, throwing the
  budget completely out of whack.
• Now, we create a new budget every single month.
  We spend out paychecks on paper BEFORE we
  actually get them.

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DAVE RAMSEYS SEVEN BABY STEPS TO FINANCIAL
FREEDOM

• 1,000 to start an emergency fund.
• Pay off all debt (excluding home) using the debt
  snowball.
• 3 to 6 months of expenses in savings.
• Invest 15 of household income into Roth IRAs and
  pre-tax retirement plans.
• College funding for children.
• Pay off home early
• Build wealth and give.

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• BUDGETING AND CASH MANAGEMENT
• WHAT IS A BUDGET?
• Many financial planners never use the term
  budget. Instead, they use cash flow
  management.
• An estimate of how much money will be received
  and spent for
• various purposes within a given time frame.
• HOW CAN IT BE USED?
• A budget has little value unless a comparison is
  made of actual
• results with expected results.
• WHEN SHOULD BUDGETS BE USED?
• SHOULD ALL FAMILIES HAVE A BUDGET?
• When there is a need to measure periodic progress
  
• toward a specific goal.
• 2. When income and expenditures are complex.
• When there is a need to communicate a planning
  strategy
• to others.
• When there is a need to provide incentives
  (rewards) for

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GUIDELINES FOR BUDGETS Must be
flexible. Usually covers a calendar year on a
month by month basis. Must be simple, short and
understandable. (Eliminate extraneous
information). Do not strive for absolute
accuracy. Tailor the budget to specific goals
and objectives. Include all sources of
income Divide expenses into fixed and
discretionary. Highly Irregular Cash Flows
Develop more than one budget 1. using lowest
income and highest expenses 2. reasonable
(most probable) expectations of cash flows 3.
highest income and lowest expenses (best case
scenario).
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PERSONAL FINANCIAL STATEMENTS Property not
owned is not shown on financial statements,
e.g. property in trust for someone else.
Joint ownershiponly the proportionate interest
should be shown. Real estate should be
carried at market value less the cost of
selling the property. Joint ownershiponly
the proportionate interest should be shown.
Business valuationis very difficult, especially
if it is a minority interest. Any
material transactions costs to convert to cash
should be shown separately. For example, a
vested pension worth 800,000 should show
the tax to be paid when the money is
taken. Receivables should be shown at a
discounted value. Life insurance cash values
must show outstanding policy loans, if any.
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EMERGENCY FUND
PURPOSE TYPE OF INVESTMENTS AMOUNT
Emergency Fund Ratio Liquid assets / Total
monthly household expenses Often a ratio of at
least 3X is called for. Notice that this ratio
differs somewhat from the typical rule of
thumb of 6 months income.
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THE THREE Cs OF CREDIT 1. CAPACITY Abilit
y to repay the debt. 2. CHARACTER Will the
borrow repay the debtwhat is his credit
history? 3. COLLATERAL Is the creditor
protected if the borrower defaults?
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FINANCIAL RATIOS 1. Current Ratio Should be
greater than 1X. 2. The Debt Ratio Total
debt / Total assets Young people may have high
ratios, such as 80, but older people often
have ratios of 50 of less. 3. Debt to
Income Ratio Installment debt (credit cards,
car loans, etc. not counting real estate) / Net
income Generally 10 or less is great. 20 or
more can be a yellow light for a lender. The
lower the better.
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4. Front-end Ratio Monthly housing expense /
gross monthly income The monthly housing
expense is PITI (principal, interest, taxes and
insurance). Homeowners association dues and
mortgage insurance premiums should be added if
applicable. The denominator (gross income) is
income before taxes. The traditional rule of
thumb is that the ratio should not exceed 25,
but some lenders go higher.
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5. Back-end Ratio Total monthly debt
payments / monthly gross income The numerator
includes PITI but also other monthly debt
payments. 35 - 40 is the usual limit. HOW
TO HANDLE DEBT PROBLEMS? 1. Realistic
budgeting 2. Credit counseling from a
reputable organization 3. Debt
consolidation Usually points are charged.
Interest is deductible. 4. Bankruptcy 5.
(Divorce?)
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BANKRUPTCY Stays on your credit report for 10
years. It usually does not erase child support,
alimony, fines, taxes, and some student loans.
Some assets might be exempt from bankruptcy,
e.g., home, cars, working tools, etc. Chapter 7
(straight bankruptcy) liquidates all assets that
are not exempt. Chapter 13 allows the filer to
keep most property if they establish a
court-approved repayment plan of 3-5 years.
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THE NEW BANKRUPTCY LAW (Became effective October,
2005). CHAPTER 7 1. MEANS TEST Clients
no longer have easy access to Chapter 7
protection. They have to pass a complete
means test to qualify for Chapter 7.
Those that fail may consider Chapter
13. 2. HOMESTEAD EXEMPTION Regardless of
the amount of the state exemption, homestead
exemptions are now capped at 125,000 if the
client has resided in the home less than 3 years
and four months. 3. TIME BETWEEN
FILINGS Cannot file for another 8 years
(increased from 6 years)
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CHAPTER 13 1. LONGER REPAYMENT PLANS Now
up to 5 years 2. TIME BETWEEN FILINGS A
client cannot file another Chapter 13 within 4
years of a Chapter 7 or two years of a prior
Chapter 13. OTHER PROVISIONS 1. MANDATORY
CREDIT COUNSELING Filers must complete both
credit counseling and financial management
education from a nonprofit agency approved by
the US Trustee program 2. NEW
PROTECTIONS The new law protects IRA and 529
plans. 3. MORE NONDISCHARGEABLE
DEBTS Now includes student loans from
nongovernmental and profit making organizations,
certain purchases of luxury items, and certain
recent loans.
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CREDIT RATINGS CREDIT RATING AGENCIES The main
agencies are Experian, TransUnion, and Equifax.
They all use the same formula developed by
Fair, Isaac, Inc. The formula is proprietary and
confidential. Different scores are produced by
different agency because they dont all use the
same data. Lenders rely heavily on these
scores.
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WHAT DETERMINES THE CREDIT SCORE 35
Payment history. (Pays on time, adverse records,
etc.) 30 Amount owed (percentage of
available credit) 15 Credit history
(age of the accountsthe older the better)
10 The type of credit on record. 10
Number of recently opened accounts. Missing
even a single payment could cost 100 points.
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TIME LIMITS ON REPORTING Bankruptcy information
is reported for 10 years. Information about
criminal convictions has no time limit. Credit
information for more than 150,000 of credit or
life insurance has no time limit. Defaults on
student loans is reported for 7 years. Unpaid
judgments and lawsuits can be reported for 7
years of until the statute of limitations runs
out, whichever is longer. (Some travel,
entertainment, gas, local retailers, and credit
unions do not report to any credit rating
agency).
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AVERAGE CREDIT SCORES Ages US NC SC 18-29 637
630 623 30-39 654 645 638 40-49 675 666 657 50
-59 697 691 683 60-69 722 719 711 70 747 743 7
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What is a good score? It varies by lender.
Some say 700, some 750, some 680. Generally
anything over 700 is a good score. The average
in the South Atlantic states, Florida to PA, is
675.
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150,000 30 year fixed loan on 8/30/05 Your
Credit Your Interest Your Monthly Score
Rate Payment 750 850
5.44 846 700 750 5.66 867
680 699 5.84 884 660 679
6.05 904 640 659 6.48 946
620 639 7.03
1,001 Daily updates are available
at myfico.com/FICOCreditScoreEstimator/AboutScor
es.aspx 1,001 - 846 155 per month or 1,860
per year. The present value of 1,860 per year
for 30 years at 6 is about 25,600 or OR, on a
monthly basis, 155 is PMT, 360 N, 6 I/Y (when P/Y
is set at 12), the present value is 25,852.
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FACTORS THAT GO INTO BORROWING ABILITY Late
payment history Late payments, collections, and
bankruptcies hurt the most. Every payment that
is 30 days overdue is shown. Delinquencies
remain for 7 years. Some bankruptcies remain
for 10 years. Unpaid tax liens remain for 15
years. Inquiries remain for 2 years. The
number of open accounts. Closing accounts
can never help your credit score, and may hurt
it. Too many open accounts can hurt your
score, but once you have opened the accounts,
your have done the damage. The age of the
accounts. Generally, the older the accounts,
the better the score. This means paying off
old accounts might be a negative because it can
make your credit history look younger than it
actually is.
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Debt / limit ratios Debt should be kept at less
than 50 of the limit. Number of
inquires Applying for new credit is generally
what hurts your score. Too many inquiries may
signify to lenders that you are extending
yourself too much. Soft inquiries do not hurt
your credit. These are personal inquires from
yourself and inquiries made by lenders when they
send you an offer of credit. Factors other than
your Credit Score Lenders sometimes consider
other factors such as income, assets, etc. Note
that these things are not included in a credit
score.
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FACTORS THAT DO NOT GO INTO YOUR CREDIT SCORE
Marital status Age Receipt of public
assistance Salary Occupation Employment
history Rental agreements Participation in a
credit counseling program
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DEVELOPING AND MAINTAINING GOOD CREDIT What can
you do to quickly improve your credit
score? Nothing. Credit repair Incorrect facts
in a report can be disputed, but the retailer is
very much in control. Pay bills on time Keep
balances low. Pay off debt rather than moving it
around. Inquire at least once each year You can
get 1 free credit report each year, but this does
not include a credit score. Apply for and open
new accounts only as needed.
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What is the difference between a credit score
and an insurance score?
IDENTITY THEFT You may need to 1. Contact
one of the credit agencies. 2. View credit
reports 3. Write a victim statement
4. Contact creditors of tampered accounts 5.
Contact law enforcement 6. Contact FTC
7. Change all account passwords 8. Notify the
Office of the Inspector General if your
social security number has been fraudulently
used 9. Change your drivers license number
10. Contact utility companies
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IDENTITY THEFT INSURANCE Coverage typically
costs from 20 to 100 a year, as a rider to a
basic homeowners policy or as a stand-alone
purchase. What does it cover? Insurance cannot
protect you from becoming a victim of identity
theft and does not cover direct monetary losses
incurred as a result of identity theft. It
simply covers some of the expenses you will
incur to deal with the problem, such as the
costs of making phone calls and copies, mailing
documents and possibly legal bills.Some policies
wont cover legal fees or lost wages due to time
away from work. Deductible? They generally
range from 100 to 250, but some are as high as
1,000. And the average victim spends less than
1,500 to recover from ID Theft, according to
the FTC.
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Alternatives to Insurance? You may be able to
get ID theft protection for free. American
Express, for example, makes its identity theft
assistance available to all cardholders for
free. It gives you round-the-clock telephone
access to company representatives who will help
you determine if your identity has been stolen,
navigate the recovery process, and protect
yourself in the future.