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					     Introduction to
   Financial Planning
   Virtual Class 2 of 3

Business Law, Financial Statements,
Cash Flow Management, and Other
       Financing Strategies




       Introduction to Financial Planning - Session 2 of 3
               Business Law
Five elements of contract law:

   •   O/A=   Offer & Acceptance
   •   C=     Consideration
   •   L=     Legal Object
   •   C=     Competent Parties
   •   L=     Legal Form




               Introduction to Financial Planning - Session 2 of 3
   Duties of Agent & Principal
An agent owes the following duties to a principal:

   • Loyalty
   • Obedience

A principal owes the following duties to an agent:

   • Compensation
   • Indemnity
   • Protection




                 Introduction to Financial Planning - Session 2 of 3
            Fiduciary Liability
• Those who manage property for others, who exercise
  discretionary authority or control over assets, and who
  render comprehensive continuous investment advice.

• Can be held liable for a breach of their fiduciary
  responsibilities.




                Introduction to Financial Planning - Session 2 of 3
                    Fiduciaries
• Generally include trustees of individual trusts, trustees
  of pension and retirement trust funds under ERISA,
  corporate directors and corporate officers.

• Financial Planners are considered fiduciaries when they
  manage their clients' assets.




                Introduction to Financial Planning - Session 2 of 3
       Financial Statements -
            Individuals
• Balance Sheet

• Statement of Cash Flows

• Statement of Changes in Net Worth

Items on personal balance sheet are reported at
Fair Market Value.

Always read the footnotes!




               Introduction to Financial Planning - Session 2 of 3
       Financial Statements -
           Corporations
• Balance Sheet

• Income Statement

• Statement of Cash Flows

• Statement of Changes in Stockholder’s Equity

Items on the balance sheet are reported at
cost or lower of cost / FMV.




               Introduction to Financial Planning - Session 2 of 3
                Balance Sheet
• Also called a statement of financial position.

• Prepared at a point in time. Think of a snapshot at that
  date. Every asset on the balance sheet is a source for
  risk management.

• On the left side, list assets based on their liquidity.
  (For example, a checking account will be listed ahead
  of a home.)




                Introduction to Financial Planning - Session 2 of 3
                Balance Sheet
On the right side of the balance sheet:

•   List all current short-term liabilities as a subtotal.

•   Under short-term liabilities, list all long-term
    liabilities as a subtotal.

•   Under long-term liabilities, list net worth (or
    stockholder’s equity for a corporation).


•   Total liabilities = all short-term + long-term liabilities


                 Introduction to Financial Planning - Session 2 of 3
      Balance Sheet Equation
           Assets = Liabilities + Net Worth

Using algebra, you can obtain:
   • Liabilities = Assets – Net Worth
   • Net Worth = Assets – Liability

If you know your assets and liabilities, the difference
   between them is net worth. This is a “plugged”
   number!



           Q&A


                 Introduction to Financial Planning - Session 2 of 3
      Statement of Cash Flow
• Reports cash inflows and outflows during reporting
  period.

• Assists in reconciling ending cash from prior year
  (same as beginning cash current year) with ending
  cash during reported period.




               Introduction to Financial Planning - Session 2 of 3
     Statement of Cash Flows
• Breaks cash into sources and uses.

• Provides detail on whether cash was obtained from
  operations, investing, or financing activities.

• Did increase in cash for the year result from earnings,
  investments, loans, and/or gifts?




                Introduction to Financial Planning - Session 2 of 3
            Poll Question #1
ABC Corp has the following information:
•   Cash $10,000
•   Accounts Receivable $15,000
•   Building $1,000,000
•   Accumulated Depreciation of $900,000 on the
    building
•   Common stock of $75,000

What are the total assets of the company?




               Introduction to Financial Planning - Session 2 of 3
            Poll Question #1
ABC Corp has the following information:
•   Cash $10,000
•   Accounts Receivable $15,000
•   Building $1,000,000
•   Accumulated Depreciation of $900,000 on the
    building
•   Common stock of $75,000

What are the total assets of the company?

Answer:      Cash $10,000 + A/R $15,000
             + $1,000,000 Bldg
             - $900,000 Accumulated Depreciation =
             $125,000



               Introduction to Financial Planning - Session 2 of 3
            Poll Question #2
Assume that XYZ Company has a $3,000,000 building,
  accumulated depreciation of $900,000, and capital
  stock of $100,000.

Is this company worth more than ABC Company in
   the previous question if there are no other assets
   or liabilities?




               Introduction to Financial Planning - Session 2 of 3
              Poll Question #2
Assume that XYZ Company has a $3,000,000 building,
  accumulated depreciation of $900,000, and capital
  stock of $100,000.

Is this company worth more than ABC Company in
   the previous question if there are no other assets
   or liabilities?

Answer:        Yes.       $3,000,000 Bldg –
                          $900,000 Accumulated Depreciation
                          = $2,100,000.
Is ABC Co. at $125,000 worth more than XYZ Co. at $2,100,000?




                 Introduction to Financial Planning - Session 2 of 3
                  Poll Question #2
Assume that XYZ Company has a $3,000,000 building,
  accumulated depreciation of $900,000, and capital
  stock of $100,000.

Is this company worth more than ABC Company in
   the previous question if there are no other assets
   or liabilities?

Answer:           Yes.         $3,000,000 Bldg –
                               $900,000 Accumulated Depreciation
                               = $2,100,000.
Is ABC Co. at $125,000 worth more than XYZ Co. at $2,100,000?
These are book values. You need FMV to determine which company is worth more.




                      Introduction to Financial Planning - Session 2 of 3
Robert Reilly Example
We will now switch to Microsoft Excel where we
  will review this example.




 Q&A


       Introduction to Financial Planning - Session 2 of 3
Personal Financial Statements
• Focus more on financial statements of an individual or
  couple, not big corporations.

• Many entrepreneurs will have business entities. The
  focus is on these mom-and-pop entities.

• Different issues will deal with money loaned or
  capitalized with owner and entity.




                Introduction to Financial Planning - Session 2 of 3
                Poll Question #3
How much cash is needed to pay off the home
  mortgage as of the December 31, 2009, balance
  sheet date if the monthly payment on this
  mortgage is $2,098.42?
             Liabilities and Net Worth
             Liabilities (Current)
             Current Credit Card Debt                                  $2,000
             Current Portion of Mortgage                               $4,300
                           Total Current Liabilities                   $6,300

             Liabilities (Long Term)
             Mortgage-Primary Residence                              $345,700
                             Total Liabilities Long-Term             $345,700

                          Total Liabilities                          $352,000

(Note: This amount of $25,181 can be found on the statement of cash
   flows. Divide the amount by 12 months.)




                      Introduction to Financial Planning - Session 2 of 3
                Poll Question #3
How much cash is needed to pay off the home
  mortgage as of the December 31, 2009, balance
  sheet date if the monthly payment on this
  mortgage is $2,098.42?
             Liabilities and Net Worth
             Liabilities (Current)
             Current Credit Card Debt                                  $2,000
             Current Portion of Mortgage                               $4,300
                           Total Current Liabilities                   $6,300

             Liabilities (Long Term)
             Mortgage-Primary Residence                              $345,700
                             Total Liabilities Long-Term             $345,700

                          Total Liabilities                          $352,000

(Note: This amount of $25,181 can be found on the statement of cash
   flows. Divide the amount by 12 months.)
Answer:           $4,300 of Current portion of Debt + $345,700 of
                  long-term portion = $350,000



                      Introduction to Financial Planning - Session 2 of 3
             Poll Question #4
What amount of cost basis would be used if Robert
 decides to sell his home?
         Personal-Use Assets

         Primary Residence (3)                                          $625,000
         Auto                                                            $15,000
         Gun Collection                                                  $15,000
         Furniture & Personal Property                                   $35,000

                        Total Use Assets                                $690,000

                        Total Assets                                   $1,540,000
         Notes:
         (1) All assets are stated at fair market value
         (2) Liabilities are stated at principal only
         (3) FMV of land is $125,000. Purchased in 1982 for $65,000.




                   Introduction to Financial Planning - Session 2 of 3
              Poll Question #4
What amount of cost basis would be used if Robert
 decides to sell his home?
          Personal-Use Assets

          Primary Residence (3)                                          $625,000
          Auto                                                            $15,000
          Gun Collection                                                  $15,000
          Furniture & Personal Property                                   $35,000

                         Total Use Assets                                $690,000

                         Total Assets                                   $1,540,000
          Notes:
          (1) All assets are stated at fair market value
          (2) Liabilities are stated at principal only
          (3) FMV of land is $125,000. Purchased in 1982 for $65,000.




Answer:          $65,000 is the cost basis per the footnotes



                    Introduction to Financial Planning - Session 2 of 3
    Let’s See Colgate-Palmolive
        Inc.’s Annual Report
              We will now switch to Microsoft Excel to review a
                balance sheet.



This balance sheet can be found on the web at:
http://www.sec.gov/Archives/edgar/data/21665/000119
   312509041029/d10k.htm#tx45329_24

(this link will be sent to you with the post course documents for further review.)




                        Introduction to Financial Planning - Session 2 of 3
         Establishing Current Ratio
       Current Ratio = Current Assets / Current Liabilities
                                               2008              2007
Total current assets                        3,710.00          3,618.50
Property, plant and equipment, net          3,119.50          3,015.20
Goodwill, net                               2,152.00          2,272.00
Other intangible assets, net                  833.50            844.80
Other assets                                  164.30            361.50

Total Assets                               9,979.30        10,112.00

Total current liabilities                   2,953.30          3,162.70
Long-term debt                              3,585.30          3,221.90
Deferred income taxes                          81.90            264.10
Other liabilities                           1,436.70          1,177.10

Total liabilities                          8,057.20          7,825.80




                            Introduction to Financial Planning - Session 2 of 3
         Establishing Current Ratio
       Current Ratio = Current Assets / Current Liabilities
                                                2008              2007
Total current assets                         3,710.00          3,618.50
Property, plant and equipment, net           3,119.50          3,015.20
Goodwill, net                                2,152.00          2,272.00
Other intangible assets, net                   833.50            844.80
Other assets                                   164.30            361.50

Total Assets                                9,979.30        10,112.00

Total current liabilities                    2,953.30          3,162.70
Long-term debt                               3,585.30          3,221.90
Deferred income taxes                           81.90            264.10
Other liabilities                            1,436.70          1,177.10

Total liabilities                           8,057.20          7,825.80


           Year             Current Assets           Current Liabilities           Current Ratio
          2007               3,618.50




                             Introduction to Financial Planning - Session 2 of 3
         Establishing Current Ratio
       Current Ratio = Current Assets / Current Liabilities
                                                2008              2007
Total current assets                         3,710.00          3,618.50
Property, plant and equipment, net           3,119.50          3,015.20
Goodwill, net                                2,152.00          2,272.00
Other intangible assets, net                   833.50            844.80
Other assets                                   164.30            361.50

Total Assets                                9,979.30        10,112.00

Total current liabilities                    2,953.30          3,162.70
Long-term debt                               3,585.30          3,221.90
Deferred income taxes                           81.90            264.10
Other liabilities                            1,436.70          1,177.10

Total liabilities                           8,057.20          7,825.80


           Year             Current Assets             Current Liabilities         Current Ratio
          2007               3,618.50              /      3,162.70




                             Introduction to Financial Planning - Session 2 of 3
         Establishing Current Ratio
       Current Ratio = Current Assets / Current Liabilities
                                                2008              2007
Total current assets                         3,710.00          3,618.50
Property, plant and equipment, net           3,119.50          3,015.20
Goodwill, net                                2,152.00          2,272.00
Other intangible assets, net                   833.50            844.80
Other assets                                   164.30            361.50

Total Assets                                9,979.30        10,112.00

Total current liabilities                    2,953.30          3,162.70
Long-term debt                               3,585.30          3,221.90
Deferred income taxes                           81.90            264.10
Other liabilities                            1,436.70          1,177.10

Total liabilities                           8,057.20          7,825.80


           Year             Current Assets             Current Liabilities         Current Ratio
          2007               3,618.50              /      3,162.70            =    1.1441




                             Introduction to Financial Planning - Session 2 of 3
         Establishing Current Ratio
       Current Ratio = Current Assets / Current Liabilities
                                                2008              2007
Total current assets                         3,710.00          3,618.50
Property, plant and equipment, net           3,119.50          3,015.20
Goodwill, net                                2,152.00          2,272.00
Other intangible assets, net                   833.50            844.80
Other assets                                   164.30            361.50

Total Assets                                9,979.30        10,112.00

Total current liabilities                    2,953.30          3,162.70
Long-term debt                               3,585.30          3,221.90
Deferred income taxes                           81.90            264.10
Other liabilities                            1,436.70          1,177.10

Total liabilities                           8,057.20          7,825.80


           Year             Current Assets             Current Liabilities         Current Ratio
          2007               3,618.50              /      3,162.70            =    1.1441
          2008


                             Introduction to Financial Planning - Session 2 of 3
         Establishing Current Ratio
       Current Ratio = Current Assets / Current Liabilities
                                                2008              2007
Total current assets                         3,710.00          3,618.50
Property, plant and equipment, net           3,119.50          3,015.20
Goodwill, net                                2,152.00          2,272.00
Other intangible assets, net                   833.50            844.80
Other assets                                   164.30            361.50

Total Assets                                9,979.30        10,112.00

Total current liabilities                    2,953.30          3,162.70
Long-term debt                               3,585.30          3,221.90
Deferred income taxes                           81.90            264.10
Other liabilities                            1,436.70          1,177.10

Total liabilities                           8,057.20          7,825.80


           Year             Current Assets             Current Liabilities         Current Ratio
          2007               3,618.50              /      3,162.70            =    1.1441
          2008               3,710.00              /      2,953.30            =    1.2562


                             Introduction to Financial Planning - Session 2 of 3
         Establishing Current Ratio
       Current Ratio = Current Assets / Current Liabilities
                                                2008              2007




                                                                                      ?
Total current assets                         3,710.00          3,618.50
Property, plant and equipment, net           3,119.50          3,015.20
Goodwill, net                                2,152.00          2,272.00
Other intangible assets, net                   833.50            844.80
Other assets                                   164.30            361.50            Is the ratio
Total Assets                                9,979.30        10,112.00
                                                                                    improving
                                                                                   or declining?
Total current liabilities                    2,953.30          3,162.70
Long-term debt                               3,585.30          3,221.90
Deferred income taxes                           81.90            264.10
Other liabilities                            1,436.70          1,177.10

Total liabilities                           8,057.20          7,825.80


           Year             Current Assets             Current Liabilities         Current Ratio
          2007               3,618.50              /      3,162.70            =    1.1441
          2008               3,710.00              /      2,953.30            =    1.2562


                             Introduction to Financial Planning - Session 2 of 3
         Establishing Current Ratio
       Current Ratio = Current Assets / Current Liabilities
                                                2008              2007
Total current assets                         3,710.00          3,618.50
Property, plant and equipment, net           3,119.50          3,015.20
Goodwill, net                                2,152.00          2,272.00
Other intangible assets, net                   833.50            844.80
Other assets                                   164.30            361.50             The ratio is
Total Assets                                9,979.30        10,112.00               improving!
Total current liabilities                    2,953.30          3,162.70
Long-term debt                               3,585.30          3,221.90
Deferred income taxes                           81.90            264.10
Other liabilities                            1,436.70          1,177.10

Total liabilities                           8,057.20          7,825.80


           Year             Current Assets             Current Liabilities         Current Ratio
          2007               3,618.50              /      3,162.70            =    1.1441
          2008               3,710.00              /      2,953.30            =    1.2562


                             Introduction to Financial Planning - Session 2 of 3
       Pro Forma Statements
• Prepared financial statements where certain amounts
  shown are hypothetical and/or estimated for the period
  in question.

• Forecast expected sales, expenses, profits, and other
  financial data for a future accounting period.




                Introduction to Financial Planning - Session 2 of 3
 Past vs. Pro Forma Financial
          Statements
• Prior return information can often be verified. Better to
  rely on financial statements audited by an accounting
  firm.

• A company-prepared pro forma is based on
  assumptions of aggressive projections to look better to
  potential investors or debtors.

• Past does not ensure the future.

• Analysts will use prior returns to project cash flows,
  income, and ratios to determine whether stock is fairly
  valued.



                Introduction to Financial Planning - Session 2 of 3
                      Budgeting
• How do you start?

• Cash outflows should not exceed cash inflows. Doing
  so creates negative discretionary income.

• I believe that budgeting/saving is a learned skill!

• Do you know how much money is in your wallet? Do
  you know what you spent for the day?




                Introduction to Financial Planning - Session 2 of 3
Budgeting/Savings Strategies
Ken’s simple strategies toward achieving financial
  security:
• Create at least 3 months of savings.
• Purchase a home on a 15-year mortgage. If this is
  impossible, try for 20, then 30 years.
• Minimize credit card debt.
• Contribute to a Roth IRA.
• Contribute 15% pretax into your 401(k).
• Spend any remaining discretionary income without
  incurring additional debt.




               Introduction to Financial Planning - Session 2 of 3
Budgeting/Savings Strategies
• Pay yourself first! Fund investments and retirement
  vehicles BEFORE you actually have the money.

• If you postpone saving until the money becomes
  available, this non-disciplined approach will leave you
  short.




                Introduction to Financial Planning - Session 2 of 3
                      Budgeting
• Tracking your expenses for a year will provide startling
  results.

• The $4 latte purchased five days a week for 50 weeks
  costs $1,000 a year.

• Set goals for short term (5 years), medium term (5 –
  15 years), and long term (greater than 15 years).
  Adjust as necessary for life changes.




                Introduction to Financial Planning - Session 2 of 3
                      Budgeting
• Need ownership of goals.

• Consider inflation effects for the intermediate and
  long-term goals.

• Set goals and monitor results over time.




                Introduction to Financial Planning - Session 2 of 3
    Emergency Fund Planning
• The rule of thumb is 3 – 6 months of cash for living
  expenses.

• Use for emergencies like unexpected car repairs.

• Can help get you through sudden unemployment or
  disability before benefits kick in.

• Liquidity is important. Invest assets with NAV of 1 or
  near 1.




                Introduction to Financial Planning - Session 2 of 3
     Debt management ratios
• Current ratio = current assets / current liabilities.

• Debt ratio = total debt / total assets

• Long-term debt ratio = total income available for living
  expenses / total long-term debt payments

• Living expense ratio = monetary assets / [annual
  living expenditures debt ratio / 12]




                 Introduction to Financial Planning - Session 2 of 3
           Poll Question #5
Which combination of high/low current ratio and
 high/low debt ratio is considered better?




             Introduction to Financial Planning - Session 2 of 3
           Poll Question #5
Which combination of high/low current ratio and
 high/low debt ratio is considered better?




Answer:     It is considered better to have a
            Higher current ratio and
            a lower debt ratio



          Q&A


                Introduction to Financial Planning - Session 2 of 3
          Credit Management
• Use credit cards only when you are able to pay them in
  full.

• Make sure payments are timely.

• Periodically review credit score/credit reports.

• Debt is neither inherently good nor bad.




                Introduction to Financial Planning - Session 2 of 3
 Monthly Housing Cost Ratios
• Used by mortgage lenders as a benchmark for loans
  secured by real estate.

• Monthly housing costs ratio = Monthly Housing Costs
  (Principal + Interest + Taxes + Insurance) / Gross
  Monthly Income.

• The ratio should be less than or equal to 28% of gross
  monthly income.




               Introduction to Financial Planning - Session 2 of 3
              Poll Question #6a
John and Mary's annual statement of income and
  expenses has the following information:
Mortgage principal                                    $4,500
Mortgage interest                                    $17,000
Property tax                                          $6,000
Homeowners insurance premium                           $1,000

The couple has gross monthly income of $10,000.
Has this couple taken on debt in excess of what is
reasonable for their income, according to
benchmarks set by mortgage lenders?




                     Introduction to Financial Planning - Session 2 of 3
              Poll Question #6a
John and Mary's annual statement of income and
  expenses has the following information:
Mortgage principal                                    $4,500
Mortgage interest                                    $17,000
Property tax                                          $6,000
Homeowners insurance premium                           $1,000

The couple has gross monthly income of $10,000.
Has this couple taken on debt in excess of what is
reasonable for their income, according to
benchmarks set by mortgage lenders?

Answer:                       No
(4,500+17,000+6,000+1,000)/(10,000 X 12) = 23.75% which is < 28%



                     Introduction to Financial Planning - Session 2 of 3
 Monthly Housing Costs and
Other Debt Repayments Ratio
• This ratio is used to adjust the previous numerator to
  reflect all monthly debt repayments.

• Monthly housing costs & other debt repayments ratio
  = Monthly Housing Costs + Other Monthly Debt
  Payments / Gross Monthly Income

• The ratio should be less than or equal to 36% of gross
  monthly income.




                Introduction to Financial Planning - Session 2 of 3
              Poll Question #6b
John and Mary's annual statement of income and
  expenses has the following information:
Mortgage principal                                   $4,500
Mortgage interest                                   $17,000
Property tax                                         $6,000
Homeowners insurance premium                         $1,000
Monthly Car Loan                                       $720
Consumer Loan                                          $500
Educational Loan                                       $280

The couple has gross monthly income of $10,000.
Does the couple meet the ratio of monthly costs and
other debt repayments?




                   Introduction to Financial Planning - Session 2 of 3
                Poll Question #6b
John and Mary's annual statement of income and
  expenses has the following information:
Mortgage principal                                      $4,500
Mortgage interest                                      $17,000
Property tax                                            $6,000
Homeowners insurance premium                            $1,000
Monthly Car Loan                                          $720
Consumer Loan                                             $500
Educational Loan                                          $280

The couple has gross monthly income of $10,000.
Does the couple meet the ratio of monthly costs and
other debt repayments?
Answer: No [(4,500+17,000+6,000+1,000)/12 + (720+500+280)] = $3,875 / $10,000
             = 38.75% which is > 36%

               Q&A


                      Introduction to Financial Planning - Session 2 of 3
Long-term vs. Short-term Debt
• Long-term rates are usually higher than short-term
  rates.

• Long-term debt is usually a fixed rate.

• Short-term debt is usually a floating rate.

• Consumer credit card debt used for short-term
  purchases can easily exceed a 20% interest rate!




                Introduction to Financial Planning - Session 2 of 3
  Secured vs. Unsecured Debt
• With secured debt, a borrower pledges an asset (car or
  property) as collateral for a loan.

• With unsecured debt, it is a general obligation with no
  collateral.

• Based on risk of loss, an unsecured loan will carry a
  higher borrowing rate.




                Introduction to Financial Planning - Session 2 of 3
                Buy vs. Lease
The financial decision requires a closer study of:

• one-time costs

• recurring costs, and

• maintenance costs.

When computing the net results, factor in the various
 psychological issues.




                Introduction to Financial Planning - Session 2 of 3
Buy vs. Lease

We will now switch to an online module
  for more information on Buying Vs.
  Leasing




Introduction to Financial Planning - Session 2 of 3
              Poll Question #7
• Assume that on January 1st, a home is selling for $350,000
  and has yearly real estate taxes of $10,000.

• You finance the purchase at 80% for 6% over 30 years.

• Your marginal tax bracket is 25%.

• A comparable rental on this same home is $2,000 monthly.

What is the monthly mortgage payment?




                 Introduction to Financial Planning - Session 2 of 3
              Poll Question #7
• Assume that on January 1st, a home is selling for $350,000
  and has yearly real estate taxes of $10,000.

• You finance the purchase at 80% for 6% over 30 years.

• Your marginal tax bracket is 25%.

• A comparable rental on this same home is $2,000 monthly.

What is the monthly mortgage payment?


Answer:     The monthly mortgage is $1,678.74
      n=360 i=.50 PV=280,000 PMT=$1,678.74




                 Introduction to Financial Planning - Session 2 of 3
              Poll Question #8
• Assume that on January 1st, a home is selling for $350,000
  and has yearly real estate taxes of $10,000.

• You finance the purchase at 80% for 6% over 30 years.

• Your marginal tax bracket is 25%.

• A comparable rental on this same home is $2,000 monthly.


What is the net after-tax cash flow from owning
 the home for a year?




                 Introduction to Financial Planning - Session 2 of 3
              Poll Question #8
• Assume that on January 1st, a home is selling for $350,000
  and has yearly real estate taxes of $10,000.

• You finance the purchase at 80% for 6% over 30 years.

• Your marginal tax bracket is 25%.

• A comparable rental on this same home is $2,000 monthly.


What is the net after-tax cash flow from owning
 the home for a year?

Answer:        The net after-tax cash flow is $23,468



                 Introduction to Financial Planning - Session 2 of 3
                  Poll Question #8
                    Calculation
Total Principal Payments            $20,145            = ($1,678.74 x 12 months)
Total Real Estate Taxes               10,000
  Subtotal                            30,145
Less: Tax benefit R/E Tax            (2,500)           = 10,000 x 25% bracket
Less: Mortgage Interest              (4,177)           = 16,706 x 25%
  Net after-tax cash flow             23,468

Interest of $16,706 and other valuable information is calculated
   by using your AMORT key:
12 f AMORT =
Press “X><Y” key =
                         $16,706.46
                          $3,438.43              }
                                       $20,144.88 = $1,678.74 x 12


RCL PV =                     $276,561.57               = $280,000.00 - $3,438.43




                   Introduction to Financial Planning - Session 2 of 3
              Poll Question #9
• Assume that on January 1st, a home is selling for $350,000
  and has yearly real estate taxes of $10,000.

• You finance the purchase at 80% for 6% over 30 years.

• Your marginal tax bracket is 25%.

• A comparable rental on this same home is $2,000 monthly.


Using the above information is there a better
  monthly savings for buying or leasing?




                 Introduction to Financial Planning - Session 2 of 3
              Poll Question #9
• Assume that on January 1st, a home is selling for $350,000
  and has yearly real estate taxes of $10,000.

• You finance the purchase at 80% for 6% over 30 years.

• Your marginal tax bracket is 25%.

• A comparable rental on this same home is $2,000 monthly.


Using the above information is there a better
  monthly savings for buying or leasing?

Answer:        You would have a $44 monthly savings
               by purchasing the home.


                 Introduction to Financial Planning - Session 2 of 3
                 Poll Question #9
                   Calculation
Net After-Tax of Purchasing:
Total Principal Payments     $20,145                       ($1,678.74 x 12 months)
Total Real Estate Taxes        10,000
Subtotal                       30,145
Less: Tax benefit R/E Tax     (2,500)                      = 10,000 x 25% bracket
Less: Mortgage Interest       (4,177)                      = 16,706 x 25%
Net after-tax cash flow        23,468

After Tax Cost of renting:
$2,000 x 12 months =                 $24,000

Savings by Purchasing a Home:
Yearly Savings =              $532                         ($24,000 - $23,468)
Monthly Savings =              $44                         ($532 / 12 months)



                  Introduction to Financial Planning - Session 2 of 3
          Buy vs. Lease Issues
• Most laymen look at a monthly cash outflow from home
  purchase as $2,512 ($1,678.74 mortgage payment +
  $10,000 / 12 months for R/E taxes) vs. $2,000 per month.

• After tax considerations at a 25% marginal rate, the amount
  is $1,956 vs. $2,000 for renting per month!

• In Year 1 payment, the $3,438 is included in the cash flow.
  This is repayment of a liability.




                 Introduction to Financial Planning - Session 2 of 3
  Buy vs. Lease Pros and Cons

• Rents and real estate taxes increase over time.

• Depends upon ability to come up with a 20% down payment.

• The lease term may not be extended.

• Capital repairs will be paid by owner.

• The need to sell can cause significant loss to owner in
  market downturns.




                  Introduction to Financial Planning - Session 2 of 3
  Buy vs. Lease Pros and Cons

• Homes are generally illiquid and it can take many months (or
  longer) to sell.

• Owner uses leverage to reap any capital gains!

• Generally favorable tax treatment on sale.

• Generally unfavorable tax treatment for losses!




                 Introduction to Financial Planning - Session 2 of 3
            Mortgage Financing
Should you refinance?

Consider these in the computation of the savings:

• Closing costs, title searches, legal fees, points, etc.

• Most laymen look at net cash flow and not how the previous
  mortgage was paying a higher ratio of principal to interest.
  Do you want additional years and more interest?




                   Introduction to Financial Planning - Session 2 of 3
          Refinancing Example
Assume that you have a mortgage with 23 years
  remaining, a 6.50% rate, and a monthly $1,264.14
  payment with a $180,832 PV.

• 15-year mortgage rate is 5.50%

• 30-year mortgage rate is 5.75%

• Closing costs are 2.5% of principal and are included in the
  refinancing.




                 Introduction to Financial Planning - Session 2 of 3
         Refinancing Example
Assuming a marginal 25% tax rate:

• 15-year mortgage is $1,514 per month (PV is $185,353 =
  $180,832 x 1.025).




                Introduction to Financial Planning - Session 2 of 3
         Refinancing Example
Assuming a marginal 25% tax rate:

• 15-year mortgage is $1,514 per month (PV is $185,353 =
  $180,832 x 1.025).

• Total payments $272,520 ($1,514 x 180 months).




                Introduction to Financial Planning - Session 2 of 3
         Refinancing Example
Assuming a marginal 25% tax rate:

• 15-year mortgage is $1,514 per month (PV is $185,353 =
  $180,832 x 1.025).

• Total payments $272,520 ($1,514 x 180 months).

• Tax deduction $21,792 =(25% x (($272,520 total payments
  - $185,353 refinanced)).




                Introduction to Financial Planning - Session 2 of 3
         Refinancing Example
Assuming a marginal 25% tax rate:

• 15-year mortgage is $1,514 per month (PV is $185,353 =
  $180,832 x 1.025).

• Total payments $272,520 ($1,514 x 180 months).

• Tax deduction $21,792 =(25% x (($272,520 total payments
  - $185,353 refinanced)).

• Net after-tax cash flow $250,728 = ($272,520 total
  payments - $21,792 tax benefit).




                Introduction to Financial Planning - Session 2 of 3
         Refinancing Example
Assuming a marginal 25% tax rate:

• 30-year mortgage is $1,082 per month (PV is $185,353 =
  $180,832 x 1.025).




                Introduction to Financial Planning - Session 2 of 3
         Refinancing Example
Assuming a marginal 25% tax rate:

• 30-year mortgage is $1,082 per month (PV is $185,353 =
  $180,832 x 1.025).

• Total payments $389,520 = ($1,082 x 360 months).




                Introduction to Financial Planning - Session 2 of 3
         Refinancing Example
Assuming a marginal 25% tax rate:

• 30-year mortgage is $1,082 per month (PV is $185,353 =
  $180,832 x 1.025).

• Total payments $389,520 = ($1,082 x 360 months).

• Tax deduction $51,042 = (25% x ($389,520 total payments
  - $185,353 refinanced))




                Introduction to Financial Planning - Session 2 of 3
         Refinancing Example
Assuming a marginal 25% tax rate:

• 30-year mortgage is $1,082 per month (PV is $185,353 =
  $180,832 x 1.025).

• Total payments $389,520 = ($1,082 x 360 months).

• Tax deduction $51,042 = (25% x ($389,520 total payments
  - $185,353 refinanced))

• Net after-tax cash flow $338,478= ($389,520 total
  payments - $51,042 tax benefit).




                Introduction to Financial Planning - Session 2 of 3
        Refinancing Example
What does all this mean over the life of these
 alternatives?




              Introduction to Financial Planning - Session 2 of 3
        Refinancing Example
What does all this mean over the life of these
 alternatives?

• Do nothing, and the after-tax cash flow is $306,885 =
  $348,903 total payments - ($25% x ($348,903 total
  payments - $180,832 refinanced)) Note: 23 years x 12
  months x $1,264.14 = $348,903




               Introduction to Financial Planning - Session 2 of 3
        Refinancing Example
What does all this mean over the life of these
 alternatives?

• Do nothing, and the after-tax cash flow is $306,885 =
  $348,903 total payments - ($25% x ($348,903 total
  payments - $180,832 refinanced)) Note: 23 years x 12
  months x $1,264.14 = $348,903

• Refinance to a 15-year mortgage, and the after-tax
  cash flow is $250,728.




               Introduction to Financial Planning - Session 2 of 3
        Refinancing Example
What does all this mean over the life of these
 alternatives?

• Do nothing, and the after-tax cash flow is $306,885 =
  $348,903 total payments - ($25% x ($348,903 total
  payments - $180,832 refinanced)) Note: 23 years x 12
  months x $1,264.14 = $348,903

• Refinance to a 15-year mortgage, and the after-tax
  cash flow is $250,728.

• Refinance to a 30-year mortgage, and the after-tax
  cash flow is $338,478.



               Introduction to Financial Planning - Session 2 of 3
         Refinance Example
Monthly cash flows:
• Do nothing =




             Introduction to Financial Planning - Session 2 of 3
         Refinance Example
Monthly cash flows:
• Do nothing = $1,264




              Introduction to Financial Planning - Session 2 of 3
          Refinance Example
Monthly cash flows:
• Do nothing = $1,264
• Refinance to 15 years =




               Introduction to Financial Planning - Session 2 of 3
          Refinance Example
Monthly cash flows:
• Do nothing = $1,264
• Refinance to 15 years = $1,514




               Introduction to Financial Planning - Session 2 of 3
          Refinance Example
Monthly cash flows:
• Do nothing = $1,264
• Refinance to 15 years = $1,514
• Refinance to 30 years =




               Introduction to Financial Planning - Session 2 of 3
          Refinance Example
Monthly cash flows:
• Do nothing = $1,264
• Refinance to 15 years = $1,514
• Refinance to 30 years = $1,082

Ignoring taxes, consider that an additional payment of
  $250 ($1,514 - $1,264) will stop a $1,264 per month
  for 96 months (23 yrs – 15 yrs x 12 months) or
  $121,344 additional cash flows!




          Q&A


                Introduction to Financial Planning - Session 2 of 3
                                      Next Class
  The next session will focus on education planning, planning for
  special circumstances and basic economic principles.

  Education planning and planning strategies for special circumstances
  are introduced in this final section. The fundamentals of economics and
  the function and regulation of financial institutions complete the
  foundations in business material in this course.

  Modules to complete before the next virtual classroom session:
     •Education Funding
     •Financial Planning for Monetary Settlements and Special Circumstances
     •Circumstances
     •Basic Economic Concepts
     •Function, Purpose and Regulation of Financial Institutions
     •Course Review
     •Course Exam*

* You can wait and take the exam immediately after virtual session 3 of 3 if you need more time to study.




                                Introduction to Financial Planning - Session 2 of 3
                    Thank You!
See you at the next session!

Introduction to Financial Planning
Session 3 of 3




                Introduction to Financial Planning - Session 2 of 3

				
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