FINANCIAL STATEMENTS AND CASH MANAGEMENT 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)
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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).
Property not owned is not shown on financial statements, e.g.
property in trust for someone else.
Joint ownership—only the proportionate interest should be
Real estate should be carried at market value less the cost of
selling the property.
Joint ownership—only the proportionate interest should be
Business valuation—is very difficult, especially if it is a minority
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
Receivables should be shown at a discounted value.
Life insurance cash values must show outstanding policy loans,
TYPE OF INVESTMENTS
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.
Ability to repay the debt.
Will the borrow repay the debt—what is his credit history?
Is the creditor protected if the borrower defaults?
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.
Monthly housing expense / gross monthly income
The monthly housing expense is PITI (principal, interest, taxes and insurance). Homeowner’s 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.
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.
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
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
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)
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.
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.
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 don’t all use the
Lenders rely heavily on these scores.
35% Payment history. (Pays on time, adverse records, etc.)
30% Amount owed (percentage of available credit)
15% Credit history (age of the accounts—the 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.
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).
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+ 747 743 738
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.
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:
$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
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.
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
What can you do to quickly improve your
Incorrect facts in a report can be disputed, but the retailer is very much in
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.
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 driver’s license number
10. Contact utility companies
Coverage typically costs from $20 to $100 a year, as a rider to a
basic homeowner’s 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 won’t cover legal fees or lost wages due to time
away from work.
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.
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.”