Ch 1

Financial planning: process of manage money & achieve personal economic satisfactions
Process: 1. financial situation 2. financial goal 3. alternative plans of actions 4. evaluation of action 5.
implementation 6. re-evaluation
Advantages: effectiveness in obtaining/using/protecting financial resources, improved personal
relationships, increased control over financial affairs & freedom from financial worries
Opportunity cost of decisions: measured in time, money, risk  Personal risk: risk of death, health,
income loss, asset & liabilities; Economic/product risk: interest rate, inflation, liquidity, & product
Financial goal development:
Influences: personal value, time frame, type of goals (education vs entertainment), life/social
situations
Needs to be: realistic, specific/measurable terms, set time frame & type of actions

Appendix
Annuity: same amount of payment for a consecutive period  ordinary/deferred annuity: paid at
end of period; annuity due: paid at beginning of period

Ch 2
Balance Sheet/Financial Statement: tells net worth
Asset – Liability = net worth; Asset: liquid, real estate, possession & investment; Liability: current
(within 1 year) & long term (longer than 1 year)
Cash Flow Statement: cash receipts/payments for a given period of time, basis for making
investment/savings plan; total cash inflow in a period of time – total cash outflow (fixed & variable) in a
period of time = cash surplus/deficit.
Purpose of above 2: 1. measure progress towards financial goals, 2. how asset is distributed among
different categories, 3. calculate asset allocation, 4. identify whether investments are tax efficient, 5.
identify assets that may be stolen/damaged/destroyed, 6. summarize types/extend of indebtness
Debt ratio = liabilities/net worth; lower is better; Current ratio = liquid assets/current liabilities; higher
is better; Liquidity ratio = liquid assets/monthly expenses; number of months to go on without pay;
Debt-payments ratio = monthly credit
payments/take-home pay; < 20% is desired;
Savings ratio = amount saved each
month/gross income; at least 10%
Budget: specific plan for spending income;
steps: 1. determine financial goals, 2.
determine income, 3. budget emergency
fund/savings, 4. budget fixed expenses, 5.
budget variable expenses, 6. record spending
amounts, 7. review spending patters  good
if realistic, flexible, clearly communicated
Budge Variance = budget – amount spent

Ch 3
1/3 of income is taxed ( important to know
rules/regulations to reduce taxable income:
know current laws, ways to make investment
decisions for tax deduction & maintain
complete tax record. 4 types of tax: purchase
tax, real estate tax, capital gain tax,
incoming (aka. earning) tax
Federal Tax Calculation – 5 Steps: 1.
Determine total income, employment, net
business, investment, taxable capital gains x
0.5, other incomes (retirement income, Old
Age Security, child support payments, education-related payments); lottery not included, 2. Net
Income, deduct RRSP/RRP, union/professional dues, child care expenses, disability support
deductions, moving expenses, others (interest on loans, business loss, spousal/child support
payment), 3. taxable income, further deductions, 4. federal tax owning, 5. net federal tax, non-
refundable tax credits & refundable tax
Ch 4
Deposit-type institutions: banks, trust companies & mutual fund companies; Non-deposit-type
institutions: life insurance co., investment co., finance co., mortgage co., pawhshops, check-cashing
outlets

Ch 5
Home Equity Loan = (home value * rate) – mortgage balance
Debt-to-equity ratio = total liability/net worth; exclude mortgage in liability and home value in net worth
- if this is 1, then upper limit reached
Debt-payment-to-income ratio = monthly liability/net monthly income; exclude mortgage
- should be < 20%

Ch 6
Discount Loan: a portion of the interest paid in beginning of the loan
Effective Annual Interest Rate = [(1+ ARR/m)^m] – 1
Floating rate personal line of credit = principle * rate + interest

Ch 7
Calculating Fixed-Rate Monthly Mortgage Payment: compounded semi-annually; steps: 1. find
EAR, 2. (1+m)*12 = 1 + EAR, find m.
Estimating Monthly Mortgage Payment:
- Monthly affordable mortgage payment: check GDS (*.03)or TDS(*.04), [(net monthly income *0.03
or *0.04)-(P + I + T + H + Debt)]  x1
- Affordable Mortgage: (above*1000)/rate  x2
- Affordable House Price: x2/down-payment%