Education Planning & Financial Analysis Flashcards

The debt-to-income (DTI) ratio is primarily used in financial planning to evaluate a client's:

Answer: Ability to manage and service existing and new debt

The DTI ratio compares total monthly debt payments to gross monthly income and is a standard measure of a client's debt-servicing capacity.

A client has total assets of $850,000 and total liabilities of $320,000. What is the client's net worth?

Answer: $530,000

Net worth equals total assets minus total liabilities: $850,000 − $320,000 = $530,000.

The standard financial planning recommendation for an emergency fund is liquid assets covering how many months of living expenses?

Answer: 3–6 months

Financial planners typically recommend 3–6 months of living expenses in accessible, liquid accounts, with those having variable income targeting the higher end.

Which personal finance ratio measures the percentage of income directed toward savings and investments?

Answer: Savings ratio

The savings ratio (savings ÷ gross income) measures what fraction of income is being accumulated for future goals rather than spent on current consumption.

On a personal cash flow statement, net cash flow is calculated as:

Answer: Total income minus total expenses

Net cash flow equals total inflows (all income) minus total outflows (all expenses), revealing whether the client has a monthly surplus or deficit.

The personal 'liquidity ratio' in financial planning is calculated as:

Answer: Liquid (monetary) assets divided by monthly expenses

The liquidity ratio equals liquid monetary assets divided by monthly expenses, indicating how many months of expenses the client can cover without any new income.