Cash Flow & Debt Management Flashcards

A self-employed RFC client has highly variable monthly income. Which cash flow strategy is MOST appropriate for managing irregular income?

Answer: Build a larger emergency fund and budget on the lowest average income month

Budgeting on the lowest income month and maintaining a larger reserve smooths out the variability inherent in self-employment income.

Which statement about the 'debt snowball' method is MOST accurate for an RFC advising clients?

Answer: It provides psychological motivation by eliminating smaller debts first

The snowball method's strength is behavioral — eliminating small balances quickly creates momentum and motivation to continue.

A client refinances a 30-year mortgage after 10 years into a new 30-year loan. What is the PRIMARY hidden cost of this strategy?

Answer: The client resets the amortization schedule, paying mostly interest again for years

Resetting to a new 30-year term restarts the front-loaded interest portion of amortization, potentially increasing total interest paid.

A client asks about a debt management plan (DMP) offered by a nonprofit credit counseling agency. Which statement is MOST accurate?

Answer: DMPs negotiate reduced interest rates and consolidate payments without new debt

A DMP arranges for reduced interest rates and a single monthly payment to the agency, which distributes funds to creditors.

For RFC cash flow planning, 'liquidity risk' in a client's personal finances refers to:

Answer: The risk of being unable to meet short-term obligations due to lack of accessible cash

Liquidity risk is the danger that a client cannot access enough cash to meet immediate obligations, even if their net worth is positive.

A client with $200,000 in assets and $140,000 in liabilities has a net worth of $60,000. If they pay down $10,000 in debt using savings, what happens to net worth?

Answer: Net worth stays the same

Paying debt with savings reduces both assets and liabilities by the same amount, leaving net worth unchanged.

Which of the following BEST describes the purpose of a 'sinking fund' in personal debt and cash flow management?

Answer: A dedicated savings account to accumulate funds for a known future expense

A sinking fund is set aside incrementally over time to cover a specific anticipated expense, preventing cash flow disruption when it arrives.