RFC Cash Flow & Debt Management 3 — Questions and Answers
Question 1: A client is 'cash flow positive' but consistently overdraws their checking account. What is the MOST likely cause?
- Underestimating fixed expenses
- Timing mismatch between income receipt and bill due dates (Correct answer)
- Excessive savings rate
- High investment contributions
Correct answer: Timing mismatch between income receipt and bill due dates
Even with positive net cash flow, overdrafts occur when bills are due before income arrives, a timing or liquidity problem.
Question 2: In the context of RFC planning, 'discretionary cash flow' is BEST defined as:
- Cash remaining after all taxes are paid
- Income minus all fixed and variable living expenses
- Net income minus debt service and essential expenses (Correct answer)
- Operating income before depreciation
Correct answer: Net income minus debt service and essential expenses
Discretionary cash flow is what remains after covering all necessary expenses and debt service, available for savings or spending.
Question 3: Which debt repayment strategy results in the highest total interest paid over time?
- Avalanche method
- Snowball method (Correct answer)
- Debt consolidation at a lower rate
- Balance transfer to 0% APR card
Correct answer: Snowball method
The snowball method targets smallest balances first, ignoring interest rates, which often results in more total interest paid.
Question 4: A client's free cash flow is defined as operating cash flow minus:
- Income taxes
- Capital expenditures (Correct answer)
- Interest expense
- Dividend payments
Correct answer: Capital expenditures
Free cash flow = operating cash flow minus capital expenditures, representing cash available after maintaining/growing assets.
Question 5: Under RFC debt management principles, which action BEST improves a client's credit utilization ratio?
- Closing unused credit card accounts
- Paying down revolving balances below 30% of limits (Correct answer)
- Taking out a personal loan to pay off cards
- Requesting a credit limit decrease
Correct answer: Paying down revolving balances below 30% of limits
Credit utilization = balances ÷ limits; keeping it below 30% positively impacts credit scores.
Question 6: A client is considering a 15-year vs. 30-year mortgage on a $400,000 loan at the same rate. Which statement is MOST accurate?
- The 15-year will have higher monthly payments but lower total interest (Correct answer)
- The 30-year will have lower total interest due to smaller payments
- Both options result in the same total interest paid
- The 15-year always carries a higher interest rate
Correct answer: The 15-year will have higher monthly payments but lower total interest
A 15-year mortgage has higher monthly payments but significantly less total interest paid due to the shorter amortization period.
Question 7: Which of the following describes 'income smoothing' in personal cash flow planning?
- Reducing gross income to lower tax liability
- Timing income recognition to match expense patterns across months (Correct answer)
- Investing only in stable, low-volatility assets
- Averaging investment returns over multiple years
Correct answer: Timing income recognition to match expense patterns across months
Income smoothing means aligning when income is received (or drawn) with when expenses occur to avoid cash flow gaps.
RFC Cash Flow & Debt Management 3
A client is 'cash flow positive' but consistently overdraws their checking account.
What is the MOST likely cause?