AFP Entrance cheat sheet
AFP Entrance · Keep the key ideas within reach.
Fundamentals of Financial Planning
The financial planning process includes establishing goals, gathering data, analyzing, developing recommendations, implementing, and monitoring.
A client's risk tolerance is influenced by psychological factors and capacity by financial ability; both must be assessed.
The time value of money formula for future value: FV = PV × (1 + r)^n.
Present value formula: PV = FV / (1 + r)^n.
The rule of 72 estimates doubling time: years ≈ 72 / annual interest rate.
Inflation reduces purchasing power; real return ≈ nominal return − inflation rate.
A fiduciary standard requires acting in the client's best interest, disclosing conflicts, and providing suitable advice.
A comprehensive financial plan integrates cash flow, risk management, investments, taxes, retirement, and estate planning.
Goals should be specific, measurable, achievable, relevant, and time-bound (SMART).
Insurance Planning and Risk Management
Risk management techniques include avoidance, reduction, retention, and transfer.
Life insurance death benefit is generally income-tax-free to beneficiaries under IRC §101(a).
Term life insurance provides pure protection with no cash value; whole life includes cash value and level premiums.
The human life value approach calculates insurance need as the present value of future income contributions.
The needs approach considers immediate expenses, debt, income replacement, and education funding.
Disability insurance replaces a portion of income, typically 60–70%, and has an elimination period and benefit period.
Long-term care insurance covers custodial care; benefits may be tax-qualified if the policy meets HIPAA requirements.
Homeowners insurance typically covers dwelling, other structures, personal property, loss of use, liability, and medical payments.
An umbrella liability policy provides excess coverage above underlying auto and homeowners limits.
Employee Benefits and Retirement Planning
401(k) contributions are pre-tax (traditional) or after-tax (Roth); employer match is common.
2024 401(k) elective deferral limit is $23,000, with a $7,500 catch-up for age 50+.
Defined benefit plans promise a specified benefit at retirement; defined contribution plans specify contributions.
Vesting schedules determine when employer contributions become non-forfeitable.
Social Security benefits are based on the primary insurance amount (PIA) using the highest 35 years of indexed earnings.
Full retirement age for Social Security is 66–67 depending on birth year; early claiming reduces benefits by up to 30%.
Required minimum distributions (RMDs) from traditional IRAs and 401(k)s begin at age 73 (SECURE 2.0).
Roth IRA contributions are after-tax, grow tax-free, and have no RMDs during the owner's lifetime.
A pension plan's lump-sum option should be evaluated against the present value of annuity payments.
Investment Planning
Modern portfolio theory uses diversification to optimize expected return for a given level of risk.
Beta measures systematic risk relative to the market; standard deviation measures total volatility.
The Sharpe ratio = (portfolio return − risk-free rate) / portfolio standard deviation.
Asset allocation is the primary determinant of long-term portfolio performance.
Rebalancing restores target weights and can manage risk; it may be done periodically or by threshold.
Bond prices and interest rates have an inverse relationship; duration measures price sensitivity to rate changes.
A mutual fund's expense ratio reduces net returns; lower costs generally enhance long-term performance.
Time-weighted return measures investment performance excluding cash flow timing; money-weighted return includes it.
Risk tolerance and time horizon guide the mix between equities, fixed income, and cash.
Income Tax Planning
Marginal tax rate is the rate on the next dollar of income; average tax rate is total tax / taxable income.
Taxable income = gross income − above-the-line deductions − standard or itemized deductions.
Long-term capital gains and qualified dividends are taxed at preferential rates (0%, 15%, or 20%).
The basis of an asset is its cost; capital gain = sale proceeds − adjusted basis.
Contributions to traditional IRAs may be deductible; Roth IRA contributions are not deductible.
The standard deduction for 2024 is $14,600 single, $29,200 married filing jointly.
Tax credits reduce tax liability dollar-for-dollar; deductions reduce taxable income.
The kiddie tax applies to unearned income of children under 19 (or 24 if full-time students).
Tax-loss harvesting realizes losses to offset gains and up to $3,000 of ordinary income annually.
Estate Planning
The federal estate tax exemption for 2024 is $13.61 million per person; portability allows surviving spouses to use the deceased spouse's unused exemption.
The annual gift tax exclusion for 2024 is $18,000 per recipient; gifts above that count against the lifetime exemption.
A will directs property distribution, names guardians, and is subject to probate.
A revocable living trust avoids probate and allows management of assets during incapacity.
The unlimited marital deduction allows tax-free transfers between spouses.
Step-up in basis at death resets the value of inherited assets to fair market value, reducing capital gains.
Intestacy laws govern distribution when no valid will exists.
A durable power of attorney and health care proxy manage financial and medical decisions if incapacitated.
Life insurance proceeds are included in the estate if the insured owns the policy; an ILIT can remove them.
Financial Statement and Cash Flow Analysis
The balance sheet lists assets, liabilities, and net worth (assets − liabilities).
The cash flow statement tracks inflows and outflows; net cash flow = income − expenses.
The emergency fund should cover 3–6 months of living expenses.
The savings rate = savings / gross income; a common target is 10–15%.
Liquidity ratio = liquid assets / monthly expenses; a target is 3–6 months.
Debt-to-income ratio = total monthly debt payments / gross monthly income; a common limit is 36–43%.
The current ratio = current assets / current liabilities; a ratio above 1 indicates short-term solvency.
Discretionary expenses are variable and can be adjusted; fixed expenses are contractual and harder to change.
Net worth growth over time reflects financial progress and goal achievement.
Debt and Credit Management
The debt avalanche method pays highest-interest debt first, minimizing total interest.
The debt snowball method pays smallest balances first for psychological wins.
Credit scores are influenced by payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%).
A credit utilization ratio below 30% is generally recommended.
The APR reflects the true cost of borrowing, including fees and interest.
Mortgage points are prepaid interest that lower the interest rate; break-even analysis determines if points are worthwhile.
A secured loan is backed by collateral; an unsecured loan is not.
Bankruptcy Chapter 7 liquidates assets; Chapter 13 reorganizes debt with a repayment plan.
Student loan interest may be tax-deductible up to $2,500, subject to income limits.
Education and Goal Funding
A 529 plan offers tax-deferred growth and tax-free qualified withdrawals for education.
Coverdell ESA contributions are limited to $2,000 per beneficiary per year.
The American Opportunity Tax Credit provides up to $2,500 per student for the first four years of college.
The Lifetime Learning Credit provides up to $2,000 per tax return for post-secondary education.
UGMA/UTMA accounts transfer assets to minors but have no contribution limits and are taxed to the child.
Financial aid formulas use the FAFSA; parental assets are assessed at up to 5.64%, student assets at 20%.
The expected family contribution (EFC) determines eligibility for need-based aid.
Education savings goals should account for inflation in tuition costs, which often exceed general inflation.
Time horizon dictates investment mix: shorter horizons favor lower-risk investments.
Professional Ethics and Fiduciary Standards
A fiduciary must act with loyalty, care, and prudence in the client's best interest.
The CFP Board's Code of Ethics includes principles: integrity, objectivity, competence, fairness, confidentiality, professionalism, and diligence.
Material conflicts of interest must be disclosed to the client.
Suitability requires recommendations be consistent with the client's objectives and risk tolerance.
Client information must be kept confidential unless disclosure is authorized or required by law.
Competence requires maintaining professional knowledge and skills.
A fee-only advisor receives compensation only from clients, reducing conflicts.
The fiduciary duty extends to monitoring the client's plan and updating recommendations as circumstances change.
Ethical standards prohibit misleading advertising and require accurate representation of credentials.