CFP Module 2 cheat sheet

Net worth = total assets at fair market value − total liabilities; it is a point-in-time balance measure, not a cash-flow measure.

Cash flow surplus = income − expenses − debt service − taxes; a surplus funds savings and goal contributions, a deficit must be closed by borrowing or asset drawdown.

Emergency reserve target = 3–6 months of essential (non-discretionary) expenses; 6–12 months where income is variable or single-earner.

Human capital = present value of expected future earnings; it is largest early in a career and declines as financial capital accumulates.

Savings rate required for a goal: solve PMT = FV × r / [(1 + r)^n − 1] for annual deposits, with r the after-tax real return and n the years to the goal.

Goal prioritization rule: fund mandatory and non-recoverable goals (housing, education, debt obligations) before discretionary goals; sequence by time horizon and penalty for shortfall.

Education funding: 529 plans grow tax-deferred and qualified withdrawals are tax-free; contributions are not federally deductible and non-qualified withdrawals incur tax plus a 10% penalty on earnings.

Inflation-adjusted return ≈ (1 + nominal) / (1 + inflation) − 1; use it to express future goals in today's purchasing power.

Ratio benchmarks: housing cost ≤ 28–36% of gross income; total debt service ≤ 36–43% of gross income; savings rate commonly targeted at ≥ 10–15%.

Portfolio expected return = Σ (weight_i × expected return_i); portfolio variance includes covariance terms, so diversification reduces risk without sacrificing expected return.

CAPM: required return = risk-free rate + beta × (market return − risk-free rate); beta measures systematic risk only, which cannot be diversified away.

Sharpe ratio = (portfolio return − risk-free rate) / standard deviation; higher is better for ranking portfolios on risk-adjusted return.

Rule of 72: doubling time in years ≈ 72 / annual return; exact doubling time = ln 2 / ln(1 + r).

Duration approximates a bond's price change for a 1% change in yield: %Δprice ≈ −duration × Δyield, plus convexity adjustment for larger moves.

Realized compound yield depends on reinvestment of coupons; yield to maturity assumes all coupons are reinvested at the YTM rate.

Asset location rule: place tax-inefficient holdings (taxable bonds, REITs, actively managed funds) in tax-advantaged accounts and tax-efficient holdings (broad index equity) in taxable accounts.

Rebalancing to target weights restores policy risk; it is a risk-control action, not a return-forecasting action.

Risk tolerance has two components: ability to take risk (capacity: horizon, liquidity, income stability) and willingness (attitude); the binding constraint governs the allocation.

Defined contribution balance at retirement: FV = PV × (1 + r)^n + PMT × [((1 + r)^n − 1) / r], with r the expected return and n years to retirement.

Capital needs method: required nest egg = annual retirement income need × annuity factor for the expected retirement duration at the assumed real return.

Replacement ratio planning commonly targets 70–85% of pre-retirement gross income, adjusted for reduced work expenses and eliminated savings.

Sequence-of-returns risk: early-retirement losses during drawdown deplete capital faster than the same average return earned in a different order.

Safe withdrawal analysis: a 4% initial real withdrawal rate is a planning benchmark, not a guarantee; it depends on horizon, fees, and asset mix.

Social Security claiming: benefits rise for each year of delay past full retirement age up to age 70 and are reduced for early claiming; spousal and survivor benefits follow different rules.

Required minimum distributions apply to traditional tax-deferred accounts; Roth IRAs are not subject to lifetime RMDs.

Inflation protection in retirement income planning requires modeling real (inflation-adjusted) spending, not nominal fixed withdrawals.

Pension choice rule: compare a lump sum to the present value of the annuity stream discounted at a rate reflecting the plan's risk; also weigh longevity and survivor coverage.

Gross estate includes all property owned at death plus specified lifetime transfers (retained interests, certain gifts within three years of death, and general powers of appointment).

Taxable estate = gross estate − deductions (debts, expenses, charitable and marital deductions) ; estate tax base then applies the applicable exclusion amount.

Unlimited marital deduction defers estate tax between spouses but does not remove assets from the survivor's estate unless a credit shelter or portability election is used.

Portability allows a surviving spouse to use the deceased spouse's unused exclusion amount, but it requires a timely estate tax return election.

Annual gift tax exclusion permits tax-free present-interest gifts per recipient per year; gifts above it reduce the lifetime exclusion, not necessarily incur tax.

Basis rules: inherited assets generally receive a stepped-up basis to fair market value at death; lifetime gifts carry over the donor's basis.

Intestacy: dying without a valid will distributes assets under state statute, typically to spouse and descendants, and bypasses the decedent's stated preferences.

Trust roles: grantor creates, trustee holds legal title and fiduciary duty, beneficiary holds equitable interest; irrevocable trusts remove assets from the grantor's estate.

Probate vs non-probate: jointly held property, beneficiary-designated accounts, and life insurance proceeds pass outside the will and are not controlled by probate.

Marginal tax rate applies to the next dollar of income; effective tax rate = total tax / total taxable income; decisions should be evaluated at the marginal rate.

After-tax return = pre-tax return × (1 − tax rate) for fully taxed income; for capital gains use the applicable preferential rate and deferral benefit.

Tax-equivalent yield of a municipal bond = tax-exempt yield / (1 − marginal tax rate); compare it to the taxable alternative's yield.

Capital gains: short-term gains (held one year or less) are taxed at ordinary rates; long-term gains qualify for preferential rates.

Tax-loss harvesting offsets realized gains and up to a limited amount of ordinary income per year, with excess carried forward.

Standard deduction vs itemizing: deduct the larger of the standard deduction or total allowable itemized deductions (state taxes subject to a cap, mortgage interest, charitable).

Traditional vs Roth: traditional contributions are deducted now and taxed on withdrawal; Roth contributions are after-tax and qualified withdrawals are tax-free.

Fiduciary standard requires acting in the client's best interest with disclosure of conflicts; suitability standard requires recommendations be merely suitable.

Regulatory framework: advisers owe duties of care and loyalty; registration, disclosure, and recordkeeping obligations depend on the entity type and assets under management.