Issues Relating to Prepaying a Mortgage

Here are the issues I look at when determining to prepay a mortgage:

Is there a prepayment penalty?
· What is the rate on the mortgage loan that is being prepaid? What is the after-tax cost of the mortgage? Are there enough itemized deductions to take advantage of the mortgage interest being paid?
· What is the opportunity cost of having the money on the mortgage versus investing it elsewhere? What is the after-tax cost of investing the money elsewhere?
· Do you have three to six months of cash saved in case of an emergency? If you are using all proceeds to pay the back end of the mortgage and find yourself out of a job or disabled for a period of time, where is the cash flow to coming from to pay the current monthly expenses, including the mortgage?

Posted by Boston Institute of Finance

Preparing for the Bryant Online or CFP Exams

I recommend that students studying for the online exams or for the actual CFP® Certification Examination exam learn not only the material (knowing rules or definitions), but also develop an ability to apply the principals and to recognize how each one can positively or negatively affect other areas relating to financial planning. A good analogy compares financial planning to a hanging mobile: touch one piece, and the rest will move, too (perhaps in an overall adverse way)!

If you can approach learning the material in this fashion, it may help you to comprehend it better and see the “bigger picture.” When taking the exam, look to the best answer based on the movement of the other parts as a whole.

Posted by Boston Institute of Finance

General Information Regarding the CFP Exam

The CFP® Certification Examination is a 10-hour, 285-question exam, given on the third Friday of March, July, and November. The Friday afternoon session is a 4-hour exam with approximately 100 questions that entail standalone, some item sets, and one case with approximately 20 to 30 questions. This format is similar for Saturday; however, the morning and afternoon sessions are 3 hours long, with approximately 90 questions per sitting.

Each session has a comprehensive case with approximately 20 questions, worth three points apiece. The standalone and item sets are worth two points apiece. The questions in the exam are random throughout (e.g., tax, tax, insurance, retirement, investments, estate, estate, estate, fundamentals, etc.), but the weightings for each topic area are determined by CFP Board. You can find the topic area percentages with the topic list at https://cfp.net/become/topiclist.asp (e.g., investments is 19% of the exam).

The CFP exam is a multiple-choice paper exam using a No. 2 pencil. You are allowed a financial calculator approved by the Board (e.g., HP-12C). It is not open-book; however, there are formulas and tax information provided. You can check various exam-related information, actual released questions, and the topic list of areas tested and the exam weightings at https://cfp.net/become/examquestions.asp.

Lastly, there is no penalty for guessing at questions. I highly recommend guessing even if you are not sure of an answer, as a blank question has no points, and a guessed answer can earn you 2 points on a standalone question and 3 points on a case question.

Posted by Boston Institute of Finance

Other Important CFP(R) Certification Information

At the top of the CFP Board’s home page, there is information with which a CFP(R) candidate should become familiar. First, click on “Become a Certified Financial Planner Professional” and click on “Exam Topic List.” I recommend browsing the following items:
· CFP® Certification Requirements
· Applications & Resources
· Sample exam questions
· Publication and resource library (you will see links for formulas and tax tables)You can        choose any other topic you find relevant.

Posted by Boston Institute of Finance

How Annual Tax Changes Can Affect a Student’s Approach to the Bryant Program

Because the typical CFP program spans an 18-month or more period (before a student is finished with the full curriculum), a common question that many students ask is this: “Why should I take a tax, retirement, or estate tax course with 2013 information if I will sit for the exam in 2014 and use 2014 numbers?”

This is a trap! Students need to learn and understand all the issues and principles relating to the courses, regardless of the tax year. When a student understands that the Roth IRA allowable contribution phase-out for joint filers is indexed for inflation, it is easy to then apply the rules from one year to the next after the index amounts change. For example, the 2012 AGI levels of $173,00 – $183,000 were increased to $178,000 – $188,000 for 2013 joint filers.

I recommend resigning yourself to the unfortunate fact that tax rules and allowable amounts are revised annually, at a minimum, and that these constant changes are an integral part of financial planning.

Posted by Boston Institute of Finance

Unemployment Rate

The unemployment rate can never be at zero, even if the economy is running optimally at full capacity, because people are always moving in and out of jobs (referred to as a “frictional unemployment”).

Posted by Boston Institute of Finance

Keynesian Economics

This is a theory of total spending in the economy and its effects on output and inflation. Beliefs are that both fiscal and monetary policy affects aggregate demand (total spending in the economy). If government spending increases, output will increase. Prices and wages respond slowly to changes in supply and demand, resulting in shortages and surpluses.

A good reference is Alan Blinder’s article at: www.econlib.org/library/Enc/keynesianEconomics.html

Posted by Boston Institute of Finance

Balanced Budget Multiplier

Any increase in government spending has a multiplier effect on GDP. Multipliers are the ripple effects that result from the changes in government spending, taxes and budget.

For example, a reduction in taxes will cause increased consumption and that in turn will result in more output and more earnings and more spending. The pattern is repeated as each person spends more money and earns more. The reduction in taxes thus may have a greater impact in affecting output than the actual amount of the tax reduction. In other words, a reduction of $1 billion in taxes may increase output by $4 billion.

Posted by Boston Institute of Finance

Fiscal Policy

The government is forced to borrow money if the tax revenues do not cover their expenses. Thus, if they decrease taxes without decreasing spending, the government might need to borrow money to pay their bills. The government typically borrows money by issuing Treasury bonds or bills. Likewise, they pay down debt by calling existing bonds or paying them off at maturity. This is a separate activity from the Fed that is buying or selling US treasuries in the secondary market.

Posted by Boston Institute of Finance

Calculating Percentage Change in the Consumer Price Index

The percentage change in CPI from year to year is calculated as follows:

% Change = [(Current yr CPI – Prior yr CPI)/Current yr CPI] x 100

Thus, for 1954: [(26.9 – 26.7)/26.9] x 100 = .743494 or .7 as indicated in the CPI Chart provided.*

Whereas, for 1955: [(26.8 – 26.9)/26.8] x 100 = (.373134) or (.37).

*You will find this chart, showing CPI from 1950 to 2005, located in the Economic Indicators lesson of the Basic Economic Concepts Module of the Bryant Online Program.

Posted by Boston Institute of Finance