1. KEY FORMULAS FOR PERSONAL FINANCE

2. Calculating Debt to Income Ratio (36% or less is best):
Total Monthly Expenses
Gross Monthly Income
or Total Expenses
Gross Income

3. Which individual is a high risk (borrower)?
Expense ratio of 45%
Expense ratio of 36%
Expense ratio of 20%
Solve: If a potential borrower earns $200,000 and has an expense ratio of 50% and discretionary expense of $20,000 what is net income? And would you lend to them?

4. To solve for no. 4 use formula below
Calculating Net Income:
Gross Income
(Taxes)
Disposable Income
(Expenses)
Discretionary Income
(Discretionary Expenses)
Net Income

5. Solution Expense ratio of 45% (high risk)
Expense ratio of 36% (moderate risk)
Expense ratio of 20% (low risk)
Solve: If a potential borrower earns $200,000 and has an expense ratio of 50% and discretionary expenses of $20,000 what is net income? And would you lend to them?

6. Solution Gross Income $200,000 (Taxes) assume 30% tax rate (60,000)
Disposable Income ,000
(Expenses) 50% (100,000)
Discretionary Income ,000
(Discretionary Expenses) (20,000)
Net Income ,000
Decision to lend would require more information

7. Which individual is a high risk (borrower)?
Expense ratio of 50%
Expense ratio of 25%
Expense ratio of 10%
Solve: If a potential borrower earns $100,000 and has an expense ratio of 50% and discretionary expenses of $20,000 what is net income? And would you lend to them?

8. Which individual is a high risk (borrower)?
Expense ratio of 50%-high risk
Expense ratio of 25%-low to moderate
Expense ratio of 10%-low
Solve: If a potential borrower earns $100,000 and has an expense ratio of 50% and discretionary expenses of $20,000 what is net income? And would you lend to them?

9. Gross Income $100,000
(Taxes) assume 30% tax rate (30,000)
Disposable Income ,000
(Expenses) 50% (50,000)
Discretionary Income ,000
(Discretionary Expenses) (20,000)
Net Income
Would very likely not lend to this individual

10. What else do we need to make a decision?

11. Calculating Net Worth: Total Assets – Total Liabilities = Net Worth

12. Also expressed as…
A – L = NW

13. Example
Total assets of $500,000 minus total liabilities of $100,000 equals a Net Worth of $400,000.
Or using the formula…
A – L = NW
$500,000 - $100,000 = $400,000

14. How do you know the true $ value of something?
Net worth may not tell the whole story. You may need to subtract assets that have no monetary value (but huge sentimental value or goodwill). In some cases you may reduce the estimate of value => adjusted net worth
Example: If someone has a guitar collection which they THINK is worth $100,000 that asset would be eliminated or reduced in value.

15. Example
If total assets of $500,000 minus total liabilities of $100,000 equals a Net Worth of $400,000 but includes a baseball card collection of $200,000 net worth must be adjusted to $200,000
Or using the formula…
NW – Overestimate (over valued asset) = Adjusted Net worth
$400,000 - $200,000 = $200,000

16. Solve for adjusted net worth
If total assets of $600,000 minus total liabilities of $100,000 equals a Net Worth of $500,000 but includes a Pokemon collection of $150,000…

17. using the formula…
NW – Overestimate (over valued asset) = Adjusted Net worth
$500,000 - $150,000 = $350,000

18. Calculating Leverage (1/1 or less is good):
Total Debt (total liabilities)
Net Worth
or Total Debt (total liabilities)
Adjusted Net Worth

19. Why is this important?
If a potential borrower has a net worth of $500,000 and total liabilities of $400,000 what is the leverage?

20. Solution $400,000 = Leverage is .80 $500,000
Since this is below 1.0 customer a good potential borrower/credit risk.

21. Solve
However, if total assets includes a $200,000 guitar collection what would leverage be?

22. Solution Solve for adjusted net worth (ANW) Net Worth $500,000
(Goodwill/Overestimate) ($200,000) Adjusted Net Worth $300,000
$400,000 = Leverage is 1.33
$300,000

23. Calculating Adjusted Net Worth:
(Goodwill/Overestimate)
Adjusted Net Worth Or
Net Worth - (Goodwill/Overestimate) = Adjusted Net Worth

24. Examples of items that are subtracted from Net Worth…
Furniture
Household items (appliances)
Any kind of a collection (even if certified)

25. What is the American Dream?
Move to America
Study
Get a job
Get married
Have two kids; get a dog (maybe a cat)
Buy a HOUSE (white picket fence if possible)

27. What is Fair Market Value (FMV)?
For most individuals, if they want to buy a home they get a loan called a MORTGAGE. In order to qualify for that mortgage the LOAN to VALUE (FMV) ratio must be 80% or less.
Thus, if you want to buy a house that is worth (FMV) $100,000 the most a bank will lend you is $80,000.

28. Calculating Loan to Value Ratio (80% or less is excellent):
__ Total Loan Amount___
Fair Market Value (FMV)
FMV is determined with an appraisal

29. Solve for loan to value ratio..
Loan amount $100,000, FMV $100,000
Loan amount $100,000, FMV $200,000
Loan amount $100,000, FMV $150,000
Loan amount $100,000, FMV $125,000
Which of the above would you lend to?

30. Solution… Loan amount $100,000, FMV $100,000-100%
Which of the above would you lend to? 2 and 3
May need more info for 1 and 4

31. Other factors to consider
Loan amount
Loan purpose
Credit rating
Type of job
“Character”

32. Would you approve the following loan requests?

33. Customer 1 Loan request $200,000 Loan purpose buy house
Debt to income .30
Net worth $500,000
Net Income $100,000
Leverage 1
Job excellent excellent
Credit rating very good
Loan to value 80%
Bonus…Solve for Total Liabilities

34. Solution
Yes
Only concerns based on information given is leverage and credit rating
Bonus…$500,000

35. Customer 2 Loan request $300,000 Loan purpose buy 2nd home
Debt to income .20
Net worth $500,000
Net Income $150,000
Leverage 1.2
Job excellent excellent
Credit rating Excellent
Loan to value 60%

36. Customer 3 Loan request $800,000 Loan purpose buy RV to see USA
Debt to income .30
Net worth $2,500,000
Net Income $150,000
Leverage .75
Job excellent excellent
Credit rating very good
Loan to value 50%

37. Customer 4 Loan request $50,000 Loan purpose buy RV to see USA
Debt to income .50
Net worth $125,000
Net Income $25,000
Leverage .75
Job excellent excellent
Credit rating excellent
Loan to value 25%