CFP general principles of financial planning
Separate the household’s financial position from its cash flow. Net worth is assets minus liabilities at a point in time; cash surplus is income minus outflows over a period. A household can be wealthy and still lack spending liquidity.
The decisions to learn first
Net worth
- Calculation
- Assets - liabilities
- What it answers
- What is the household’s current financial position?
Monthly surplus
- Calculation
- Monthly receipts - monthly outflows
- What it answers
- How much can fund the next goal?
Future value
- Calculation
- Present value × (1 + r)^n
- What it answers
- What could a lump sum grow to under a stated return?
Present value
- Calculation
- Future value ÷ (1 + r)^n
- What it answers
- What amount today supports a future target?
Where this fits in the CFP exam
General Principles of Financial Planning has an approximate 15% domain weight. It spans the planning process, financial statements, debt, economics, time value of money and education funding.
Selected official topic references: B.8, B.9 and B.12.
Practise here: Net worth, recurring cash flow and timing conventions for a calculation.
Continue your preparation: Debt strategy, economics and detailed time-value calculations need further study; education funding has a separate applied note.
Match periods before using a formula
List whether each number is monthly, annual or a one-time balance. Converting a monthly savings amount into a yearly contribution is different from treating it as a lump sum deposited today.
For time-value questions, draw a timeline before entering calculator values. Identify the payment timing, number of periods and interest-rate period. “Beginning of year” payments compound for longer than “end of year” payments. A sign or timing error can overwhelm otherwise correct arithmetic.
- 1
Inventory
Assets and debts are balances; income and spending are flows.
- 2
Normalize
Use the same time period and distinguish gross from net cash.
- 3
Allocate
Assign the available surplus to goals without counting it twice.
Move from financial statements to a dated goal
A statement of financial position is a snapshot. A goal calculation adds a deadline and assumptions about future cash flows. A contribution deposited today earns a return for a different number of periods than contributions made over time, so drawing the cash-flow timeline is part of choosing the method.
For a single future amount, present value discounts the target to today. For a single current amount, future value compounds it forward. An annuity calculation adds repeated payments and requires identifying whether they occur at the beginning or end of each period. Do not use a lump-sum formula for a stream simply because the totals happen to match.
Rates and periods must agree. An annual effective rate and a monthly contribution schedule need a consistent conversion; dividing by 12 is not automatically equivalent to converting an effective annual rate. Use the convention supplied by the problem and check calculator frequency settings.
Worked example: value a single future target
Assume a $10,000 payment is due in two years, a fixed 5% annual return is stipulated, and there are no fees, taxes or additional deposits. Required present value is $10,000 divided by 1.05 squared, or about $9,070.29. Compounding that amount forward under the same assumptions reproduces the target.
This is a mathematical scenario, not a guaranteed available investment. If the household cannot tolerate a shortfall at the deadline, the suitability of taking risk is a separate decision. A higher assumed return lowers the calculated deposit but does not reduce the promised payment.
General planning questions may combine this calculation with debt, reserves or education funding. Avoid assigning the same current cash both to the goal deposit and to an emergency reserve. Check the household’s actual surplus and available assets before treating a calculated funding amount as feasible.
Worked example: apply the rule
An original teaching example. All numerical assumptions are stated; this is not a released CFP Board question.
Original worked example
A household has $310,000 of assets and $190,000 of liabilities. Monthly take-home pay is $7,200 and all monthly outflows are $6,450. What are net worth and the annual cash surplus if flows stay constant?
Illustrative values · common scale from zero to $310,000
- Assets
- $310,000
- Liabilities
- $190,000
- Net worth
- $120,000
- 1Net worth = $310,000 - $190,000 = $120,000.
- 2Monthly cash surplus = $7,200 - $6,450 = $750.
- 3Annual cash surplus = $750 × 12 = $9,000.
$120,000 net worth and $9,000 annual surplus.
Watch for: Adding net worth to annual income, or subtracting a debt payment again when it is already included in outflows.
Change one fact: can you still solve it?
Attempt this original variation before revealing the answer. Explain which assumption changed and why it matters.
Try it
A household’s monthly surplus is $750 before a new annual insurance premium of $1,800. The premium is not in the existing outflows. What recurring monthly saving can the household plan?
Reveal answer and reasoning
$600 per month, or $7,200 per year.
Reserve $1,800 ÷ 12 = $150 each month. Then $750 - $150 = $600. Ignoring an annual bill overstates recurring surplus; subtracting the full $1,800 every month overstates the cost.
Questions about this topic
Does a large net worth mean a client has an adequate reserve?
No. Net worth may be tied up in a home, business or retirement accounts. Reserve analysis depends on accessible assets, spending needs and the client’s risks.
How much of the exam does this topic represent?
The full General Principles of Financial Planning domain has an approximate 15% weight. This page teaches selected methods within that domain, not all of its content. The worked example has no separate published exam weight.
Sources and editorial notes
Source check: . MiloPrep editorial team. Official rules and provider descriptions are distinguished from our original examples and study suggestions.
- CFP Board: principal knowledge topics
Eight domain weights and the scope of the topics. Domain weights are approximate; a narrower lesson has no separate published weight.
- CFP Board: applying the planning process
Seven-step process, integration factors and scope-of-engagement responsibilities.
- SEC Investor.gov: asset allocation
Allocation by time horizon and risk tolerance, diversification and rebalancing. Does not endorse an example portfolio or return.
US CFP scope. Study examples are simplified and are not individualized financial, tax or legal advice. No independent CFP professional review is claimed. MiloPrep is not affiliated with or endorsed by CFP Board or the compared providers.
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Notes
- * A balance sheet is a snapshot: Original example: assets less liabilities equals net worth. All three amounts are balances on the same date; annual cash flow is a different measure. ↩ Return to content