Presentation on theme: "The Financial Planning Process"— Presentation transcript:
1 The Financial Planning Process Chapter 1The Financial Planning Process
2 Learning ObjectivesExplain why personal financial planning is so important.Describe the five basic steps of personal financial planning.Set your financial goals.
3 Learning Objectives4. Explain the personal finance lessons learned in the recent economic downturn. 5. Explain how career management and education can determine your income level. 6. List ten principles of personal finance. 7. Understand that achieving financial security is more difficult for women.
4 Introduction It’s easier to spend than to save. Personal financial planning is an ongoing process—it changes as your financial situation and position in life change.Manage and control your finances with a personal financial plan.It helps you achieve financial and lifestyle goals.
5 Importance of Personal Financial Planning Accumulate wealth for special expensesSave for retirement“Cover your assets”Invest intelligentlyMinimize payments to Uncle Sam
6 Five basic steps to personal financial planning Evaluate your financial healthDefine your financial goalsDevelop a plan of actionImplement your planReview your progress, reevaluate, and revise your plan
7 Step 1: Evaluate Your Financial Health Examine your current financial situation.How much money do you make?How much are you spending and on what?Use careful record keeping to track finances and spending.
8 Step 2: Define Your Financial Goals Write or formalize your goals. An unwritten goal is simply a Dream!Attach a financial cost to each one.When will you need the money to achieve the goal?Analyze and revise your goals.
9 Step 3: Develop a Plan of Action Flexibility:Plan for life changes and the unexpected happens.LiquidityImmediate use of cash by quickly and easily (costlessly) converting an asset.ProtectionPrepare for the unexpected with insurance.Minimize TaxesKeep more of what you earn.
10 Step 4: Implement Your Plan Stick to it.Use your financial plan as a road map to achieve goals.Keep goals in mind and work towards them.
11 Step 5: Review, Reevaluate, and Revise Review progress.Reevaluate and revise for changes in your life.Be prepared to formulate a different plan to meet your goals.
12 ESTABLISHING YOUR FINANCIAL GOALS Short-term—within 1 yearIntermediate-term—1 to 10 yearsLong-term—more than 10 years
13 Short–Term GoalsAccumulate Emergency Funds Equaling at least 3 Months’ Living ExpensesPay Off Bills and Credit CardsPurchase InsurancePurchase a smallish Major ItemFinance a Vacation
14 Intermediate-Term Goals Save for Older Child’s CollegeSave for a Down PaymentPay Off Major DebtFinance Large Items (Weddings)Purchase a Vacation Home
15 Long-Term Goals Save for Younger Child’s College Purchase Retirement HomeCreate a Retirement Fund to Maintain Current Standard of LivingTake Care of Elderly Family MembersStart a Business
16 Figure 1.3 A Typical Individual’s Financial Life Cycle
17 Stage 1 The Early Years—A Time of Wealth Accumulation Prior to age 54Develop a regular savings pattern:How much can be saved?Is that enough?Where should the savings be invested?Cost of raising children
18 Stage 2 Approaching Retirement—The Golden Years Transition years between agesDepends on preparation for retirement.Reassess financial goals and decisions— retirement, insurance protection and estate planning.
19 Stage 3 The Retirement Years After age 65, live off savingsRetirement age depends on savings.Less risky investment strategyConsider extended nursing home protection.Estate planning decisions and documents are critical.
20 Ten Principles of Personal Finance The foundation of personal finance.
21 Principle 1: The Best Protection Is Knowledge Understand the basics of personal finance.Take responsibility for your lifetime financial plan.Seek professional advice wisely.
22 Principle 2: Nothing Happens Without a Plan Easier to think about spending than about saving.Saving must be planned.Putting off a financial plan means goals are harder to achieve.
23 Principle 3: The Time Value of Money Money received today is worth more than money received in the future.Understand how savings and investments grow over timeUnderstand compound interest.Understand spending now and paying later
24 Principle 4: Taxes Affect Personal Finance Decisions Know the effect of taxes on the rate of return of investments.Compare investment alternatives on an after-tax basis.Understand tax laws.
25 Principle 5: Stuff Happens, or the Importance of Liquidity Plan for unexpected eventsHave money or liquid funds availableLiquid funds should cover 3 to 6 months of living expenses
26 Principle 6: Waste Not, Want Not - Smart Spending Matters Differentiate want from needDo homework before the purchaseMake the purchase at the best priceMaintain your purchase
27 Principle 7: Protect Yourself Against Major Catastrophes Have the right kind of insurance before a tragedy occurs.Know your insurance policy coverage.Focus insurance on major catastrophes which can be financially devastating.
28 Principle 8: Risk and Return Go Hand in Hand Saving and investing grows money.Investors demand a minimum return above anticipated inflation.Investors demand higher return for added risk.Diversification by spreading money in several investments reduces risk.
30 Principle 9: Mind Games, Your Financial Personality, and Your Money Behavioral biases lead to big financial mistakes.Mental accounting impacts financial decisions.“Sunk cost effect” pours good money after bad money because of bias.
31 Principle 10: Just Do It!Taking the first step towards your goals is difficult.The following steps become easier.First step is to pay yourself first—save then spend.Saving early can make a big difference.
32 Women and Personal Finance Tougher to achieve financial security.Generally earn less.Less likely to have pensions.Qualify for less Social Security.Live longer than men.Planning for financial independent more difficult for them than it is for men.
33 Women and Personal Finance Need to take charge of their money and financial future.Acquire knowledge.Make things happen—need a plan.See a financial planner about specific concerns.
34 SummaryPersonal financial planning allows you to manage your finances and achieve lifecycle financial goals.There are five basic steps to personal financial planning.Set your financial goals in order to achieve them with a financial plan.
35 SummaryAn emergency fund can help protect yourself in the event of an economic downturn.The more educated your are, the more you will earn.There are ten basic principles on which personal financial planning is built.Planning is especially important for the financial future of women.
36 Figure 1.6 How Long Households Go Without Income Before Hardship Sets In