1. Financial Planning 101 Presented by The Arkansas Financial Group, Inc.

2. ©2002 The Arkansas Financial Group, Inc. Decisions, Decisions, Decisions! Need to look at financial decisions from a holistic point of view How does each decision affect the overall picture

3. ©2002 The Arkansas Financial Group, Inc. Planning Issues Goal Setting Company Benefits Risk Management Tax Issues Investment Issues

4. ©2002 The Arkansas Financial Group, Inc. Goal Setting Short Term Goals: – Take into account “Pent Up Demand” – Pay off debt – Buy a House/Car/Furniture – Take a vacation

5. ©2002 The Arkansas Financial Group, Inc. Goal Setting Long Term Goals – Take care of family in event of death/disability How much life insurance do you need? How much disability income insurance do you need? Do you have a will? What other legal documents should you have? – College funds for children – Retirement

6. ©2002 The Arkansas Financial Group, Inc. Where are you now? Do you have health and dental insurance? How much life insurance do you currently have? Do you have disability income insurance? Do you have adequate coverage on your home/auto? Do you have adequate professional/personal liability coverage?

7. ©2002 The Arkansas Financial Group, Inc. What company benefits are available? Health/Dental Short/Long term disability income Life insurance Retirement – 401k or 403b Other miscellaneous – Child care

8. ©2002 The Arkansas Financial Group, Inc. How do you plan to achieve goals? Maximize company benefits first – Company may be paying portion, so it costs you little or nothing! – Payroll deduction is painless – what you don’t see in your checking account, you never miss! – Generally cost efficient

9. ©2002 The Arkansas Financial Group, Inc. What Next? Life Insurance – if you have a family that depends on your income – NOT an investment – Buy Term – more important to have enough coverage – If you have no dependants, you probably don’t need life insurance

10. ©2002 The Arkansas Financial Group, Inc. What Next? Disability Income – Need to cover 60% of of your gross income – Most important if you are responsible for your self – Important to have benefits to age 65 – increase waiting period to reduce premium

11. ©2002 The Arkansas Financial Group, Inc. What Next? Legal Documents – Will lets you determine where your assets will go If you have children, a must to be sure the children will go to whom you would want – Durable Power of Attorney – Health Powers

12. ©2002 The Arkansas Financial Group, Inc. How to avoid “Credit Card Hell” Key is to separate money for short term goals from your regular checking account “Savings to Spend Account” – makes savings unconscious, and spending conscious

13. ©2002 The Arkansas Financial Group, Inc. How to avoid “Credit Card Hell” Determine how much you will spend annually on non-routine expenses – Clothing – Gifts – Vacations/Travel – Life/Disability insurance

14. ©2002 The Arkansas Financial Group, Inc. How to avoid “Credit Card Hell” Total non-routine expenses Divide by 12 Have that amount automatically transferred to a separate account (money market or savings account)

15. ©2002 The Arkansas Financial Group, Inc. How to avoid “Credit Card Hell” The key is the enforced discipline – automatic draft means you decide only once to save for your short term goals The money is still available to pay for these expenses Extra step of going to separate account makes you think a little longer before you spend the money

16. ©2002 The Arkansas Financial Group, Inc. Basics of Investing

17. ©2002 The Arkansas Financial Group, Inc. Money Magazine The creator of unrealistic expectations: It is possible to make good financial decisions if you read our magazine for two hours a month It is possible to predict which investments will outperform the others It is possible to know before the rest of the market when to buy or when to sell Past Performance does indicate future results

18. ©2002 The Arkansas Financial Group, Inc. Fear is the Greatest Motivator for Most Investors Only 20% of the population feels comfortable with higher levels of risk¹ Investors tend to be more influenced by the prospect of loss than opportunity for gain¹ ¹ Kathleen Gumey, Ph.D. Financial Psychology Corp.

19. ©2002 The Arkansas Financial Group, Inc. How Bad Can It Get Since 1956, the stock market has experienced 9 bear markets which fell by more than 20% each Average bear market duration: 12 months Average bear market decline: -25.1% Between January 11, 1973 and December 6, 1974 the stock market dropped 45.1% Between early 2000 and October 9, 2002 the DOW dropped 37.85%; the S&P 500 fell 49.15%; and the NASDAQ crashed 77.92%

20. ©2002 The Arkansas Financial Group, Inc. Emotion-Based Expectations Fear of losses and greed brought by “great tips” are normal feelings. Emotions from pride and regret can drive decisions – causing deviations from plan and risk of failure of achieving goals Adhere to the policies and procedures set forth in the Investment Policy Statement Avoid emotionally reacting to events, news and opinions

21. ©2002 The Arkansas Financial Group, Inc. Mistakes & Misperceptions Dow Jones Industrial Average: Average Total Returns thru June 30, 1999 0% 5% 10% 15% 20% 25% 21.7% 12.5% Bull Market 10/1/90 – 6/30/99 30 Years 7/1/69 – 6/30/99 Source: Towers, Dow Jones Industrial Average, which is comprised of 30 large (NYSE) stocks. Total return, calculated by Wilshire Associates, Inc., includes reinvested dividends. An individual cannot invest directly in an index. Past performance cannot guarantee future results.

22. ©2002 The Arkansas Financial Group, Inc. Eliminate Emotion Establish Objective Procedures Risk Capacity and Risk Tolerance Asset Allocation Investment Policy Statement – Sets the policies and procedures to be followed – States the goals and the reasoning – Identifies criteria for evaluation

23. ©2002 The Arkansas Financial Group, Inc. Know Thyself What messages did you get about money when you were growing up? What is your most memorable investment experience? How is your money invested now? How do you feel about that?

24. ©2002 The Arkansas Financial Group, Inc. Measuring Risk Risk Tolerance – Willingness to tolerate risk (volatility/losses) Risk Capacity – How much risk (volatility) is it prudent to have in your portfolio based on your life circumstances?

25. ©2002 The Arkansas Financial Group, Inc. Factors Determining Risk Tolerance and Capacity Tolerance – Time Horizon – Investment Experience – Education – Personality – Values – Political Philosophy – Background Capacity – Stage of Life – Lifestyle – Income Tax Bracket – Liquidity Needs – Other Assets – General Financial Situation

26. ©2002 The Arkansas Financial Group, Inc. Why Measure Risk Tolerance? A key element in any plan Helps determine which portfolio plan is appropriate Gives you a sound footing to refer back to when your attitude or the market changes

27. ©2002 The Arkansas Financial Group, Inc. Over/Under-estimating Your Risk Tolerance Many investors overestimate the amount of risk they can tolerate Some investors sell themselves short by being too conservative

28. ©2002 The Arkansas Financial Group, Inc. Measuring Risk Tolerance can be Difficult Most people generally do not know their own tolerance Their experiences may have led them to irrational preferences or aversions Responses are typically heavily weighted by recent experiences or actions in the investment markets

29. ©2002 The Arkansas Financial Group, Inc. Risk Capacity Your measurable capacity to withstand annual low or negative returns. Capacity may or may not be consistent with your emotional or subjective risk tolerance The more conservative of the two is the “safe route”

30. ©2002 The Arkansas Financial Group, Inc. Risk Capacity Life Expectancy -- 20% Income-- 20% Investment Assets-- 20% Debt-- 15% Liquidity-- 15% Family Responsibilities-- 10% Source: PPC’s Risk Capacity Index

31. ©2002 The Arkansas Financial Group, Inc. Before you hire an advisor, what needs to be clarified? Your advisor’s role in the engagement Your role The advisor’s process; Practice Standards The education provided by the advisor The possibility of losses Degree and frequency of communication Compensation and how it is disclosed How the advisor ensures consistency between financial plans and strategies with your goals and concerns