CHAPTER 1: UNDERSTANDING THE FINANCIAL PLANNING PROCESS

1-2 The Rewards of Sound Financial Planning  Maintain and improve standard of living.  Control spending in order to live well today and tomorrow!  Accumulate wealth.

1-3 Average Propensity to Consume: The percentage of each dollar of income that is spent, on average, for current needs rather than saved.  What is your average propensity to consume? Income spent on current needs Total income

1-4 The Personal Financial Planning Process  Taking conscientious and systematic steps toward fulfilling your financial goals.

1-5 Steps in the Financial Planning Process: 1. Define financial goals. 2. Develop financial plans and strategies to achieve goals. 3. Implement financial plans and strategies. 4. Develop budgets to monitor and control progress toward goals. 5. Evaluate results by using financial statements. 6. Revise goals as situations change.

Define financial goals 2. Develop plans

Implement plans 4. Develop budgets 1. Define financial goals 2. Develop plans FINANCIAL ACTIONS Basic asset decisions Credit decisions Insurance decisions Investment decisions Retirement and estate decisions

Implement plans 4. Develop budgets 1. Define financial goals 2. Develop plans 5. Evaluate results 6. Revise plans FINANCIAL ACTIONS Basic asset decisions Credit decisions Insurance decisions Investment decisions Retirement and estate decisions Prepare financial statements

1-9 Money:  Used as a medium of exchange.  Financial goals are stated in dollar amounts.  Need to consider utility, or amount of satisfaction derived from purchases, as well as cost.  May be closely linked to personal psychological concepts.  May play key role in personal relationships.

1-10 To attain your financial goals:  Be specific in defining goals and focus on results.  Make goals realistically attainable.  Involve family members and enlist their cooperation.  Prioritize goals and set a definite time frame.

1-11 Putting target dates on financial goals:  Short-term goals—to be accomplished within the next year.  Intermediate-term goals—to be accomplished in the next 2-5 years.  Long-term goals—to be accomplished in time periods greater than 5 years.

1-12 From Goals to Plans: A Lifetime of Planning  Early childhood  High school and college  Family formation  Career development  Pre-retirement  Retirement

1-13 Age Income Income Stream Personal Financial Planning Lifecycle Retirement/ Estate Tax Savings/ Investmen t Asset Acquisition Liability/Insurance Benefits

1-14 Benefit of planning:  Your money works more efficiently for you by...  Utilizing the financial wonder— The power of compounding through time!

1-15 Growth of $1,000 at 8 % interest: Years

1-16 Growth of $1000 at 10% interest: Years 21,725 45,259

1-17 Use the personal computer to:  Prepare financial statements  Plan retirement  Prepare and file tax returns  Track investments  Analyze needs

1-18 The Planning Environment Financial planning is carried out in an economic environment created by the interactions of  Government  Business  Consumers

1-19 BUSINESSGOVERNMENTCONSUMERS Money payments of wages, rents interest, and profit Money payments for goods and services

1-20 BUSINESSGOVERNMENTCONSUMERS Money payments of wages, rents interest, and profit Money payments for goods and services Land, labor, and financial capital Goods and services

1-21 BUSINESSGOVERNMENTCONSUMERS Money payments of wages, rents interest, and profit Money payments for goods and services Land, labor, and financial capital Goods and services Public goods & services, regulations, and revenues Taxes

1-22 Government policy decisions are used to regulate the economy in an effort to:  Provide economic stability  Maintain acceptable employment levels

1-23  Controls money supply  Used to stimulate or contract economic growth Fiscal Policy  Controls levels of taxation  Sets levels of government spending on various programs Monetary Policy

1-24 Policies seek to control:  Economic Cycles –Stages related to employment and production levels –Growth measured by changes in GDP  Inflation –Measured by changes in CPI –Affects purchasing power and interest rates –Affects financial plans and goals

1-25 Economic Cycles ExpansionRecessio n DepressionRecovery HIGH LOW Levels of Employment and Production

1-26 What Determines Your Personal Income?  Age, marital status  Education  Where you live  Career choice

THE END!