Chapter 1 Overview of a Financial Plan Copyright © 2012 Pearson Canada Inc. edited by Laura Lamb, Department of Economics, Thompson Rivers University 1-1

Chapter Objectives Explain how you benefit from personal financial planning Identify the key components of a financial plan Outline the steps involved in developing your financial plan Copyright © 2012 Pearson Canada Inc. 1-2

Definitions Personal Finance: the process of planning your spending, financing, and investing activities, while taking into account uncontrollable events such as death or disability, in order to optimize your financial situation over time. Copyright © 2012 Pearson Canada Inc. 1-3

Definitions (cont’d) Personal Financial Plan: a plan that specifies your financial goals, describes the spending, financing, and investing activities that are intended to achieve those goals over time, and uses the risk management strategies that are required to protect against uncontrollable events such as death or disability. Copyright © 2012 Pearson Canada Inc. 1-4

Benefits of Understanding Personal Finance Make Your Own Financial Decisions Judge the Advice of Financial Advisers Become a Financial Advisor Earning the Certified Financial Planner (CFP) designation Copyright © 2012 Pearson Canada Inc. 1-5

Components of a Financial Plan 1.Budgeting and tax planning 2.Managing your liquidity 3.Financing your large purchases 4.Protecting your assets and income 5.Investing your money 6.Planning your retirement and estate Copyright © 2012 Pearson Canada Inc. 1-6

A Plan for Your Budgeting and Tax Planning Budget planning: The process of forecasting future income, expenses and savings goals Evaluate your current financial position Assets Liabilities Net worth Copyright © 2012 Pearson Canada Inc. 1-7

Budgeting and Tax Planning Copyright © 2012 Pearson Canada Inc. 1-8

Financial Planning Life Stages Life Stages Pre-Career Early Earning Mid Earning Prime Earning Retirement Post-Retirement Age Group 0 to to to to to Copyright © 2012 Pearson Canada Inc. 1-9

Financial Planning Life Stages Copyright © 2012 Pearson Canada Inc. 1-10

A Plan to Manage Your Liquidity Liquidity Money management Emergency fund Credit management Copyright © 2012 Pearson Canada Inc. 1-11

Managing Your Liquidity Copyright © 2012 Pearson Canada Inc. 1-12

A Plan for Your Financing Loans often needed for large expenditures –What type of large expenditures? How to manage loans? Copyright © 2012 Pearson Canada Inc. 1-13

Financing Large Purchases Copyright © 2012 Pearson Canada Inc. 1-14

A Plan for Protecting Your Assets and Income Risk Risk management Insurance planning Copyright © 2012 Pearson Canada Inc. 1-15

A Plan for Your Investing Any funds you have beyond what you need to maintain liquidity should be invested Stocks, bonds, mutual funds, real estate All investments have some level of risk Investment risk: uncertainty surrounding the potential return on an investment and its future potential value Copyright © 2012 Pearson Canada Inc. 1-16

A Plan for Your Retirement and Estate This includes insurance planning, retirement planning, and estate planning Retirement planning Estate planning Copyright © 2012 Pearson Canada Inc. 1-17

Components of Your Financial Plan Copyright © 2012 Pearson Canada Inc. 1-18

How Financial Planning Relates to Cash Flow Copyright © 2012 Pearson Canada Inc. 1-19

Developing the Financial Plan 1.Establish your financial goals Ensure they are specific, measurable, realistic, and timely 2.Consider your current financial position 3.Identify and evaluate alternative plans 4.Select and implement the best plan 5.Evaluate your financial plan 6.Revise your financial plan Copyright © 2012 Pearson Canada Inc. 1-20

Developing the Financial Plan (cont’d) Step 1. Establish Your Financial Goals Specify your goals Down payment on a house, pay down your debt Measure your goals Use financial calculators Set realistic goals Stronger likelihood of reaching goals Copyright © 2012 Pearson Canada Inc. 1-21

Developing the Financial Plan (cont’d) Timing of goals Short term (within one year) Medium term (between 1–5 years) Long term (beyond five years) Aggressive goals require a more ambitious financial plan Copyright © 2012 Pearson Canada Inc. 1-22

Developing the Financial Plan (cont’d) Step 2. Consider Your Current Financial Position How your future financial position is tied to your current level of debt How your future financial position is tied to your age and wealth Copyright © 2012 Pearson Canada Inc. 1-23

Developing the Financial Plan (cont’d) Step 3. Identify and Evaluate Alternative Plans That Could Achieve Your Goals Plans could be conservative or aggressive Copyright © 2012 Pearson Canada Inc. 1-24

Developing the Financial Plan (cont’d) Step 4. Select and Implement the Best Plan for Achieving Your Goals The Internet has valuable financial planning information Copyright © 2012 Pearson Canada Inc. 1-25

Developing the Financial Plan (cont’d) Focus on Ethics: Personal Financial Advice Your objective is to get the best advice appropriate to your needs Be wary of unethical behavior Be wary of incompetent advice Copyright © 2012 Pearson Canada Inc. 1-26

Developing the Financial Plan (cont’d) Step 5. Evaluate Your Financial Plan Keep plan in an accessible place and monitor your progress Step 6. Revise Your Financial Plan Change plan as financial condition and financial goals change Copyright © 2012 Pearson Canada Inc. 1-27

Copyright © 2012 Pearson Canada Inc. 1-28