The Financial Planning Process

1-2 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Learning Objectives 1. Explain why personal financial planning is so important. 2. Describe the five basic steps of personal financial planning. 3. Set your financial goals.

1-3 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Learning Objectives 4. Explain how career management and education can determine your income level. 5. List ten principles of personal finance.

1-4 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.

1-5 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Importance of Personal Financial Planning Accumulate wealth for special expenses Save for retirement “Cover your assets” Invest intelligently Minimize payments to Uncle Sam

1-6 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Five basic steps to personal financial planning 1. Evaluate your financial health 2. Define your financial goals 3. Develop a plan of action 4. Implement your plan 5. Review your progress, reevaluate, and revise your plan

1-7 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.

1-8 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Step 2: Define Your Financial Goals Write or formalize them Attach a financial cost to each one. When will you need the money to achieve the goal? Analyze and revise your goals.

1-9 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Step 3: Develop a Plan of Action Flexibility: Plan for life changes and the unexpected. Liquidity Immediate use of cash by quickly and easily converting an asset. Protection Prepare for the unexpected with insurance. Minimize Taxes Keep more of what you earn.

1-10 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.

1-11 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.

1-12 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 1.1 The Budgeting and Planning Process

1-13 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Short-term -- within 1 year Intermediate-term -- 1 to 10 years Long-term -- more than 10 years

1-14 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Short–Term Goals Accumulate Emergency Funds Equaling 3 Months’ Living Expenses Pay Off Bills and Credit Cards Purchase Insurance Purchase a Major Item Finance a Vacation

1-15 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Intermediate-Term Goals Save for Older Child’s College Save for a Down Payment Pay Off Major Debt Finance Large Items (Weddings) Purchase a Vacation Home

1-16 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Long-Term Goals Save for Younger Child’s College Purchase Retirement Home Create a Retirement Fund to Maintain Current Standard of Living Take Care of Elderly Family Members Start a Business

1-17 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 1.2 Personal Financial Goals Worksheet

1-18 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 1.3 A Typical Individual’s Financial Life Cycle

1-19 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Stage 1 The Early Years—A Time of Wealth Accumulation Prior to age 54 Develop a regular savings pattern: How much can be saved? Is that enough? Where should the savings be invested? Cost of raising children

1-20 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Table 1.1 The Cost of Raising a Child

1-21 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Stage 2 Approaching Retirement—The Golden Years Transition years between ages Depends on preparation for retirement. Reassess financial goals and decisions— retirement, insurance protection and estate planning.

1-22 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Stage 3 The Retirement Years After age 65, live off savings Retirement age depends on savings. Less risky investment strategy Consider extended nursing home protection. Estate planning decisions and documents are critical.

1-23 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall A series of positions to show your skills. Is the job important, enjoyable, and satisfying? Does it provide for your desired lifestyle?

1-24 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 1.4 Job Search Worksheet

1-25 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 1.4 Job Search Worksheet

1-26 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 1.4 Job Search Worksheet

1-27 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Choosing a Major and a Career Effective self-assessment Interests, skills, values, personal traits Desired lifestyle Research career alternatives and match with your skills and interests Research potential earnings

1-28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Table 1.2 What Different College Majors Earn

1-29 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Getting a Job Start early Prepare and practice for interviews Research the company Dress appropriately, be confident, and follow-up

1-30 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Table 1.3 Most Common Interview Questions

1-31 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Do good work. Project the right image. Understand and work within the power structure. Gain visibility. Being Successful in Your Career

1-32 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Take new assignments. Acquire new skills and keep up with technology. Develop a strong network. Be ethical. Being Successful in Your Career

1-33 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall What Determines Your Income? Skills Education The wealthy are married

1-34 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 1.5 Education and Earnings

The foundation of personal finance.

1-36 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Principle 1: The Best Protection Is Knowledge Understand the basics of personal finance. Take responsibility for your lifetime financial plan. Seek professional advice wisely.

1-37 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.

1-38 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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 time Understand compound interest. Understand spending now and paying later

1-39 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Table 1.4 Importance of Starting Early—Just Do It!—to Accumulate $1 Million by Age 67 Investing Your Money at 12%

1-40 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.

1-41 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Principle 5: Stuff Happens, or the Importance of Liquidity Plan for unexpected events Have money or liquid funds available Liquid funds should cover 3 to 6 months of living expenses

1-42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Principle 6: Waste Not, Want Not - Smart Spending Matters Differentiate want from need Do homework before the purchase Make the purchase at the best price Maintain your purchase

1-43 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.

1-44 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Principle 8: The 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

1-45 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Figure 1.6 The Risk-Return Trade-Off

1-46 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Principle 9: Mind Games 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.

1-47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 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.

1-48 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Summary Personal financial planning allows you to manage your finances and achieve lifecycle financial goals. There are five basic steps to personal financial planning.

1-49 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Summary Set your financial goals in order to achieve them with a financial plan. The more educated your are, the more you will earn. There are ten basic principles on which personal financial planning is built.

1-50 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.