Understanding the Financial Planning Process

Rewards of Sound Financial Planning Improving your standard of living Spending money wisely Accumulating wealth

Organizational Planning Model

Personal Financial Planning Systematic process that considers important elements of an individual’s financial affairs to fulfill financial goals

The Six-Step Financial Planning Process

Financial Goals 6 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Results that an individual wants to attain Utility and cost are to be considered when evaluating alternative qualities of life, spending patterns, and forms of wealth accumulation Money and utility are linked to psychological concepts of values, emotion, and personality Financial planning is an important part of the conflict resolution process PFIN4 | CH1

Target Dates on Financial Goals Goal dates: Target dates in the future when certain financial objectives are expected to be completed Long-term goals Indicates wants and desires for a period covering about 6 years out to the next 30 or 40 years Short-term financial goals Set each year and cover a 12-month period Intermediate goals Bridge the gap between short- and long-term goals

The Personal Financial Planning Life Cycle

Types of Financial Planning Asset acquisition Liability and insurance Savings and investment Employee benefit Tax Retirement and estate

How a $1,000 Investment Grows Over Time

Financial Planning Concerns Managing two incomes Managing employee benefits Managing finances in tough economic times

Financial Planning Players Government Source of revenue for business and wages for consumers Business Important part of the circular flow of income that sustains a free enterprise system Consumers Consumer choices determine the kinds of goods and services that businesses provide

The Financial Planning Environment

Factors that Determine the Personal Income Place of residence Difference in salaries earned Difference in living costs Career Social, demographic, economic, and technological trends influence decisions regarding the fields that offer best opportunities for future

Steps for Career Planning Identify interests, skills, needs, and values Set specific long- and short-term career goals Develop and use an action plan to achieve those goals Review and revise career plans as the situation changes

SUMMARY Sound financial planning is necessary for achieving financial objectives Planning what to do with one’s money and spending and investing it wisely involves personal financial planning Financial goals help in achieving financial goals Financial planning constitutes a dynamic environment including business and consumers

There are Four Basic Economic Activities of Consumers Earning Spending Savings Borrowing

Earning Earning --- gaining money by working, owning a business, or receiving investment returns. Money gained from earning is called earnings. A person’s career choices, ability to find employment, and ability to advance determine his or her expected earnings and standard of living.

Factors Affecting Earnings Career Choices Type of career/job Place of employment Ability to Find Employment Education level Employability skills Prior job performance Economic conditions Workplace trends and opportunities Ability to Advance Type of career/job Education level Job performance Economic conditions Workplace trends and opportunities Earnings Standard of Living

Education pays… Education Income Earning Ability Unemployment

Spending Spending --- using money to purchase goods and services. The way a person spends money determines the value received and influences the economy. Each purchase contributes to the demand for the product or service purchased

Law of Scarcity Law of Scarcity: An economic system cannot produce all goods and services that consumers want, and most consumers do not have the resources to purchase everything they want. – Choices must be made about how limited resources (time, money) are used.

Trade-offs and Opportunity Costs Because of scarcity, any time a choice is made there are alternatives that are not chosen. When making a choice, other alternatives must be sacrificed. The highest-valued alternative that must be given up when a choice is made is the opportunity cost of the choice. The choice of one item while giving up another is called a trade-off.

Responsible spending Responsible spending includes researching and planning purchases in advance and making wise choices in light of opportunity costs and trade-offs that apply

Saving Saving --- putting aside money for later use. – Money may be “saved” in a bank account or in a wallet. The form of savings used determines the financial return “Later Uses” For Savings Emergencies Recurring expenses Future purchases Financial goals Retirement

Benefits of Saving – Provide money for future purchases – Can be used to earn income – Produce a healthy economy – Increase personal financial security – Provide growth opportunities for business ventures Responsible Saving - forming the habit of saving regularly & finding forms of saving that yield high returns

Borrowing Borrowing --- obtaining money, goods, or services at present in exchange for the promise of future payment... “Buy now, pay later.” Examples of Borrowing Buying with a credit card Buying on installment Payday loans Cash advances Layaway purchases

Reasons for Borrowing – Major purchases – Emergencies – Convenience – Prepare for future goals – Take advantage of good sales/offers Responsible borrowing means borrowing only what can be paid back when due

Education Tower – Education Affecting Earnings Goal Build the tallest free- standing tower using only the supplies provided Challenge Each group has a different education level with certain skills and limitations

Education Tower Can use one hand only, the other must be kept behind their back and all communication must be done nonverbally High School Dropout Can use one hand only and the other must be kept behind their back High School Graduate Have full use of their hands but all communication must be done nonverbally Associate degree Have full use of their hands but the team must designate one person only who can talk; others must communicate nonverbally Bachelor’s degree Have no limitations Doctorate degree

Education Tower Discussion Which group had to work the hardest to build the tower? Why? Why were some groups more successful than others? How did the education level relate to the degree of the assigned limitations? How does this activity relate and not relate to real life? How might a person get the “skills” needed for the opportunity to add to their occupational level and earn a higher income?

QUESTIONS