PFIN 4 Understanding the Financial Planning Process 1 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. GITMAN/ JOEHNK/ BILLINGSLEY

2 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. 1Identify the benefits of using personal financial planning techniques to manage your finances 2 Describe the personal financial process and define your goals 3 Explain the life cycle of financial plans, the role they play in achieving your financial goals, how to deal with special planning concerns, and the use of professional financial planners LEARNING OUTCOMES PFIN4 | CH1

3 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. 4 Examine the economic environment’s influence on personal financial planning 5Evaluate the impact of age, education, and geographic location on personal income 6 Understand the importance of career choices and their relationship to personal financial planning LEARNING OUTCOMES (continued) PFIN4 | CH1

Rewards of Sound Financial Planning 4 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. Improving your standard of living Spending money wisely Accumulating wealth PFIN4 | CH1

Exhibit 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. Organizational Planning Model PFIN4 | CH1

Personal Financial Planning 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. Systematic process that considers important elements of an individual’s financial affairs to fulfill financial goals PFIN4 | CH1

Exhibit 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. The Six-Step Financial Planning Process PFIN4 | CH1

Financial Goals 8 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 9 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. PFIN4 | CH1 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

Exhibit 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. The Personal Financial Planning Life Cycle PFIN4 | CH1

Types of Financial Planning 11 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. Asset acquisition Liability and insurance Savings and investment Employee benefit Tax Retirement and estate PFIN4 | CH1

Exhibit 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. How a $1,000 Investment Grows Over Time PFIN4 | CH1

Financial Planning Concerns 13 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. Managing two incomes Managing employee benefits Managing finances in tough economic times PFIN4 | CH1

Financial Planning Players 14 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. 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 PFIN4 | CH1

Exhibit 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. The Financial Planning Environment PFIN4 | CH1

Phases of Economic Cycles 16 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. Real GDP increases until it hits a peak Expansion Expansion ends and a contraction begins Peak Real GDP falls Contraction Contraction ends and an expansion begins Trough PFIN4 | CH1

Exhibit 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. The Business Cycle PFIN4 | CH1 Source: Adapted from William Boyes and Michael Melvin, Economics, 8th ed. (Cengage, 2011), p. 135.

Economy 18 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. General price level is increasing Inflation Measure of inflation based on changes in the cost of consumer goods and services Consumer price index (CPI) Amount of goods and services that each dollar buys at a given time Purchasing power PFIN4 | CH1

Factors that Determine the Personal Income 19 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. 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 PFIN4 | CH1

Steps for Career Planning 20 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. 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 PFIN4 | CH1

21 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. Standard of living Average propensity to consume Wealth Tangible assets Personal financial planning Utility Goal dates KEY TERMS Peak Contraction Trough Inflation Consumer price index Purchasing power Expansion Flexible-benefit (cafeteria) plans PFIN4 | CH1

22 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. 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 PFIN4 | CH1