1. The Financial Planning Process
Chapter 1
The Financial Planning Process

2. 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.

3. Importance of Personal Financial Planning
Accumulate wealth for special expenses
Save for retirement
“Cover your assets”
Invest intelligently
Minimize payments to Uncle Sam

4. Five basic steps to personal financial planning
Evaluate your financial health
Define your financial goals
Develop a plan of action
Implement your plan
Review your progress, reevaluate, and revise your plan

5. 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.

6. Step 2: Define Your Financial Goals
Write or formalize your goals.
Attach a financial cost to each one.
When will you need the money to achieve the goal?
Analyze and revise your goals.

7. 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.

8. 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.

9. 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.

10. ESTABLISHING YOUR FINANCIAL GOALS
Short-term—within 1 year
Intermediate-term—1 to 10 years
Long-term—more than 10 years

11. 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

12. 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

13. 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

14. 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

15. Table 1.1 The Cost of Raising a Child

16. 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.

17. 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.

18. Thinking About Your Career
A series of positions to show your skills.
Is the job important, enjoyable, and satisfying?
Does it provide for your desired lifestyle?

19. 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

20. Table 1.2 What Different College Majors Earn

21. Getting a Job Start early Prepare and practice for interviews
Research the company
Dress appropriately, be confident, and follow-up

22. Table 1.3 Most Common Interview Questions

23. Being Successful in Your Career
Do good work.
Project the right image.
Understand and work within the power structure.
Gain visibility.

24. Being Successful in Your Career
Take new assignments.
Acquire new skills and keep up with technology.
Develop a strong network.
Be ethical.

25. What Determines Your Income?
Skills
Education
The wealthy are married

26. Figure 1.5 Education and Earnings

27. Ten Principles of Personal Finance
The foundation of personal finance.

28. Principle 1: The Best Protection Is Knowledge
Understand the basics of personal finance.
Take responsibility for your lifetime financial plan.
Seek professional advice wisely.

29. 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.

30. 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

31. Table 1. 4 Importance of Starting Early—Just Do It
Table 1.4 Importance of Starting Early—Just Do It!—to Accumulate $1 Million by Age 67 Investing Your Money at 12%

32. 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.

33. 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

34. 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

35. 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.

36. Principle 8: 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.

37. Figure 1.7 The Risk-Return Trade-Off

38. Principle 9: Mind Games, Your Financial Personality, 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.

39. 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.

40. Women and Personal Finance
Tougher to achieve financial security.
Generally earn less.
Less likely to have pensions.
Qualify for less Social Security.
Live longer than men.
Planning for financial independent more difficult for them than it is for men.

41. Women and Personal Finance
Need to take charge of their money and financial future.
Acquire knowledge.
Make things happen—need a plan.
See a financial planner about specific concerns.