1. Chapter 1 Overview of a Financial Plan

2. Chapter Objectives Explain how you benefit from personal finance
Identify the key components of a financial plan
Outline the steps involved in developing your financial plan

3. Definitions
Personal finance: the process of planning your spending, financing, and investing to optimize your financial situation
Personal financial plan: a plan that specifies your financial goals and describes the spending, financing, and investing plans that are intended to achieve those goals
Opportunity cost: what you give up as a result of a decision

4. How You Benefit from an Understanding of Personal Finance
Make your own financial decisions
Every spending decision has an opportunity cost
Judge the advice of financial advisors
Make informed decisions
Become a financial advisor
Many career opportunities available

5. Components of a Financial Plan
Budgeting and tax planning
Managing your liquidity
Financing your large purchases
Protecting your assets and income (insurance)
Investing your money
Planning your retirement and estate

6. A Plan for Your Budgeting and Tax Planning
Budget planning: The process of forecasting future expenses and savings
Evaluate your current financial position
Assets: what you own
Liabilities: what you owe
Net worth: the value of what you own minus the value of what you owe

7. Budget and Tax Planning

8. A Plan to Manage Your Liquidity
Liquidity: access to funds to cover any short-term cash deficiencies
Money management: decisions regarding how much money to retain in a liquid form and how to allocate the funds among short- term investment instruments

9. A Plan to Manage Your Liquidity (cont’d)
Credit management: decisions regarding how much credit to obtain to support your spending and which sources of credit to use

10. Managing Your Liquidity

11. A Plan for Your Financing
Loans often needed for large expenditures
College tuition, car, house
Managing loans
How much can you afford to borrow?
Determining maturity of the loan
Selecting a loan with a competitive interest rate

12. Financing Your Large Purchases

13. A Plan for Protecting Your Assets and Income
Insurance planning: Determining the types and amount of insurance needed to protect your assets
Automobile and homeowner’s insurance protect assets
Health insurance limits potential medical expenses
Disability and life insurance protect your income

14. A Plan for Your Investing
Any funds beyond what you need to maintain liquidity should be invested
Primary objective to earn a high return
Potential investments include stocks, bonds, mutual funds and real estate
Risk: uncertainty surrounding the potential return on an investment
Manage investments to keep risk at a tolerable level

15. A Plan for Your Retirement and Estate
This includes insurance planning, retirement planning, and estate planning
Retirement planning: determining how much money should be set aside each year for retirement and how you should invest those funds
Estate planning: determining how your wealth will be distributed before or upon your death

16. Building Your Own Financial Plan
Enhances your net worth
Builds your wealth
All components of your financial plan affect your cash inflows and outflows and how much cash you have available

17. How Financial Plan Decisions Affect Your Cash Flows
How the components relate to your cash flows
Cash inflows are cash that you receive
Cash outflows are cash that you spend
Budgeting balances income and spending
Liquidity deals with cash excesses or shortages

18. How Financial Plan Decisions Affect Your Cash Flows (cont’d)
Part 1 – Tools for Financial Planning
Budgeting allows you to plan how you will use the cash you receive in a given period
How much should you work this month (if your employer allows flexibility)?
Budget decisions determine how much you spend and the amount of your cash outflows each month
What products or services should you purchase this month?

20. How Financial Plan Decisions Affect Your Cash Flows (cont’d)
Part 2 – Managing Your Liquidity
If you have excess cash this month, how much cash should you add to your checking or saving account?
If you have a cash deficiency this month, how much cash should you withdraw from your checking or savings account?
If you have a cash deficiency this month, how much credit should you use from credit cards or other sources?

22. How Financial Plan Decisions Affect Your Cash Flows (cont’d)
Part 3 – Personal Financing
Should you lease a car?
Should you borrow money to purchase a car?
Should you borrow money to purchase a home?
How much cash will you need to borrow?
How long a period will you need to borrow funds?
What is the ideal source from which you will borrow funds?

24. How Financial Plan Decisions Affect Your Cash Flows (cont’d)
Part 4 – Protecting Your Wealth
What types of insurance do you need?
How much insurance should you purchase to protect your assets?
How much insurance should you purchase to protect your income?

26. How Financial Plan Decisions Affect Your Cash Flows (cont’d)
Part 5 – Personal Investing
How much cash should be used to make investments?
What types of investments should you make?
How much risk should you tolerate when making investments?

28. How Financial Plan Decisions Affect Your Cash Flows (cont’d)
Part 6 – Retirement and Estate Planning
How much cash should you invest toward your retirement each month?
What types of investments should you make for your retirement accounts?

30. Summary of Financial Plan Components
Summary of sources of cash
Attempt to work more hours
Withdraw cash from savings
Obtain a loan
Cash in an insurance policy
Sell some of your investments
Withdraw funds from your retirement account

31. Summary of Financial Plan Components
Summary of uses of cash
Purchase products and services
Deposit cash in your checking or savings account
Pay interest payments on a loan or pay off a loan
Make insurance payments
Make new investments
Contribute toward your retirement account

32. How Financial Planning Relates to Cash Flow

33. Integration of the Financial Plan Components
Budgeting decisions affect liquidity management decisions
Liquidity management decisions can affect your financing decisions
Financing decisions can affect your insurance decisions
Insurance decisions can affect your investment decisions

34. Integration of the Financial Plan Components (cont’d)
Investment decisions can affect your retirement planning decisions
Retirement planning decisions can affect your budgeting decisions

35. How Psychology Affects Your Financial Plan
Major impact on human behavior and decision making
Major impact on spending behavior and ability to implement an effective financial plan
Consider two different types of spending behavior
Focus on immediate satisfaction and peer pressure
Focus on the future

36. How Psychology Affects Your Financial Plan
Assess your own spending behavior
Do you pay rent for a single apartment rather than share an apartment?
Do you have large monthly car payments?
Do you have credit card bills that you only make the minimum monthly payment toward each month?

37. How Psychology Affects Your Financial Plan
Do you spend all of your income that is not needed for rent or car loans payments within the first day or two of receiving your paycheck?
Do you always find a reason each month to spend all of your income?

38. Developing the Financial Plan
Step 1. Establish Your Financial Goals
Types of financial goals
Car, home, college, wealth, charity
Set realistic goals
Stronger likelihood of reaching goals
Timing of goals
Short term (within one year)
Intermediate (between 1–5 years)
Long term (beyond five years)

39. Developing the Financial Plan (cont’d)
Step 2. Consider Your Current Financial Position
How your future financial position is tied to your education
Consider your skills, interests, and career paths
How your future financial position is tied to your career choice
Choose a career that will be enjoyable and suit your skills

40. Developing the Financial Plan (cont’d)
How your future financial position is tied to the economy
Economic conditions affect types of jobs available, salaries offered, price of services, value of assets
Financial crisis of affected financial positions in many ways
Reduction in new job opportunities
Elimination of some jobs
Lower salaries for existing jobs
Value of many assets declined

41. Developing the Financial Plan (cont’d)

42. Developing the Financial Plan (cont’d)

43. Developing the Financial Plan (cont’d)

44. Developing the Financial Plan (cont’d)
Step 3. Identify and Evaluate Alternative Plans That Could Achieve Your Goals
Plans could be conservative or aggressive
Step 4. Select and Implement the Best Plan for Achieving Your Goals
The Internet has valuable financial planning information

45. Using the Internet to Facilitate Financial Planning
Provides updated information on all parts of your financial plan
Current tax rates and regulations
Investment performances
New retirement plan rules

46. Using the Internet to Facilitate Financial Planning
Online calculators
Estimating taxes
Determining how your savings will grow over time
Determining whether buying or leasing a car is more appropriate

47. 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
Difficult to discern
Be wary of incompetent advice
Be alert, ask questions, carefully consider advice

48. 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