1. Financial Planning and Money Management
Summer 2014, BUS-121
Financial Planning & Money Management
Frank Paiano – “Paco”
Professor, School of Social Studies, Business, and Humanities
Welcome, Everyone!

2. First – A Perspective
“It is a gloomy moment in history. Never has the future seemed so dark and incalculable. The United States is beset with racial, industrial and commercial chaos, drifting we know not where. Of our troubles, no one can see the end.”
Harper’s Magazine, 1847

3. CHAPTER 1 Personal Financial Planning in Action
“It is not money that brings happiness, it is lots of money.” – Old Russian Proverb

4. Financial Planning, Definition
Personal financial planning is the process of managing your money to achieve personal economic satisfaction (our book’s definition)
Other definitions:
The ability to use knowledge and skills to manage one's financial resources effectively for lifetime financial security
The process of realizing more enjoyment from income and improving one’s standard of living while making adequate arrangements for a secure and comfortable retirement
The process of identifying assets, determining the classification of those assets in regard to both current and future needs, analyzing debt, expenses, and consumption patterns, reviewing tax status, and addressing a host of other issues and concerns
How would you define personal financial planning?

5. The Benefits of Financial Planning
There are several advantages of effective personal financial planning
Increased effectiveness in obtaining, using, and protecting your financial resources
Increased control of your financial affairs
A sense of freedom from financial worries obtained by being able to look optimistically toward the future
Improved personal relationships
What is the number 1 reason for divorce in America?

6. Developing a Flexible Financial Plan
A financial plan is a formalized report that...
Summarizes your current financial situation
Analyzes your financial needs
Recommends future financial activities
Your financial plan can be created by you, done with assistance from a financial planner, or made using a money management software package

7. The Financial Planning Process
Determine your current financial situation
Develop your financial goals
Identify alternative courses of action
Evaluate your alternatives
Keep in mind opportunity costs and risks
Create and implement a financial action plan
Write it down!
Reevaluate and revise your plan
“My Goodness! Does anybody really do all this?!”

8. What is a More Realistic and Typical Financial Planning Process?
Make money
Spend it
Make some more money
Spend that …
… and then spend some more
Go into debt
Panic!
Take BUS-121, Financial Planning and Money Management
“Lots of anybodies have done this!”

9. Simply Put, It All Comes Down to the Choices We Make!
Opportunity cost
What you give up by making a choice
The opportunity cost is sometimes referred to as the trade-off of a decision
It cannot always be measured in dollars. Sometimes the cost is your time or your health
Consider the lost opportunities that will invariably result from your decisions
Example/Discussion: “There is no such thing as a free lunch!”
What are the opportunity costs of attending college?

10. Your Money or Your Life, Joe Dominguez & Vicki Robin
Opportunity Costs and Financial Results Evaluated When Making Decisions
Personal
Opportunity Costs
(time, effort, health)
Financial
(interest, liquidity,
safety )
Acquisitions
(automobile, home, college education, investments, insurance, retirement fund, lifestyle)
versus
Your Money or Your Life, Joe Dominguez & Vicki Robin

11. Every Financial Decision Involves Evaluating Types of Risk
Inflation risk
Rising prices cause lost buying power
Interest-rate risk
Affect costs of borrowing and rate of return
Income risk
The loss of a job
Personal risk
Health or safety
Liquidity risk
Higher return may mean less liquidity
Culture of Consumerism risk
a.k.a. Die-Working-and-in-Debt-Up-to-Your-Eyeballs risk
Discussion:
Can you guard against all risks?
Should you try?

12. Implementing Your Financial Plan
Developing good financial habits
Use a well-conceived spending plan to help you stay within your income, while allowing you to save and invest for the future
Have appropriate insurance protection to prevent financial disasters
Become informed about tax and investment alternatives
Achieving your financial objectives requires…
A willingness to learn, and
Appropriate information sources

13. Financial Planning Information Sources
Printed materials
Books, magazines
Financial institutions
Credit unions, banks, brokerages, etc.
School courses and educational seminars
Computer software and on-line information sources
The Internet is an inexhaustible supply
Sometimes useful, sometimes not…
Financial specialists
Taking this course is a great start!

14. Influences on Personal Financial Planning
Life situation and personal values
Marital status, household size, and employment
Major events
Marriage, Birth or adoption of child, Divorce!, Bankruptcy
Values
What are the ideas and principles you consider correct, desirable and important?
Where are you in the Adult Life Cycle stage?
“Traditionalist / Mature” – Pre 1946 – 62 million
“Baby Boomer” – 1946 to 1964 – 78 million
“Gen Xer” – 1965 to 1981 – 59 million
“Millennial” – 1981 to 2000 – 78 million
(a.k.a. Digital Generation, Gen Y)
The next generation? – 2001+

15. Influences on Personal Financial Planning
(continued)
Millennial tee-shirt worn by an SDSU student.

16. Influences on Personal Financial Planning
(continued)
Economic factors:
Market Forces
Supply and demand
Production costs and competition
Financial institutions
Influence of the Federal Reserve Bank and the global financial markets
Global influences
Level of exports and imports
Economic conditions....

17. Changing Economic Conditions
Consumer Prices and Inflation
Consumer Spending
Interest Rates
Money Supply
Unemployment
Housing Starts
GDP: Gross Domestic Product
Trade Balance (a.k.a. Trade Inbalance!)
Budget Deficit
Financial Markets
But since none of us has much, if any, control over these matters, we will focus on the things that we can and do have control over.

18. Components of Financial Planning
Planning (chapters 1, 2)
Taxes (chapter 3)
Saving (chapter 4)
Borrowing (chapter 5)
Spending (chapters 6, 7)
Managing risk (chapters 8, 9, 10)
Investing (chapters 11, 12, 13)
Retirement and estate planning (chapter 14)

19. Developing Personal Financial Goals
Types of financial goals include those...
Influenced by the time frame in which you want to achieve your goals
Influenced by the financial need that drives your goals
Timing of goals must be identified
Short-term, intermediate-term and long-term goals
Financial goals should...
Be realistic, be stated in specific, measurable terms, have a time frame, have a priority, and indicate the action or actions to be taken

20. Timing of Financial Goals
Short-term – up to 1 year “or so”
Intermediate-term – 2 to 5 years
Long-term – more than 5 years
The above are the book’s time frames. Here are mine:
Short-term – 1 to 3 years
Intermediate-term – 3 to 5, 6 or even 7 years
Long-term – 7 years or longer (10 to 30 years)
The book’s time frames are more in line with the general consensus within the financial industry (brokerage firms, mutual funds, etc.) My time frames are more common in the life insurance industry.

21. Financial Goal: Example
Pay off VISA
Balance: $3,500
Time frame: Within 12 months
Actions to be taken
Reduce dating and clubbing to twice a month
Cancel cable service and mobile phone
Stop buying coffee at FiveBuck$
Pay extra $300 per month
Priority: High
Which time frame does this belong to?
How would you measure the success of the goal?
Is the goal reasonable?

22. Financial Goal: Example
Save up for a Home Theater system
Amount needed: $2,000
Time frame: Within 12 months
Actions to be taken
Take part-time job at Home Cheapo
Put $150 per month into a special savings account at the bank
Priority: Medium

23. Financial Goal: Example
Save for down payment on a condo
Amount needed: $15,000
Time frame: 5 years
Actions to be taken
Set up $200 automatic investment per month to be taken from our checking account
Expected rate of return: 7%
Priority: High
Will $200 per month at 7% be enough to reach this goal?
We are going to learn how to calculate the future value of this stream of investments.

24. Non-Financial Goal: Example
Be able to do 15 “good” push-ups
Can currently only do 7 “good” push-ups
Time frame: Within 3 months
Actions to be taken
Start with 7 push-ups, three times a day
Increase by 2 or 3 push-ups every three to four weeks
Work up to 15 push-ups within 3 months
Priority: Medium
Is this goal reasonable?

25. Goal Setting
Which of the following goals would be the easiest to implement and measure its accomplishment?
Spend less so we can save more each month
Save $10,000 for a down payment on a condo
Save $100 each month to create a $4,000 emergency fund in 40 months by canceling the cable service
Save enough for a $4,000 vacation next year
The correct answer is (C).

26. The Financial Goal of Most Americans
Spend everything that you earn!
And then spend some more!
Most Americans Live Beyond Their Means
“Honey, Can We Make It to the Next Paycheck?”
Discussion: How do we do it? Why do we do it?

27. The Most Important Financial Goal!
Spend less than you earn!
“Live Beneath Your Means”
“Pay Yourself First” – 10%?
“MAKE L VE, NOT LOAN$!”

28. The Most Important Financial Goal!
(continued)
Pay Yourself First
By having the money come out of your paycheck or checking account automatically, most individuals easily adjust to investing
Works like a pay raise, only in reverse
The 10% Solution
Many financial planners recommend saving at least 10% of your income for long-term, compounded growth
The Wealthy Barber, David Chilton
Is 10% a reasonable goal?

29. The Most Important Financial Goal!
(continued)
“The magic of compound interest. Thirty dollars a month, a dollar a day, can magically turn into over a million dollars. And do you know what is even more impressive? You know someone who has done it,” Roy, our barber, said proudly.
“Thirty-five years ago, I started my savings with thirty dollars a month, approximately 10% of my earnings. I have achieved just under 13% return per year. In addition, as my income rose, my savings rose accordingly. Thirty dollars a month became sixty dollars, then a hundred, and eventually hundreds of dollars a month.”
“You three are looking at a very wealthy man.”
The Wealthy Barber, David Chilton

30. The Most Important Financial Goal!
(continued)
“One of my early students only followed the ‘Pay Yourself 10% First’ lesson. He bought the wrong life insurance, abused credit cards, overpaid for his mortgage, did not take advantage of his 401(k) at work, and lost all $15,000 of an inheritance playing the commodities market.”
“This is a real upbeat, encouraging story, Roy,” said Tom.
“Today, his net worth is $850,000, Tom. $300,000 of it is the equity in his house but the rest is his 10% savings.”
“He did everything else wrong but –” Cathy started.
“Because he had saved 10% of each paycheck and invested it for long-term, compounded growth, today he is in great shape,” Roy finished.
The Wealthy Barber, David Chilton

31. The Rule of 72
A Quick ‘n’ Dirty Method for Calculating Compound Interest (or Inflation)
Divide the interest (or inflation) rate into 72
That is approximately how long it will take the amount to double
Example: 10% Interest Rate
72 / 10 = 7.2 years – It will take about 7 years for your investment to double if you earn 10%
Example: 3% Consumer Price Index (inflation)
72 / 3 = 24 years – It will take about 24 years for prices to double if inflation runs about 3%
But let us get more precise…

32. Simple versus Compound Interest
Simple Interest
Interest = Principal * Rate * Time Interest = $100 * 6% * 1 year = $6.00 In one year you have $106 ($100 + $6.00)
Compound Interest
But the next year, you will earn interest on your interest…
$106 x 6% x 1 = $6.36
After the next year, you will have $112.36
I know what you are thinking, “Big Deal, Paiano!”

33. Time Value of Money (discounting) Future Amount Now Value
Increases in an amount of money as a result of interest earned
Present
Amount
Now
Future
Value
(compounding)
Later
(discounting)

34. Future Value of Money
The amount to which a sum you invest now will increase based on a specified interest rate and time period
Future value is also called compounding
Future value can be computed for a single amount – a.k.a. a lump sum or principal
Future value can also be determined for a series of deposits – a.k.a. stream of investments, “annuity”
Start investing now to take advantage of the future value of money.

35. Future Value of Money Future Value = Principal * (1 + Rate)Time
(continued)
Future value formula for Lump Sum Principal
Future Value = Principal * (1 + Rate)Time
Future value formula for Series of Deposits
(1+Rate)Time - 1
Future Value = Deposit * ────────── Rate
Do not worry about the math. We use the future value of money tables.

36. Present Value of Money
The current value for a future amount based on a certain interest rate and a certain time period
Present value is also called discounting
Present value of a single lump sum
Present value of a series of withdrawals
Not only is present value harder to comprehend, it is also not as important for personal finance. (We use present value extensively in the BUS-123, Introduction to Investments, class.)

37. Present Value of Money Lump Sum Present Value = ───────────
(continued)
Present value formula for Lump Sum
Lump Sum
Present Value = ───────────
(1 + Rate)Time
Present value formula for Series of Withdrawals 1
1- ───────
(1+Rate)Time
Present Value = Deposit * ─────────── Rate
Please do not drop the class. We are not going to do any present value calculations.

38. Future Value of Money Okay, let us do some exercises…
Future value handouts

39. Hope For Your Future
As of December 31, 2013

40. Financial Aspects of Career Planning
Do you have a Job or a Career?
A Job –
An employment position obtained mainly to earn money, without regard for interests or opportunities for advancement
A Career –
A commitment to a profession that requires continued training and offers a clear path for occupational growth
“A job is something you do for a paycheck. A career is something you do regardless of the paycheck.”

41. How Education Relates to Income
Level of Education
Annual
Lifetime
High School Graduate
$35,035
$1,401,400
Associate’s Degree
$42,419
$1,696,760
Bachelor’s Degree
$55,864
$2,234,560
Master’s Degree
$68,879
$2,755,160
Doctorate Degree
$91,492
$3,659,680
Professional Degree
$101,737
$4,069,480
Source: U.S. Census Bureau, 2010

42. Service Industries Expected to Have the Greatest Employment Potential
Computer Technology
Health Care
Business Services
Social Services
Sales and Retailing
Hospitality and Food Services
Management and Human Resources
Education
Financial Services
“Biotechnology.”

43. But What Is Your Career Goal?
Most people believe you must become a doctor or lawyer or high-powered executive to become wealthy
But what if you want to be a writer or a teacher or an artist or a janitor or mechanic or plumber?
Can you become wealthy while doing what you love...
Even if it does not command a large salary?
As we saw, the answer is, “Yes!”
The key is to set a goal for yourself & start investing early.
In fact, your career is not your most important financial decision.
But if your career is not your most important decision, what is?

44. What is Your Most Important Financial Decision?
Who You Marry!
And then subsequently divorce …
“Marriage is grand. Divorce is more like $100 grand.”
– Anonymous

45. The Millenials Go To Work
Fortune says…
“They are ambitious, they are demanding and they question everything, so if there is not a good reason for that long commute or late night, do not expect them to do it. When it comes to loyalty, the companies they work for are last on their list – behind their families, their friends, their communities, their co-workers and, of course, themselves.
But there are a whole lot of them. And as the baby-boomers begin to retire, triggering a … worker shortage, businesses are realizing that they may have no choice but to accommodate these curious Gen Y creatures. Especially because if they do not, the creatures will simply go home to their parents, who in all likelihood will welcome them back.”

46. The March of Civilization
Hunting & Gathering
Agrarian
Simple
Advanced
Industrial
Information (?)
25 hours per week
60 to 80 hours per week
40 hours per week
25 hours per week?

47. Our Secret Weapons!

48. Could not have said it better myself…
“Choose a job you love, and you will never have to work a day in your life.”
Confucious