Chapter 1 Financial Planning

8/11/2019 Chapter 1 Financial Planning

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The Financial Planning Process


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Elvis Presley

Graduated from high school in June 1953,

took a job at the Precision Tool Co.

His career goal?

To become a truck driver

Met Sam Phillips of Sun Records

What happened then?

Faced financial ruin by his early 40s

How?


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Elvis contd.

Failed to devise a financial plan!

3 major problems:1a) Hired his father, a former truck driver who had once

served an 8-month prison sentence for passing badchecks, as his business advisor

1b) Paid him almost 50 % commission as opposed to theindustry standard of 10%

2) Spent more than half a million dollars a year just to

maintain Graceland, his estate3) Bestowed expensive gifs, and impulsively gave away

money


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Why Personal Financial Planning?

Need a financial plan because its easier to

spend than to save.

Want a financial plan since it helps you

achieve financial goals.

Use financial planning, not to make more

money, but to achieve goals.

Control your finances or they will control you.


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What will you gain fromthe study of

personal finance? Financial literacy-- the vocabulary necessary

to manage ones personal finances Personal finance-- the study of personal and

family resources considered important in

achieving financial success. Personal financial planningthe process of

planning your spending, financing, andinvesting to optimize your financial situation.

Financial success-- the achievement offinancial aspirations that are desired, planned,or attempted. It is defined by the individual orfamily that seeks it.


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Heres What You Can Accomplish

Manage the unplanned

Accumulate wealth for special expenses

Save for retirement Cover your assets

Invest intelligently

Minimize tax payments


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The 6-Step Financial Planning Process

1. Define financial goals.

2. Develop financial plans and strategies.

3. Implement financial plans and strategies.

4. Develop budgets.

5. Evaluate results by using financial statements.

6. Revise goals as situations change.


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Goal Setting

1. Set a long-term financial goal. Long-term goal

(> 5 years)

2. Set a medium-term goal. Intermediate-term goal

(Next 2-5 years)3. Set a goal for this year.

4. Set a goal for this month. Short-term goals

(within one year)

5. Set a goal for this week.


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Attain Your Financial Goals

Be specific in defining goals (put a dollaramount) and focus on results.

Make sure the goal you are working for is

something you really want, not just somethingthat sounds good.

Make goals realistically attainable.

Involve family members and enlist theircooperation.

Prioritize goals and set a definite time frame.


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From Goals to Plans: Personal Financial

Planning Lifecycle


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Stage 1 The Early YearsA Time of

Wealth Accumulation

Prior to age 54: Purchase a home

Prepare for child rearing costs

Save for a childs education

Establish an emergency fund

Start retirement savings

Develop a regular pattern of saving by asking:

How much can be saved? Is that enough?

Where should the savings be invested?


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Stage 2 Approaching RetirementThe

Golden Years

Transition years between ages 55-64.

- Retirement goals are the center of attention.

- Continuously review your financial decisions,

insurance protection and estate planning.

- Unplanned events, such as corporate

downsizing, divorce, or the death of a spouse,

have dramatic effects on your goals.


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The Time

Value of Money

Money has a time value.

Money received today is worth morethan money received in the future.

Compound interest - interest paid on

interest.


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Effect of Compound InterestSimple Interest Compound Interest

Year Principal Rate Time

Interest

Earned

New

Balance Principal Rate Time

Interest

Earned

New

Balance

1 100.00 10% 1 10.00 110.00 100.00 10% 1 10.00 110.00

2 100.00 10% 1 10.00 120.00 110.00 10% 1 11.00 121.00

3 100.00 10% 1 10.00 130.00 121.00 10% 1 12.10 133.10

4 100.00 10% 1 10.00 140.00 133.10 10% 1 13.31 146.41

5 100.00 10% 1 10.00 150.00 146.41 10% 1 14.64 161.056 100.00 10% 1 10.00 160.00 161.05 10% 1 16.11 177.16

7 100.00 10% 1 10.00 170.00 177.16 10% 1 17.72 194.87

8 100.00 10% 1 10.00 180.00 194.87 10% 1 19.49 214.36

9 100.00 10% 1 10.00 190.00 214.36 10% 1 21.44 235.79

10 100.00 10% 1 10.00 200.00 235.79 10% 1 23.58 259.37

11 100.00 10% 1 10.00 210.00 259.37 10% 1 25.94 285.31

12 100.00 10% 1 10.00 220.00 285.31 10% 1 28.53 313.8413 100.00 10% 1 10.00 230.00 313.84 10% 1 31.38 345.23

14 100.00 10% 1 10.00 240.00 345.23 10% 1 34.52 379.75

15 100.00 10% 1 10.00 250.00 379.75 10% 1 37.97 417.72

16 100.00 10% 1 10.00 260.00 417.72 10% 1 41.77 459.50

17 100.00 10% 1 10.00 270.00 459.50 10% 1 45.95 505.45

18 100.00 10% 1 10.00 280.00 505.45 10% 1 50.54 555.99

180.00 455.99


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Understanding the Economic

Environment of Personal Finance The State of the Economy

Economy is a system of managing the productive and employmentresources of a country, community, or business.

Economic growthis a condition of increasing production and consumptionin the economy.

Business cycle (or economic growth)is a wavelike pattern of economicactivity that includes temporary phases that undulate from boom to bust.

Expansionoccurs when production is at a high capacity, unemployment islow, retail sales are high, and prices and interest rates are low or falling.

Recessionis generally a decline in business a recurring period of declinein total output, income, employment, trade, usually lasting from six

months to a year and marked by widespread contractions in many sectorsof the economy.

Depressionis a severe downward phase of the economic cycle whereunemployment is very high, prices are very low, the level of livingdecreases sharply, and economic activity virtually ceases.


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Understanding the Economic

Environment of Personal Finance Tracking at least two statistics may help understand the

direction of the economy:

Gross Domestic Product (GDP) -- the value of all goods andservices produced by workers and capital located in theUnited States, regardless of ownership.

Inflation-- a steady rise in the general level of prices.

Deflation-- falling prices.

When prices are rising, an individuals income also mustrise to maintain its purchasing power, which is a measure

of the goods and services that ones income will buy. Your real incomereflects the actual buying power of your

nominal income(also called money income.)


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Economic Considerations That Affect

Decision Making

Opportunity Costs-- the value of the next best alternative

that must be forgone.

Utility-- the ability of a good or service to satisfy a human

want.

Marginal Utility-- the extra satisfaction derived from having

one more incremental unit of a product or service.

Marginal Costs-- the additional cost of one more incremental

unit of some item.

Interestis the price of money. Savers make no money when

the inflation rate is equal to or higher than their interest rate.

In fact, they are worse off -- going broke slowly.


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The Positive Effects of a Flexible Spending Account

Without With Flexible Spending

the Plan The Plan Account

Monthly salary $2,500 $2,500 --

To FSA account -- (410) $410

Taxable salary $2,500 $2,090

Income tax* (248) (186)

Social Security tax (191) (160)

Salary after taxes $2,061 $1,744

Medical and/or

Dependent care expenses (410) (410)

Take home pay $1,651 $1,344

FSA reimbursement -- 410 (410)

Effective take home pay $1,651 $1,744

How Work Decisions Affect Success in

Personal Finance Fringe Benefitis compensation for employment that does not take form of

wages, salaries, commissions, or other cash payments. Examples include paid

holidays, health insurance, and a retirement plan. Some fringe benefits are

tax-sheltered, such as a flexible spending accounts and retirement accounts.


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Thinking About Your Career

Choosing a Major and a Career

Getting a Job

Making it a Successful Career Youll work for at least 3 different companies, have

over 10 different jobs.

Job switching results from great opportunities or

downsizing.

Job security is a thing of the past.


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Recruiter Roundtable: Keys to Success

in 2009

http://hotjobs.yahoo.com/career-articles-

recruiter_roundtable_keys_to_success_in_200

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Exhaust All Options

Network With Smarts

Flexibility Is Key

Diversify and Listen

Tailor Your Resume
http://hotjobs.yahoo.com/career-articles-recruiter_roundtable_keys_to_success_in_2009-621http://hotjobs.yahoo.com/career-articles-recruiter_roundtable_keys_to_success_in_2009-621http://hotjobs.yahoo.com/career-articles-recruiter_roundtable_keys_to_success_in_2009-621http://hotjobs.yahoo.com/career-articles-recruiter_roundtable_keys_to_success_in_2009-621http://hotjobs.yahoo.com/career-articles-recruiter_roundtable_keys_to_success_in_2009-621http://hotjobs.yahoo.com/career-articles-recruiter_roundtable_keys_to_success_in_2009-621http://hotjobs.yahoo.com/career-articles-recruiter_roundtable_keys_to_success_in_2009-621http://hotjobs.yahoo.com/career-articles-recruiter_roundtable_keys_to_success_in_2009-621http://hotjobs.yahoo.com/career-articles-recruiter_roundtable_keys_to_success_in_2009-621http://hotjobs.yahoo.com/career-articles-recruiter_roundtable_keys_to_success_in_2009-621http://hotjobs.yahoo.com/career-articles-recruiter_roundtable_keys_to_success_in_2009-621

Chapter 1 Financial Planning

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