Financial Planning
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Transcript of Financial Planning
Financial Planning
Decisions & Goals in Personal Finance
What does personal financial planning mean?
O It means spending, saving, and investing your money so you can have the kind of life you want as well as financial security.
O Everyone has different financial goals (things you want to accomplish).
Why Plan?Some of the benefits:O You have more money, know how to
use money to achieve your goals, and are financially secure;
O You have less chance of going into debt you can’t handle;
O You can help your partner and support your children.
Why It’s ImportantLearning the steps in the financial planning process
will give you a solid foundation for making all
your financial decisions, big and small, now and in the
future.
Personal Financial Planning
in 6 Steps
Step 1: Determine your current
financial situation
Make a list of monthly income, expenses, and debts.
Keep a record!!!
Step 2:Develop your financial goals
What is your attitude toward money?
Need vs. Want
Think Critically….Why is it important to distinguish
between your needs and your wants?
Step 3:Identify alternative courses
of actionWhat are your options?O Expand current situationO Change the current situationO Start something newO Continue the same course of action
Step 4: Evaluate your alternatives
O Sources of financial informationO social and economic conditions
O Consequences of choicesO opportunity costs
O Understanding risksO Inflation, interest rate, income,
personal, and liquidity
Step 5:Create and use your
financial plan of action
O A list of way to achieve your financial goals
Step 6:Review & Revise your plan
O Should be looked at at minimum every year
Developing Personal Financial Goals
WRITE IT DOWN!!!!
Studies show that people who write down their goals are 3 times more likely to achieve
them.
Types of Goals
Can be defined by the time it takes to achieve them:O Short-term goals are those that you’ll
reach in one year or less (save for computer)
O Intermediate goals take two to five years to reach (house down payment)
O Long-term goals take more than five years to reach (retirement)
Can also be defined depending on the need..
Service vs Good
Consumable (soda)Durable (car….expensive, not purchased often)Intangible (education)
Guidelines for setting goals
Your financial goals should:
O Be realisticO Be specificO Have a clear time frameO Help you decide what type of action
to take
SMART goalsSpecific “I want to go to Panama City for Spring Break” vs. “I want to go somewhere fun over Spring Break”Measurable“I’ll need $150 for my share of the hotel room for the week” vs. “ I want to save a bunch of money for the trip”Attainable“I’ll split the driving with my friends and take $200 more for gas, food, and other spending” vs. “I want $500 to fly there and $700 for spending money”Realistic“I’ll save $60 a month from my paycheck for the next six months” vs. “I’ll buy lottery tickets every week”
Time bound“I want to save all the money by March 1st vs. “I want to save all the money by spring”
Influences on Personal Financial Planning
Life situationsPersonal values
Economic factors
Financial Goals and Activities for Various Life SituationLife Situation Financial Goals & Activities
Young single adult Become financially independent
Obtain career training
Develop a savings plan
Carefully manage your use of credit
Young couple with no children Create an effective financial record-keeping system
Implement a budget
Carefully manage your use of credit
Develop a savings and investment program
Couple with young children Purchase a home
Obtain adequate health and life insurance
Start a college fund
Make a will and name a guardian for your children
Single parent with young children Obtain adequate health, life, and disability insurance
Make a will and name a guardian for your children
Establish an emergency fund
Middle-aged, single adult Contribute to a tax-deferred retirement plan
Evaluate and select appropriate investments
Accumulate an adequate emergency fund
Review will and estate plans
Older couple with no children at home Plan retirement houseing, living expenses, and activities
Obtain health insurance for retirement
Review will and estate plans
Economic FactorsMarket Forces
Supply/DemandFinancial Institutions
Federal Reserve SystemGlobal Influences
Where were they made?Economic Conditions
Inflation, Consumer, Interest
Economic Conditions and Financial PlanningEconomic Condition What It Measures
Consumer prices The value of a dollar; changes in inflation
Consumer spending Demand for goods and services by individuals and households
Interest rates Cost of money, cost of credit when you borrow, and the return on your money when you save or invest
Money supply The dollars available for spending in our economy
Unemployment The number of people without jobs who are willing and able to work
Gross domestic product (GDP) Total dollar value of all the goods and services produced in a country in one year
Opportunity Costs & Financial Strategies
O Personal Opportunity CostsO Time, health, skills, etc
O Financial Opportunity CostsO Time value of money---future value?
Calculating InterestNeed the following 3 numbers:
PrincipalAnnual Interest RateLength of time investing
Principal x Annual Interest Rate = Interest Earned for 1 Year
P x R = I$1,000 x 5% = $50
Future ValueA. Future Value of a Single Deposit
A. $1000 deposit, 5% interest rate=$50 1st yrA. ($1000+$50) x 5%= $52.50 2nd yr = $1102.50
B. Future Value of a Series of DepositsA. $1000 a yr @ %5 6 yrs. = $1000 x 6.802=$6802
C. Present Value of a Single DepositA. Amt to deposit now to have a desired amt.
Want $1000…1000 x .784=$784 nowPresent Value Series of Deposits-how much you need to take so much out later onEx. Want $400 each year for 9 yrs, how much need in acct right now?
Achieving Your Financial Goals
1. Obtain – making money2. Plan – how to spend3. Spend – less than earn!4. Save – bills, emergencies, long-term5. Borrow – when necessary6. Invest – income & long-term growth7. Manage Risk – protect if sick,
injured, die8. Retire – enjoy life