Personal FinancePersonal FinanceCourse OverviewCourse Overview

MBA. Juan José Salas M.MBA. Juan José Salas M.

México 2009México 2009

Course OverviewCourse Overview

• Give you the skills to responsibly manage your

money

– Today, personal bankruptcies are out of control

– Personal Debt is at an all-time high

• Give you perspective on how money and work

should affect your life

– People are more than just their jobs and possessions

Course OverviewCourse Overview

• Main Topics– Your Goals in Life

– Setting Financial Goals

– Maximizing Income

– Minimizing Expenses

– Maximizing Assets

– Minimizing Liabilities

– A Planning Approach

– Determining Net Worth

– Reflecting on what it all means

Your Goals in LifeYour Goals in Life

• Nonfinancial goals– Family, children, education, religious, social, etc.– Finances can affect your ability to attain these goals.

• Financial goals– Financial independence is an important goal for many

people. Financial independence is defined as having enough income or resources to be self-reliant.

– One of the financial choices that we make is between consumption today versus consumption in the future.

Your Goals in LifeYour Goals in Life

– Researchers have found that most people, regardless of their income level, feel that they need 20% more wealth than they currently have.

Setting Financial GoalsSetting Financial Goals

• If you don’t know where your going, it doesn’t

matter which way you go

– Cheshire Cat from Alice In Wonderland

• Set up a process now to set goals

• Then review them at least annually to see if you

are where you want to be

Maximizing IncomeMaximizing Income

• “You only have so much time on earth, you

should make the most of every moment.

• However, you need to balance your needs

against the needs of others

• Your retirement age and income depend on how

well you do

Minimizing ExpensesMinimizing Expenses

• If you spend more than you make, then you will

end up in debt.

• This seems so simple

• So why are so many Americans on the verge of

bankruptcy?

• We have to learn how to control our spending

Maximizing AssetsMaximizing Assets

• In today’s world you have to be able to take

care of your own investments

• Very few people will receive pensions where

their employers make all their investment

decisions for them

• You will probably have to make your own

investment decisions

Minimizing LiabilitiesMinimizing Liabilities

• There is good debt and bad debt

– Taking out loans to buy things that increase in value

(like a house) or will let you earn more income (like

an education loan) creates good debt

– Taking out a loan to pay for vacations or stereos

creates bad debt

– You also need to know the basics of insurance so

unexpected events do not drive you into bankruptcy

Major Financial Planning AreasMajor Financial Planning Areas

• Consumption and Savings Planning

• Debt Planning

• Insurance Planning

• Investment Planning

• Retirement Planning

• Estate Planning

• Income Tax Planning

• Career Planning

A planning approachA planning approach

Step 1. Determine concrete goals. First state your broad goal such as the purchase of a home. Determine the specific pieces to achieve that goal such as

the cost of the house, the down payment amount, etc.

Step 2. Create an action plan. How will you achieve the goals stated in step 1? How

much will you save each month and where will the money be invested?

A planning approachA planning approach

Step 3. Evaluate performance. At least annually, evaluate steps 1 and 2 to determine if

any adjustments should be made in the action plan or goals.

Step 4. Decide on a future course of action. Is your goal realistic or should it be reevaluated?

Life-Cycle Financial PlanningLife-Cycle Financial Planning

Life-Cycle Phases Financial Planning Areas

Young adult (18–25) Consumption and savings; career

Family formation (26–35) Consumption and savings; career; debt; insurance; income taxes

Family development (36–49) Investment; retirement; income taxes

Family maturity (50–60) Investment; retirement; estate

Retirement (60–?) Estate; income taxes

(assumes children/marriage)

Determining Net WorthDetermining Net Worth

• Net Worth = Assets – Liabilities– If you have more assets than liabilities, then you

have a positive net worth

– If you have more liabilities than assets, then you are in debt

• When your income is greater than your expenses you add to your net worth– Vice versa when your expenses exceed your income

• We need to remind ourselves that financial net worth is not the same as your actual net worth

Reflecting on what it all meansReflecting on what it all means

• We should never lose track of the fact that

personal finance is just a means to an end

• Who we are as a person is not measured by our

income or our balance sheet

Discussion QuestionsDiscussion Questions

• What are some of the benefits of personal financial planning?

• How do economic cycles affect the personal financial planning process?

• What is meant by life-cycle financial planning?• Explain marginal analysis and its importance to

financial decision making.• Opportunity cost is a very important concept in

financial decision making. Can you think of an example of opportunity cost in your financial planning?

Please contact:Please contact:

MBA. Juan José Salas M.

sjuan@itesm.mx