PFIN 4 Understanding the Financial Planning Process 1 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GITMAN/ JOEHNK/ BILLINGSLEY

1. Define Personal Financial Planning.

Personal Financial Planning 3 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Systematic process that considers important elements of an individual’s financial affairs to fulfill financial goals PFIN4 | CH1

2. What are the rewards of sound financial planning?

Rewards of Sound Financial Planning 5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Improving your standard of living Spending money wisely Accumulating wealth PFIN4 | CH1

Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Organizational Planning Model PFIN4 | CH1

3. What are the six steps in the Financial Planning Process?

Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Six-Step Financial Planning Process PFIN4 | CH1

Financial Goals 9 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Results that an individual wants to attain Utility and cost are to be considered when evaluating alternative qualities of life, spending patterns, and forms of wealth accumulation Money and utility are linked to psychological concepts of values, emotion, and personality Financial planning is an important part of the conflict resolution process PFIN4 | CH1

Target Dates on Financial Goals 10 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH1 Goal dates: Target dates in the future when certain financial objectives are expected to be completed Long-term goals Indicates wants and desires for a period covering about 6 years out to the next 30 or 40 years Short-term financial goals Set each year and cover a 12-month period Intermediate goals Bridge the gap between short- and long-term goals

From Goals to Plans: A Lifetime of Planning Early childhood High school and college Family formation Career development Pre-retirement Retirement

4. What are the major plan categories in achieving financial goals?

Types of Financial Planning 13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Asset acquisition Liability and insurance Savings and investment Employee benefit Tax Retirement and estate PFIN4 | CH1

Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Personal Financial Planning Life Cycle PFIN4 | CH1

5. What are the two important aspects of the financial planning environment?

The Players Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Government Source of revenue for business and wages for consumers Business Important part of the circular flow of income that sustains a free enterprise system Consumers Consumer choices determine the kinds of goods and services that businesses provide PFIN4 | CH1

Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Financial Planning Environment PFIN4 | CH1

Government Federal government plays a major role in regulating the level of economic activity Taxation and regulation constrain personal financial planning

Monetary Policy Controls money supply Used to stimulate or contract economic growth Fiscal Policy Controls levels of taxation Sets levels of government spending The Economy - 2

Economic Cycles Stages related to employment and production levels Growth measured by changes in GDP Inflation Measured by changes in CPI Affects purchasing power and interest rates Affects financial plans and goals The Economy

Phases of Economic Cycles 21 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Real GDP increases until it hits a peak Expansion Expansion ends and a contraction begins Peak Real GDP falls Contraction Contraction ends and an expansion begins Trough PFIN4 | CH1

Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Business Cycle PFIN4 | CH1 Source: Adapted from William Boyes and Michael Melvin, Economics, 8th ed. (Cengage, 2011), p. 135.

Economy 23 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. General price level is increasing Inflation Measure of inflation based on changes in the cost of consumer goods and services Consumer price index (CPI) Amount of goods and services that each dollar buys at a given time Purchasing power PFIN4 | CH1

6. What determines your personal income ?

Factors that Determine the Personal Income 25 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Demographics and Income Place of residence Difference in salaries earned Difference in living costs Career Social, demographic, economic, and technological trends influence decisions regarding the fields that offer best opportunities for future PFIN4 | CH1