Planning Personal Finances The Importance of Planning Rule #1 “If you want to enjoy a successful and rewarding life, you have to plan for it.” “Don’t count on the winning lottery.” “Create your own success.” “Design a plan and follow it.” Investing in Your Future. NAIC: National Association of Investors Corporation. 2001. p. 5

What is a Plan A method or process worked out in advance that leads to the achievement of some goal It is systematic Relies on using a step-by-step procedure Needs to be flexible Adapts to gradual changes in your goal

The Planning Process Step 1: Set a Goal Identify what you want to achieve or obtain Step 2: Acquire Knowledge Understand what it will require to achieve your goal. Fill in the picture by research, conversation, and thought Step 3: Compare Alternatives Weigh your options, analyze pluses and minuses of each--the costs, demands, the likelihood of success

The Planning Process Step 4: Choose a Strategy Select one option as the best plan of action The choice is based on sound information, the experience of others, and your own interests and abilities. Step 5: Make a Commitment Resolve to proceed step by step toward achieving your goal. Step 6: Keep Flexible Evaluate your progress and revise your plan to deal with change

Example Step 1: Set a Goal Purchase a stereo system Step 2: Acquire Knowledge Visit friends to hear their systems Study standards and specification Check dealers, brands, models, and prices Consult Consumer Reports

Example Step 3: Compare Alternatives Alternative 1: Buy a 2nd hand system for $250 Pro: Affordable high-end equipment. Can buy right now. Con: Uncertain condition of equipment. No warranty or service agreement. Alternative 2: Buy a compact shelf system for $325 Pro: Can afford now. New--has warranty Con: Not suitable for adding extra speakers or using with TV. Not best sound quality.

Example Step 3: Compare Alternatives (con’t) Alternative 3: Buy a high-quality component system for $775 Pro: Excellent sound. Greatest flexibility. New equipment with warranty. Con: Cost more than prepared to pay now. Step 4: Choose a Strategy Decide to buy Alternative 3 Will delay purchase for 6 months instead of using credit card with high interest.

Example Step 5: Make a Commitment Start a “Stereo Fund” Need to save $130 per month Pack your lunch instead of eating out Cut back on entertainment cost (movies) Step 6: Keep Flexible Four months into the plan, a discontinued model sale provides an opportunity to buy comparable equipment for $550. You have saved $520 in your Stereo Fund Make the purchase paying cash

Planning vs Dreams “Planning is not the same as dreaming, but it uses dreams as raw materials.” p8 Dream: Become a trial lawyer Dream: Go to Spain as an exchange student Dreams can become goals Requires a plan Fits the 6 steps of the planning process

Financial Planning Process Step 1: Determine your current financial situation Step 2: Begin developing financial goals Step 3: Identify alternative courses of action Step 4: Evaluate these alternatives Step 5: Create and implement your financial plan Step 6: Reevaluate and revise your financial plan

Financial Goals Short-term goal Attain within one year Intermediate-term goal Reach in 2 - 5 years Long-term goals Reached after six to ten years or 30 years

Effective Goals Written Down Measurable Realistic It is critical that you make a commitment to achieve the goals you set.

Examples of Financial Planning Describe a situation in your life where either you or a family member used the planning process to obtain goals Describe a situation where a financial plan was used to obtain financial goals