1 Personal Financial Planning Chapter 1, Financial Planning Process

2 Personal Financial Planning Why plan? Planning: provides control creates options for the future Who needs to plan?

3 Where You Are Financially Determine “where you are” financially: establish: –Create a personal balance sheet showing assets at market value & liabilities to determine net worth. –Analyze your cash flow by listing income & expenditures.

4 Set Goals Financial goals: identify what is important to you.

5 Records & Budget Records: Find a simple system you will use. Budget: Establish limits on spending, by category.

6 Shortfalls & Debt Many people in recent years got into trouble with debt. In 2009, 1.4 million Americans declared bankruptcy. More Americans declared bankruptcy last year than graduated from college.

7 Personal Financial Planning Chapters 2-6, Building Wealth

8 Investing for Retirement Employer-sponsored retirement: –In 1980, 70% of full-time employees worked for employers with a defined benefit retirement program. –After working a required period (often 20 years) for the same employer, you qualified (were “vested”) for a pension based on years of service and your salary.

9 Defined Benefit Retirement Program –Defined benefit: your pension is based on a fixed formula. –Once vested in a defined benefit retirement program, your pension upon retirement (after 20 years of employment) might be: Annual pmt = 20 x 2.5% x highest year’s salary

10 Investing for Retirement Now, most employers offer a defined contribution plan: –A portion of your salary is withheld –Employers sometimes match your contributions –Participation is often voluntary –You decide how your funds are invested

11 Investing for Retirement Median U.S. income: –All married couples: $50,000 –Newly retired couples: $30,000 Approximately $20,000 from Social Security Approximately $10,000 from all other sources (largely part-time employment)

12 Investing for Retirement Do Americans save enough for retirement? NO! –The median amount of total savings and investments (including retirement accounts) of U.S. adults is less than $25,000. –Less than 25% of working adults are “very confident” of having enough money to retire. –Only 42% have tried to calculate how much they need for retirement

13 Investment Planning First step in investment planning: Set goals Factors affecting investment goals: –Time horizon –Priorities –Your cash flow situation (including job security) –Personal profile (age, wealth, tax status, risk tolerance)

14 Financial Concepts Basic financial concepts a. Risk-return tradeoff b. Diversification c. Asset allocation d. Dollar cost averaging e. Importance of tax shelters

Investment Strategy Another important consideration: take advantage of payroll deduction: Payroll deduction makes saving and investing automatic. By investing every month, you take advantage of “dollar cost averaging.” Employers often match your contributions. Tax shelters (401k accounts, IRAs) defer payment of taxes. 15

16 Implement Your Strategy When to buy: on a regular basis. One of the biggest mistakes investors make is to “time the market.” This usually results in buying high and selling low. Saving and investing through payroll deduction avoids trying to second guess which way the market is going.

17 Mutual Funds The most popular method of investing in stocks and bonds is through mutual funds. When you invest in a mutual fund, you become part owner in the portfolio of securities held by the fund.

18 Mutual Funds Mutual funds offer: –Professional management –Record keeping –Diversification –Low transaction costs (in some cases)

19 Mutual Fund Information Sources of info on mutual funds include: –Morningstar –Value Line –Investment Company Institute –Popular press (Wall Street Journal, Barron’s, Business Week) –Prospectus –Fund’s website

20 How to Pick a Mutual fund In comparing mutual funds, look for: –No load –Low fees –Matches your objectives and risk tolerance –Tax efficiency –Good recent performance (3-5 years) –No recent change in management