1 Chapter 1 – What’s Important Discuss financial logic exemplified by the 15 principles of finance Importance of financial planning Setting up a plan Role of goals

2 Financial Planning Objectives of planning: Avoid financial pitfalls to achieve goals Understand logic behind financial planning Why plan? Needed to achieve financial goals To reach goals, first must set them

3 Planning to Achieve Goals Managing the unplanned Accumulate wealth for special expenses Saving for retirement Protecting your assets Investing intelligently Minimize and defer taxes

4 Financial Planning Process On-going- changes as life changes 1.Evaluate current financial situation 2.Define financial goals 3.Develop the action plan 4.Implement it and stick to it 5.Review and reevaluate as needed

5 Budget and Planning Process

6 Goals Define –Be specific –Write down –Attach a cost –Determine time frame – date to accomplish

7 Your Income – What Determines Earnings determine your standard of living Education is key factor in determining income Some correlation with marital status Unfortunately, there is much, much more … Gender, race/ethnicity and age discrimination

8 The Fifteen Principles 1.The risk-return trade-off We are risk adverse; won’t accept more risk unless paid for it 2.Time Value of Money A dollar received today more valuable than one in the future Compound interest – interest on interest

9 Risk-Return Tradeoff

10 Principles- Continued 3. Diversification reduces risk Money in several investments, not just one 4. Not all risk is equal Not all risk can be eliminated

11 Reduce Risk by Diversification

12 More Principles 5. Financial markets are competitive Bargains don’t last long Difficult to “beat the market” 6. Taxes affect decisions Understand how taxes affect you Look at alternatives on after-tax basis

13 A Few More Principles 7. Things happen – importance of liquidity 8. Nothing happens without a plan 9.Best protection is knowledge 10. Protect against catastrophes

14 Principles – Almost Done 11. Time dimension of investing 12. Agency problem – beware of sales pitches 13. Pay yourself first

15 At Last, The End 14. Money isn’t everything 15. Just do it! Commitment to make the plan is the most difficult step Once you take control, following steps are easier

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17 Required Web Reading Identity Theft Read before next class Address in schedule