Prentice-Hall, Inc.1 Chapter 1 Financial Planning: The Ties That Bind

Prentice-Hall, Inc.2 The Role of Personal Financial Planning  To manage income and expenses.  To create an awareness of your current financial status.  To plan for the future by developing goals and devising ways to achieve those goals.  To provide a system of evaluation and revision for your financial progress.

Prentice-Hall, Inc.3 Why Do You Need a Personal Financial Plan?  For most people it is easier to spend than save.  To track your expenses, so you don’t spend more than you think you’re spending.  To retire someday.

Prentice-Hall, Inc.4 Why Should You Develop a Personal Financial Plan?  It helps you achieve your financial goals.  It helps you achieve financial independence.  It helps you understand where all your money is spent.  It may even help you support those that have supported you.

Prentice-Hall, Inc.5 Why Isn’t Personal Financial Planning Easy?  Some people are uncomfortable discussing financial matters, the “fear of finance.”  Motivation and time is required to complete an accurate plan.  Good record keeping is necessary both before and during the planning period.

Prentice-Hall, Inc.6 What Can You Accomplish As a Result of This Course?  Manage the unplanned.  Accumulate wealth for special expenses.  Save for retirement.  “Cover your assets.”  Invest intelligently.  Minimize your payments to Uncle Sam.

Prentice-Hall, Inc.7 The Personal Financial Planning Process  Step 1: Evaluate Your Financial Health  Step 2: Define Your Financial Goals  Step 3: Develop a Plan of Action –Flexibility, Liquidity, Protection, Minimization of Taxes –Consider Your Goals  Step 4: Implement Your Plan  Step 5: Review Your Progress, Reevaluate, and Revise Your Plan

Prentice-Hall, Inc.8 Step 1: Evaluate Your Financial Health  Evaluate your current situation: income, spending, wealth  Assess your whole financial picture

Prentice-Hall, Inc.9 Step 2: Define Your Financial Goals  Specifically define and write down your financial goals to reflect your financial and life situation.  Attach a cost to each goal.  Set a date for when the money is needed to accomplish the goal.

Prentice-Hall, Inc.10 What Are the Time Horizons for Financial Goals?  Short-term goals can be accomplished within a 1-year period.  Intermediate-term goals take 1-10 years to accomplish.  Long-term goals take more than 10 years to achieve.

Prentice-Hall, Inc.11 Goals: The Cornerstone of a Financial Plan  Goals keep the future in mind by reminding you of the rewards.  Goals entice you to keep the plan in effect.  Goals provide tangibility for the question, “Why?”

Prentice-Hall, Inc.12 Step 3: Develop a Plan of Action  Flexibility -- The ability for your plan to change as your situations or goals change.  Liquidity -- Your ability to convert noncash assets into cash with relative ease and speed.

Prentice-Hall, Inc.13 Step 3: Develop a Plan (cont’d)  Protection -- Your ability to meet the unexpected large expenses without destroying your plan.  Minimization of Taxes -- Your ability to pay as little as possible to Uncle Sam.

Prentice-Hall, Inc.14 Step 3: Develop a Plan (cont’d)  Consider future needs: –Create a budget –Determine investment strategies –Plan for big-ticket purchases –Plan for managing debt –Plan for insurance –Plan for the expense of children and college –Plan for retirement –Plan for estate transfer

Prentice-Hall, Inc.15 Step 4: Implement Your Plan  Use common sense and moderation; don’t force yourself to track every penny.  Remain positive about your plan; use it as a roadmap.  Stay on track after the detours; rewards await you.

Prentice-Hall, Inc.16 Step 5: Revise Your Plan  Periodically review your progress to see if any fine tuning needs to be done.  Make sure that your plan still matches your goals.  Be prepared to start over if your plan no longer meets your needs.

Prentice-Hall, Inc.17 The Life Cycle of Financial Planning  Stage 1: The Early Years -- A Time of Wealth Accumulation  Stage 2: Approaching Retirement -- The Golden Years  Stage 3: The Retirement Years

Prentice-Hall, Inc.18 Stage 1: The Early Years -- A Time of Wealth Accumulation  Develop your savings plan.  Set your initial goals of all lengths.  Establish your long- range investment strategy.

Prentice-Hall, Inc.19 Stage 2: Approaching Retirement -- The Golden Years  Realize intermediate-term goals that were established during Stage 1.  Re-evaluate the plan to match current goals.  Plan for retirement.

Prentice-Hall, Inc.20 Stage 3: The Retirement Years  Reduce investment risk  Concentrate on preservation rather than growth of assets  Plan for the transfer of your estate

Prentice-Hall, Inc.21 Managing Your Career  Find a career path for the rest of your life –Work that is enjoyable and satisfying –Adequate financial support –Balance between work and personal life

Prentice-Hall, Inc.22 Deciding On A Career  Conduct a self-assessment  Research academic and career alternatives that match your skills and interests  Talk to people in the career field  Make a decision and start work on your future

Prentice-Hall, Inc.23 Getting A Job  Start your job search in summer, before your senior year –Develop your resume before fall –Starting early tells employers you are serious and organized –Recruiting cycles often start in fall

Prentice-Hall, Inc.24 Getting A Job (cont’d)  Prepare for the interview –Practice –Learn about the company before the interview –Prepare: rest, dress, arrive early, make a good impression –Thank the interviewer at the close; follow- up with a letter

Prentice-Hall, Inc.25 Building Job Security  Keep up, with education and new skills  Do good work  Match your image to that of the company  Know and use the power structure  Take new assignments and make others aware of your work  Be loyal and supportive of your boss  Learn to network, in case you need another job

Prentice-Hall, Inc.26 Your Income: What Determines It  Earnings determine standard of living.  Education is the key factor in determining income level.  70% of wealthy householders finished college.

Prentice-Hall, Inc.27 Education  It may be the best single investment you will ever make!

Prentice-Hall, Inc.28 The 15 Axioms of Personal Finance  Axiom 1: The Risk- Return Tradeoff  Axiom 2: The Time Value of Money  Axiom 3: Diversification Reduces Risk  Axiom 4: All Risk Is Not Equal

Prentice-Hall, Inc.29 The 15 Axioms of Personal Finance (cont’d)  Axiom 5: The Curse of Competitive Investment Markets  Axiom 6: Taxes Affect Personal Finance Decisions  Axiom 7: Stuff Happens, or The Importance of Liquidity

Prentice-Hall, Inc.30 The 15 Axioms of Personal Finance (cont’d)  Axiom 8: Nothing Happens Without a Plan  Axiom 9: The Best Protection is Knowledge  Axiom 10: Protect Yourself Against Major Catastrophes

Prentice-Hall, Inc.31 The 15 Axioms of Personal Finance (cont’d)  Axiom 11: The Time Dimension of Investing  Axiom 12: The Agency Problem-- Beware of the Sales Pitch

Prentice-Hall, Inc.32 The 15 Axioms of Personal Finance (cont’d)  Axiom 13: Pay Yourself First  Axiom 14: Money Isn’t Everything  Axiom 15: Just Do It!

Prentice-Hall, Inc.33 Summary  Build your financial future around this text and a financial plan: –Manage the unplanned -- financial planning withstands minor setbacks –Accumulate wealth -- financial planning maps out strategies for meeting your goals –Save for retirement -- financial planning helps you determine the costs of retirement

Prentice-Hall, Inc.34 Summary (cont’d) –“Cover your assets” -- financial planning includes protecting your assets with insurance –Invest intelligently -- financial planning helps you understand the principles of investing –Minimize taxes -- financial planning helps you keep your assets where they should be, in your own pocket

Prentice-Hall, Inc.35 Summary (cont’d)  Develop a personal financial plan –Evaluate -- know where you are today –Define -- know where you want to go –Develop a plan -- draw the map –Implement -- follow the plan with action –Review progress-- check the map to ensure you are on course

Prentice-Hall, Inc.36 Summary (cont’d)  Don’t overlook the financial life cycle –The Early Years –Approaching Retirement –The Retirement Years

Prentice-Hall, Inc.37 Summary (cont’d)  Manage your career to ensure personal and financial success  Remember the 15 axioms, but most importantly remember the 15th -- Just Do It!