Financial Planning Chapter 9

Looking at Your Finances Section 1

Benefits of Financial Planning Allows you to identify priorities Clarify Financial Goals Determine how to reach the goals Helps you pay expenses

Benefits of Financial Planning Continued… Live within your income Reduce the need to buy on credit Reduces anxiety about money Helps you stay in control of financial matters Develop a sense of financial independence

What does it mean to be financially sound? Live within your means Postpone some purchases to stay out of debt Know where your money is going

False Sense of Wealth Teens don’t have to pay all the living expenses that other working-adults do They have more spending freedom Premature Affluence- a false sense of wealth

Elements of Financial Planning Budget- a plan for spending and saving money Choose Investments Establish credit Obtain adequate insurance Make decisions about retirement plans Setting up an estate plan

Start Financial Planning by: Identifying your goals Taking stock of your current finances Analyze your spending habits

Identify Financial Goals Planning for college Pay off debt Go on vacation

Assessing Current Finances Balance Sheet- a statement of what you own and what you owe Assets- Items of value that you own-including $ Liabilities- debts or obligations owed to others Net Worth- the difference between your assets and liabilities

Balance Sheet Assets Liabilities Checking Account $500 Cell Phone Bill $75 Savings Account $1500 Amount owed on Credit Cards $200 Cash Car loan $700 Total $2075 $975 Net Worth $1100

How much would it cost you each year to have a Starbucks coffee everyday? (364 days) = $728 $3 Everyday = $1092 $4 Everyday = $1456 $5 Everyday = $1820

Analyzing Spending Habits Save receipts Record spending Add up over a month Separate spending by categories Analyze your expenses Look for ways to cut costs Look for things that are high in cost Look for poor spending habits

Planning for Financial Goals Specific goals Identify resources create, organize, implement, and evaluate your plan Follow decision making steps Take personal responsibility for your own financial plan

Adapting to Changing Needs Family Life Stages Marriage Parenthood Children moving out Aging Demographic Trends- population Family Crises- loss of job, death, injury, divorce

What Can You Do? Have an emergency fund Have life, health, car, and home insurance Seek help from others to manage the strain

Using Financial Software Section 2

What can Financial Software Do? Expense tracking Budgeting Financial Review Tax planning Investment tracking

Online Banking Features Online Banking- conducting business with financial institutions over the internet Online Bill Payment- means paying bills electronically over the internet Online Bill Presentment- receiving bills over the internet

Should you use Financial Software? Pros Easier to organize and manage personal finances Errors eliminated Stay in Control Cons Costs $ Upgrading Need computer skills Time to learn

Choosing a Package Determine your needs and wants for a program Look for one that meets both needs and wants

Tips for Using Software Backup data Take time getting comfortable with it Seek Help Decide how much time you want to invest Stay aware of upgrades

Creating a Budget Section 3

Why make a budget? Avoid running out of money Evaluate spending habits Set aside savings Work toward financial goals

Setting up a budget Estimating income Estimating expenses Bringing the two into balance

Estimating Income Gross Income- total amount of money you expect to earn before taxes and other paycheck deductions Net Income- amount you expect to receive after paycheck deductions Don’t Know? Estimate based on past paychecks, tips, bonuses, etc

Estimate Expenses Fixed Expenses- regular payments that don’t vary in amount Variable- (flexible) normally increase or decrease Discretionary Expenses- expenses that aren’t absolutely necessary : vacation and entertainment Irregular Expenses- expenses that come only once (annually), twice (semi-annually), or four (quarterly) times a year

Estimate Expenses Continued Put into Categories Look at Your past spending Expert recommendations National averages: Consumer Expenditure survey

Recommendations for Spending 10-15% on Charitable giving 5-10% on Savings 30-35% on Housing (mortgage/rent, utilities, fixing up) 5-15% on Food 10-15% on Transportation 2-7% on Clothing 5-10% on Health, on Personal, on recreation, on debts

Plan for Savings Savings shouldn’t just be “leftover” money Necessary for unexpected events or job loss Put a part of budget

Balance Budget Add all expenses $1350 Subtract from income - $1500 Result should be zero +$150 If not move some money around…add to savings or subtract from discretionary expenses, reduce fixed expenses, or increase income

Using Your Budget Use discipline to follow through Monitor it each week Compare what you really spent with projected amount Adjust your spending Revise budge amounts

Evaluating the Budget Adjust each month Evaluate if it is working or not Are you reaching your financial goals? Adapt to circumstances as they change

Organizing your Records Section 4

Why Keep Records? Identification Legal proof Loan applications Tax purposes Budgeting purposes Verify transactions Reference Medical reasons

How long to keep records Some permanent Depends on what it is General rule: more important the longer you keep it 7 yrs for Taxes

Storing Records and Documents Safe Deposit Box- locked box that can be rented in a secure area of a bank Home safe or lock box Home filling system

Reviewing Records Once a year Prepare for tax return Discard or archive old records Review contents of safe deposit box Update list of accounts Update inventory of where records are stored

Updating Documents When you move: address and phone With: Financial institutions Voter registration office Your employer State motor vehicle Post office Clubs, magazines, etc Friends and family members

Archive Put in long-term storage in a less accessible area

Seeking Professional Advice Section 5

What help do you need? Know what help you are looking for Tax returns Investing advice Checking over contracts

Who is Qualified to help? Credentials- licenses, certifications, or degrees that indicate that a person is qualified to perform a certain service Financial planner Financial advisor Financial consultant

Certified Financial Planner CFP Evaluate your financial status Make recommendations for ways to reach financial goals

Chartered Financial Consultant ChFC CFP + courses in insurance, economics, taxation, real estate, other areas related to investing and financial planning

Accountant Tax advice and preparation Investment advice Financial Planning Certified Public Accountants: CPA Personal Financial Specialist: PFS

Insurance Agent Chartered Life Underwriter- CLU Training in retirement and estate planning

Attorney Prepares wills Review documents connected to home purchases Enforce contracts Handles complicated tax situations

Pro bono No charge for service to clients who face extreme financial hardship

Fees and Commissions Conflict of interest- choose what would earn them most money rather than what is best for the client Fee –the only arrangements eliminate all questions of conflict of interests

Choosing a Professional Financial Planning Associations National Association of Personal Financial Advisors American Bar Association Family and Friends

Ask Questions What is your training and experience? Will some services be provided by other staff members or outside sources? Are you paid fees, commissions, or both? What is the estimated cost of all the services I will be receiving? Can I have that in writing Can I have names of references? Verify credentials

Stay Focused on your Goals Stay informed Ask questions Make sure you understand everything Don’t sign unless you understand Evaluate the Advisor