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. Dont 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 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 (cont) –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 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