1. 1 (of 22) FIN 200: Personal Finance Topic 2–Introduction to Financial Planning Larry Schrenk, Instructor

2. 2 (of 22) Introduction FIN 200 Personal Finance Larry Schrenk, Instructor  E-Mail: schrenk@american.edu  Office: 260 McKinley  Office Telephone: 202-885-2794 Course Page http://auapps.american.edu/~schrenk/FIN200/FIN200.htm Syllabus

3. 3 (of 22) Learning Objectives 1. Explain the concept of financial planning. 2. Outline the elements of a personal financial plan. 3. Describe the development of a personal financial plan. ▪

4. 4 (of 22) Poor Financial Planning In a survey...a large majority of corporate owners and executives of middle-market companies do not meet their personal financial goals in spite of the success of their business enterprise. sourcesource Multiple surveys “suggest that people's financial planning methods are fairly rudimentary, that their financial knowledge is generally poor, and that their self-described savings plans are often inconsistent with the predictions of standard saving models. source source

5. Students and Financial Planning Over 60% of you have credit cards. About 15% of you have balances over $1,000; about 5% exceeding $3,000. Average Undergraduate Credit Card Debt: $2,200 Sticking to minimum payments it would take you more than 12 years and $1,115 in interest to pay off a $1,000 bill on a card with an 18 percent annual rate. 5 (of 22)

6. 6 (of 22) Financial Thinking Opportunity Costs Trade-Offs  Risk versus Return  Costs versus Benefits Incentives Short-Term versus Long-Term Wealth versus Income

7. 7 (of 22) The Basic Definitions Personal Finance: Personal Financial Plan

8. 8 (of 22) Elements of the Financial Plan 1. Budgeting (Topics 5-7) 2. Liquidity (Topics 8-9) 3. Financing (Topics 10-11) 4. Protecting (Topics 12-14) 5. Investing (Topics 15-21) 6. Retiring and Estate Planning (Topics 22-23)

9. 9 (of 22) 1. Budgeting Evaluate your current position (market value)  Assets: what you own  Liabilities: what you owe  Net Worth: Assets - Liabilities Develop a plan for financial stability (more later)  Identify personal needs, goals and desires  Forecast the financial decisions required to meet these ‘Cash Flows’ e.g.,  Big Spender (little or no savings)  Big Saver (relatively little spending)  Negative Saver (withdrawing savings to support spending)

10. 10 (of 22) 2. Liquidity Liquidity: The ability to meet your expected and unexpected short-term obligations. Two facets:  Money (‘cash-like’)–Expected obligations  Credit (borrowing)–Unexpected obligations Trade-off between liquidity and return  E.g., cash, checking, savings account, versus  Long-term investments

11. 11 (of 22) 3. Financing Major Expenditures  Car  House  Retirement Key Decisions  Is the purchase a sound financial decision?  How do I best raise the required funds?

12. 12 (of 22) 4. Protecting Insurance  Auto  Home  Health and Disability  Life

13. 13 (of 22) 5. Investing Investment Opportunities Risk versus Return  Return: The increased value of an investment over time (expressed as a percentage)  Risk: The possibility that the return you expected is not what you actually receive.

14. 14 (of 22) 6. Retiring and Estate Planning Retirement Planning  Retirement Goals  Required Savings  Investment Plan Estate Planning  Planned Size of Estate  Distribution of Estate

15. 15 (of 22) Planning and Cash Flows

16. 16 (of 22) Developing a Personal Financial Plan 1. Determine Lifetime Goals 2. Establish Financial Goals to Meet Lifetime Goals 3. Evaluate Current Financial Position NOTE: This is the focus of the course project!

17. 17 (of 22) Developing a Personal Financial Plan 4. Formulate Financial Plans Career Education Savings Spending Lifestyle

18. 18 (of 22) Example: Career Bureau of Labor Statistics (BLS) Data for 800 occupations.Bureau of Labor Statistics (BLS) Data

19. 19 (of 22) Example: Education

20. 20 (of 22) Developing a Personal Financial Plan 5. Select Optimal Plan 6. Evaluate Financial Plan 7. Revise Financial Plan

21. Project Notes 21 (of 22)

22. 22 (of 22) Ethical Dilemma (Chap.1, 16.7) Sandy and Phil decide to go to Sandy's cousin Larry, who is a stockbroker. Larry tells them the only fee he will charge is for transactions. Larry recommends stocks of several well-known companies which they purchase. Three months later, Larry tells them that they need to sell the stocks and buy several others. Three months later, the same thing happens. At the end of they had sold each of the stocks for more than they had paid, but the total dollar value of their portfolio had declined, since the transaction fees exceeded their capital gains.  a. Do you think Larry behaved ethically? Explain.  b. Would Larry have a personal reason for handling Sandy and Phil's portfolio as he did? Explain.