1. 1 (of 23) FIN 200: Personal Finance Topic 25–Integrating Your Financial Plan Lawrence Schrenk, Instructor

2. 2 (of 23`) Learning Objectives 1. Explain the goals and strategies of lifetime financial planning. ▪ 2. Discuss role of human capital in financial planning. 3. Develop an integrated financial plan. ▪

3. Goal of Life: Happiness Supreme happiness would be nice, but… ▪ We might need to settle for happiness that is  Evenly Distributed, and  Smooth We want to avoid  Ups and Downs, and  Spikes ▪ 3 (of 23)

4. Rule of Financial Planning ▪ Derive financial goals from your life goals.  Financial goals should support life goals.  Financial decisions are ethical decisions. Consider the financial implications of every decision you make. Decide nothing solely on its financial implications. ▪ 4 (of 23)

5. Goal of Financial Planning: Consumption What is consumption?  ‘Buying’ Leisure  Opportunity Cost For happiness to be even and smooth,  Should consumption be even and smooth? Preferences change over your lifetime Value of consumption changes over your lifetime.  Value to you of a dollar changes over your lifetime. 5 (of 23)

6. Strategy Life Goals Financial Goals Consumption Levels Short Term Horizon Long Term Horizon 6 (of 23)

7. 7 (of 31) Income and Wealth Cycles Age ▪ Income CollegeCareerRetirement Saving Wealth Dis-saving ▪Borrowing

8. Objectives Short Term  Smooth Consumption  Avoid Consumption ‘Shocks’ Long Term  Reach Desired Consumption Levels 8 (of 23)

9. Methods and Tools: Short Term How to Smooth Consumption  Liquidity Credit Short Term Savings  Flexibility Job Characteristics  Insurance ‘Reactive’ Strategies 9 (of 23)

10. Digression: Money and Time I Function of Saving and Borrowing  Transfer Wealth across Time  Rate of Return ‘Saving’ versus ‘investing’  Investment Portfolio ‘Borrowing’ versus ‘XXX’?  Borrowing Portfolio 10 (of 23)

11. Digression: Money and Time II Ideally, what would you like? Limits to Transferring Wealth across Time Uncertainty Incentive Problems  Structures for Transferring Wealth across Time Contracts Legal System 11 (of 23)

12. Methods and Tools: Long Term How to Reach Consumption Levels  Increase Income Education Experience Effort  Adjust Wealth Saving and Investment Borrowing Inflation Issues ‘Proactive’ Strategies 12 (of 23)

13. Remember: Human Capital What is human capital? Facts about Human Capital  Low Risk  Changing Proportion of Wealth Counterexamples 13 (of 23)

14. Sources of Value Financial Assets  Investment Portfolio and Short Term Savings  Credit Human Capital  Labor Income Real (Non-Financial) Assets  House  Collections, Other Property  People 14 (of 23)

15. Diversification Being Well-Diversified versus Holding a Well-Diversified Portfolio Differences:  Human Capital  Real (Non-Financial) Assets 15 (of 23)

16. Interdependencies Income House Portfolio ▪ 16 (of 23)

17. Your Risk Profile To what risks are you exposed? A Small Sampling  Investment Risk  Job Loss/Reduced Income  Longevity Risk  Theft  Health Problems  Correlation Risk  Etc... 17 (of 23)

18. Responses to Risks Passive: Diversification  Dampening Consumptions Shocks  Low Costs  Incomplete Active: Hedging  Managing Consumptions Shocks  More Cost  More Complete 18 (of 23)

19. Hedging What is hedging? Examples  Insurance  Structured ‘Stand of Living’ Products  ‘Targeted’ Products  ‘Bundled’ Products  Future Developments? 19 (of 23)

20. Two Approaches Simple  Follow Practical Guidelines Complex  Statistical Analysis Excel Web Resources if available 20 (of 23)

21. Practical Issues Lifetime Horizon Review and Revise Insurance Avoid or Divest Company Stock Plan for Inflation Habit Formation Consider a Financial Planner/Advisor On life-cycle planning, read Paula H. Hogan, “Life-Cycle Investing Is Rolling Our Way”Paula H. Hogan, “Life-Cycle Investing Is Rolling Our Way” 21 (of 23)

22. Exam Coverage Main Focus–Topics 20-25 A Few Earlier Questions 22 (of 23)

23. How to Study for the Short Answer Questions Study the slides–full slide ‘rule’. Read the textbook and know the key words. Answer the selected end of chapter questions. Review the PowerPoint slides and your class notes. Know the bold words on the slides. 23 (of 28)

24. How to Study for the Calculation Problems Study the examples done in class and the worked problem set. Practice with your calculator. Answer the selected end of chapter problems. 24 (of 28)