1. Managing Your Personal Finances Chapter 23

2. Chapter 23 Learning Goals 1.W 1.What is the personal financial planning process, and how does it facilitate successful financial management? 2.H 2.How can cash flow planning and management of liquid assets help you meet your financial goals? 3.W 3.What are the advantages and disadvantages of using consumer credit? 4.W 4.What are the major types of taxes paid by individuals?

3. Chapter 23 Learning Goals (cont’d.) 5.W 5.What is the most important principle in deciding what types of insurance to purchase? 6.W 6.What personal characteristics are important when making investment decisions? 7.W 7.What are the emerging trends in personal financial planning? 8.W 8.What is risk, and how can it be managed? What makes a risk insurable? 9.W 9.What types of insurance coverage should businesses consider?

4. Learning Goal 1 WWhat is the personal financial planning process, and how does it facilitate successful financial management? –Six steps of financial planning 1.E 1.Establishing financial goals 2.G 2.Gathering financial and non-financial information 3.A 3.Analyzing the information 4.D 4.Developing a financial plan 5.I 5.Implementing the plan 6.M 6.Monitoring the plan

5. 1. Establish financial goals 2. Gather information 3. Analyze the information 4. Develop a plan 5. Implement the plan 6. Monitor the plan Financial Planning Process

6. Learning Goal 2 HHow can cash flow planning and management of liquid assets help you meet your financial goals? –Cash flow plan Plan for managing income and expenses Based on financial goals, including saving for those goals Money is set aside to pay for the goals –Liquid assets Checking and savings-type accounts are important for: –Day-to-day spending –Meeting short-term goals –Unexpected expenditures Can be held in safe, convenient accounts so money is readily available when needed

7. Cash Flow Management Establish goals & calculate how much to save to meet them Estimate income & expenses Track actual income & expenses for 1 month Compare planned & actual Modify estimates & repeat

8. Income Statement: Tennis Player Revenue $105,858 Expenses $83,060 Earnings before taxes$22,492 Taxes$19,654 Earning after taxes$2,838 Revenue Prize money$105,858 Expenses Hotel, air, other travel$45,679 Meals & entertainment17,650 Telephone487 Business expenses & dues1,656 Tennis equipment4,379 Computer2,383 Foreign taxes paid10,826 $83,060 Earnings before taxes$22,492 Taxes$19,654 Earning after taxes$2,838 Source: Fortune, Sept. 28, 1998, p. 58.

9. Learning Goal 3 WWhat are the advantages and disadvantages of using consumer credit? –Advantages of consumer credit Convenience Purchasing an item sooner Taking advantage of bargains Better service Establishing a credit rating Convenient record keeping Meeting a financial emergency –Disadvantages of consumer credit Ease of overspending Cost of credit (interest charges) Possibility that merchandise may cost more Reduction in future discretionary income due to legal commitment to repay debt

10. Using Consumer Credit Pros: convenient immediate purchase establish credit rating provides record keeping emergencies perks like rebates & frequent flyer milesCons: overspending interest charges may pay more reduced discretionary income

11. Using Consumer Credit Credit cards –open-end, line of credit, revolving –grace periods Loans Credit history & credit ratings Europeans rely on personal credit less than Americans $6 billion $240 billion –Continental Europe has $6 billion in outstanding credit card debt, compared with $240 billion in the US (Source: Fortune, Sept. 28, 1998, p. 190)

12. Learning Goal 4 WWhat are the major types of taxes paid by individuals? –Income taxes Payroll taxes based on income and deducted from paycheck –Social Security taxes Payroll taxes based on income and deducted from paycheck –Sales tax Assessed on purchases made –Property taxes Based on the value of property owned, usually real estate

13. Managing Taxes Income taxes Social security & Medicare taxes Other taxes –sales –property

14. Learning Goal 5 WWhat is the most important principle in deciding what types of insurance to purchase? –Budget for problems that represent a small financial loss –Set aside money in savings to pay for loss when it happens –Buy good insurances policies to cover major losses Those that would cause large financial loss if they occurred

15. Selecting Insurance Property & liability insurance –automobile insurance –homeowner’s/renter’s insurance Health insurance –major medical –managed care –Health maintenance organizations (HMOs) Disability income insurance Life insurance

16. Learning Goal 6 WWhat personal characteristics are important when making investment decisions? –Decisions should be based on your goals and risk tolerance –Examples of investment goals: Desire for income from interest and dividends Need for growth (capital gains) Need for safety

17. Making Investment Decisions Setting goals Developing strategy –start early –diversify –invest regularly

18. Personal Investment Options Dividend reinvestment plans (DRIPs):Dividend reinvestment plans (DRIPs): permit small investors to invest in individual shares inexpensively & easily –only some companies offer DRIPs Netstock Direct & Buyandhold.com offer an alternate way to invest small amounts –low monthly minimum contributions ($10 or $20) & minimal transaction fees –you can buy partial shares of expensive stocks –most company’s stocks are available Source: The Star Ledger, Dec. 19, 1999, Section 3, p. 3.

19. Investment Risk Pyramid ` High-grade municipal bonds Balanced mutual funds Growth stocks, funds Junk bonds Treasury bills, bonds, notes Futures, commodities Increasing risk of lost principal Increasing potential gain

20. Learning Goal 7 WWhat are the emerging trends in personal financial planning? –More employee responsibility for the choices made in employer fringe benefit plans Cafeteria benefit plans are being offered in the insurance area Self-directed retirement plans are being offered Emphasizes the importance of all individuals to understand their financial needs and the best ways to achieve them

21. Trends in Personal Finance  Cafeteria-type benefit plans  more responsibility on employees  more choice for employees  Self-directed retirement accounts  401(k), SIMPLE, mutual funds

22. Retirement Choices  Self-directed retirement accounts Frequency of Employee Benefits in 1999 Defined benefit Profit sharing 403(b) Source: Bryan, Pendleton, Swats & McAllister survey in The Arizona Republic, Jan. 2, 2000, pg. D3. 401(k)ESOPOther

23. Learning Goal 8 WWhat is risk, and how can it be managed? What makes a risk insurable? –Risk is the chance for financial loss due to a peril Many risks can be covered by insurance Pays insured up to a specified amount in the event of loss from a particular peril –Risk can be managed by Avoiding situations known to be risky Assuming the responsibility for losses due to certain types of risk Adopting safety measures –Risk is insurable when it meets certain criteria

24. Learning Goal 9 WWhat types of insurance coverage should businesses consider? –Property insurance Covers losses arising from damage to property owned by the insured person or business –Liability insurance Covers losses due to injuries to others or their property determined to be caused by the insured –Other important business coverages: Business interruption Automobile and theft Fidelity and surety bonds Personal, professional, and product liability Companies must be knowledgeable about health and life insurance packages offered to employees as fringe benefits