1. The Financial Plan
Chapter 2

2. Chapter Objectives Describe the purpose of a financial plan
Identify the key components of a financial plan

3. Describe the purpose of a financial plan
Objective 1
Describe the purpose of a financial plan

4. Financial Plan Involves specifying financial goals
Describing in detail the plans for:
Spending
Financing
Investing
It’s important to have a personal financial plan because it becomes your roadmap that serves as a detailed guide that will help you achieve your goals.

5. Financial Plan
Best description of a financial plan: It’s like a blueprint for a builder.
How to accumulate and grow wealth
How to provide for emergencies
Ensures you make steady progress towards your financial goals

6. 7 Key Components of your Financial Plan

7. Identify the key components of a financial plan
Objective 2
Identify the key components of a financial plan

8. Component 1 – Plan for Your Budgeting and Taxes
About 40% of teens years old have a savings or checking account in their name
BUDGETING: process of forecasting future expenses and income
Purpose of a budget is to plan your spending and saving, given your current income level so you can meet your needs and wants.
4 Steps to Creating a Budget
Determine your net worth
Establish your income
Identify your expenses
Consider the impact of taxes

9. Step 1: Determine Your Net Worth
Knowing your net worth is important because it helps you know where you are beginning in your quest to reach your goals.
Where are you right now financially?
Do you have money in the bank?
Do you owe people money?
Do you have a job?
What are your expenses?
FORMULA FOR FINDING YOUR NET WORTH:
Net worth = Assets – Liabilities

10. Vocabulary
Assets: anything owned, such as cars, motorcycles, and homes
Liabilities: what we owe, or our debt
Net worth: the differences between your assets and liabilities
Equity: the amount of a specific asset that we own after subtracting any liabilities

11. Asset = Car Worth $5,000
Liability = Amount Owed $2,000
Net Worth = $3,000
Equity also = $3,000 because equity means ownership (Equity: the amount of a specific asset that we own after subtracting any liabilities)

12. Net Worth for Emily Emily’s car is worth $5,000
Emily still owes $1,000
She also has $500 in a savings account
What is Emily’s net worth? (hint: Net worth = Assets – Liabilities)
$5,000 + $500 (Assets) = $5,500 - $1,000 (Liabilities)
Net Worth = $4,500

13. Step 2: Establishing Your Income
Income is the money coming in through wages earned, allowance, or other sources
Income is the major means by which a person:
Saves money
Builds wealth
Acquires assets
Fulfills wants and needs
A person’s income depends on decisions he/she makes about education and career choices
The more education or specialized training, the more income made

14. Step 3: Identifying Your Expenses
Estimate how much money you’re spending every month
Knowing expenses makes it possible to determine if your income is sufficient to meet your needs.
Typical expenses might be clothing and entertainment
Some may have car payments and related expenses
Use accurate estimates

16. Step 4: Consider the Impact of Taxes
Income taxes – money owed to government on earned income
The more money you make, the more you’ll pay in taxes
As your income level increases you’ll want to include tax planning in your financial plan

17. Components of Your Financial Plan
Continued (steps 2 – 7)

18. Component 2: A Plan for Managing Your Liquidity
You go to the store and don’t have enough money. That’s a LIQUIDITY problem.
You didn’t have enough liquid assets to cover your purchase.
Your level of liquidity is how much readily available cash you have on hand for immediate wants and needs.
People without enough liquidity often use credit to cover immediate shortfalls. (costly)
Liquidity is different than net worth
Having assets that aren’t liquid (examples?) will be no use to you when facing a short-term financial need.
Example: If you need $20 and have a car worth $5,000, it will do little to help you.

19. Liquidity Management Money management Credit management
Making decisions about how much cash/liquid assets to keep in reserve
How much should you invest in less liquid assets, such as REAL ESTATE? (buildings and land)
Money management helps you determine how much money to keep liquid to avoid cash downfalls.
Making decisions about getting credit and using credit. (borrowing money)
Used to cover immediate cash shortfalls, so it increases liquidity.
Lender charges interest.
Interest is rent on money borrowed.
Don’t use credit if you can’t pay back quickly.
Limit your amount of cards and credit limit.

21. Component 3: A Plan for Your Financing
Financing - Taking a loan out to pay for a portion of a major purchase, such as a car or house.
Example: You have $1,000 down payment for a $4,000 car. You FINANCE the remaining ???

22. Payment Terms Include:
The interest rate the lender will charge you – 8%
Time period for paying back the loan – 4 years
Down payment amount (if applicable) - $2,000
CREDITWORTHINESS: an assessment of how likely you are to pay back the loan
Payment schedules for long-term loans use monthly payments.
Credit-card financing is usually available AT A HIGHER COST TO a borrower compared to longer- term financing for a major purchase.

23. Component 4: A Plan for Managing Your Risk (Insurance Planning)
Risk – the possibility of a financial loss
Without insurance on a major purchase, the owner assumes all of the risk.
Types:
Life insurance – protects loved ones left behind
Home insurance – protects your house
Car insurance – protects your vehicle

24. Component 5: A Plan for Your Investing
People invest money so they can make more money
Stocks
Bonds
Mutual funds
Remember that different types of investments have different levels of risk
Riskier investments can produce great returns—but also may experience significant losses
In a typical budget, money for investing tends to be money remaining after paying bills.

25. Component 6: A Plan for Your Retirement
People who plan for retirement while they are young often retire early
Retirement planning involves determining how much to save for retirement and how to invest that money AS EARLY AS POSSIBLE.

26. Component 7: A Plan for Communicating and Keeping Records
Communicate your financial plan to your family
Keeping good records of your finances is equally important
These records will help you when you file your taxes and calculate your net worth
Your heirs may also need these records at some point as well