prentice-hall, inc.1 chapter 1 financial planning: the ties that bind

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Chapter 1

Financial Planning:

The Ties That Bind

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The Role of Personal Financial Planning

To manage income and expenses.To create an awareness of your current

financial status.To plan for the future by developing

goals and devising ways to achieve those goals.

To provide a system of evaluation and revision for your financial progress.

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Why Do You Need a Personal Financial Plan?

For most people it is easier to spend than save.

To track your expenses, so you don’t spend more than you think you’re spending.

To retire someday.

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Why Should You Develop a Personal Financial Plan?

It helps you achieve your financial goals.

It helps you achieve financial independence.

It helps you understand where all your money is spent.

It may even help you support those that have supported you.

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Why Isn’t Personal Financial Planning Easy?

Some people are uncomfortable discussing financial matters, the “fear of finance.”

Motivation and time is required to complete an accurate plan.

Good record keeping is necessary both before and during the planning period.

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What Can You Accomplish As a Result of This Course?

Manage the unplanned.Accumulate wealth for special

expenses.Save for retirement.“Cover your assets.” Invest intelligently.Minimize your payments to Uncle Sam.

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The Personal Financial Planning Process

Step 1: Evaluate Your Financial Health Step 2: Define Your Financial Goals Step 3: Develop a Plan of Action

– Flexibility, Liquidity, Protection, Minimization of Taxes

– Consider Your Goals Step 4: Implement Your Plan Step 5: Review Your Progress, Reevaluate,

and Revise Your Plan

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Step 1: Evaluate Your Financial Health

Evaluate your current situation: income, spending, wealth

Assess your whole financial picture

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Step 2: Define Your Financial Goals

Specifically define and write down your financial goals to reflect your financial and life situation.

Attach a cost to each goal.Set a date for when the money is

needed to accomplish the goal.

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What Are the Time Horizons for Financial Goals?

Short-term goals can be accomplished within a 1-year period .

Intermediate-term goals take 1-10 years to accomplish.

Long-term goals take more than 10 years to achieve.

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Goals: The Cornerstone of a Financial Plan

Goals keep the future in mind by reminding you of the rewards.

Goals entice you to keep the plan in effect.

Goals provide tangibility for the question, “Why?”

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Step 3: Develop a Plan of Action

Flexibility -- The ability for your plan to change as your situations or goals change.

Liquidity -- Your ability to convert noncash assets into cash with relative ease and speed.

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Step 3: Develop a Plan (cont’d)

Protection -- Your ability to meet the unexpected large expenses without destroying your plan.

Minimization of Taxes -- Your ability to pay as little as possible to Uncle Sam.

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Step 3: Develop a Plan (cont’d)

Consider future needs:– Create a budget– Determine investment strategies– Plan for big-ticket purchases– Plan for managing debt– Plan for insurance– Plan for the expense of children and college– Plan for retirement– Plan for estate transfer

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Step 4: Implement Your Plan

Use common sense and moderation; don’t force yourself to track every penny.

Remain positive about your plan; use it as a roadmap.

Stay on track after the detours; rewards await you.

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Step 5: Revise Your Plan

Periodically review your progress to see if any fine tuning needs to be done.

Make sure that your plan still matches your goals.

Be prepared to start over if your plan no longer meets your needs.

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The Life Cycle of Financial Planning

Stage 1: The Early Years -- A Time of Wealth Accumulation

Stage 2: Approaching Retirement -- The Golden Years

Stage 3: The Retirement Years

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Stage 1: The Early Years -- A Time of Wealth Accumulation

Develop your savings plan.

Set your initial goals of all lengths.

Establish your long-range investment strategy.

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Stage 2: Approaching Retirement -- The Golden Years

Realize intermediate-term goals that were established during Stage 1.

Re-evaluate the plan to match current goals.

Plan for retirement.

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Stage 3: The Retirement Years

Reduce investment risk

Concentrate on preservation rather than growth of assets

Plan for the transfer of your estate

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Managing Your Career

Find a career path for the rest of your life– Work that is enjoyable and satisfying– Adequate financial support– Balance between work and personal life

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Deciding On A Career

Conduct a self-assessmentResearch academic and career

alternatives that match your skills and interests

Talk to people in the career fieldMake a decision and start work on your

future

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Getting A Job

Start your job search in summer, before your senior year– Develop your resume before fall– Starting early tells employers you are

serious and organized– Recruiting cycles often start in fall

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Getting A Job (cont’d)

Prepare for the interview– Practice– Learn about the company before the

interview– Prepare: rest, dress, arrive early, make a

good impression– Thank the interviewer at the close; follow-

up with a letter

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Building Job Security Keep up, with education and new skills Do good work Match your image to that of the company Know and use the power structure Take new assignments and make others

aware of your work Be loyal and supportive of your boss Learn to network, in case you need another

job

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Your Income: What Determines It

Earnings determine standard of living.Education is the key factor in

determining income level.70% of wealthy householders finished

college.

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Education

It may be the best single investment you will ever make!

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The 15 Axioms of Personal Finance

Axiom 1: The Risk-Return Tradeoff

Axiom 2: The Time Value of Money

Axiom 3: Diversification Reduces Risk

Axiom 4: All Risk Is Not Equal

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The 15 Axioms of Personal Finance (cont’d)

Axiom 5: The Curse of Competitive Investment Markets

Axiom 6: Taxes Affect Personal Finance Decisions

Axiom 7: Stuff Happens, or The Importance of Liquidity

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The 15 Axioms of Personal Finance (cont’d)

Axiom 8: Nothing Happens Without a Plan

Axiom 9: The Best Protection is Knowledge

Axiom 10: Protect Yourself Against Major Catastrophes

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The 15 Axioms of Personal Finance (cont’d)

Axiom 11: The Time Dimension of Investing

Axiom 12: The Agency Problem-- Beware of the Sales Pitch

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The 15 Axioms of Personal Finance (cont’d)

Axiom 13: Pay Yourself First

Axiom 14: Money Isn’t Everything

Axiom 15: Just Do It!

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SummaryBuild your financial future around this

text and a financial plan:– Manage the unplanned -- financial

planning withstands minor setbacks– Accumulate wealth -- financial planning

maps out strategies for meeting your goals– Save for retirement -- financial planning

helps you determine the costs of retirement

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Summary (cont’d)

– “Cover your assets” -- financial planning includes protecting your assets with insurance

– Invest intelligently -- financial planning helps you understand the principles of investing

– Minimize taxes -- financial planning helps you keep your assets where they should be, in your own pocket

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Summary (cont’d)

Develop a personal financial plan– Evaluate -- know where you are today– Define -- know where you want to go– Develop a plan -- draw the map– Implement -- follow the plan with action– Review progress-- check the map to

ensure you are on course

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Summary (cont’d)

Don’t overlook the financial life cycle– The Early Years– Approaching Retirement– The Retirement Years

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Summary (cont’d)

Manage your career to ensure personal and financial success

Remember the 15 axioms, but most importantly remember the 15th -- Just Do It!