pfin 4 understanding the financial planning process 1 copyright ©2016 cengage learning. all rights...
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PFIN 4
Understanding the Financial Planning Process
1
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GITMAN/ JOEHNK/ BILLINGSLEY
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1 Identify the benefits of using personal financial planning techniques to manage your finances
2 Describe the personal financial process and define your goals
3 Explain the life cycle of financial plans, the role they play in achieving your financial goals, how to deal with special planning concerns, and the use of professional financial planners
LEARNING OUTCOMES
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4 Examine the economic environment’s influence on personal financial planning
5 Evaluate the impact of age, education, and geographic location on personal income
6 Understand the importance of career choices and their relationship to personal financial planning
LEARNING OUTCOMES (continued)
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Rewards of Sound Financial Planning
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• Improving your standard of living• Spending money wisely• Accumulating wealth
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Exhibit 1.1
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Organizational Planning Model
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Personal Financial Planning
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• Systematic process that considers important elements of an individual’s financial affairs to fulfill financial goals
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Exhibit 1.3
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The Six-Step Financial Planning Process
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Financial Goals
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• Results that an individual wants to attain• Utility and cost are to be considered when
evaluating alternative qualities of life, spending patterns, and forms of wealth accumulation• Money and utility are linked to psychological
concepts of values, emotion, and personality• Financial planning is an important part of
the conflict resolution process
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Target Dates on Financial Goals
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• Goal dates: Target dates in the future when certain financial objectives are expected to be completed
• Long-term goals• Indicates wants and desires for a period
covering about 6 years out to the next 30 or 40 years
• Short-term financial goals• Set each year and cover a 12-month period
• Intermediate goals• Bridge the gap between short- and long-term
goals
Exhibit 1.4
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The Personal Financial Planning Life Cycle
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Types of Financial Planning
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• Asset acquisition• Liability and insurance• Savings and investment• Employee benefit• Tax• Retirement and estate
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Exhibit 1.5
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How a $1,000 Investment Grows Over Time
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Financial Planning Concerns
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• Managing two incomes• Managing employee benefits• Managing finances in tough economic
times
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Financial Planning Players
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• Government• Source of revenue for business and wages for
consumers• Business
• Important part of the circular flow of income that sustains a free enterprise system
• Consumers• Consumer choices determine the kinds of
goods and services that businesses provide
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Exhibit 1.6
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The Financial Planning Environment
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Phases of Economic Cycles
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Exhibit 1.7
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The Business Cycle
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Source: Adapted from William Boyes and Michael Melvin, Economics, 8th ed. (Cengage, 2011), p. 135.
Economy
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Factors that Determine the Personal Income
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• Place of residence• Difference in salaries earned• Difference in living costs
• Career• Social, demographic, economic, and
technological trends influence decisions regarding the fields that offer best opportunities for future
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Steps for Career Planning
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• Identify interests, skills, needs, and values• Set specific long- and short-term career
goals• Develop and use an action plan to achieve
those goals• Review and revise career plans as the
situation changes
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• Standard of living • Average propensity to
consume• Wealth• Tangible assets• Personal financial
planning• Utility• Goal dates
KEY TERMS
• Peak• Contraction• Trough• Inflation• Consumer price index• Purchasing power• Expansion• Flexible-benefit
(cafeteria) plans
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SUMMARY
• Sound financial planning is necessary for achieving financial objectives
• Planning what to do with one’s money and spending and investing it wisely involves personal financial planning
• Financial goals help in achieving financial goals
• Financial planning constitutes a dynamic environment including business and consumers
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