chapter 1: understanding the financial planning process

CHAPTER 1:

UNDERSTANDING THE FINANCIAL PLANNING

PROCESS

1-2

The Rewards of Sound Financial Planning

Maintain and improve standard of living.

Control spending in order to live well today and tomorrow!

Accumulate wealth.

1-3

Average Propensity to Consume:

The percentage of each dollar of income that is spent, on average,

for current needs rather than saved.

What is your average propensity to consume?

Income spent on current needs

Total income

1-4

The Personal Financial Planning Process

Taking conscientious and systematic steps toward fulfilling your financial goals.

1-5

Steps in the Financial Planning Process:

1. Define financial goals.

2. Develop financial plans and strategies to achieve goals.

3. Implement financial plans and strategies.

4. Develop budgets to monitor and control progress toward goals.

5. Evaluate results by using financial statements.

6. Revise goals as situations change.

1-6

1. Define financial goals

2. Develop plans

1-7

3. Implement plans

4. Develop budgets

1. Define financial goals

2. Develop plans

FINANCIAL ACTIONS•Basic asset decisions•Credit decisions•Insurance decisions•Investment decisions•Retirement and estate decisions

1-8

3. Implement plans

4. Develop budgets

1. Define financial goals

2. Develop plans

5. Evaluate results

6. Revise plans

FINANCIAL ACTIONS•Basic asset decisions•Credit decisions•Insurance decisions•Investment decisions•Retirement and estate decisions

Prepare financial statements

1-9

Money: Used as a medium of exchange. Financial goals are stated in dollar

amounts. Need to consider utility, or amount

of satisfaction derived from purchases, as well as cost.

May be closely linked to personal psychological concepts.

May play key role in personal relationships.

1-10

To attain your financial goals:

Be specific in defining goals and focus on results.

Make goals realistically attainable. Involve family members and enlist their

cooperation. Prioritize goals and set a definite time

frame.

1-11

Putting target dates on financial goals:

Short-term goals—to be accomplished within the next year.

Intermediate-term goals—to be accomplished in the next 2-5 years.

Long-term goals—to be accomplished in time periods greater than 5 years.

1-12

From Goals to Plans:A Lifetime of Planning

Early childhood High school and college Family formation Career development Pre-retirement Retirement

1-13

Age

Income

10 20 30 40 50 60 70 80

Income Stream

Personal Financial Planning Lifecycle

Retirement/Estate

Tax

Savings/Investment

Asset Acquisition

Liability/Insurance

Benefits

1-14

Benefit of planning:

Your money works more efficiently for you by...

Utilizing the financial wonder—

The power of compounding through time!

1-15

Growth of $1,000 at 8 % interest:

21,725

10,063

4,6612,159

$0

$10,000

$20,000

$30,000

$40,000

$50,000

0 10 20 30 40Years

1-16

Growth of $1000 at 10% interest:

17,449

6,7272,594

$0

$10,000

$20,000

$30,000

$40,000

$50,000

0 10 20 30 40Years

21,725

45,259

1-17

Use the personal computer to:

Prepare financial statements

Plan retirement

Prepare and file tax returns

Track investments

Analyze needs

1-18

The Planning Environment

Financial planning is carried out in an economic environment created by the interactions of

Government Business Consumers

1-19

BUSINESS GOVERNMENT CONSUMERS

Money payments of wages, rentsinterest, and profit

Money payments for goodsand services

1-20

BUSINESS GOVERNMENT CONSUMERS

Money payments of wages, rentsinterest, and profit

Money payments for goodsand services

Land, labor, and financial capital

Goods and services

1-21

BUSINESS GOVERNMENT CONSUMERS

Money payments of wages, rentsinterest, and profit

Money payments for goodsand services

Land, labor, and financial capital

Goods and services

Public goods &services, regulations,

and revenues

Taxes

1-22

Government policy decisions are used to regulate the economy in an effort to:

Provide economic stability Maintain acceptable employment

levels

1-23

Controls money supply

Used to stimulate or contract economic growth

Fiscal Policy Controls levels of taxation

Sets levels of government spending on various programs

Monetary Policy

1-24

Policies seek to control: Economic Cycles

– Stages related to employment and production levels

– Growth measured by changes in GDP

Inflation– Measured by changes in CPI– Affects purchasing power and interest

rates– Affects financial plans and goals

1-25

Economic Cycles

Expansion Recession

Depression Recovery

HIGH

LOW

Levels of Employment and Production

1-26

What Determines Your Personal Income?

Age, marital status Education Where you live Career choice

THE END!