chapter 1: understanding the financial planning process
TRANSCRIPT
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!