Elements of Financial Planning

Why is Personal Financial Planning Important

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.

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.

You would like to achieve financial independence or retire someday.

Why Should You Develop aPersonal Financial Plan?

To help you achieve your financial goals. To help you achieve financial independence. To help you understand where all your

money is spent. To help you support those that have

supported you.

The Personal Financial Planning Process

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

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

and Revise Your Plan as Your Financial Status Changes

Step 1: 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.

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.

Why are 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?”

Step 2: Evaluate Your Current Financial Status

Your income: What determines it.

Your expenses:What determines them.

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.

Your Expenses: What Determines Them

Expenses are your costs of living. There are two types of expenses:

Fixed expenses such as rent, car payments, and day care are expenses that don’t change in amount and are usually controlled by a contract.

Variable (flexible) expenses, like your phone bill or the amount you spend on entertainment, are expenses over which you have control.

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 non-cash assets into cash with relative ease and speed.

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 the federal government.

Step 4: Implement Your Plan

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

Remain positive about your plan; don’t view your plan as a punishment.

Rewards await you, so don’t lose sight of why you developed the plan.

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.

Summary

Build your financial future around a financial plan:– Manage the unplanned -- financial planning

withstands minor setbacks.– Accumulate wealth -- financial planning maps out

strategies for meeting your goals.– Save for financial independence and/or

retirement -- financial planning helps you determine the costs of retirement and how much you need to save.

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

Summary (cont’d)

Define your goals – you must first know where you want to go before you can decide how to get there.

Evaluate your financial health – you must first know where you are before you can determine where you are going.

Develop a personal financial plan – you must first draw a map before you can follow it.

Summary (cont’d)

Implement your plan – you must begin before you can end.

Review your progress – you must continue to check the map t ensure you are staying on course.