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Fin442_ch2.ppt Presentation Transcript

  • 1. CHAPTER 2: YOUR FINANCIAL STATEMENTS AND PLANS
  • 2. Mapping Out Your Financial Future
    • Financial planning facilitates:
    • Greater wealth
    • Financial security
    • Attainment of financial goals
  • 3. Financial plans, budgets and statements facilitate financial planning!
    • Link future goals and plans with actual results
    • Provide direction, control and feedback
  • 4. The Interlocking Network of Financial Plans & Statements * evaluate and plan major outlays * reduce taxes * establish savings and investment programs * manage credit * secure adequate insurance * implement retirement program * facilitate estate distribution FINANCIAL PLANS
  • 5. * evaluate and plan major outlays * reduce taxes * establish savings and investment programs * manage credit * secure adequate insurance * implement retirement program * facilitate estate distribution FINANCIAL PLANS * monitor and control income, living expenses, purchases, and savings on a monthly basis BUDGETS feedback Actual financial results * balance sheet * income & expenditures statement FINANCIAL STATE- MENTS feedback
  • 6. Special Planning Concerns :
    • 1. Dual income families
    • 2. Employee benefit choices
    • 3. Major life changes, such as:
    • First job
    • Marriage
    • Children
    • Death of family member
    • Divorce
    • Change in health
    • Loss of job
    • Change in economy
  • 7. Types of Financial Planners:
    • Commissioned salespeople who work for financial institutions.
    • Fee-only financial planners who work for the individual client.
    • Planners who charge both fees and commissions, depending on the products and services offered.
    • Computerized financial plans prepared by financial institutions.
  • 8. Financial Planning Designations
    • Certified Financial Planner (CFP): Requires a comprehensive education in financial planning
    • Chartered Financial Consultant (ChFC): Financial planning designation for insurance agents
    • Certified Trust & Financial Advisor (CTFA): Estate planning and trusts expertise, found mostly in the banking industry
    • Personal Financial Specialist (PFS): Comprehensive planning credential only for CPAs
    • Chartered Life Underwriter (CLU): Insurance agent designation, often accompanied by the ChFC credential
  • 9. Choosing A Financial Planner
    • Largely unregulated industry (be careful with the self-claimed financial planners)
    • Tips on choosing a financial planner:
      • Know what you want
      • Talk to others (get referrals)
      • Interview several planners
      • Check the planner’s background
      • Get it in writing
      • Receive regular statements
      • Reassess the relationship regularly
  • 10. Time Value of Money: Putting a Dollar Value on Financial Goals A dollar today is worth more than a dollar received in the future because it can be invested and earn interest.
  • 11. Types of TVM Calculations:
    • Single sum —one lump sum investment with no more additions or subtractions.
    • Annuity —a series of equal payments made at fixed time intervals for a specified number of periods.
  • 12. Ways to Calculate TVM :
    • Formulas
    • Tables (see Appendices A-D)
    • Financial calculators
    • Spreadsheets (ex: Excel)
    • Internet calculators (search on “calculators”)
  • 13. Future Value
    • The value your invested money will grow to become earning a specific rate of interest over a given time period.
    • The process of growing today’s present value to a larger future value by applying compound interest is known as “compounding.”
  • 14. Calculating the Future Value of a Single Sum:
    • Example : What will $5000 grow to become if invested at 10% for 6 years?
    Tables (Find Future Value Factor for 6 years and 10% in Appendix A) FV = PV x Factor $5000 x 1.772 = $8,860 Calculator (Set on 1 P/YR and END mode.) 5000 +/- PV 6 N 10 I/YR FV $8,857.81
  • 15. Calculating the Future Value of an Annuity:
    • Example : What would you accumulate if you could invest $5000 every year for the next 6 years at 10%?
    Tables (Find Future Value Annuity Factor for 6 years and 10% in Appendix B) FV = PMT x Factor $5000 x 7.716 = $38,580 Calculator (Set on 1 P/YR and END mode.) 5000 +/- PMT 6 N 10 I/YR FV $38,578.05
  • 16. Present Value
    • The amount needed today to invest at a specific rate of interest over a given time period to accumulate the desired future amount.
    • “Discounting” is the reverse of compounding and is the process of working from the future value back to the present value.
  • 17. Calculating the Present Value of a Single Sum
    • Example :
    • You wish to accumulate a retirement fund of $300,000 in 25 years. If you can invest at 7%, what single lump-sum deposit must you make today in order to achieve your goal?
  • 18.
    • Tables
    • (Find Present Value Factor for 25 years and 7% in Appendix C)
    • PV = FV x Factor
    • $300,000 x .184 =
    • $55,200
    • Calculator
    • (Set on 1 P/YR and END mode.)
    • 300000 +/- FV
    • 25 N
    • 7 I/YR
    • PV $55,274.75
  • 19. Calculating the Present Value of an Annuity Example : Your rich uncle wishes to give you a sum of money today to use for the next 4 years of college. If you need $10,000 a year and will leave the remainder invested at 7%, how much should you tell him you need?
  • 20.
    • Tables
    • (Find Present Value Annuity Factor for 4 years and 7% in Appendix D.)
    • PV = PMT x Factor
    • $10,000 x 3.387 =
    • $33,870
    • Calculator
    • (Set on 1 P/YR and END mode.)
    • 10000 +/- PMT
    • 4 N
    • 7 I/YR
    • PV $33,872.11
  • 21. Balance Sheet
    • A statement of
    • your financial position
    • at one point in time.
  • 22. Balance Sheet Equation :
    • Liabilities Assets = + Net Worth
  • 23. Balance Sheet ASSETS LIABILITIES (Fair Market Value of Assets) (Payoff Amount of Loans and Debts) NET WORTH (Your Equity Portion)
  • 24. Balance Sheet ASSETS LIABILITIES
    • What you own :
    • checking acct.
    • car
    • investments
    • jewelry
    • furniture
    • What you owe :
    • car loan
    • credit card balances
    • education loans
    • unpaid monthly bills
    • NET WORTH
    • (Subtract total liabilities
    • from total assets to
    • determine net worth.)
  • 25. The Concept of Solvency :
    • If your net worth is POSITIVE , you are SOLVENT and have enough assets to cover your financial obligations.
    • If your net worth is ( NEGATIVE ) , you are INSOLVENT and do not have enough assets to cover your financial obligations.
  • 26. The Income and Expense Statement
    • A measure of your
    • financial performance
    • over a given time period.
  • 27. Income and Expense Statement :
    • Total Income – Total Expenses =
    • CASH SURPLUS OR
    • (CASH DEFICIT)
  • 28. Income : Cash IN   
    • Wages and salaries
    • Bonuses
    • Interest and dividends
    • Child support
    • Tax refunds
    • Gifts
  • 29. Expenses : Cash OUT   
    • FIXED
      • Rent or mortgage payment
      • Cable TV
      • Insurance
    • VARIABLE
      • Dry cleaning
      • Recreation
      • Eating out
  • 30. CASH SURPLUS (DEFICIT) :
    • If your income exceeds your expenses, you have a CASH SURPLUS .
    • If your expenses exceed your income, you have a ( CASH DEFICIT ) .
  • 31. 66%
  • 32. Using Your Personal Financial Statements
    • Maintain a good recordkeeping system
    • Prepare financial statements periodically
    • Track financial progress
  • 33. Ratio Analysis
    • Financial ratios allow you to:
    • Track progress toward your financial goals
    • Evaluate your financial performance over a period of time
  • 34. Balance Sheet Ratios
    • Solvency Ratio
    • Shows the state of your net worth at a given point in time.
    • Indicates your potential to withstand financial problems.
    Total net worth Total assets
  • 35.
    • Example :
    • $41,420  $147,175 = .28 or 28%
    • The larger this ratio, the greater the financial cushion to protect against insolvency.
    • This family could withstand a 28% decline in asset value before they would be insolvent.
  • 36.
    • Liquidity Ratio
    • Measures your ability to pay current debts with existing liquid assets.
    • Current is defined as needing payment within one year.
    Liquid assets Total current debts
  • 37.
    • Example :
    • $2,225  $22,589 = .099 or 9.9%
    • The higher this ratio, the longer the existing liquid assets can cover the yearly living expenses.
    • This family could last about 1.2 months or 1/10th of a year on their existing liquid assets.
  • 38.
    • Savings Ratio
    • Shows the percentage of after-tax income being saved during a given period.
    Income & Expense Statement Ratios Cash surplus Income after taxes
  • 39.
    • Example :
    • $11,336  ($73,040 – $15,430) =
    • 0.197 or 19.7%
    • The higher this ratio, the greater the amount of after-tax income being saved.
    • This family is doing much better than the national average of 5–8%.
  • 40.
    • Debt Service Ratio
    • Indicates ability to repay loan obligations promptly with before-tax income.
    Total monthly loan payments Monthly gross income
  • 41.
    • Example :
    • $1,807  $6,807 = .266 or 26.6%
    • The lower this ratio, the less the difficulty in making monthly loan payments.
    • This family’s ratio is under 35% and would probably be considered at a manageable level.
  • 42. Preparing & Using Budgets
    • Budget
    • A short-term financial planning report that helps you achieve your short-term financial goals.
    • Achieving your short-term goals then helps you achieve your longer-term goals.
  • 43. Budgets help you:
    • Monitor and control finances.
    • Allocate income to reach goals.
    • Implement system of disciplined spending.
    • Reduce needless spending.
    • Achieve long-term financial goals.
  • 44. The Budgeting Process
    • Estimate income
    • Estimate expenses
    • Finalize the cash budget
    • Deal with deficits
  • 45. What should you do if you have monthly deficits?
    • Shift expenses from months with deficits to months with surpluses.
    • Use savings, investments, or borrowing to cover temporary deficits.
  • 46. What should you do if you end the year in a deficit?
    • Liquidate savings/investments
    • Borrow to cover the deficit
    • Cut low priority expenses; alter spending habits
    • Increase income
  • 47. Deficit spending DECREASES your Net Worth! Deficit spending causes you to Deplete an existing asset, Incur more debt – Or both!
  • 48. Things to remember about a budget :
    • Use a Budget Control Schedule to compare your budgeted figures to your actual figures and determine the variances.
    • Continually update your budget based upon the actual figures.
    • Always try to keep your budget balanced or, even better, at a surplus.