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YOD YOD Presentation Transcript

  • Chapter Two Financial Planning
  • Learning Objectives
    • Explain the elements of successful financial planning.
    • Describe the balance sheet and the cash-flow statement.
    • Use financial ratios to evaluate your financial strength and progress.
  • Learning Objectives
    • Know which financial records to maintain and where to keep them.
    • Understand which factors to consider when choosing a professional financial planner.
    View slide
  • Setting the Stage for Successful Personal Financial Planning
    • Financial Planning:
      • developing and implementing financial plans in order to achieve financial success.
      • is unique to each individual or family.
    View slide
  • Figure 2.1: Overview of Effective Personal Financial Management
  • Values Provide the Base for Financial Planning
    • Values: Fundamental beliefs about what is important, desirable, and worthwhile.
  • Financial Goals Follow from Values
    • Financial Goals: objectives to be attained through financial planning and management efforts.
    • Financial goals should be specific in terms of both dollar amounts and the projected dates by which they are to be achieved.
  • Financial Strategies Guide Financial Behavior
    • Financial Strategies:
      • pre-established plans of action to be implemented in specific situations.
  • Developing Your Initial Financial Statements
    • Financial Statements:
      • compilations of personal financial data designed to communicate information on money matters.
  • The Balance Sheet Reveals Your Net Worth
    • Balance Sheet (Net Worth Statement):
      • describes an individual’s or family’s financial condition on a specified date.
  • Components of the Balance Sheet
    • Assets
    • Liabilities
    • Net Worth
  • What Is Owned–Assets
    • Monetary Assets/Liquid Assets
    • Tangible (or Use) Assets
    • Investment Assets/Capital Assets
  • What Is Owed–Liabilities
    • Short-term (or Current) Liabilities
    • Long-term Liabilities
  • Net Worth–What Is Left
    • Net Worth Formula:
      • Net worth = assets - liabilities
      • or
      • Net worth = what is owned - what is owed
  • Table 2.2: Balance Sheet for a College Student
  • The Cash-Flow Statement Tracks Income and Expenses
    • Cash-Flow (Income and Expense) Statement:
      • lists and summarizes income and expense transactions that have taken place over a specific period of time.
  • Income
    • Income is not limited to what is earned from salaries and wages.
    • It also includes
      • gifts
      • interest
      • stock dividends
      • scholarships
  • Expenses
    • Fixed Expenses:
      • usually paid in the same amount during each time period.
      • they are often contractual.
    • Variable Expenses:
      • expenditures you can control.
      • items that differ from month to month.
  • Surplus (Loss)
    • The surplus (loss)
      • shows the amount remaining after subtracting expenditures from income.
    • Surplus/deficit formula:
      • Surplus(deficit) = total income - total expenses
  • Table 2.4: Cash-Flow Statement for a College Student
  • Financial Ratios Assess Your Financial Strength and Progress
    • Financial Ratios:
      • calculations based on information in your financial statements.
      • simplify judgments regarding financial strength and condition.
  • Basic Liquidity Ratio
    • Liquidity: The speed and ease with which an asset can be converted to cash.
  • Basic Liquidity Ratio (continued)
    • Tells how long you could meet monthly expenses with monetary assets after a total loss of income.
    • Three months is seen as a good cushion.
    • More may be needed if income varies significantly from month to month.
  • Asset-to-Debt Ratio
    • Compares total assets with total liabilities.
    • Is 1.0 or larger if net worth is positive
    • Should grow as you get older
  • Debt Service-to-Income Ratio
    • Provides a view of one’s total debt burden.
  • Debt Payments-to-Disposable Income Ratio
    • Disposable Personal Income: Take-home pay remaining after all deductions are withheld.
  • Debt Payments-to-Disposable Income Ratio (continued)
    • Indicates ability to handle monthly debt payments other than a mortgage.
    • 20 percent or more is seen as too high.
  • Investment Assets-to-Total Assets Ratio
    • Compares the value of investment assets to total assets.
    • Should increase as you get older.
  • Savings Ratio
    • Compares your dollars saved to your after-tax income.
  • Financial Recordkeeping Saves Time and Money
    • Some of your records will be original, legal documents such as receipts, retirement account statements.
    • Others records will be ones you developed in the course of financial planning such as balance sheets and budgets.
  • Financial Recordkeeping Saves Time and Money (continued)
    • Some of your records can be stored safely at home in a fire-resistant cabinet or safe.
    • Others records should be safeguarded more securely such as in a safe-deposit box at bank.
  • Where to Seek Professional Financial Planning Advice
    • A true financial planner should be able to analyze a family’s total needs in such areas as:
      • investments
      • taxes
      • insurance
      • education goals
      • retirement
  • How are Financial Planners Compensated?
    • Commission-Only Financial Planners
    • Fee-Only Financial Planners
    • Fee-Based Financial Planners
    • Fee-Offset Financial Planners
  • Appropriate Professional Designations and Credentials for Planners
    • Certified Financial Planner (CFP)
    • Chartered Financial Consultant (CFC)
    • Certified Public Accountant (CPA)
    • Accredited Financial Counselor (AFC)
    • Mutual Fund Chartered Counselor (MFCC)
    • Registered Investment Advisor (RIA)
  • Golden Rules of Financial Planning
    • Develop your own balance sheet and update it annually.
    • Develop your own cash-flow statements monthly or quarterly and compile them into an annual statement each year.
  • Golden Rules of Financial Planning (continued)
    • Calculate your financial ratios periodically and use them to assess your financial progress.
    • Develop a list of your financial goals. Start with the sorter-term goals and then expand your list to longer-range goals. Update and revise your goals annually.
  • Golden Rules of Financial Planning (continued)
    • Start an uncomplicated personal financial recordkeeping system that meets your needs.