Chapter 1 Financial Planning: The Ties That Bind


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Chapter 1 Financial Planning: The Ties That Bind

  1. 1. Chapter 1 Financial Planning: The Ties That Bind
  2. 2. The Role of Personal Financial Planning  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.
  3. 3. 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.  To retire someday.
  4. 4. Why Should You Develop a Personal Financial Plan?  It helps you achieve your financial goals.  It helps you achieve financial independence.  It helps you understand where all your money is spent.  It may even help you support those that have supported you.
  5. 5. Why Isn’t Personal Financial Planning Easy?  Some people are uncomfortable discussing financial matters, the “fear of finance.”  Motivation and time is required to complete an accurate plan.  Good record keeping is necessary both before and during the planning period.
  6. 6. What Can You Accomplish As a Result of This Course?  Manage the unplanned.  Accumulate wealth for special expenses.  Save for retirement.  “Cover your assets.”  Invest intelligently.  Minimize your payments to Uncle Sam.
  7. 7. The Personal Financial Planning Process  Step 1: Evaluate Your Financial Health  Step 2: Define Your Financial Goals  Step 3: Develop a Plan of Action  Flexibility, Liquidity, Protection, Minimiza tion of Taxes  Consider Your Goals  Step 4: Implement Your Plan  Step 5: Review Your Progress, Reevaluate, and Revise Your Plan
  8. 8. Step 1: Evaluate Your Financial Health  Evaluate your current situation: income, spen ding, wealth  Assess your whole financial picture
  9. 9. Step 2: 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.
  10. 10. 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.
  11. 11. 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?”
  12. 12. 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 noncash assets into cash with relative ease and speed.
  13. 13. 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 Uncle Sam.
  14. 14. Step 3: Develop a Plan (cont’d)  Consider future needs:  Create a budget  Determine investment strategies  Plan for big-ticket purchases  Plan for managing debt  Plan for insurance  Plan for the expense of children and college  Plan for retirement  Plan for estate transfer
  15. 15. Step 4: Implement Your Plan  Use common sense and moderation; don’t force yourself to track every penny.  Remain positive about your plan; use it as a roadmap.  Stay on track after the detours; rewards await you.
  16. 16. 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.
  17. 17. The Life Cycle of Financial Planning  Stage 1: The Early Years -- A Time of Wealth Accumulation  Stage 2: Approaching Retirement -- The Golden Years  Stage 3: The Retirement Years
  18. 18. Stage 1: The Early Years -- A Time of Wealth Accumulation  Develop your savings plan.  Set your initial goals of all lengths.  Establish your long-range investment strategy.
  19. 19. Stage 2: Approaching Retirement -- The Golden Years  Realize intermediate- term goals that were established during Stage 1.  Re-evaluate the plan to match current goals.  Plan for retirement.
  20. 20. Stage 3: The Retirement Years  Reduce investment risk  Concentrate on preservation rather than growth of assets  Plan for the transfer of your estate
  21. 21. Managing Your Career  Find a career path for the rest of your life  Work that is enjoyable and satisfying  Adequate financial support  Balance between work and personal life
  22. 22. Deciding On A Career  Conduct a self-assessment  Research academic and career alternatives that match your skills and interests  Talk to people in the career field  Make a decision and start work on your future
  23. 23. Getting A Job  Start your job search in summer, before your senior year  Develop your resume before fall  Starting early tells employers you are serious and organized  Recruiting cycles often start in fall
  24. 24. Getting A Job (cont’d)  Prepare for the interview  Practice  Learn about the company before the interview  Prepare: rest, dress, arrive early, make a good impression  Thank the interviewer at the close; follow-up with a letter
  25. 25. Building Job Security  Keep up, with education and new skills  Do good work  Match your image to that of the company  Know and use the power structure  Take new assignments and make others aware of your work  Be loyal and supportive of your boss  Learn to network, in case you need another job
  26. 26. 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.
  27. 27. Education  It may be the best single investment you will ever make!
  28. 28. The 15 Axioms of Personal Finance  Axiom 1: The Risk-Return Tradeoff  Axiom 2: The Time Value of Money  Axiom 3: Diversification Reduces Risk  Axiom 4: All Risk Is Not Equal
  29. 29. The 15 Axioms of Personal Finance (cont’d)  Axiom 5: The Curse of Competitive Investment Markets  Axiom 6: Taxes Affect Personal Finance Decisions  Axiom 7: Stuff Happens, or The Importance of Liquidity
  30. 30. The 15 Axioms of Personal Finance (cont’d)  Axiom 8: Nothing Happens Without a Plan  Axiom 9: The Best Protection is Knowledge  Axiom 10: Protect Yourself Against Major Catastrophes
  31. 31. The 15 Axioms of Personal Finance (cont’d)  Axiom 11: The Time Dimension of Investing  Axiom 12: The Agency Problem-- Beware of the Sales Pitch
  32. 32. The 15 Axioms of Personal Finance (cont’d)  Axiom 13: Pay Yourself First  Axiom 14: Money Isn’t Everything  Axiom 15: Just Do It!
  33. 33. Summary  Build your financial future around this text and a financial plan:  Manage the unplanned -- financial planning withstands minor setbacks  Accumulate wealth -- financial planning maps out strategies for meeting your goals  Save for retirement -- financial planning helps you determine the costs of retirement
  34. 34. 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
  35. 35. Summary (cont’d)  Develop a personal financial plan  Evaluate -- know where you are today  Define -- know where you want to go  Develop a plan -- draw the map  Implement -- follow the plan with action  Review progress-- check the map to ensure you are on course
  36. 36. Summary (cont’d)  Don’t overlook the financial life cycle  The Early Years  Approaching Retirement  The Retirement Years
  37. 37. Summary (cont’d)  Manage your career to ensure personal and financial success  Remember the 15 axioms, but most importantly remember the 15th -- Just Do It!