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# INTRODUCTION TO FINANCIAL PLANNING

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Introductory lecture on personal financial planning

Introductory lecture on personal financial planning

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• 1. Chapter 1Financial Planning:The Ties That Bind 1
• 2. ……Money and Marriage… 2
• 3. What does a penny mean to you?• What will you have if you double a penny a day for 30 days? 3
• 4. ONLY………………• \$10,737,418.23• (try this yourself: .01 * 100% for 30 periods 4
• 5. • If a tiny worthless penny can grow to be that much, imagine what 10% to 20% of your salary could grow to be? 5
• 6. • How „bout those acrylic nails? – \$80 month * 12 = \$960/year – For 30 years = \$28,800 – That \$960 invested each year at 11% for 30 years = \$91,064!!! – Ladies, you are wearing your new dream car! 6
• 7. • What about your coffee?• Your recreational liquid consumption?• Do you smoke? 7
• 8. Java• \$4.50 @ 3 per day = \$13.5• Per week = \$94.5• Per year = \$4,914• Invested per year for 10 years at 11% = \$82,171 8
• 9. Alcohol• Average 45 drinks per month (college males) @ average \$4.5 per drink = \$202.50• Per year \$2,430• Invested for 40 years at 11% = \$1,413,837 9
• 10. Death Sticks• \$20.65 Carton (Camels)• 1.5 cartons per week = \$30.98• Per year = \$1610.70• Invested for 20 years @ 11% = \$103,411.50 10
• 11. Think about it….• Your habits TODAY determine your life style for tomorrow. 11
• 12. Why Should You Developa Personal Financial Plan? 12
• 13. • Achieve your financial goals.• Achieve financial independence.• Invest intelligently• Minimize your payments to Uncle Sam• Cover your assets 13
• 14. Putting Planning In Context 14
• 15. 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 15
• 16. 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. • Through age 54 16
• 17. Stage 2: Approaching Retirement -- The Golden Years• Realize intermediate- term goals• Re-evaluate the plan to match current goals.• Plan for retirement.• Age 55-64 17
• 18. Stage 3: The Retirement Years • Reduce investment risk • Concentrate on preservation rather than growth of assets • Plan for the transfer of your estate • Ages 65+ 18
• 19. The Personal Financial Planning Process• Step 1: Evaluate Your Financial Health• Step 2: Define Your Financial Goals• Step 3: Develop a Plan of Action• Step 4: Implement your plan• Step 5: Review Your progress, Reevaluate, and Revise your plan 19
• 20. A question…• If there are only 5 steps to financial planning, then why is it so difficult to manage your finances? 20
• 21. Step 1: Evaluate Your Financial Health• Evaluate your current situation: income, spending, wealth• Assess your whole financial picture (chpt. 2) 21
• 22. 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. 22
• 23. 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?” 23
• 24. 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. 24
• 25. Step 3: Develop a Plan of Action• What MUST I do to achieve my goals? – Cut expenses? – Increase income? – Start saving? – Start investing? – Career choice? 25
• 26. 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. (Chp 5) 26
• 27. Step 3: Develop a Plan (cont‟d)• Protection -- Your ability to meet the unexpected large expenses without destroying your plan. (Chp 9 & 10)• Minimization of Taxes -- Your ability to pay as little as possible to Uncle Sam. (Chp 4) 27
• 28. Step 4: Implement Your Plan• Your plan is your road map• Use common sense and moderation; don‟t force yourself to track every penny;• Remain positive about your plan;• Stay on track after the detours. 28
• 29. Step 5: Revise Your Plan• Review your progress.• Match your plan to your goals.• Be prepared to start over if your plan no longer meets your needs. 29
• 30. A 2nd question…• What road blocks or detours might you encounter while following your financial plan? 30
• 31. Financial Detours• Many plans change due to unanticipated events, but generally they change due to financial life cycle pattern changes. 31
• 32. Education• It may be the best single investment you will ever make! 32
• 33. 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. 33
• 34. Summary: The PersonalFinancial Planning Process• Step 1: Evaluate Your Financial Health• Step 2: Define Your Financial Goals• Step 3: Develop a Plan of Action• Step 4: Implement your plan• Step 5: Review Your progress, Reevaluate, and Revise your plan 34