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Financial Planning 101


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Financial Planning 101

  1. 1. Financial Planning 101 Simple strategies to last a lifetime © 2003 Financial Planning Association
  2. 2. Financial planning is the process of funding your personal desires and goals throughout your life .
  3. 3. The Lifetime Financial Continuum Birth Death Childhood Dependenc y Adulthood Accumulation Maturity Retirement Travel Golf Medical Expenses Nursing Home care Room & Board Education Wedding Early Adulthood Self Supporting Get Married Buy a Home Have Children Start College Fund Max out 401k Max out Employee Benefits Room & Board Buy a Car Repay College Loans Enroll in 401k Build Emergency Fund
  4. 4. Where do I start? 1. Get your last month’s paycheck stubs. 2. Get your checkbook register. 3. Get your most recent credit card receipts. 4. Get a calculator, paper, pencil and other supplies. (Aspirin is optional.) ©2003 Financial Planning Association
  5. 5. Strategy #1 Create a Net Worth Statement <ul><li>A net worth statement lists everything you own on the left and everything you owe on the right </li></ul><ul><li>What you own –what you owe = net worth </li></ul>
  6. 6. Recent College Graduate Net Worth Statement
  7. 7. Graduate A’s Net Worth 10 years after graduation
  8. 8. Graduate B’s Net Worth 10 years after graduation
  9. 9. Strategy #2: Create a Cash Flow Statement A cash flow statement lays out all of your sources of income on the left and all of your expenses on the right to identify where your money is going. © © 2003 Financial Planning Association
  10. 10. Recent College Graduate Cash Flow Statement
  11. 11. Graduate A’s Cash Flow Statement 10 years after graduation
  12. 12. Graduate B’s Cash Flow 10 years after graduation
  13. 13. Income - Expenses = Opportunity There are two categories in any cash flow statement: Income and Expenses. The difference between the two represents your opportunity. ©2003 Financial Planning Association
  14. 14. Strategy 3: Establish Financial Goals ©2003 Financial Planning Association
  15. 15. Common Financial Goals <ul><li>Buy a house </li></ul><ul><li>Pay off student loans </li></ul><ul><li>Pay of credit card debt </li></ul><ul><li>Purchase a new laptop </li></ul><ul><li>Maximize your 401k contributions </li></ul><ul><li>Purchase life insurance </li></ul><ul><li>Purchase a giant plasma TV </li></ul><ul><li>Purchase a new car </li></ul>
  16. 16. Setting Goals
  17. 17. Strategy #4: Establish a Budget A budget is a spending plan that breaks the details of your cash flow statement into manageable monthly increments so that you can fine-tune your cash management and achieve your life goals. © © 2003 Financial Planning Association
  18. 18. What is a realistic budget? INCOME FIXED EXPENSES <ul><li>Salary 1 </li></ul><ul><li>Salary 2 </li></ul><ul><li>Investments </li></ul><ul><li>Child Support </li></ul><ul><li>Social Security </li></ul><ul><li>Part-Time Job </li></ul><ul><li>Taxes </li></ul><ul><li>Rent or Mortgage </li></ul><ul><li>Insurance </li></ul><ul><li>Student Loans </li></ul><ul><li>Auto Loan </li></ul><ul><li>401k salary deferral </li></ul>©2003 Financial Planning Association
  19. 19. What is a realistic budget? <ul><li>VARIABLE EXPENSES </li></ul><ul><li>Food </li></ul><ul><li>Utilities </li></ul><ul><li>Entertainment </li></ul><ul><li>Savings </li></ul><ul><li>Transportation </li></ul><ul><li>Credit card debt service/ Consumer debt </li></ul><ul><li>Gifts </li></ul><ul><li>Miscellaneous </li></ul>©2003 Financial Planning Association
  20. 20. “ Nickel and Dime Category” - Lunches out - Happy Hour after work - Morning visits to the coffee shop - Dog food, cat food, and other pet expenses - Haircuts and manicures - Auto repairs, medical bills ©2003 Financial Planning Association
  21. 21. $7/day x 5 days x 50 weeks = $1750 per yr. $7/day x 3 days x 50 weeks = $1050 per yr. $7/day x 2 days x 50 weeks = $700 a yr. It all adds up! ©2003 Financial Planning Association
  22. 22. Strategy 5: Take full advantage of Employee Benefits Most of all take advantage of the fact that TIME is on your side. ©2003, Financial Planning Association
  23. 23. Typical benefits offered by employers <ul><li>Core Employee Benefits </li></ul><ul><ul><li>Health Insurance </li></ul></ul><ul><ul><li>401(k), 403(b), SIMPLE or SEP retirement plan </li></ul></ul><ul><ul><li>Group term life insurance </li></ul></ul><ul><ul><li>Short term and long term disability insurance </li></ul></ul><ul><ul><li>Additional death and dismemberment insurance (AD&D) </li></ul></ul><ul><li>Additional Employee benefits </li></ul><ul><ul><li>Bonus </li></ul></ul><ul><ul><li>Dental Insurance </li></ul></ul><ul><ul><li>Long-term care Insurance </li></ul></ul><ul><ul><li>Stock options </li></ul></ul><ul><ul><li>Educational assistance plan </li></ul></ul><ul><ul><li>Flexible benefit plans </li></ul></ul><ul><ul><li>Stock purchase plans </li></ul></ul><ul><ul><li>Deferred Compensation plans </li></ul></ul>
  24. 24. Strategy 6: Limit Your Debt <ul><li>Be smart about using credit </li></ul><ul><li>Excessive debt is the result of failure to plan </li></ul><ul><li>Pay cash whenever possible </li></ul><ul><li>Use low-interest rate credit cards </li></ul><ul><li>Set limits for monthly credit card spending </li></ul><ul><li>Pay your cards off in full each month, if possible </li></ul>©2003 Financial Planning Association
  25. 25. Debt Reduction Strategies ©2003 Financial Planning Association 1. Prioritize your debt. Mortgage, student loans = good debt 19.99% interest = bad debt 2. Conventional wisdom says pay off highest interest rate credit cards first, consolidate debt to lower rate cards, always pay more than the minimum due. (Minimum plus finance charges at a minimum.) 3. In the real world you are better off to pay off lowest balance credit cards first . 4. Cut up high rate credit cards, use one card only. 4. Pay attention to terms.
  26. 26. Strategy 7: Pay Yourself First ©2003 Financial Planning Association
  27. 27. Savings Strategies <ul><li>Always carry a $100 bill in your wallet. </li></ul><ul><li>Open a tax free money market account at a brokerage house and set up it up for automatic deposit </li></ul><ul><li>When you accumulate $1,000, invest it in a no-load stock mutual fund. </li></ul><ul><li>When you have saved 6 months of living expenses, start working on your cash emergency fund </li></ul><ul><li>Increase your 401(k) savings to the maximum permitted by law ($15,500 annually) </li></ul><ul><li>Establish a vacation savings account for your next vacation. </li></ul><ul><li>Establish a new car account so you can start saving for your next car. </li></ul><ul><li>Establish a down payment account to buy a home </li></ul>©2003 Financial Planning Association
  28. 28. Strategy # 8: Understand the Time Value of Money <ul><li>The earlier you start saving, the less you have to save because of the time value of money and the magic of compounding. </li></ul><ul><ul><li>If you invest $2,000 in an IRA mutual fund at age 25 and add $2,000 for four more years and then forget about it, you will have $1,064,222 at age 65. </li></ul></ul><ul><ul><li>If you wait until age 60 to start saving for retirement, you will have to invest $154,476 for five years to achieve the same goal. </li></ul></ul><ul><li>Leverage your time and productivity to pay employees to do the things you hate and professional advisors to do the things you don’t know how to do </li></ul><ul><li>Productivity or output per hour is the universal variable that determines who gets promotions, bonuses, and raises (and who doesn’t) </li></ul><ul><li>Excuses are not permitted and “incompletes’ are not an option once you graduate. You must meet time deadlines if you expect to remain employed once you graduate </li></ul><ul><li>Record retention and administrative organization are crucial to financial success </li></ul>
  29. 29. Strategy # 9: Hire Competent Professionals <ul><li>Tax Return Preparation </li></ul><ul><ul><li>Enrolled Agents </li></ul></ul><ul><ul><li>CPA </li></ul></ul><ul><li>Estate Planning Documents, Business Filings, Contracts </li></ul><ul><ul><li>Attorney At Law </li></ul></ul><ul><li>Financial Planning </li></ul><ul><ul><li>Registered Investment Advisor </li></ul></ul><ul><ul><li>CFP ® Designation </li></ul></ul>©2003 Financial Planning Association
  30. 30. “ Competence and Integrity are essential: Nice is a bonus” <ul><li>Does the professional maintain credentials relevant to the profession they are practicing </li></ul><ul><ul><li>CPA’s prepare tax returns </li></ul></ul><ul><ul><li>Attorneys provide legal services </li></ul></ul><ul><ul><li>CFP ® certificants provide financial planning services </li></ul></ul><ul><ul><li>CFA’s do money management </li></ul></ul><ul><ul><li>Insurance agents sell insurance products </li></ul></ul><ul><ul><li>Registered Representatives sell securities </li></ul></ul><ul><li>If a professional maintains credentials but does not work in the profession they are certified in, they are not currently practicing their own profession </li></ul><ul><li>A CPA selling insurance is an insurance agent </li></ul><ul><ul><li>An attorney working as a bank lending officer is a lending officer and not a practicing attorney </li></ul></ul><ul><ul><li>A CFA working as a CFO is a CFO </li></ul></ul><ul><ul><li>A CFP ® selling stocks is a licensed securities salesperson but not a financial planner </li></ul></ul><ul><ul><li>A PhD of Philosophy is not a licensed psychologist An </li></ul></ul><ul><ul><li>MBA is not a professional certification in any circumstance </li></ul></ul>
  31. 31. Additional Tips For Selecting Professional Advisors <ul><li>Check professional associations for disciplinary history and to verify licensing </li></ul><ul><li>Verify that the advisors business is registered with the secretary of state </li></ul><ul><li>Expect to pay for professional services </li></ul><ul><li>Professionals usually deliver disclosure documents for informed consent rather than glossy marketing materials </li></ul>
  32. 32. The Certified Financial Planner ™ designation ©2003 Financial Planning Association A CFP ® professional has completed a comprehensive course of study in financial planning and passed an examination, met work experience requirements, and agreed to adhere to a professional code of ethics.
  33. 33. Financial Planning 101: In Summary <ul><li>Create a net worth statement and update it annually </li></ul><ul><li>Create a cash flow statement and update it annually </li></ul><ul><li>Establish financial goals and monitor your progress toward reaching your goal </li></ul><ul><li>Develop a spending plan a.k.a budget and monitor the variance monthly </li></ul><ul><li>5. Take full advantage of employee benefits </li></ul><ul><li>Limit your debt </li></ul><ul><li>Pay yourself first </li></ul><ul><li>Understand the time value of money </li></ul><ul><li>Hire appropriate professionals </li></ul>
  34. 34. Financial Planning 102: What’s Next? <ul><li>Buying a home and shopping for a mortgage </li></ul><ul><li>Investment management </li></ul><ul><li>Tax return preparation </li></ul><ul><li>Risk management (insurance) </li></ul><ul><li>Estate planning documents </li></ul>
  35. 35. Financial Planning 101 Simple strategies to last a lifetime ©2003 Financial Planning Association
  36. 36. <ul><li> </li></ul><ul><li>800.647.6340 </li></ul><ul><li> </li></ul><ul><ul><ul><ul><li>Referrals </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Designations and licenses </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Interview several planners </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Big-picture approach </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Trust </li></ul></ul></ul></ul>©2003 Financial Planning Association