Introduction to Financial Planning

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Introduction to Financial Planning

  1. 1. Personal Finance Financial Planning: Why It’s Important to You 1-
  2. 2. WHY STUDY PERSONAL FINANCE? <ul><li>Achieve financial success. </li></ul><ul><li>Financial success may not have the same meaning to everyone. </li></ul><ul><ul><li>Accumulating a lot of money. </li></ul></ul><ul><ul><li>Ability to purchase goods and services. </li></ul></ul><ul><ul><li>Live credit-free. </li></ul></ul>1-
  3. 3. <ul><li>What makes you happy now? </li></ul><ul><li>What do you think will make you happy in 5 years? </li></ul><ul><li>What are your financial planning concerns? </li></ul><ul><li>Are your financial planning concerns the same as your parents or grandparents? </li></ul><ul><li>What would you do if you won the lottery? </li></ul>1-
  4. 4. Your Goals in Life <ul><li>Financial goals </li></ul><ul><ul><li>Financial independence is defined as having enough income or resources to be self-reliant. </li></ul></ul><ul><ul><li>Consumption today versus consumption in the future. </li></ul></ul><ul><li>Nonfinancial goals </li></ul><ul><ul><li>Family, children, education, religious, social, etc. </li></ul></ul><ul><ul><li>Finances can affect your ability to attain these goals. </li></ul></ul>1-
  5. 5. The Principle of Diminishing Marginal Satisfaction <ul><li>Satisfaction from current consumption increases but at a decreasing rate. </li></ul><ul><li>People enjoy their current purchases but as they purchase more and more, their satisfaction decreases. </li></ul><ul><li>At a certain income level, individuals are willing to postpone current consumption and save money. </li></ul><ul><li>Saving money facilitates the attainment of financial and nonfinancial goals. </li></ul>1-
  6. 6. ACHIEVING FINANCIAL GOALS THROUGH PLANNING <ul><li>Key to achieving all goals </li></ul><ul><li>Life-cycle planning suggests that financial planning is a lifelong process. </li></ul><ul><ul><li>Career development </li></ul></ul><ul><ul><li>Family formation </li></ul></ul><ul><ul><li>Retirement </li></ul></ul><ul><li>Major financial planning areas </li></ul><ul><ul><li>Different phases of life impact the importance of the various components of financial planning </li></ul></ul>1-
  7. 7. Major Financial Planning Areas <ul><li>Consumption and Savings Planning </li></ul><ul><li>Debt Planning </li></ul><ul><li>Insurance Planning </li></ul><ul><li>Investment Planning </li></ul><ul><li>Retirement Planning </li></ul><ul><li>Estate Planning </li></ul><ul><li>Income Tax Planning </li></ul><ul><li>Career Planning </li></ul>1-
  8. 8. Life-Cycle Financial Planning (assumes children/marriage) 1- Life-Cycle Phases Financial Planning Areas Young adult (18 – 25) Consumption and savings; career Family formation (26 – 35) Consumption and savings; career; debt; insurance; income taxes Family development (36 – 49) Investment; retirement; income taxes Family maturity (50 – 60) Investment; retirement; estate Retirement (60 – ?) Estate; income taxes
  9. 9. A Planning Approach <ul><li>Step 1. Determine concrete goals . </li></ul><ul><ul><ul><ul><li>Broad goals </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Determine the specific pieces to achieve that goal </li></ul></ul></ul></ul><ul><li>Step 2. Create an action plan. </li></ul><ul><ul><ul><ul><li>How will you achieve the goals stated in step 1? How much will you save each month and where will the money be invested? </li></ul></ul></ul></ul><ul><li>Step 3. Evaluate performance. </li></ul><ul><ul><ul><ul><li>At least annually, evaluate steps 1 and 2 to determine if any adjustments should be made in the action plan or goals. </li></ul></ul></ul></ul><ul><li>Step 4. Decide on a future course of action. </li></ul><ul><ul><ul><ul><li>Is your goal realistic or should it be reevaluated? </li></ul></ul></ul></ul>1-
  10. 10. Financing your Goals <ul><li>Determine the amount of annual savings to finance your goals. </li></ul><ul><li>Establish a Savings Plan . </li></ul>1-

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