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Personal Financial Planning


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Personal Financial Planning

  1. 1. PERSONAL FINANCIAL PLANNING When Should You Start? M. Piczak January 2006
  2. 2. WHY A PERSONAL FINANCIAL PLAN? <ul><li>As an employer, no one else does it for you </li></ul><ul><li>Need retirement income </li></ul><ul><li>Help choose your priorities between home, vehicles, vacation property, children’s education, travel, early retirement </li></ul><ul><li>Pay less income tax </li></ul>
  3. 3. THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN <ul><li>Evaluate your personal, current financial situation </li></ul><ul><ul><li>Estimate current net worth </li></ul></ul><ul><ul><li>Estimate income from all sources </li></ul></ul><ul><ul><li>List all recurring expenses </li></ul></ul>
  4. 4. <ul><li>2. Choose financial goals. </li></ul><ul><li>Time frames are important </li></ul><ul><li>Separate wants from needs </li></ul>THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN
  5. 5. <ul><li>3. Develop saving/investment strategy </li></ul><ul><li>For desired retirement income </li></ul><ul><li>For goals between now & retirement </li></ul><ul><li>Make assumptions regarding income and expenditures over future years </li></ul><ul><li>Identify alternative “action plans” (contingency planning) </li></ul>THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN
  6. 6. <ul><li>4. Evaluate alternative action plans considering: </li></ul><ul><li>Economic & employment factors </li></ul><ul><li>Risk factors – financial & other </li></ul><ul><li>Opportunity costs </li></ul><ul><li>Lifestyle choices </li></ul><ul><li>Your values </li></ul><ul><li>Family situation </li></ul>THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN
  7. 7. <ul><li>5. Develop your plan by: </li></ul><ul><li>Choosing from alternatives </li></ul><ul><li>Using professional advice </li></ul><ul><li>Remember the family life cycle </li></ul><ul><li>Ensure you have a wise budget </li></ul><ul><li>Remember tax considerations </li></ul>THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN
  8. 8. <ul><li>6. Implement by: </li></ul><ul><li>Evaluating periodically </li></ul><ul><li>Changing your plans as needs change </li></ul><ul><li>Changing as external factors change </li></ul><ul><li>Focus on goals </li></ul>THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN
  9. 9. WEALTH CREATION IN OUR CAPITALISTIC SOCIETY <ul><li>Creation of wealth is encouraged so that individuals take care of themselves rather than by the state </li></ul><ul><li>System is designed to “control” the rate of wealth creation to promote stability and induce hard work and risk taking </li></ul>
  10. 10. WHAT YOU CAN DO WITH YOUR $ <ul><li>4 options exist: </li></ul><ul><ul><li>Spend it – it’s gone forever </li></ul></ul><ul><ul><li>Give it away – you feel better but it’s also gone for good </li></ul></ul><ul><ul><li>Bury it – you’ve outsmarted the tax man but lowered your worth because of inflation </li></ul></ul><ul><ul><li>Invest it – participating in the power of the time value of money (interest and capital appreciation) </li></ul></ul>
  11. 11. THE TIME VALUE OF MONEY <ul><li>Money grows according to the force of interest </li></ul><ul><li>Future Value = P(1 + i) n </li></ul><ul><li>Interest is paid on interest resulting in a power function </li></ul><ul><li>Consider that $1,000 invested annually into an RRSP accumulating beyond the reach of CCRA will grow to $1.5 million depending on the interest rate used </li></ul><ul><li>Remember, that it will be taxable when drawn out at retirement although at a lower rate of tax </li></ul>
  12. 12. GETTING TO $1,000,000 <ul><li>Contrary to easy jokes, $1 million is still some serious money </li></ul><ul><li>How much money must be invested to get to the magic $1 million? </li></ul><ul><li>The answer is:_________________ </li></ul>
  13. 13. DEPENDS… <ul><li>Depends on: </li></ul><ul><li>A. Investment return assumptions </li></ul><ul><li>B. Amount contributed </li></ul><ul><li>C. Time involved </li></ul><ul><li>Consider the following piece: </li></ul><ul><li>Future Value Calculations: Getting to $1,000,000 </li></ul>
  14. 14. INCOME SOURCES <ul><li>Salaries </li></ul><ul><li>Employment insurance benefits </li></ul><ul><li>Self employed income </li></ul><ul><li>Business income </li></ul><ul><li>Rental income </li></ul><ul><li>Pension income </li></ul><ul><li>Interest and investment earnings </li></ul><ul><li>Inheritances </li></ul><ul><li>Unexpected windfalls </li></ul>
  15. 15. ITEMIZE YOUR EXPENSES <ul><li>Food </li></ul><ul><li>Shelter </li></ul><ul><li>Car </li></ul><ul><li>Children </li></ul><ul><li>Medical care </li></ul><ul><li>Meals outside the home </li></ul><ul><li>Entertainment </li></ul><ul><li>Travel </li></ul><ul><li>Beer </li></ul>
  16. 16. WHEN TO START? <ul><li>NOW! </li></ul>
  17. 17. EASY INVESTMENT OPTIONS <ul><li>Starting an RRSP and making regular contributions </li></ul><ul><li>Do what Esther Pauls did…get off your lease, purchase the building reducing your present costs and owning the building after 7 years </li></ul><ul><li>Starting up a mutual fund of your own </li></ul><ul><li>“ Play” with stocks on e-trader sites limiting yourself to a particular sum </li></ul><ul><li>Buy a house (appreciates tax free for your principal residence) </li></ul><ul><li>Do “forced” savings using CSBs and then investing it at the end of the year in some other investment instrument </li></ul>
  18. 18. DEVELOP MULTIPLE INCOME STREAMS <ul><li>Rent </li></ul><ul><li>Residual income streams </li></ul><ul><li>Having several activities that generate income simultaneously </li></ul>
  19. 19. CONTROLLING YOUR SPENDING <ul><li>Budget and stick to it </li></ul><ul><li>Learn to say no </li></ul><ul><li>Don’t have too many credit cards </li></ul><ul><li>Use a line of credit </li></ul><ul><li>Stop impulse buying </li></ul><ul><li>“ do you really need it?” </li></ul><ul><li>Don’t go shopping </li></ul><ul><li>Control dining out </li></ul><ul><li>Don’t carry cash </li></ul><ul><li>Pay down debt ASAP so you can do other things </li></ul>
  20. 20. CUT DOWN AND SAVE BIG OVER A LIFETIME <ul><li>How much money is generated by cutting down on: </li></ul><ul><ul><li>Taking own lunch 3 days/week </li></ul></ul><ul><ul><ul><ul><li>= $95,000 </li></ul></ul></ul></ul><ul><ul><li>Buying bottled water $3/dozen bottles rather than at convenience store at $1/bottle </li></ul></ul><ul><ul><ul><ul><li>= $57,000 </li></ul></ul></ul></ul><ul><ul><li>Park car, take bus </li></ul></ul><ul><ul><ul><ul><li>= $110,000 </li></ul></ul></ul></ul><ul><ul><ul><ul><li>=SUM TOTAL > $260,000 </li></ul></ul></ul></ul><ul><ul><li>(See Spec article Jan. 27, 2006) </li></ul></ul>
  21. 21. THAT’S ALL THERE IS TO IT… <ul><li>Decide what you want </li></ul><ul><li>Look at where you are now </li></ul><ul><li>Establish your priorities </li></ul><ul><li>Cut down your spending </li></ul><ul><li>Make the investment/saving commitment </li></ul><ul><li>Go relax in the sun </li></ul>
  23. 23. PERSONAL FINANCIAL PLANNING M. Piczak January 2006 THE END