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  1. 1. Chapter 1 Overview of a Financial Plan
  2. 2. Chapter Objectives <ul><li>Introduce the subject of personal finance </li></ul><ul><li>Identify the key components of a financial plan </li></ul><ul><li>Outline the steps involved in developing your financial plan </li></ul>
  3. 3. Definitions <ul><li>Personal finance: the process of planning your spending, financing, and investing so as to optimize your financial situation </li></ul><ul><li>Personal financial plan: a plan that specifies your financial goals and describes the spending, financing, and investing plans that are intended to achieve those goals </li></ul>
  4. 4. Definitions <ul><li>Opportunity cost: what you give up as a result of a decision </li></ul>
  5. 5. How You Benefit From An Understanding of Personal Finance <ul><li>Make your own financial decisions </li></ul><ul><ul><li>Every spending decision has an opportunity cost </li></ul></ul><ul><li>Judge the advice of financial advisors </li></ul><ul><ul><li>Make informed decisions </li></ul></ul><ul><li>Become a financial advisor </li></ul><ul><ul><li>Many career opportunities available </li></ul></ul>
  6. 6. Components of a Financial Plan <ul><li>Budgeting and tax planning </li></ul><ul><li>Managing your liquidity </li></ul><ul><li>Financing your large purchases </li></ul><ul><li>Protecting your assets and income (insurance) </li></ul><ul><li>Investing your money </li></ul><ul><li>Planning your retirement and estate </li></ul>
  7. 7. A Plan for Your Budgeting and Tax Planning <ul><li>Budget planning: The process of forecasting future expenses and savings </li></ul><ul><li>Evaluate your current financial position </li></ul><ul><ul><li>Assets: what you own </li></ul></ul><ul><ul><li>Liabilities: what you owe </li></ul></ul><ul><ul><li>Net worth: the value of what you own minus the value of what you owe </li></ul></ul>
  8. 8. Budgeting and Tax Planning Exhibit 1.1: How a Budget Affects Savings
  9. 9. A Plan to Manage Your Liquidity <ul><li>Liquidity: access to funds to cover any short-term cash deficiencies </li></ul><ul><li>Money management: decisions regarding how much money to retain in a liquid form and how to allocate the funds among short-term investment instruments </li></ul>
  10. 10. A Plan to Manage Your Liquidity <ul><li>Credit management: decisions regarding how much credit to obtain to support your spending and which sources of credit to use </li></ul>
  11. 11. Managing Your Liquidity Exhibit 1.2: Managing Your Liquidity
  12. 12. A Plan for Your Financing <ul><li>Loans often needed for large expenditures </li></ul><ul><ul><li>College tuition, car, house </li></ul></ul><ul><li>Managing loans </li></ul><ul><ul><li>How much can you afford to borrow? </li></ul></ul><ul><ul><li>Determining maturity of the loan </li></ul></ul><ul><ul><li>Selecting a loan with a competitive interest rate </li></ul></ul>
  13. 13. Financing Your Large Purchases Exhibit 1.3: Financing Process
  14. 14. A Plan for Your Investing <ul><li>Funds not needed for liquidity can be invested </li></ul><ul><ul><li>Stocks, bonds, mutual funds, real estate </li></ul></ul><ul><li>All investments have some level of risk </li></ul><ul><li>Risk: uncertainty surrounding the potential return on an investment </li></ul>
  15. 15. A Plan for Your Retirement and Estate <ul><li>This includes insurance planning, retirement planning, and estate planning </li></ul><ul><ul><li>Retirement planning: determining how much money should be set aside each year for retirement and how those funds should be invested </li></ul></ul><ul><ul><li>Estate planning: determining how your wealth will be distributed before or upon your death </li></ul></ul>
  16. 16. Components of Your Financial Plan Exhibit 1.4: Components of Your Financial Plan
  17. 17. How the Text Organization Relates to the Financial Plan’s Components <ul><li>Each of the six parts of the text covers one specific component of the financial plan </li></ul><ul><li>An effective financial plan enhances net worth and builds wealth </li></ul><ul><li>Follow the steps to a complete financial plan at the end of the school term </li></ul>
  18. 18. How the Text Organization Relates to the Financial Plan’s Components <ul><li>How the components relate to your cash flows </li></ul><ul><ul><li>Cash inflows are cash that you receive </li></ul></ul><ul><ul><li>Cash outflows are cash that you spend </li></ul></ul><ul><ul><li>Budgeting balances income and spending </li></ul></ul><ul><ul><li>Liquidity deals with cash excesses or shortages </li></ul></ul>
  19. 19. How the Text Organization Relates to the Financial Plan’s Components <ul><ul><li>Financing focuses on obtaining cash for large purchases or repaying loans </li></ul></ul><ul><ul><li>Protect assets and income by using cash for insurance and retirement </li></ul></ul><ul><ul><li>Investing uses cash to build wealth </li></ul></ul>
  20. 20. How Financial Planning Relates to Cash Flow Exhibit 1.6: How Financial Planning Affects Your Cash Flows
  21. 21. Developing the Financial Plan <ul><li>Step 1. Establish Your Financial Goals </li></ul><ul><ul><li>Types of goals </li></ul></ul><ul><ul><ul><li>Car, home, college, wealth, charity </li></ul></ul></ul><ul><ul><li>Set realistic goals </li></ul></ul><ul><ul><ul><li>Stronger likelihood of reaching goals </li></ul></ul></ul><ul><ul><li>Timing of goals </li></ul></ul><ul><ul><ul><li>Short term (within one year) </li></ul></ul></ul><ul><ul><ul><li>Intermediate (between 1–5 years) </li></ul></ul></ul><ul><ul><ul><li>Long term (beyond five years) </li></ul></ul></ul>
  22. 22. Developing the Financial Plan <ul><li>Step 2. Consider Your Current Financial Position </li></ul><ul><ul><li>How your future financial position is tied to your education </li></ul></ul><ul><ul><ul><li>Consider your skills, interests, and career paths </li></ul></ul></ul><ul><ul><li>How your future financial position is tied to your career choice </li></ul></ul><ul><ul><ul><li>Choose a career that will be enjoyable and suit your skills </li></ul></ul></ul>
  23. 23. Developing the Financial Plan
  24. 24. Developing the Financial Plan
  25. 25. Developing the Financial Plan <ul><li>Step 3. Identify and Evaluate Alternative Plans That Could Achieve Your Goals </li></ul><ul><ul><li>Plans could be conservative or aggressive </li></ul></ul><ul><li>Step 4. Select and Implement the Best Plan for Achieving Your Goals </li></ul><ul><ul><li>The Internet has valuable financial planning information </li></ul></ul>
  26. 26. Developing the Financial Plan <ul><li>Focus on Ethics: Personal Financial Advice </li></ul><ul><ul><li>Your objective is to get the best advice appropriate to your needs </li></ul></ul><ul><ul><li>Be wary of unethical behavior </li></ul></ul><ul><ul><ul><li>Difficult to discern </li></ul></ul></ul><ul><ul><li>Be wary of incompetent advice </li></ul></ul><ul><ul><ul><li>Be alert, ask questions, carefully consider advice </li></ul></ul></ul>
  27. 27. Developing the Financial Plan <ul><li>Step 5. Evaluate Your Financial Plan </li></ul><ul><ul><li>Keep plan in an accessible place and monitor your progress </li></ul></ul><ul><li>Step 6. Revise Your Financial Plan </li></ul><ul><ul><li>Change plan as financial condition and financial goals change </li></ul></ul>
  28. 28. How the Internet Facilitates Financial Planning <ul><li>The Internet provides information on all aspects of financial planning </li></ul><ul><ul><li>Bank deposit rates </li></ul></ul><ul><ul><li>Prices of cars and homes </li></ul></ul><ul><ul><li>Financing rates </li></ul></ul><ul><ul><li>Prices of investments </li></ul></ul><ul><ul><li>Insurance premiums </li></ul></ul>
  29. 29. How the Internet Facilitates Financial Planning <ul><li>Provides updated information on all parts of your financial plan </li></ul><ul><ul><li>Current tax rates and regulations </li></ul></ul><ul><ul><li>Investment performances </li></ul></ul><ul><ul><li>Online calculators </li></ul></ul>
  30. 30. How the Internet Facilitates Financial Planning 1.1 Financial Planning Online: Should You Pursue a Career in Financial Planning?
  31. 31. Financial Planning Online: Financial Planning Tools for You <ul><li>Go to http:// finance.yahoo.com </li></ul><ul><li>This website provides much information and many tools that can be used for all aspects of financial planning. </li></ul><ul><li>It also provides information for creating retirement plans and wills. </li></ul>
  32. 32. Integrating Key Concepts
  33. 33. Looking Ahead <ul><li>Part 1: Financial Planning Tools </li></ul><ul><ul><li>Chapter 1 showed an overview of a financial plan </li></ul></ul><ul><ul><li>Chapter 2 teaches personal financial statements </li></ul></ul><ul><ul><li>Chapter 3 teaches time value of money </li></ul></ul><ul><ul><li>Chapter 4 teaches tax planning </li></ul></ul><ul><li>Part 2: Liquidity Management </li></ul><ul><li>Part 3: Financing </li></ul><ul><li>Part 4: Protecting Your Wealth </li></ul><ul><li>Part 5: Investing </li></ul><ul><li>Part 6: Retirement and Estate Planning </li></ul>