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Chapter Two Financial Planning
Learning Objectives <ul><li>Explain the elements of successful financial planning. </li></ul><ul><li>Describe the balance ...
Learning Objectives <ul><li>Know which financial records to maintain and where to keep them. </li></ul><ul><li>Understand ...
Setting the Stage for Successful Personal Financial Planning <ul><li>Financial Planning:  </li></ul><ul><ul><li>developing...
Figure 2.1: Overview of Effective Personal Financial Management
Values Provide the Base for Financial Planning <ul><li>Values: Fundamental beliefs about what is important, desirable, and...
Financial Goals Follow from Values <ul><li>Financial Goals: objectives to be attained through financial planning and manag...
Financial Strategies Guide Financial Behavior <ul><li>Financial Strategies:  </li></ul><ul><ul><li>pre-established plans o...
Developing Your Initial Financial Statements <ul><li>Financial Statements:  </li></ul><ul><ul><li>compilations of personal...
The Balance Sheet Reveals Your Net Worth <ul><li>Balance Sheet (Net Worth Statement): </li></ul><ul><ul><li>describes an i...
Components of the Balance Sheet <ul><li>Assets </li></ul><ul><li>Liabilities </li></ul><ul><li>Net Worth </li></ul>
What Is Owned–Assets <ul><li>Monetary Assets/Liquid Assets </li></ul><ul><li>Tangible (or Use) Assets </li></ul><ul><li>In...
What Is Owed–Liabilities <ul><li>Short-term (or Current) Liabilities </li></ul><ul><li>Long-term Liabilities </li></ul>
Net Worth–What Is Left <ul><li>Net Worth Formula: </li></ul><ul><ul><li>Net worth = assets - liabilities </li></ul></ul><u...
Table 2.2: Balance Sheet for a College Student
The Cash-Flow Statement Tracks Income and Expenses <ul><li>Cash-Flow (Income and Expense) Statement:  </li></ul><ul><ul><l...
Income <ul><li>Income is not limited to what is earned from salaries and wages.  </li></ul><ul><li>It also includes </li><...
Expenses <ul><li>Fixed Expenses:  </li></ul><ul><ul><li>usually paid in the same amount during each time period.  </li></u...
Surplus (Loss) <ul><li>The surplus (loss)  </li></ul><ul><ul><li>shows the amount remaining after subtracting expenditures...
Table 2.4:  Cash-Flow Statement for a College Student
Financial Ratios Assess Your Financial Strength and Progress <ul><li>Financial Ratios:  </li></ul><ul><ul><li>calculations...
Basic Liquidity Ratio <ul><li>Liquidity:  The speed and ease with which an asset can be converted to cash. </li></ul>
Basic Liquidity Ratio (continued) <ul><li>Tells how long you could meet monthly expenses with monetary assets after a tota...
Asset-to-Debt Ratio <ul><li>Compares total assets with total liabilities. </li></ul><ul><li>Is 1.0 or larger if net worth ...
Debt Service-to-Income Ratio <ul><li>Provides a view of one’s total debt burden. </li></ul>
Debt Payments-to-Disposable Income Ratio <ul><li>Disposable Personal Income: Take-home pay remaining after all deductions ...
Debt Payments-to-Disposable Income Ratio (continued) <ul><li>Indicates ability to handle monthly debt payments other than ...
Investment Assets-to-Total Assets Ratio <ul><li>Compares the value of investment assets to total assets. </li></ul><ul><li...
Savings Ratio <ul><li>Compares your dollars saved to your after-tax income. </li></ul>
Financial Recordkeeping Saves Time and Money  <ul><li>Some of your records will be original, legal documents such as recei...
Financial Recordkeeping Saves Time and Money (continued) <ul><li>Some of your records can be stored safely at home in a fi...
Where to Seek Professional Financial Planning Advice <ul><li>A true financial planner should be able to analyze a family’s...
How are Financial Planners Compensated? <ul><li>Commission-Only Financial Planners </li></ul><ul><li>Fee-Only Financial Pl...
Appropriate Professional Designations and Credentials for Planners <ul><li>Certified Financial Planner (CFP) </li></ul><ul...
Golden Rules of Financial Planning <ul><li>Develop your own balance sheet and update it annually. </li></ul><ul><li>Develo...
Golden Rules of Financial Planning (continued) <ul><li>Calculate your financial ratios periodically and use them to assess...
Golden Rules of Financial Planning (continued) <ul><li>Start an uncomplicated personal financial recordkeeping system that...
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  1. 1. Chapter Two Financial Planning
  2. 2. Learning Objectives <ul><li>Explain the elements of successful financial planning. </li></ul><ul><li>Describe the balance sheet and the cash-flow statement. </li></ul><ul><li>Use financial ratios to evaluate your financial strength and progress. </li></ul>
  3. 3. Learning Objectives <ul><li>Know which financial records to maintain and where to keep them. </li></ul><ul><li>Understand which factors to consider when choosing a professional financial planner. </li></ul>
  4. 4. Setting the Stage for Successful Personal Financial Planning <ul><li>Financial Planning: </li></ul><ul><ul><li>developing and implementing financial plans in order to achieve financial success. </li></ul></ul><ul><ul><li>is unique to each individual or family. </li></ul></ul>
  5. 5. Figure 2.1: Overview of Effective Personal Financial Management
  6. 6. Values Provide the Base for Financial Planning <ul><li>Values: Fundamental beliefs about what is important, desirable, and worthwhile. </li></ul>
  7. 7. Financial Goals Follow from Values <ul><li>Financial Goals: objectives to be attained through financial planning and management efforts. </li></ul><ul><li>Financial goals should be specific in terms of both dollar amounts and the projected dates by which they are to be achieved. </li></ul>
  8. 8. Financial Strategies Guide Financial Behavior <ul><li>Financial Strategies: </li></ul><ul><ul><li>pre-established plans of action to be implemented in specific situations. </li></ul></ul>
  9. 9. Developing Your Initial Financial Statements <ul><li>Financial Statements: </li></ul><ul><ul><li>compilations of personal financial data designed to communicate information on money matters. </li></ul></ul>
  10. 10. The Balance Sheet Reveals Your Net Worth <ul><li>Balance Sheet (Net Worth Statement): </li></ul><ul><ul><li>describes an individual’s or family’s financial condition on a specified date. </li></ul></ul>
  11. 11. Components of the Balance Sheet <ul><li>Assets </li></ul><ul><li>Liabilities </li></ul><ul><li>Net Worth </li></ul>
  12. 12. What Is Owned–Assets <ul><li>Monetary Assets/Liquid Assets </li></ul><ul><li>Tangible (or Use) Assets </li></ul><ul><li>Investment Assets/Capital Assets </li></ul>
  13. 13. What Is Owed–Liabilities <ul><li>Short-term (or Current) Liabilities </li></ul><ul><li>Long-term Liabilities </li></ul>
  14. 14. Net Worth–What Is Left <ul><li>Net Worth Formula: </li></ul><ul><ul><li>Net worth = assets - liabilities </li></ul></ul><ul><ul><li>or </li></ul></ul><ul><ul><li>Net worth = what is owned - what is owed </li></ul></ul>
  15. 15. Table 2.2: Balance Sheet for a College Student
  16. 16. The Cash-Flow Statement Tracks Income and Expenses <ul><li>Cash-Flow (Income and Expense) Statement: </li></ul><ul><ul><li>lists and summarizes income and expense transactions that have taken place over a specific period of time. </li></ul></ul>
  17. 17. Income <ul><li>Income is not limited to what is earned from salaries and wages. </li></ul><ul><li>It also includes </li></ul><ul><ul><li>gifts </li></ul></ul><ul><ul><li>interest </li></ul></ul><ul><ul><li>stock dividends </li></ul></ul><ul><ul><li>scholarships </li></ul></ul>
  18. 18. Expenses <ul><li>Fixed Expenses: </li></ul><ul><ul><li>usually paid in the same amount during each time period. </li></ul></ul><ul><ul><li>they are often contractual. </li></ul></ul><ul><li>Variable Expenses: </li></ul><ul><ul><li>expenditures you can control. </li></ul></ul><ul><ul><li>items that differ from month to month. </li></ul></ul>
  19. 19. Surplus (Loss) <ul><li>The surplus (loss) </li></ul><ul><ul><li>shows the amount remaining after subtracting expenditures from income. </li></ul></ul><ul><li>Surplus/deficit formula: </li></ul><ul><ul><li>Surplus(deficit) = total income - total expenses </li></ul></ul>
  20. 20. Table 2.4: Cash-Flow Statement for a College Student
  21. 21. Financial Ratios Assess Your Financial Strength and Progress <ul><li>Financial Ratios: </li></ul><ul><ul><li>calculations based on information in your financial statements. </li></ul></ul><ul><ul><li>simplify judgments regarding financial strength and condition. </li></ul></ul>
  22. 22. Basic Liquidity Ratio <ul><li>Liquidity: The speed and ease with which an asset can be converted to cash. </li></ul>
  23. 23. Basic Liquidity Ratio (continued) <ul><li>Tells how long you could meet monthly expenses with monetary assets after a total loss of income. </li></ul><ul><li>Three months is seen as a good cushion. </li></ul><ul><li>More may be needed if income varies significantly from month to month. </li></ul>
  24. 24. Asset-to-Debt Ratio <ul><li>Compares total assets with total liabilities. </li></ul><ul><li>Is 1.0 or larger if net worth is positive </li></ul><ul><li>Should grow as you get older </li></ul>
  25. 25. Debt Service-to-Income Ratio <ul><li>Provides a view of one’s total debt burden. </li></ul>
  26. 26. Debt Payments-to-Disposable Income Ratio <ul><li>Disposable Personal Income: Take-home pay remaining after all deductions are withheld. </li></ul>
  27. 27. Debt Payments-to-Disposable Income Ratio (continued) <ul><li>Indicates ability to handle monthly debt payments other than a mortgage. </li></ul><ul><li>20 percent or more is seen as too high. </li></ul>
  28. 28. Investment Assets-to-Total Assets Ratio <ul><li>Compares the value of investment assets to total assets. </li></ul><ul><li>Should increase as you get older. </li></ul>
  29. 29. Savings Ratio <ul><li>Compares your dollars saved to your after-tax income. </li></ul>
  30. 30. Financial Recordkeeping Saves Time and Money <ul><li>Some of your records will be original, legal documents such as receipts, retirement account statements. </li></ul><ul><li>Others records will be ones you developed in the course of financial planning such as balance sheets and budgets. </li></ul>
  31. 31. Financial Recordkeeping Saves Time and Money (continued) <ul><li>Some of your records can be stored safely at home in a fire-resistant cabinet or safe. </li></ul><ul><li>Others records should be safeguarded more securely such as in a safe-deposit box at bank. </li></ul>
  32. 32. Where to Seek Professional Financial Planning Advice <ul><li>A true financial planner should be able to analyze a family’s total needs in such areas as: </li></ul><ul><ul><li>investments </li></ul></ul><ul><ul><li>taxes </li></ul></ul><ul><ul><li>insurance </li></ul></ul><ul><ul><li>education goals </li></ul></ul><ul><ul><li>retirement </li></ul></ul>
  33. 33. How are Financial Planners Compensated? <ul><li>Commission-Only Financial Planners </li></ul><ul><li>Fee-Only Financial Planners </li></ul><ul><li>Fee-Based Financial Planners </li></ul><ul><li>Fee-Offset Financial Planners </li></ul>
  34. 34. Appropriate Professional Designations and Credentials for Planners <ul><li>Certified Financial Planner (CFP) </li></ul><ul><li>Chartered Financial Consultant (CFC) </li></ul><ul><li>Certified Public Accountant (CPA) </li></ul><ul><li>Accredited Financial Counselor (AFC) </li></ul><ul><li>Mutual Fund Chartered Counselor (MFCC) </li></ul><ul><li>Registered Investment Advisor (RIA) </li></ul>
  35. 35. Golden Rules of Financial Planning <ul><li>Develop your own balance sheet and update it annually. </li></ul><ul><li>Develop your own cash-flow statements monthly or quarterly and compile them into an annual statement each year. </li></ul>
  36. 36. Golden Rules of Financial Planning (continued) <ul><li>Calculate your financial ratios periodically and use them to assess your financial progress. </li></ul><ul><li>Develop a list of your financial goals. Start with the sorter-term goals and then expand your list to longer-range goals. Update and revise your goals annually. </li></ul>
  37. 37. Golden Rules of Financial Planning (continued) <ul><li>Start an uncomplicated personal financial recordkeeping system that meets your needs. </li></ul>

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