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  1. 1. Chapter 1 Financial Planning: The Ties That Bind
  2. 2. The Role of Personal Financial Planning <ul><li>To manage income and expenses </li></ul><ul><li>To create an awareness of your current financial status </li></ul><ul><li>To plan for the future by developing goals and devising ways to achieve those goals </li></ul><ul><li>To provide a system of evaluation and revision for your financial progress </li></ul>
  3. 3. Why Do You Need a Personal Financial Plan? <ul><li>For most people, it is easier to spend than save </li></ul><ul><li>To track your expenses, so you don’t spend more than you think you’re spending </li></ul><ul><li>To retire someday </li></ul>
  4. 4. Why Should You Develop a Personal Financial Plan? <ul><li>To achieve your financial goals </li></ul><ul><li>To achieve financial independence </li></ul><ul><li>To understand where all your money is spent </li></ul><ul><li>To support those that have supported you </li></ul>
  5. 5. Why Isn’t Personal Financial Planning Easy? <ul><li>Uncomfortable discussing financial matters; the “fear of finance” </li></ul><ul><li>Motivation and time required to complete an accurate plan </li></ul><ul><li>Good record keeping </li></ul>
  6. 6. What Can You Accomplish as a Result of This Course? <ul><li>Manage the unplanned </li></ul><ul><li>Accumulate wealth for special expenses </li></ul><ul><li>Save for retirement </li></ul><ul><li>“ Cover your assets” </li></ul><ul><li>Invest intelligently </li></ul><ul><li>Minimize your payments to Uncle Sam </li></ul>
  7. 7. The Personal Financial Planning Process <ul><li>Step 1: Evaluate Your Financial Health </li></ul><ul><li>Step 2: Define Your Financial Goals </li></ul><ul><li>Step 3: Develop a Plan of Action </li></ul><ul><ul><li>Flexibility, Liquidity, Protection, Minimization of Taxes </li></ul></ul><ul><ul><li>Consider Your Goals </li></ul></ul><ul><li>Step 4: Implement Your Plan </li></ul><ul><li>Step 5: Review Your Progress, Reevaluate, and Revise Your Plan </li></ul>
  8. 8. Step 1: Evaluate Your Financial Health <ul><li>Evaluate your current situation: income, spending, wealth </li></ul><ul><li>Assess your whole financial picture </li></ul>
  9. 9. Step 2: Define Your Financial Goals <ul><li>Specifically define and write down your financial goals to reflect your financial and life situation </li></ul><ul><li>Attach a cost to each goal </li></ul><ul><li>Set a date for when the money is needed to accomplish the goal </li></ul>
  10. 10. What are the Time Horizons for Financial Goals? <ul><li>Short-term goals </li></ul><ul><ul><li>Within a 1-year period </li></ul></ul><ul><li>Intermediate-term </li></ul><ul><ul><li>1-10 years to accomplish. </li></ul></ul><ul><li>Long-term goals </li></ul><ul><ul><li>More than 10 years to achieve. </li></ul></ul>
  11. 11. Goals <ul><li>Keep the future in mind by reminding you of the rewards </li></ul><ul><li>Entice you to keep the plan in effect </li></ul><ul><li>Provide tangibility for the question, “Why?” </li></ul>
  12. 12. Step 3: Develop a Plan of Action <ul><li>Flexibility </li></ul><ul><ul><li>Ability for your plan to change as your situations or goals change </li></ul></ul><ul><li>Liquidity </li></ul><ul><ul><li>Ability to convert noncash assets into cash with relative ease and speed </li></ul></ul>
  13. 13. Step 3: Develop a Plan (cont’d) <ul><li>Protection </li></ul><ul><ul><li>Ability to meet the unexpected large expenses without destroying your plan </li></ul></ul><ul><li>Minimization of Taxes </li></ul><ul><ul><li>Ability to pay as little as possible to Uncle Sam </li></ul></ul>
  14. 14. Step 3: Develop a Plan (cont’d) <ul><li>Consider future needs: </li></ul><ul><ul><li>Create a budget </li></ul></ul><ul><ul><li>Determine investment strategies </li></ul></ul><ul><ul><li>Plan for big-ticket purchases </li></ul></ul><ul><ul><li>Plan for managing debt </li></ul></ul><ul><ul><li>Plan for insurance </li></ul></ul><ul><ul><li>Plan for the expense of children and college </li></ul></ul><ul><ul><li>Plan for retirement </li></ul></ul><ul><ul><li>Plan for estate transfer </li></ul></ul>
  15. 15. Step 4: Implement Your Plan <ul><li>Use common sense and moderation; don’t force yourself to track every penny </li></ul><ul><li>Remain positive about your plan; use it as a roadmap </li></ul><ul><li>Stay on track after the detours; rewards await you </li></ul>
  16. 16. Step 5: Revise Your Plan <ul><li>Periodically review your progress to see if any fine tuning needs to be done </li></ul><ul><li>Make sure that your plan still matches your goals </li></ul><ul><li>Be prepared to start over if your plan no longer meets your needs </li></ul>
  17. 17. The Life Cycle of Financial Planning <ul><li>Stage 1: </li></ul><ul><ul><li>The Early Years – A Time of Wealth Accumulation </li></ul></ul><ul><li>Stage 2: </li></ul><ul><ul><li>Approaching Retirement – The Golden Years </li></ul></ul><ul><li>Stage 3: </li></ul><ul><ul><li>The Retirement Years </li></ul></ul>
  18. 18. Stage 1: The Early Years – A Time of Wealth Accumulation <ul><li>Save regularly </li></ul><ul><li>Invest for the long-haul </li></ul><ul><li>Contribute to tax-deductible retirement plans </li></ul><ul><li>Create diversified stock portfolio </li></ul><ul><li>Have health & property insurance </li></ul><ul><li>If no dependents, no life insurance </li></ul>
  19. 19. Stage 2: Approaching Retirement – The Golden Years <ul><li>Maximize retirement plan contributions </li></ul><ul><li>Plan for children’s education </li></ul><ul><li>Invest in stocks </li></ul><ul><li>Review life, health, & home insurance </li></ul>
  20. 20. Stage 3: The Retirement Years <ul><li>Okay not to preserve all your wealth for heirs </li></ul><ul><li>Time retirement so have funds for 30 years </li></ul><ul><li>Consider part-time job </li></ul><ul><li>Don’t put all funds in fixed-income accounts </li></ul><ul><li>Consider long-term care insurance </li></ul>
  21. 21. The 15 Principles of Personal Finance <ul><li>Principle 1: </li></ul><ul><ul><li>The Risk-Return Tradeoff </li></ul></ul><ul><li>Principle 2: </li></ul><ul><ul><li>The Time Value of Money </li></ul></ul><ul><li>Principle 3: </li></ul><ul><ul><li>Diversification Reduces Risk </li></ul></ul>
  22. 22. The 15 Principles of Personal Finance (cont’d) <ul><li>Principle 4: </li></ul><ul><ul><li>All Risk is Not Equal </li></ul></ul><ul><li>Principle 5: </li></ul><ul><ul><li>The Curse of Competitive Investment Markets </li></ul></ul><ul><li>Principle 6: </li></ul><ul><ul><li>Taxes Affect Personal Finance Decisions </li></ul></ul>
  23. 23. The 15 Principles of Personal Finance (cont’d) <ul><li>Principle 7: </li></ul><ul><ul><li>Stuff Happens, or The Importance of Liquidity </li></ul></ul><ul><li>Principle 8: </li></ul><ul><ul><li>Nothing Happens Without a Plan </li></ul></ul><ul><li>Principle 9: </li></ul><ul><ul><li>The Best Protection is Knowledge </li></ul></ul>
  24. 24. The 15 Principles of Personal Finance (cont’d) <ul><li>Principle 10: </li></ul><ul><ul><li>Protect Yourself Against Major Catastrophes </li></ul></ul><ul><li>Principle 11: </li></ul><ul><ul><li>The Time Dimension of Investing </li></ul></ul><ul><li>Principle 12: </li></ul><ul><ul><li>The Agency Problem – Beware of the Sales Pitch </li></ul></ul>
  25. 25. The 15 Principles of Personal Finance (cont’d) <ul><li>Principle 13: </li></ul><ul><ul><li>Pay Yourself First </li></ul></ul><ul><li>Principle 14: </li></ul><ul><ul><li>Money Isn’t Everything </li></ul></ul><ul><li>Principle 15: </li></ul><ul><ul><li>Just Do It! </li></ul></ul>