Chapter 1

1. Chapter 1 Financial Planning: The Ties That Bind

2. The Role of Personal Financial Planning • To manage income and expenses • To create an awareness of your current financial status • To plan for the future by developing goals and devising ways to achieve those goals • To provide a system of evaluation and revision for your financial progress Prentice Hall Inc.

3. Why Do You Need a Personal Financial Plan? • For most people, it is easier to spend than save. • To track your expenses, so you don’t spend more than you think you’re spending • To retire someday Prentice Hall Inc.

4. Why Should You Develop a Personal Financial Plan? • It helps you achieve your financial goals. • It helps you achieve financial independence. • It helps you understand where all your money is spent. • It may even help you support those that have supported you. Prentice Hall Inc.

5. Why Isn’t Personal Financial Planning Easy? • Some people are uncomfortable discussing financial matters; the “fear of finance.” • Motivation and time is required to complete an accurate plan. • Good record keeping is necessary both before and during the planning period. Prentice Hall Inc.

6. What Can You Accomplish as a Result of This Course? • Manage the unplanned. • Accumulate wealth for special expenses. • Save for retirement. • “Cover your assets.” • Invest intelligently. • Minimize your payments to Uncle Sam. Prentice Hall Inc.

7. The Personal Financial Planning Process • Step 1: Evaluate Your Financial Health • Step 2: Define Your Financial Goals • Step 3: Develop a Plan of Action • Flexibility, Liquidity, Protection, Minimization of Taxes • Consider Your Goals • Step 4: Implement Your Plan • Step 5: Review Your Progress, Reevaluate, and Revise Your Plan Prentice Hall Inc.

8. Step 1: Evaluate Your Financial Health • Evaluate your current situation: income, spending, wealth. • Assess your whole financial picture. Prentice Hall Inc.

9. Step 2: Define Your Financial Goals • Specifically define and write down your financial goals to reflect your financial and life situation. • Attach a cost to each goal. • Set a date for when the money is needed to accomplish the goal. Prentice Hall Inc.

10. What are the Time Horizons for Financial Goals? • Short-term goals can be accomplished within a 1-year period. • Intermediate-term goals take 1-10 years to accomplish. • Long-term goals take more than 10 years to achieve. Prentice Hall Inc.

11. Goals: The Cornerstone of a Financial Plan • Goals keep the future in mind by reminding you of the rewards. • Goals entice you to keep the plan in effect. • Goals provide tangibility for the question, “Why?” Prentice Hall Inc.

12. Step 3: Develop a Plan of Action • Flexibility – the ability for your plan to change as your situations or goals change. • Liquidity – your ability to convert noncash assets into cash with relative ease and speed. Prentice Hall Inc.

13. Step 3: Develop a Plan (cont’d) • Protection – your ability to meet the unexpected large expenses without destroying your plan. • Minimization of Taxes – your ability to pay as little as possible to Uncle Sam. Prentice Hall Inc.

14. Step 3: Develop a Plan (cont’d) • Consider future needs: • Create a budget. • Determine investment strategies. • Plan for big-ticket purchases. • Plan for managing debt. • Plan for insurance. • Plan for the expense of children and college. • Plan for retirement. • Plan for estate transfer. Prentice Hall Inc.

15. Step 4: Implement Your Plan • Use common sense and moderation; don’t force yourself to track every penny. • Remain positive about your plan; use it as a roadmap. • Stay on track after the detours; rewards await you. Prentice Hall Inc.

16. Step 5: Revise Your Plan • Periodically review your progress to see if any fine tuning needs to be done. • Make sure that your plan still matches your goals. • Be prepared to start over if your plan no longer meets your needs. Prentice Hall Inc.

17. The Life Cycle of Financial Planning • Stage 1: The Early Years – A Time of Wealth Accumulation • Stage 2: Approaching Retirement – The Golden Years • Stage 3: The Retirement Years Prentice Hall Inc.

18. Stage 1: The Early Years – A Time of Wealth Accumulation • Develop your savings plan. • Set your initial goals of all lengths. • Establish your long-range investment strategy. Prentice Hall Inc.

19. Stage 2: Approaching Retirement – The Golden Years • Realize intermediate-term goals that were established during Stage 1. • Re-evaluate the plan to match current goals. • Plan for retirement. Prentice Hall Inc.

20. Stage 3: The Retirement Years • Reduce investment risk. • Concentrate on preservation rather than growth of assets. • Plan for the transfer of your estate. Prentice Hall Inc.

21. Picking a Career & Getting a Job • Find a career path for the rest of your life: • Work that is enjoyable and satisfying • Adequate financial support • Balance between work and personal life Prentice Hall Inc.

22. Deciding on a Career • Conduct a self-assessment. • Research academic and career alternatives that match your skills and interests. • Talk to people in the career field. • Make a decision and start working on your future. • Use the Internet to guide your search. Prentice Hall Inc.

23. Getting a Job • Start your job search in summer, before your senior year: • Develop your resume before fall. • Starting early tells employers you are serious and organized. • Recruiting cycles often start in fall. Prentice Hall Inc.

24. Getting a Job (cont’d) • Prepare for the interview: • Practice. • Learn about the company before the interview. • Prepare: rest, dress, arrive early, make a good impression. • Thank the interviewer at the close; follow-up with a letter. Prentice Hall Inc.

25. Building Job Security • Keep up with education and new skills. • Do good work. • Match your image to that of the company. • Know and use the power structure. • Take new assignments and make others aware of your work. • Be loyal and supportive of your boss. • Learn to network, in case you need another job. Prentice Hall Inc.

26. Your Income: What Determines It • Earnings determine standard of living. • Education is the key factor in determining income level. • Marriage also seems to be a factor, in that 85% of wealthy households are headed by a married couple. Prentice Hall Inc.

27. Education • 70% of wealthy householders finished college. • It may be the best single investment you will ever make! Prentice Hall Inc.

28. The 15 Principles of Personal Finance • Principle 1: The Risk-Return Tradeoff • Principle 2: The Time Value of Money • Principle 3: Diversification Reduces Risk Prentice Hall Inc.

29. The 15 Principles of Personal Finance (cont’d) • Principle 4: All Risk is Not Equal • Principle 5: The Curse of Competitive Investment Markets • Principle 6: Taxes Affect Personal Finance Decisions Prentice Hall Inc.

30. The 15 Principles of Personal Finance (cont’d) • Principle 7: Stuff Happens, or The Importance of Liquidity • Principle 8: Nothing Happens Without a Plan • Principle 9: The Best Protection is Knowledge Prentice Hall Inc.

31. The 15 Principles of Personal Finance (cont’d) • Principle 10: Protect Yourself Against Major Catastrophes • Principle 11: The Time Dimension of Investing • Principle 12: The Agency Problem – Beware of the Sales Pitch Prentice Hall Inc.

32. The 15 Principles of Personal Finance (cont’d) • Principle 13: Pay Yourself First • Principle 14: Money Isn’t Everything • Principle 15: Just Do It! Prentice Hall Inc.

33. Financial planning withstands minor setbacks. Financial planning maps out strategies for meeting your goals. Financial planning helps you determine the costs of retirement. Financial planning includes protecting your assets with insurance. Financial planning helps you understand the principles of investing. Financial planning helps you keep your assets where they should be, in your own pocket. Summary Prentice Hall Inc.

34. Summary (cont’d) • Steps to developing a personal financial plan: • Evaluate – know where you are today. • Define – know where you want to go. • Develop a plan – draw the map. • Implement – follow the plan with action. • Review progress – check the map to ensure you are on course. Prentice Hall Inc.

35. Summary (cont’d) • Don’t overlook the financial life cycle: • The Early Years • Approaching Retirement • The Retirement Years • Where are you? • Manage your career to ensure personal and financial success. • Remember the 15 Principles, but most importantly remember the 15th – Just Do It! Prentice Hall Inc.