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FIN 200: Personal Finance

FIN 200: Personal Finance. Topic 25–Integrating Your Financial Plan Lawrence Schrenk, Instructor. Learning Objectives. Explain the goals and strategies of lifetime financial planning. ▪ Discuss role of human capital in financial planning. Develop an integrated financial plan. ▪.

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FIN 200: Personal Finance

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  1. FIN 200: Personal Finance Topic 25–Integrating Your Financial Plan Lawrence Schrenk, Instructor

  2. Learning Objectives • Explain the goals and strategies of lifetime financial planning. ▪ • Discuss role of human capital in financial planning. • Develop an integrated financial plan. ▪

  3. Goal of Life: Happiness • Supreme happiness would be nice, but… ▪ • We might need to settle for happiness that is • Evenly Distributed, and • Smooth • We want to avoid • Ups and Downs, and • Spikes ▪

  4. Rule of Financial Planning ▪ • Derive financial goals from your life goals. • Financial goals should support life goals. • Financial decisions are ethical decisions. • Consider the financial implications of every decision you make. • Decide nothing solely on its financial implications. ▪

  5. Goal of Financial Planning: Consumption • What is consumption? • ‘Buying’ Leisure • Opportunity Cost • For happiness to be even and smooth, • Should consumption be even and smooth? • Preferences change over your lifetime • Value of consumption changes over your lifetime. • Value to you of a dollar changes over your lifetime.

  6. Strategy Life Goals Financial Goals Consumption Levels Short Term Horizon Long Term Horizon

  7. Income and Wealth Cycles College Career Retirement Wealth Income Age ▪ Borrowing Dis-saving ▪ Saving

  8. Objectives • Short Term • Smooth Consumption • Avoid Consumption ‘Shocks’ • Long Term • Reach Desired Consumption Levels

  9. Methods and Tools: Short Term • How to Smooth Consumption • Liquidity • Credit • Short Term Savings • Flexibility • Job Characteristics • Insurance • ‘Reactive’ Strategies

  10. Digression: Money and Time I • Function of Saving and Borrowing • Transfer Wealth across Time • Rate of Return • ‘Saving’ versus ‘investing’ • Investment Portfolio • ‘Borrowing’ versus ‘XXX’? • Borrowing Portfolio

  11. Digression: Money and Time II • Ideally, what would you like? • Limits to Transferring Wealth across Time • Uncertainty • Incentive Problems • Structures for Transferring Wealth across Time • Contracts • Legal System

  12. Methods and Tools: Long Term • How to Reach Consumption Levels • Increase Income • Education • Experience • Effort • Adjust Wealth • Saving and Investment • Borrowing • Inflation Issues • ‘Proactive’ Strategies

  13. Remember: Human Capital • What is human capital? • Facts about Human Capital • Low Risk • Changing Proportion of Wealth • Counterexamples

  14. Sources of Value • Financial Assets • Investment Portfolio and Short Term Savings • Credit • Human Capital • Labor Income • Real (Non-Financial) Assets • House • Collections, Other Property • People

  15. Diversification Being Well-Diversified versus Holding a Well-Diversified Portfolio Differences: • Human Capital • Real (Non-Financial) Assets

  16. Interdependencies Income House Portfolio ▪

  17. Your Risk Profile • To what risks are you exposed? • A Small Sampling • Investment Risk • Job Loss/Reduced Income • Longevity Risk • Theft • Health Problems • Correlation Risk • Etc...

  18. Responses to Risks • Passive: Diversification • Dampening Consumptions Shocks • Low Costs • Incomplete • Active: Hedging • Managing Consumptions Shocks • More Cost • More Complete

  19. Hedging • What is hedging? • Examples • Insurance • Structured ‘Stand of Living’ Products • ‘Targeted’ Products • ‘Bundled’ Products • Future Developments?

  20. Two Approaches • Simple • Follow Practical Guidelines • Complex • Statistical Analysis • Excel • Web Resources if available

  21. Practical Issues • Lifetime Horizon • Review and Revise Insurance • Avoid or Divest Company Stock • Plan for Inflation • Habit Formation • Consider a Financial Planner/Advisor On life-cycle planning, read Paula H. Hogan, “Life-Cycle Investing Is Rolling Our Way”

  22. Exam Coverage • Main Focus–Topics 20-25 • A Few Earlier Questions

  23. How to Study for the Short Answer Questions • Study the slides–full slide ‘rule’. • Read the textbook and know the key words. • Answer the selected end of chapter questions. • Review the PowerPoint slides and your class notes. • Know the bold words on the slides.

  24. How to Study for the Calculation Problems • Study the examples done in class and the worked problem set. • Practice with your calculator. • Answer the selected end of chapter problems.

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