Personal Financial Planning – Part I

1. Personal Financial Planning – Part I Dr. Steve Hays Personal Finance BKHS – Spring 2013

2. The New Economy • Emphasis in US has shifted • Manufacturing and retailing to • Telecommunications, high tech, financial services • New career opportunities • New perspectives on financial planning

3. Money, money, money!!! • People everywhere talk about money • Three types • Explorer – always searching uncharted areas • Passenger – just along for the ride • Researcher – seeking answers to questions

4. Personal Financial Planning • Definition • Process of managing your money to achieve personal economic satisfaction • Allows you to control financial situation • Every person, family, household has unique position • Activities must be planned carefully to meet specific needs

5. Advantages of Personal Financial Planning • Increased effectiveness in obtaining, using, and protecting financial resources • Increased control of financial affairs by avoiding excessive debt, bankruptcy, and dependence on others • Improved personal relationships resulting from well planned and effectively communicated financial decisions • Sense of freedom from financial worries obtained by looking to the future, anticipating expenses, and achieving personal economic goals

6. Financial Planning Process

7. Step 1 – Determine Current Financial Situation • Determine financial situation regarding income, living expenses, and debts • Prepare a list of current assets, debt balances, and amounts spent for various items

8. Step 2 – Develop Financial Goals • Periodically analyze financial values and goals • How do you feel about money? • Why? • Factual knowledge or influence of others? • SMART Goals

9. What are SMART Goals?

10. Step 3 – Identify Alternative Courses of Action • Categories • Continue same course of action • Expand current situation • Change current situation • Take new course of action • Creativity in decision making is vital to effective choices • Consider all possible alternatives • Doing nothing is a dangerous alternative!!

11. Step 4 – Evaluate Alternatives • Evaluate courses of action • Consider • Life situation • Personal values • Current economic conditions • Opportunity cost

12. What is Opportunity Cost? • What you give up by making a choice • Trade-off • The resources you give up (money or time) have a value you can never regain

13. Evaluating Risk • Uncertainty is part of every decision • High degree • Low degree • In many financial decisions, identifying and evaluating risk is difficult • Gather information based on your experience and experience of others • Use financial planning information sources

14. Types of Risk • Inflation Risk • Interest Rate Risk • Income Risk • Personal Risk • Liquidity Risk

15. Inflation Risk • Rising prices cause lost buying power • Decide whether to buy something now or later • If you buy, you may have to pay more

16. Comparing Prices 1963 Coca-Cola: $0.05/bottle Bread:  $0.21/loaf Milk:  $1.04/gal US Eggs:  $0.96/doz Car:  $2,300 Gas:  $0.30/gal House:  $19,300 Stamp:  $0.05/ea Ave. Income:  $6,998/yr Min Wage:  $1.25/hr DOW Ave:    763 2012 Coca-Cola:$1.19/bottle Bread:  $1.88/loaf Milk:  $2.79/gal US Eggs:  $1.54/doz Car:  $ 30,748 Gas:  $3.72/gal House:  $263,200 Stamp:  $0.46/ea Ave. Income:  $47,000/yr Min Wage:  $7.25/hr DOW Ave:    13,553

17. Interest Rate Risk • Changing interest rates affect your costs when you borrow and your benefits when you save or invest • Borrowing at low rates saves you money • Investing when rates are dropping costs you money

18. Income Risk • Loss of job could result in change in consumer spending • Individuals who face risk of unemployment need to save while employed • Acquire skills they can use to obtain different type of work

19. Personal Risk • Tangible and intangible factors can create less than desirable situations • Purchasing certain brands pr from certain stores may entail risk (i.e repairs) • Health risks • Safety risks

20. Liquidity Risk • Some investments have potential for higher earnings • Mat be more difficult to convert to cash or sell without significant loss in value • Art • Jewelry • Sports Collectibles • Precious Metals

21. Financial Planning Information Sources • Financial Specialists • Financial planners • Bankers, CPAs • Lawyers • WWW, Computer Software • School Courses • Financial Institutions • Printed Materials

22. Step 5 – Create and Implement Plan • Develop an action plan identifying ways to achieve goals • Prioritize goals • Seek assistance from others

23. Step 6 – Review and Revise Plan • Dynamic process that always changes • Regularly assess financial decisions • Changing personal, social, and economic factors require more frequent assessment

24. Reviewing the Financial Planning Process

25. Developing Personal Financial Goals • Two factors influence financial aspirations • Time frame • Financial needs

26. Timing of Goals • Short-term • Less than one year • Intermediate • Two to fives years • Long-term • Greater than five years

27. Financial Needs • Consumable Products Goals • Periodic basis • Food, clothing, entertainment • Can have negative impact on financial situation if made unwisely • Durable Product Goals • Infrequently purchased • Expensive items • Intangible Purchase Goals • Personal relationships, health, education, leisure

28. Homework – Due Friday, February 1, 2013 • Using Excel, develop two charts • Compare the prices of goods for the year you were born with 2012 (see PPT slide for items to compare) • What is the percentage of increase from the year you were born to 2012? • Develop SMART financial goals for both you and your family – short term, intermediate, and long-term.