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CHAPTER 1: UNDERSTANDING THE FINANCIAL PLANNING PROCESS

CHAPTER 1: UNDERSTANDING THE FINANCIAL PLANNING PROCESS. The Rewards of Sound Financial Planning. Maintain and improve standard of living. Control spending in order to live well today and tomorrow! Accumulate wealth. Average Propensity to Consume:.

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CHAPTER 1: UNDERSTANDING THE FINANCIAL PLANNING PROCESS

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  1. CHAPTER 1:UNDERSTANDING THE FINANCIAL PLANNING PROCESS

  2. The Rewards of Sound Financial Planning • Maintain and improve standard of living. • Control spending in order to live well today and tomorrow! • Accumulate wealth.

  3. Average Propensity to Consume: The percentage of each dollar of income that is spent, on average, for current needs rather than saved. • What is your average propensity to consume? Income spent on current needs Total income

  4. The Personal Financial Planning Process • Taking conscientious and systematic steps toward fulfilling your financial goals.

  5. Steps in the Financial Planning Process: 1. Define financial goals. 2. Develop financial plans and strategies to achieve goals. 3. Implement financial plans and strategies. 4. Develop budgets to monitor and control progress toward goals. 5. Evaluate results by using financial statements. 6. Revise goals as situations change.

  6. 1. Define financial goals 2. Develop plans

  7. 1. Define financial goals 2. Develop plans 3. Implement plans 4. Develop budgets • FINANCIAL ACTIONS • Basic asset decisions • Credit decisions • Insurance decisions • Investment decisions • Retirement and • estate decisions

  8. 1. Define financial goals 2. Develop plans 3. Implement plans 4. Develop budgets • FINANCIAL ACTIONS • Basic asset decisions • Credit decisions • Insurance decisions • Investment decisions • Retirement and • estate decisions Prepare financial statements 5. Evaluate results 6. Revise plans

  9. Money: • Used as a medium of exchange. • Financial goals are stated in dollar amounts. • Need to consider utility, or amount of satisfaction derived from purchases, as well as cost. • May be closely linked to personal psychological concepts. • May play key role in personal relationships.

  10. To attain your financial goals: • Be specific in defining goals and focus on results. • Make goals realistically attainable. • Involve family members and enlist their cooperation. • Prioritize goals and set a definite time frame.

  11. Putting target dates on financial goals: • Short-term goals—to be accomplished within the next year. • Intermediate-term goals—to be accomplished in the next 2-5 years. • Long-term goals—to be accomplished in time periods greater than 5 years.

  12. From Goals to Plans:A Lifetime of Planning • Early childhood • High school and college • Family formation • Career development • Pre-retirement • Retirement

  13. Personal Financial Planning Lifecycle Income Income Stream Retirement/ Estate Tax Benefits Savings/ Investment Liability/Insurance Asset Acquisition 10 20 30 40 50 60 70 80 Age

  14. Benefit of planning: • Your money works more efficiently for you by... • Utilizing the financial wonder— The power of compounding through time!

  15. Growth of $1,000 at 8 % interest: Years

  16. Growth of $1000 at 10% interest: 45,259 21,725 Years

  17. Use the personal computer to: • Prepare financial statements • Plan retirement • Prepare and file tax returns • Track investments • Analyze needs

  18. The Planning Environment Financial planning is carried out in an economic environment created by the interactions of • Government • Business • Consumers

  19. Money payments of wages, rents interest, and profit BUSINESS GOVERNMENT CONSUMERS Money payments for goods and services

  20. Money payments of wages, rents interest, and profit BUSINESS GOVERNMENT CONSUMERS Money payments for goods and services Land, labor, and financial capital Goods and services

  21. Money payments of wages, rents interest, and profit Land, labor, and financial capital Public goods & services, regulations, and revenues BUSINESS GOVERNMENT CONSUMERS Taxes Goods and services Money payments for goods and services

  22. Government policy decisions are used to regulate the economy in an effort to: • Provide economic stability • Maintain acceptable employment levels

  23. Monetary Policy • Controls money supply • Used to stimulate or contract economic growth Fiscal Policy • Controls levels of taxation • Sets levels of government spending on various programs

  24. Policies seek to control: • Economic Cycles • Stages related to employment and production levels • Growth measured by changes in GDP • Inflation • Measured by changes in CPI • Affects purchasing power and interest rates • Affects financial plans and goals

  25. Economic Cycles Levels of Employment and Production HIGH LOW Expansion Recession Depression Recovery

  26. What Determines Your Personal Income? • Age, marital status • Education • Where you live • Career choice

  27. THE END!

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