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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. Improving Your Standard of Living. Average Propensity to Consume.

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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. Improving Your Standard of Living

  4. 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

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

  6. The Six-Step Financial Planning Process 1. Define financial goals. 2. Develop financial plans and strategies. 3. Implement financial plans and strategies. 4. Develop budgets. 5. Evaluate results by using financial statements. 6. Revise goals as situations change.

  7. 1. Define financial goals 2. Develop plans

  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

  9. 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

  10. 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.

  11. 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.

  12. Put 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.

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

  14. Personal Financial Planning Lifecycle

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

  16. Growth of $1000 at 8% and 10% Interest

  17. Using the Personal Computer • Prepare financial statements • Plan retirement • Prepare and file tax returns • Track investments • Analyze needs

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

  19. The Financial Planning Environment

  20. Government Policy Decisions • Provide economic stability • Maintain acceptable employment levels

  21. Government Policy Decisions 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

  22. Government Policy Decisions • 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

  23. Economic Cycles

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

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