Financial Planning and Money Management

1. Financial Planning and Money Management

2. First � A Perspective

3. CHAPTER 1

4. Financial Planning, Definition Personal financial planning is the process of managing your money to achieve personal economic satisfaction This is our book�s definition The ability to use knowledge and skills to manage one's financial resources effectively for lifetime financial security Here is another that I thought was useful

5. The Benefits of Financial Planning There are several advantages of effective personal financial planning Increased effectiveness in obtaining, using, and protecting your financial resources Increased control of your financial affairs A sense of freedom from financial worries obtained by being able to look optimistically toward the future Improved personal relationships What is the number 1 reason for divorce in America?

6. Developing a Flexible Financial Plan A financial plan is a formalized report that... Summarizes your current financial situation Analyzes your financial needs Recommends future financial activities Your financial plan can be created by you, done with assistance from a financial planner, or made using a money management software package

7. The Financial Planning Process Determine your current financial situation Develop your financial goals Identify alternative courses of action Evaluate your alternatives Keep in mind opportunity costs and risks Create and implement a financial action plan Write it down! Reevaluate and revise your plan

8. What is a More Realistic and TypicalFinancial Planning Process? Make money Spend it Make some more money Spend that � � and then spend some more Go into debt Panic! Take BUS-121, Financial Planning and Money Management

9. Simply Put, It All Comes Down to the Choices We Make! Opportunity cost What you give up by making a choice The opportunity cost is sometimes referred to as the trade-off of a decision. It cannot always be measured in dollars. Sometimes the cost is your time or your health. Consider the lost opportunities that will invariably result from your decisions.

10. Opportunity Costs and Financial Results Evaluated When Making Decisions

11. Every Financial DecisionInvolves Evaluating Types of Risk Inflation risk Rising prices cause lost buying power Interest-rate risk Affect costs of borrowing and rate of return Income risk The loss of a job Personal risk Health or safety Liquidity risk Higher return may mean less liquidity Culture of Consumerism risk a.k.a. Die-Working-and-in-Debt-Up-to-Your-Eyeballs risk

12. Implementing Your Financial Plan Developing good financial habits Use a well-conceived spending plan to help you stay within your income, while allowing you to save and invest for the future Have appropriate insurance protection to prevent financial disasters Become informed about tax and investment alternatives Achieving your financial objectives requires� A willingness to learn, and Appropriate information sources

13. Financial Planning Information Sources Printed materials Books, magazines Financial institutions Credit unions, banks, brokerages, etc. School courses and educational seminars Computer software and on-line information sources The Internet is an inexhaustible supply Sometimes useful, sometimes not� Financial specialists

14. Influences on Personal Financial Planning Marital status, household size, and employment Major events Marriage, Birth or adoption of child, Divorce!, Bankruptcy Values What are the ideas and principles you consider correct, desirable and important? Where are you in the Adult Life Cycle stage? �Traditionalist / Mature� � Pre 1946 � 62 million �Baby Boomer� � 1946 to 1964 � 78 million �Gen Xer� � 1965 to 1981 � 59 million �Millennial� � 1981 to 2000 � 78 million (a.k.a. Digital Generation, Gen Y) The next generation? � 2001+

15. Influences on Personal Financial Planning (continued)

16. Influences on Personal Financial Planning (continued) Market Forces Supply and demand Production costs and competition Financial institutions Influence of the Federal Reserve Bank and the global financial markets Global influences Level of exports and imports Economic conditions....

17. Changing Economic Conditions Consumer Prices and Inflation Consumer Spending Interest Rates Money Supply Unemployment Housing Starts GDP: Gross Domestic Product Trade Balance (a.k.a. Trade Inbalance!) Budget Deficit Financial Markets

18. Components of Financial Planning Planning (chapters 1, 2) Taxes (chapter 3) Saving (chapter 4) Borrowing (chapter 5) Spending (chapters 6, 7) Managing risk (chapters 8, 9, 10) Investing (chapters 11, 12, 13) Retirement and estate planning (chapter 14)

19. Developing Personal Financial Goals Types of financial goals include those... Influenced by the time frame in which you want to achieve your goals Influenced by the financial need that drives your goals Timing of goals must be identified Short-term, intermediate-term and long-term goals Financial goals should... Be realistic, be stated in specific, measurable terms, have a time frame, have a priority, and indicate the action or actions to be taken

20. Timing of Financial Goals Short-term � up to 1 year �or so� Intermediate-term � 2 to 5 years Long-term � more than 5 years

21. Financial Goal: Example Pay off VISA Balance: $3,500 Time frame: Within 12 months Actions to be taken Reduce dating and clubbing to twice a month Cancel cable service and mobile phone Stop buying coffee at FiveBuck$ Pay extra $300 per month Priority: High

22. Financial Goal: Example Save up for a Home Theater system Amount needed: $2,000 Time frame: Within 12 months Actions to be taken Take part-time job at Home Cheapo Put $150 per month into a special savings account at the bank Priority: Medium

23. Financial Goal: Example Save for down payment on a condo Amount needed: $15,000 Time frame: 5 years Actions to be taken Set up $200 automatic investment per month to be taken from our checking account Expected rate of return: 7% Priority: High

24. Non-Financial Goal: Example Be able to do 15 �good� push-ups Can currently only do 7 �good� push-ups Time frame: Within 3 months Actions to be taken Start with 7 push-ups, three times a day Increase by 2 or 3 push-ups every three to four weeks Work up to 15 push-ups within 3 months Priority: Medium

25. Goal Setting Which of the following goals would be the easiest to implement and measure its accomplishment? Spend less so we can save more each month Save $10,000 for a down payment on a condo Save $100 each month to create a $4,000 emergency fund in 40 months by canceling the cable service Save enough for a $4,000 vacation next year

26. The Financial Goal of Most Americans Spend everything that you earn!

27. The Most Important Financial Goal! Spend less than you earn!

28. The Most Important Financial Goal! Pay Yourself First By having the money come out of your paycheck or checking account automatically, most individuals easily adjust to investing Works like a pay raise, only in reverse The 10% Solution Many financial planners recommend saving at least 10% of your income for long-term, compounded growth The Wealthy Barber, David Chilton

29. �The magic of compound interest. Thirty dollars a month, a dollar a day, can magically turn into over a million dollars. And do you know what is even more impressive? You know someone who has done it,� Roy, our barber, said proudly. �Thirty-five years ago, I started my savings with thirty dollars a month, approximately 10% of my earnings. I have achieved just under 13% return per year. In addition, as my income rose, my savings rose accordingly. Thirty dollars a month became sixty dollars, then a hundred, and eventually hundreds of dollars a month.� �You three are looking at a very wealthy man.� The Most Important Financial Goal!

30. �One of my early students only followed the �Pay Yourself 10% First� lesson. He bought the wrong life insurance, abused credit cards, overpaid for his mortgage, did not take advantage of his 401(k) at work, and lost all $15,000 of an inheritance playing the commodities market.� �This is a real upbeat, encouraging story, Roy,� said Tom. �Today, his net worth is $850,000, Tom. $300,000 of it is the equity in his house but the rest is his 10% savings.� �He did everything else wrong but �� Cathy started. �Because he had saved 10% of each paycheck and invested it for long-term, compounded growth, today he is in great shape,� Roy finished. The Most Important Financial Goal!

31. The Rule of 72

32. Simple versus Compound Interest Simple Interest Interest = Principal * Rate * TimeInterest = $100 * 6% * 1 year = $6.00In one year you have $106 ($100 + $6.00)

33. Time Value of Money

34. Future Value of Money The amount to which a sum you invest now will increase based on a specified interest rate and time period Future value is also called compounding Future value can be computed for a single amount � a.k.a. a lump sum or principal Future value can also be determined for a series of deposits � a.k.a. stream of investments, �annuity�

35. Future value formula for Lump Sum Principal Future Value of Money

36. Present Value of Money The current value for a future amount based on a certain interest rate and a certain time period Present value is also called discounting Present value of a single lump sum Present value of a series of withdrawals

37. Present value formula for Lump Sum Present Value of Money

38. Future Value of Money Okay, let us do some exercises�

39. Hope For Your Future

40. Financial Aspects of Career Planning A Job � An employment position obtained mainly to earn money, without regard for interests or opportunities for advancement A Career � A commitment to a profession that requires continued training and offers a clear path for occupational growth

41. How Education Relates to Income 

42. Service Industries Expected to Havethe Greatest Employment Potential Computer Technology Health Care Business Services Social Services Sales and Retailing Hospitality and Food Services Management and Human Resources Education Financial Services

43. But What Is Your Career Goal? Most people believe you must become a doctor or lawyer or high-powered executive to become wealthy But what if you want to be a writer or a teacher or an artist or a janitor or mechanic or plumber? Can you become wealthy while doing what you love... Even if it does not command a large salary? As we saw, the answer is, �Yes!�

44. What is Your Most Important Financial Decision? Who You Marry!

45. The Millenials Go To Work �They are ambitious, they are demanding and they question everything, so if there is not a good reason for that long commute or late night, do not expect them to do it. When it comes to loyalty, the companies they work for are last on their list � behind their families, their friends, their communities, their co-workers and, of course, themselves. But there are a whole lot of them. And as the baby-boomers begin to retire, triggering a � worker shortage, businesses are realizing that they may have no choice but to accommodate these curious Gen Y creatures. Especially because if they do not, the creatures will simply go home to their parents, who in all likelihood will welcome them back.�

46. �Choose a job you love, and you will never have to work a day in your life.� Could not have said it better myself�