Chapter 1

1. The Financial Planning Process Chapter 1

2. Introduction • It’s easier to spend than to save. • Personal financial planning is an ongoing process—it changes as your financial situation and position in life change. • Manage and control your finances with a personal financial plan. • It helps you achieve financial and lifestyle goals.

3. Importance of Personal Financial Planning • Accumulate wealth for special expenses • Save for retirement • “Cover your assets” • Invest intelligently • Minimize payments to Uncle Sam

4. Five basic steps to personal financial planning • Evaluate your financial health • Define your financial goals • Develop a plan of action • Implement your plan • Review your progress, reevaluate, and revise your plan

5. Step 1: Evaluate Your Financial Health • Examine your current financial situation. • How much money do you make? • How much are you spending and on what? • Use careful record keeping to track finances and spending.

6. Step 2: Define Your Financial Goals • Write or formalize your goals. • Attach a financial cost to each one. • When will you need the money to achieve the goal? • Analyze and revise your goals.

7. Step 3: Develop a Plan of Action • Flexibility: • Plan for life changes and the unexpected. • Liquidity • Immediate use of cash by quickly and easily converting an asset. • Protection • Prepare for the unexpected with insurance. • Minimize Taxes • Keep more of what you earn.

8. Step 4: Implement Your Plan • Stick to it. • Use your financial plan as a road map to achieve goals. • Keep goals in mind and work towards them.

9. Step 5: Review, Reevaluate, and Revise • Review progress. • Reevaluate and revise for changes in your life. • Be prepared to formulate a different plan to meet your goals.

10. Short-term—within 1 year Intermediate-term—1 to 10 years Long-term—more than 10 years ESTABLISHING YOUR FINANCIAL GOALS

11. Short–Term Goals • Accumulate Emergency Funds Equaling 3 Months’ Living Expenses • Pay Off Bills and Credit Cards • Purchase Insurance • Purchase a Major Item • Finance a Vacation

12. Intermediate-Term Goals • Save for Older Child’s College • Save for a Down Payment • Pay Off Major Debt • Finance Large Items (Weddings) • Purchase a Vacation Home

13. Long-Term Goals • Save for Younger Child’s College • Purchase Retirement Home • Create a Retirement Fund to Maintain Current Standard of Living • Take Care of Elderly Family Members • Start a Business

14. Stage 1 The Early Years—A Time of Wealth Accumulation • Prior to age 54 • Develop a regular savings pattern: • How much can be saved? • Is that enough? • Where should the savings be invested? • Cost of raising children

15. Table 1.1 The Cost of Raising a Child

16. Stage 2 Approaching Retirement—The Golden Years • Transition years between ages 55-64. • Depends on preparation for retirement. • Reassess financial goals and decisions—retirement, insurance protection and estate planning.

17. Stage 3 The Retirement Years • After age 65, live off savings • Retirement age depends on savings. • Less risky investment strategy • Consider extended nursing home protection. • Estate planning decisions and documents are critical.

18. A series of positions to show your skills. Is the job important, enjoyable, and satisfying? Does it provide for your desired lifestyle? Thinking About Your Career

19. Choosing a Major and a Career • Effective self-assessment • Interests, skills, values, personal traits • Desired lifestyle • Research career alternatives and match with your skills and interests • Research potential earnings

20. Table 1.2 What Different College Majors Earn

21. Getting a Job • Start early • Prepare and practice for interviews • Research the company • Dress appropriately, be confident, and follow-up

22. Table 1.3 Most Common Interview Questions

23. Being Successful in Your Career • Do good work. • Project the right image. • Understand and work within the power structure. • Gain visibility.

24. Being Successful in Your Career • Take new assignments. • Acquire new skills and keep up with technology. • Develop a strong network. • Be ethical.

25. What Determines Your Income? • Skills • Education • The wealthy are married

26. Figure 1.5 Education and Earnings

27. Ten Principles ofPersonal Finance The foundation of personal finance.

28. Principle 1: The Best Protection Is Knowledge • Understand the basics of personal finance. • Take responsibility for your lifetime financial plan. • Seek professional advice wisely.

29. Principle 2: Nothing Happens Without a Plan • Easier to think about spending than about saving. • Saving must be planned. • Putting off a financial plan means goals are harder to achieve.

30. Principle 3: The TimeValue of Money • Money received today is worth more than money received in the future. • Understand how savings and investments grow over time • Understand compound interest. • Understand spending now and paying later

31. Table 1.4 Importance of Starting Early—Just Do It!—to Accumulate $1 Million by Age 67 Investing Your Money at 12%

32. Principle 4: Taxes Affect Personal Finance Decisions • Know the effect of taxes on the rate of return of investments. • Compare investment alternatives on an after-tax basis. • Understand tax laws.

33. Principle 5: Stuff Happens, or the Importance of Liquidity • Plan for unexpected events • Have money or liquid funds available • Liquid funds should cover 3 to 6 months of living expenses

34. Principle 6: Waste Not, Want Not - Smart Spending Matters • Differentiate want from need • Do homework before the purchase • Make the purchase at the best price • Maintain your purchase

35. Principle 7: Protect Yourself Against Major Catastrophes • Have the right kind of insurance before a tragedy occurs. • Know your insurance policy coverage. • Focus insurance on major catastrophes which can be financially devastating.

36. Principle 8: Risk and Return Go Hand in Hand • Saving and investing grows money. • Investors demand a minimum return above anticipated inflation. • Investors demand higher return for added risk. • Diversification by spreading money in several investments reduces risk.

37. Figure 1.7 The Risk-Return Trade-Off

38. Principle 9: Mind Games, Your Financial Personality, and Your Money • Behavioral biases lead to big financial mistakes. • Mental accounting impacts financial decisions. • “Sunk cost effect” pours good money after bad money because of bias.

39. Principle 10: Just Do It! • Taking the first step towards your goals is difficult. • The following steps become easier. • First step is to pay yourself first—save then spend. • Saving early can make a big difference.

40. Women and Personal Finance • Tougher to achieve financial security. • Generally earn less. • Less likely to have pensions. • Qualify for less Social Security. • Live longer than men. • Planning for financial independent more difficult for them than it is for men.

41. Women and Personal Finance • Need to take charge of their money and financial future. • Acquire knowledge. • Make things happen—need a plan. • See a financial planner about specific concerns.