CHAPTER 1: UNDERSTANDING THE FINANCIAL PLANNING PROCESS

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CHAPTER 1 UNDERSTANDING THE FINANCIAL
PLANNING PROCESS
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The Rewards of Sound Financial Planning

• Maintain and improve standard of living.
• Control spending in order to live well today and
  tomorrow!
• Accumulate wealth.

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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

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The Personal Financial Planning Process

• Taking conscientious and systematic steps toward
  fulfilling your financial goals.

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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.

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1. Define financial goals 2. Develop plans
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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

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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
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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.

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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.

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Putting target dates on financial goals

• Short-term goalsto be accomplished within the
  next year.
• Intermediate-term goalsto be accomplished in the
  next 2-5 years.
• Long-term goalsto be accomplished in time
  periods greater than 5 years.

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From Goals to PlansA Lifetime of Planning

• Early childhood
• High school and college
• Family formation
• Career development
• Pre-retirement
• Retirement

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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
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Benefit of planning

• Your money works more efficiently for you by...
• Utilizing the financial wonder

The power of compounding through time!
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Growth of 1,000 at 8 interest
Years
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Growth of 1000 at 10 interest
45,259
21,725
Years
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Use the personal computer to

• Prepare financial statements
• Plan retirement
• Prepare and file tax returns
• Track investments
• Analyze needs

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The Planning Environment

• Financial planning is carried out in an economic
  environment created by the interactions of
• Government
• Business
• Consumers

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Land, labor, and financial capital
Goods and services
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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
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Government policy decisions are used to regulate
the economy in an effort to

• Provide economic stability
• Maintain acceptable employment levels

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• 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

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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

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Economic Cycles
Levels of Employment and Production
HIGH
LOW
Expansion
Recession
Depression
Recovery
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What Determines Your Personal Income?

• Age, marital status
• Education
• Where you live
• Career choice

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THE END!