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Basics of Personal FinancialPlanning[date][venue][contact information]
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Personal Financial Planning Section
Introduction
About the PFP Section & PFS Credential The AICPA PFP Section provides information,
resources, advocac and guidance for CPAs !hospeciali"e in providing estate, ta#, retirement, ris$
management and investment planning advice toindividuals and their closel held entities
The CPA%Personal Financial Specialist &PFS'credential distinguishes CPAs as su()ect*mattere#perts !ho have demonstrated their financialplanning $no!ledge through e#perience, educationand testing
+
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Personal Financial Planning Section
Todays Objectives
You gain an enhanced understanding of the basics of financiallanning and ho! a co"anys co"ensation and benefitsrogra"s add to your financial !ell#being
You gain an enhanced understanding of basic investingconcets and ho! to develo your invest"ent lan
You gain an enhanced understanding of ho! a Co"anysco"ensation and benefits rogra"s can contribute to thesuccess of your investing
You identify and co""it to ta$ing the actions you can tosignificantly enhance your financial !ell#being
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Personal Financial Planning Section
-ife .vents/ 0ill 1ou Be 2ead3
% Pre"ature eath
% 'etire"ent
% Serious Illness
% eath of Souse
% Aged Parents
% Children (etting )arried
% Second *o"e
% 'e"arriage
% Starting a +usiness
% Paying for College
% ivorce
% ,ob -oss
% 'elocation
% *o"e Purchase
% +irth of Children
% )arriage
% Te"orary isability
4
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Personal Financial Planning Section
-ife5s Financial Trade*6ffsC.''/0T 0/C/SSITI/S F.T.'/ 0/C/SSITI/S
C.''/0T /1T'AS F.T.'/ /1T'AS
+asic shelter2 food
clothing2 transortation
and "edical care
+asic shelter2 food
clothing2 cash for e"ergencies
and nursing ho"e care
-arger ho"e2 rivate
college2 retire"ent travel2
be3uests4charity
0e! $itchen2 ne! car2
vacation2 fa"ily gifts
Trade#offs
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Personal Financial Planning Section
The 5alue of a Financial Plan
A financial lan !ill hel you to clarify6
Your financial goals
Strategies to achieve the goals
Secific stes to i"le"ent the strategies
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Areas to /7lore
Saving
)anaging debt
Insurance
Investing
/ducation funding
'etire"ent funding
Pre#retire"ent lanning
Incaacitation lanning
/state lanning
Co"any stoc$ o!nershi
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The Financial Planning Process
8hat do you !ant9
8hat !ill you have9
8ill you have a shortfall9
8hat strategy !ill you e"loy9
8hat actions !ill you ta$e9
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8hat o You 8ant9
These are your financial lanning goals
/ach goal !ill have its o!n hori:on For the period of accumulation
For the period over !hich it !ill (e spent
)a$e a list and refine as you go along
Start !ith broad ideas and !or$ to!ard increasinglysecific and "easurable goals
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8hat 8ill You *ave9
8hat you have no!
8hat you !ill save fro" future inco"e
Future invest"ent earnings on the above ifinvested
/7ected future benefits
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>anaging ?e(t
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8hat )anaging ebt )eans
Con3uering e7cessive debt
.sing debt !isely6 Credit cards
4=
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ebt 'atios
*ousing e7ense ratio @ousing e#penses &mortgage, ta#es and insurance' should not
e#ceed +: of gross pa
ross pa is (efore ta#es and deductions
ebt to inco"e ratio Total consumer de(t ¬ including mortgage' should (e less
than += of ta$e*home*pa
Ta$e*home pa is after ta#es and deductions
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8arning Signs of Too )uch ebt
.nable to save ;
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Con3uering ebt
Sto borro!ing
Start using a debit card
Prioriti:e your debt reay"ent
See$ lo!er rates
eter"ine the "a7i"u" you can ay
'eay highest cost debt first
Continue aying the "a7i"u"
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?ecrease ?e(t or Invest3
Pay do!n debt !hen you cant invest at a higher rate
>
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.sing *o"e )ortgages 8isely
eter"ining !hether buying is aroriate
Choosing the right tye of "ortgage
eciding if you should refinance
Eno!ing !hether to ay oints
eciding !hether to reay "ortgage rincial
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Is Buing a @ome 2ight for 1ou3
+uying 'enting
Change location freuentl o 1es
>aintenance responsi(ilities 1es o
A(ilit to customi"e 1es Perhaps
Pament increases Perhaps -i$el
Investment element 1es o
Ta# (enefits 1es o
Initial costs 1es 1es
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Ta# Benefits of @ome 6!nership
ortgage interest G8,===
Propert ta#es +,===
6ther itemi"ed deductions 4,+7=
Total itemi"ed deductions
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Personal Financial Planning Section
Tpes of >ortgages
+=
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Personal Financial Planning Section
Consider a Fi7ed 'ate )ortgage 8hen6
You intend to live in your ho"e for a significanteriod of ti"e2 or
You anticiate rising interest rates in the future
+<
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Personal Financial Planning Section
Consider an A') 8hen6
Fi7ed rate is at least = oints greater thanadjustable rate
You e7ect your inco"e !ill increase enough tocover any otential ay"ent increases
You e7ect to "ove before the rate increases?be!are of reay"ent enalties@
++
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Personal Financial Planning Section
Prepaing >ortgage Principal
8=
G
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Personal Financial Planning Section
Consider Preaying Princial 8hen6
You use the standard deduction
You invest conservatively
+4
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Personal Financial Planning Section
)aintaining a (ood Credit *istory
/stablish a good credit history
Obtain your credit reort
.nderstand your credit reort
Correct "ista$es in your credit reort
+7
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Saving H Investing
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Personal Financial Planning Section
I"ortance of Saving and Investing
If you dont have the follo!ing Sufficient assets full devoted to our goal&s'
.#pected future (enefits from third parties
.#pected future (orro!ing
Then you !ill need the follo!ing to reach yourgoal?s@ Future savings devoted to our goals
Future earnings from investing the a(ove if ou invest thoseassets
+9
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Personal Financial Planning Section
Eey Saving and Investing Concets
Saving versus investingCo"bining saving and investing
Saving and investing early
Ta7#deferred saving and investing
Ta7#deductible saving and investingSaving and investing using e"loyercontributions
+:
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Personal Financial Planning Section
Saving ersus Investing
Saving Investing
>eans ot spendingmone?oingsomething !ith
mone to earn areturn
eeds to(e done
In a regular,
disciplinedmanner
Carefull and
!ith dueconsideration
+;
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Personal Financial Planning Section
Co"bining Saving and Investing
Saves 2
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Personal Financial Planning Section
Co"bining Saving and Investing
Stan 5ic$ie
<
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Personal Financial Planning Section
Saving and Investing /arly
Saves 2
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Personal Financial Planning Section
Saving and Investing /arly
Stan
5ic$ie
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Personal Financial Planning Section
Ta7#eferred /arnings
Saves 2
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Personal Financial Planning Section
Ta#*?eferred .arnings
Stan 5ic$ie
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Personal Financial Planning Section
The Saving Process
8hat do you !ant98hat !ill you have9
8ill you have a shortfall9
8hat strategy !ill you e"loy9
8hat actions !ill you ta$e9
8
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Personal Financial Planning Section
8hat o You 8ant9
Identify your secific savings goalsIdentify your ti"e hori:on
Luantify your saving goals
Prioriti:e your saving goals
9
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Personal Financial Planning Section
Identify Your Secific Saving (oals
Pay do!n e7isting debtCreate an e"ergency fund
Save for retire"ent
Accu"ulate a do!n ay"ent for a house
+uild a college fund for your childrens education
Set aside "oney for a secific goal ?vacation2 funand ga"es2 etcH@
:
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Personal Financial Planning Section
Create an /"ergency Fund
Set aside to > "onths of living e7enses.se it for a crisis ?iHeH2 roof lea$s@
.se it and relace it
ont use it for discretionary sending ?iHeH2
vacation@
;
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Personal Financial Planning Section
Save for 'etire"ent
o everything ossible 0O8Start earlyMyoull end u !ith "ore
4=
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Personal Financial Planning Section
Identify Your Ti"e *ori:on
Identify nu"ber of "onths or years until goalAllo! as "uch ti"e as ossible6 1ou can accept a lo!er investment ris$
1our monthl saving and investing commitment !ill (e less
4<
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Personal Financial Planning Section
/7a"ine Your Sending *abits
Eee a list of all sending for one "onthCo"are total sending to ta$e#ho"e ay
/7a"ine closely if you have a substantialune7lained ga
+eco"e highly $no!ledgeable about your e7enses
4+
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Personal Financial Planning Section
Identify 8ays to Save )ore
Save your ne7t raiseSave your ne7t bonus
'einvest dividends andinterest
Save all cash gifts
'ent instead of buying?boo$s2 videos2 etcH@
elay buying a ne! car uonaying off resent car loan
Save the Ndonut "oneyMand lose !eight
+uy generic roducts
Tri" your sending by D=
+e creative
4
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Personal Financial Planning Section
8hat About Investing9
Co"bined !ith savings2 a $ey resource forachieving your financial goals
Investing s$ills are needed to rudently utili:e Compan 4=
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Personal Financial Planning Section
8hat Investing Carefully )eans
Phase I6 -earn investing basicsPhase II6 evelo your invest"ent lan
Phase III6I"le"ent your invest"ent lan
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Investing Basics and Planning
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Personal Financial Planning Section
8hy -earn +asic Investing Concets9
A-- invest"ents involve ris$s .ven so*called ris$*free investments li$e a cash
As such2 aroach investing carefully
-earning basic investing concets is art of
investing carefully
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Personal Financial Planning Section
0hat Are The >a)or Asset Classes3
)ajor AssetClass Characteristics (oals
*istoricalAverage'eturns
Cash >atures in less thanone ear
Capital preservation
-iuidit
*4
Bonds Fi#ed income
aried maturities
Income
Capital preservation
7*9
Stoc$s Compan o!nership Possi(le dividendincome
Capital appreciation
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Personal Financial Planning Section
0hat 2is$s are Involved in Investing3
Pri"ary long#ter"ris$
Inflation ris$ -oss of purchasing po!er
Pri"ary short#ter"ris$
olatilit ris$ Insta(ilit of investment
Other ris$s
Business ris$
>ar$et ris$
-iuidit ris$
Interest rate ris$
Currenc ris$
Inherent ris$s of a particular(usiness
-i$elihood that the mar$et as a!hole !ill fall
2is$ of not (eing a(le to accessmone !hen needed
-oss of principal on fi#ed*rateinvestments due to risinginterest rates
Investment5s value !ill (eaffected ( changes ine#change rates
4;
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Personal Financial Planning Section
@o! are These 2is$s >anaged3
Pri"ary long#ter"ris$
Inflation ris$ Invest in stoc$s
Pri"ary short#ter"ris$
olatilit ris$ @old investments for the long*term
Other ris$s
Business ris$>ar$et ris$
-iuidit ris$
Interest rate ris$
Currenc ris$
?iversif !ithin an asset class?iversif among asset classes
?iversif among asset classes
@ave an emergenc fund
J-adderK portfolios
?iversif among countries orhedge
7=
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Personal Financial Planning Section
*o!ever2 Stoc$s *ave )ore 5olatility 'is$
-o!ereviation
*ighereviationegree of 5olatility
*igher'eturn
-o!er
'eturn
Annual'eturn
D=
;
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Personal Financial Planning Section
;Danage olatilit 2is$ ( Investing 6ver Time
S"allCo"anyStoc$s
-argeCo"anyStoc$s
-ong#Ter"(overn"ent
+onds
Cash
6ne*1ear @olding Periods
Five*1ear @olding Periods
T!ent*1ear @olding Periods
Average 2eturn
KHQ=;=;HQ= DH>=
#QD=
#D
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Personal Financial Planning Section
)anaging +usiness and )ar$et 'is$s
Portfolio'is$
0u"ber of*oldings
K D Q ;; ;K ;D
Portfolio 'is$R)ar$et 'is$ +usiness
'is$+usiness
'is$
)ar$et 'is$
7
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Personal Financial Planning Section
Current
Bonds 2eal .state
>one mar$etfunds
Converti(le (ondsSmall*compan stoc$s
Certificates
of deposit -arge*compan stoc$s
Ltilit stoc$s Mero coupon (onds
'eturn eferred
-o!er -i3uidity 'is$ *igher
)anage -i3uidity 'is$ by iversifying
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Personal Financial Planning Section
>anaging Interest 2ate 2is$
)anaged by N-addering Portfolio of +onds
Price
Interest'ates
+onds
Price
Interest'ates
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Personal Financial Planning Section
'is$ 4 'eturn Trade#Offs6 /7a"le ;egree of 5olatility
-o!ereviation
*ighereviationegree of 5olatility
*igher'eturn
-o!er'eturn
Annual'eturn
D=
;
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Personal Financial Planning Section
2is$ % 2eturn Trade*6ffs/ .#ample +Cash vsD Bonds vsD Stoc$s
Cash +onds Stoc$s
Current ieldAppreciationTotal return.stimated income ta#es N =
After*ta# returnInflation rate
After*ta# JrealK rate of return
2elative ris$
D=D=D
&
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Personal Financial Planning Section
2is$ % 2eturn Trade*6ffs/ .#ample Su(*Categories 0ithin >a)or Asset Classes
Cash
+onds
Stoc$s
*ard Assets
InternationalS"all Co"any
Stoc$s-arge Co"any Stoc$s
-ong Ter"
Inter"ediate Ter"Short Ter"
*igh 'is$4*igh 'eturn Potential
-o! 'is$4-o! 'eturn Potential
7:
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Personal Financial Planning Section
'is$ 4 'eturn Trade#Offs6 /7a"le >Ta7able vsH Ta7#/7e"t Invest"ents
7;
# HH H H H#H HH H H H;DHHQ=DHI=QH;=GHCCDHH
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Personal Financial Planning Section
2is$ % 2eturn Trade*6ffsBet!een ?iffering Portfolios
Portfolio A
8D8
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Personal Financial Planning Section
8hat One Factor )ost Influences Your 'eturn
Source/ Brinson, Singer, Bee(o!er
Your Asset Allocation
8
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Personal Financial Planning Section
0h These Priorities3
Ta7ableAccount
'oth I'A.sing After#Ta7Contributions
Traditional I'A.sing Pre#Ta7Contributions
/"loyer>
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Personal Financial Planning Section
8hy These Priorities9
5ic$ie
9
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Personal Financial Planning Section
8hy These Priorities9
5ic$ie
94
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Personal Financial Planning Section
Consider Ta#*Advantaged Accounts First
Features Available /"loyer>
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Personal Financial Planning Section
Then Consider Ta#a(le Accounts
Features Available /"loyer/SPP ?;@/"loyerTP ?@
)utualFunds
+ro$erageAccounts
Ta#*?eferred contri(utions o o o o
Ta#*?eferred earnings o o o o
.mploer contri(utions o o o o
Lnlimited contri(utions o o
Automatic saving and investing o
0ide*arra of professionallmanaged funds o o o
Self*direction of fund allocation
Bu .mplr stoc$ at a discount o o o
Bu .mplr stoc$ !ithout fees o o
Immediate penalt*free!ithdra!al
&
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Personal Financial Planning Section
o! ?evelop 1our Preliminar Plan
Luestion Ans!ers R Plan
1our goal3
1our ris$ tolerance3
1our e#pected rate of return31our time hori"on3
Current assets set aside for our goal3
Future periodic savings%investing3
.#pected future (enefits3
Tpes of account&s' ou5ll use3
Asset allocation !ithin account&s'3
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Personal Financial Planning Section
Then Calculate Your /7ected 'eturn
)ajor AssetClass
AssetAllocation
*istorical'eturn
/sti"ated'eturn
Cash
Bonds
Stoc$s@ard assets
QQQQQQQQQQ
QQQQQQQQQQ
QQQQQQQQQQQQQQQQQQQQ
R 4
R 8
R
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Personal Financial Planning Section
And Then the Future alue of These ItemsE
Contribution To!ard (oal Future 5alue Calculation
Current assets set aside forour goal
Calculate the future value ofthis amount invested at oure#pected rate of return overour time hori"on
Future periodicsavings%investing
Calculate the future value ofthese paments at oure#pected rate of return overour time hori"on
.#pected future (enefits
Calculate the future value of
this amount invested at oure#pected rate of return fromthe date of receipt to the end ofour time hori"on
E Calculated for each account ou are using to invest our savingsD
9;
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Personal Financial Planning Section
The 2esult is 0hat 1ou 0ill @ave
Ta$e intoaccount
Current assets set aside forour goal
um(er of ears to our goal
Future saving .#pected return on our
invested assets
.#pected future (enefits
To arrive at 0hat ou !ill have
:=
E P i ' b
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Personal Financial Planning Section
Eey Points to 'e"e"ber
Financial lanning !ill hel you clarify goals2strategies and action stes
eter"ine !hether you have too "uch debt anddevelo a lan to con3uer it
)a$e !ise decisions about using debtCo""it to saving and investing
Save and invest early
Pay yourself first
-earn as "uch as you can about investing todevelo a lan and invest according to yourNco"fort level
:<
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uestions3[insert contact information here]
Special than$s to evin 2oach, CPA%PFS of Te#as AH> Lniversit for contri(uting contentD