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FIN 200: Personal Finance
Topic 2–Introduction to Financial Planning
Larry Schrenk, Instructor
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Introduction
FIN 200 Personal Finance Larry Schrenk, Instructor
E-Mail: [email protected] Office: 260 McKinley Office Telephone: 202-885-2794
Course Page http://auapps.american.edu/~schrenk/FIN200/FIN200.htm
Syllabus
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Learning Objectives
1. Explain the concept of financial planning.
2. Outline the elements of a personal financial plan.
3. Describe the development of a personal financial plan.▪
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Poor Financial Planning
In a survey...a large majority of corporate owners and executives of middle-market companies do not meet their personal financial goals in spite of the success of their business enterprise. source
Multiple surveys “suggest that people's financial planning methods are fairly rudimentary, that their financial knowledge is generally poor, and that their self-described savings plans are often inconsistent with the predictions of standard saving models. source
Students and Financial Planning
Over 60% of you have credit cards. About 15% of you have balances over
$1,000; about 5% exceeding $3,000. Average Undergraduate Credit Card Debt:
$2,200 Sticking to minimum payments it would take
you more than 12 years and $1,115 in interest to pay off a $1,000 bill on a card with an 18 percent annual rate.
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Financial Thinking
Opportunity Costs Trade-Offs
Risk versus Return Costs versus Benefits
Incentives Short-Term versus Long-Term Wealth versus Income
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The Basic Definitions
Personal Finance:
Personal Financial Plan
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Elements of the Financial Plan
1. Budgeting (Topics 5-7)
2. Liquidity (Topics 8-9)
3. Financing (Topics 10-11)
4. Protecting (Topics 12-14)
5. Investing (Topics 15-21)
6. Retiring and Estate Planning (Topics 22-23)
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1. Budgeting
Evaluate your current position (market value) Assets: what you own Liabilities: what you owe Net Worth: Assets - Liabilities
Develop a plan for financial stability (more later) Identify personal needs, goals and desires Forecast the financial decisions required to meet these
‘Cash Flows’ e.g., Big Spender (little or no savings) Big Saver (relatively little spending) Negative Saver (withdrawing savings to support spending)
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2. Liquidity
Liquidity: The ability to meet your expected and unexpected short-term obligations.
Two facets: Money (‘cash-like’)–Expected obligations Credit (borrowing)–Unexpected obligations
Trade-off between liquidity and return E.g., cash, checking, savings account, versus Long-term investments
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3. Financing
Major Expenditures Car House Retirement
Key Decisions Is the purchase a sound financial decision? How do I best raise the required funds?
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4. Protecting
Insurance Auto Home Health and Disability Life
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5. Investing
Investment Opportunities Risk versus Return
Return: The increased value of an investment over time (expressed as a percentage)
Risk: The possibility that the return you expected is not what you actually receive.
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6. Retiring and Estate Planning
Retirement Planning Retirement Goals Required Savings Investment Plan
Estate Planning Planned Size of Estate Distribution of Estate
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Developing a Personal Financial Plan
1. Determine Lifetime Goals
2. Establish Financial Goals to Meet Lifetime Goals
3. Evaluate Current Financial Position
NOTE: This is the focus of the course project!
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Developing a Personal Financial Plan
4. Formulate Financial Plans Career Education Savings Spending Lifestyle
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Example: Career
Bureau of Labor Statistics (BLS) Data for 800 occupations.
Occupation Employment Mean Annual Income
Airline Pilots, Copilots, and Flight Engineers 78,250 $148,810
Anesthesiologists 31,030 $192,780
Bakers 141,560 $24,360
Carpet Installers 34,630 $39,960
Chemical Engineers 28,780 $84,240
Cooks, Fast Food 575,510 $16,860
Correctional Officers and Jailers 431,980 $39,970
Database Administrators 116,340 $70,260
Fitness Trainers and Aerobics Instructors 219,990 $32,990
Foresters 10,510 $54,030
Funeral Directors 24,020 $57,660
Historians 3,600 $54,630
Interior Designers 52,620 $50,190
Landscape Architects 21,890 $62,250
Lawyers 555,770 $118,280
Marriage and Family Therapists 23,340 $45,310
Motorcycle Mechanics 16,800 $32,210
Real Estate Brokers 49,270 $79,800
Sales Managers 322,170 $106,790
Special Education Teachers, Middle School 100,160 $51,610
BLS May 2007 National Occupational Employment and Wage Estimates
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Developing a Personal Financial Plan
5. Select Optimal Plan
6. Evaluate Financial Plan
7. Revise Financial Plan
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Ethical Dilemma (Chap.1, 16.7)
Sandy and Phil decide to go to Sandy's cousin Larry, who is a stockbroker. Larry tells them the only fee he will charge is for transactions. Larry recommends stocks of several well-known companies which they purchase. Three months later, Larry tells them that they need to sell the stocks and buy several others. Three months later, the same thing happens. At the end of they had sold each of the stocks for more than they had paid, but the total dollar value of their portfolio had declined, since the transaction fees exceeded their capital gains. a. Do you think Larry behaved ethically? Explain. b. Would Larry have a personal reason for handling Sandy and
Phil's portfolio as he did? Explain.
