The Financial Planning Process

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Learning Objectives

1. Explain why personal financial planning is so important.

2. Describe the five basic steps of personal financial planning.

3. Set your financial goals.

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Learning Objectives

4. Explain how career management and education can determine your income level.

5. List ten principles of personal finance.

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IntroductionIt’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.

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Importance of Personal Financial Planning

Accumulate wealth for special expenses

Save for retirement

“Cover your assets”

Invest intelligently

Minimize payments to Uncle Sam

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Five basic steps to personal financial planning

1. Evaluate your financial health

2. Define your financial goals

3. Develop a plan of action

4. Implement your plan

5. Review your progress, reevaluate, and revise your plan

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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.

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Step 2: Define Your Financial Goals

Write or formalize them

Attach a financial cost to each one.

When will you need the money to achieve the goal?

Analyze and revise your goals.

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Step 3: Develop a Plan of Action

Flexibility: Plan for life changes and the unexpected.

LiquidityImmediate use of cash by quickly and easily

converting an asset.

ProtectionPrepare for the unexpected with insurance.

Minimize TaxesKeep more of what you earn.

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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.

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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.

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Short-term -- within 1 yearIntermediate-term -- 1 to 10 yearsLong-term -- more than 10 years

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Short–Term Goals

Accumulate Emergency Funds Equaling 3 Months’ Living Expenses

Pay Off Bills and Credit CardsPurchase InsurancePurchase a Major ItemFinance a Vacation

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Intermediate-Term Goals

Save for Older Child’s College Save for a Down PaymentPay Off Major DebtFinance Large Items (Weddings)Purchase a Vacation Home

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Long-Term Goals

Save for Younger Child’s CollegePurchase Retirement HomeCreate a Retirement Fund to Maintain

Current Standard of LivingTake Care of Elderly Family Members Start a Business

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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

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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.

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Stage 3 The Retirement Years

After age 65, live off savingsRetirement age depends on savings.

Less risky investment strategy

Consider extended nursing home protection.

Estate planning decisions and documents are critical.

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A series of positions to show your skills.

Is the job important, enjoyable, and satisfying?

Does it provide for your desired lifestyle?

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Choosing a Major and a Career

Effective self-assessmentInterests, skills, values, personal traitsDesired lifestyle

Research career alternatives and match with your skills and interests

Research potential earnings

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Getting a Job

Start early

Prepare and practice for interviews

Research the company

Dress appropriately, be confident, and follow-up

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Do good work.

Project the right image.

Understand and work within the power structure.

Gain visibility.

Being Successful in Your Career

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Take new assignments.

Acquire new skills and keep up with technology.

Develop a strong network.

Be ethical.

Being Successful in Your Career

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What Determines Your Income?

Skills

Education

The wealthy are married

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The foundation of personal finance.

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Principle 1: The Best Protection Is Knowledge

Understand the basics of personal finance.

Take responsibility for your lifetime financial plan.

Seek professional advice wisely.

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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.

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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

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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.

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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

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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

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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.

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Principle 8: The 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

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Principle 9: Mind Games 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.

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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.

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Summary

Personal financial planning allows you to manage your finances and achieve lifecycle financial goals.

There are five basic steps to personal financial planning.

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Summary

Set your financial goals in order to achieve them with a financial plan.

The more educated your are, the more you will earn.

There are ten basic principles on which personal financial planning is built.

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