chapter 15 - personal financial planning
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Chapter 15
Personal Financial Planning
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The Purpose of Personal Financial Planning
• Meeting Current and Future Financial Needs
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Key Concepts
• Computing Net Worth– Key Knowledge
• Personal balance sheet• Net worth• Appreciating assets• Depreciating assets• Diversification• Portfolio of assets• Return on your portfolio• Liquidity
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Personal Balance Sheet (part 1)
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Personal Balance Sheet (part 2)
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Key Concepts (cont’d)
• Setting Financial Goals– Key Knowledge
• Financial success• Independently wealthy• Wealth
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Examples of Personal Goals
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Key Concepts (cont’d)
• Evaluating Spending Patterns• Identifying Your Stage in Life
– Employed, Before Marriage– Married, Before Children– Married, with Precollege Children– Married, Empty Nest– Retirement
• Turning to Experts– Key Knowledge
• Personal Financial Specialist (PFS)
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ExerciseStudent Strategies
• Brainstorm at least ten different ways in which students can improve their financial situation.
• Develop a list of the three most important things (in order of priority) you can do to improve your financial situation.
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Financial Planning Specialist Designations
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Managing Income
• Budgeting– Key Concepts
• Cash flow• Cash flow budget• Net cash inflow
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Cash Flow Budget (part 1)
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Cash Flow Budget (part 2)
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Estimated Expenses as a Percentage of Net Income
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Simple Methods to Cut Expenses
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Source: http://yahoo.usatoday.com/news/snapshot.htm?section=M&label=2004-12-01-holspend&csp=1
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$100
$200
$300
$400
$500
$600
$700
$800
Men Women
2004 Holiday Shopping: Men Plan on Spending More
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Managing Income (cont’d)
• The Envelope Budget
• Checkbook Management– Key Concepts
• Bank statement• Bank reconciliation
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Jacob LawrenceBank Reconciliation Statement
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Managing Income (cont’d)
• Financial Planning Software– Personal financial planning (PFP) software
• Quicken
• Web Resources– Bank of America– Century 21– CNBC – Fannie Mae
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• Web Resources (cont’d)– Fidelity Investments – Freddie Mac – U.S. Department of Housing and Developme
nt (HUD)– Intuit Corporation
• Intuit’s financial calculators
– Morningstar – Quicken – Wells Fargo– Yahoo! Finance
Managing Income
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Managing Income (cont’d)
• Insurance– Key Concept
• Deductible
– Health– Disability– Life– Property and Casualty– Automobile
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Living on One Income
• To Determine Feasibility– Update cash-flow budget– Identify all expenses Associated with second
income/job– Deduct second job expenses from total income– Result is amount to cut in order to live on one
income
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Debate Issue
• Despite what the book suggests may be possible, both spouses must have jobs with incomes in order to have a decent standard of living in today’s world,.
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Think About It
• There is a common misconception that it requires to incomes for young families today to maintain the same style of living that their parents enjoyed. Consider: most parents didn’t have a car for every member of the family, computers, cell phones, DVDs, or microwaves. Our increasingly technologically sophisticated society is providing us with more and more costly toys that quickly become perceived as necessities. Are there things that you consider “necessities” that may really not be necessary?
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Investing
• Accumulation of Wealth– Key Concept
• Investment risk
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Investments and Relative Risk
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Investing (cont’d)
• Managing Investments– Key Concepts
• Assets accumulation• Time horizon• Mutual fund• Unit investment trusts (UIT)• Real estate investment trust (REIT)
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Discussion Question
• When investing in a mutual fund that you plan to keep for five or ten years, is it generally better to buy one with a load (sales charge) or one with no load (no sales charge)?
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Source: Kuhle, James L. and Pope, Ralph A., A Comprehensive Long-Term Performance Analysis of Load Vs. No-Load Mutual Funds, Journal of Financial and Strategic Decisions, Vol. 13, No. 2., Summer, 2000. See:
www.studyfinance.com/jfsd/pdffiles/v13n2/kuhle.pdf
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5
10
15
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1993 1994 1995 1996 1997
1993 13.2 13.5 12.1 12.3
1994 8.4 8.4 12.4 12.5
1995 15.3 15.4 12.7 12.8
1996 10.2 9.5 10.4 10.3
1997 11.5 10.5 11.7 11.3
5 Year Return No-Load
5 year Return Load
10 Year Return No-Load
10 Year Return Load
Returns for Load and No-Load Mutual Funds
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Investing (cont’d)
• Fixed-Income Investments– Key Concept
• Interest rate risk
– Treasury Securities– U.S. Savings Bonds– Corporate Bonds– Municipal Bonds– Other Fixed-Income Investments
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Investing (cont’d)
• Equity Investments– Stock Quotes on the WWW
• Yahoo! Finance
– Key Concepts• Growth stocks• Income stocks• Value stocks• Dollar cost averaging• Market timing approach
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Investing (cont’d)
• Your Home– Key Concept
• Mortgage
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Retirement and Estate Planning
• Social Security
• IRAs and 401(k) Plans
• A Will
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Tax Planning
• Tax Reduction Strategy– Planning Purposefully– Organizing
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Go to the Web
• The mission of The USAA Educational Foundation (http://www.usaaedfoundation.org/) is to help consumers make informed decisions by providing information on financial management, safety concerns, and significant life events. The organization is a tax-exempt nonprofit organization that provides consumer information to the military community and the general public.
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Ethics of Financial Planning
• Giving
• Repaying Debts
• Paying Taxes
• Providing for Your Family
• Planning for Future Needs
• Keep Money in Perspective
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Careers in Personal Financial Planning
• Personal Financial Specialist (PFS)
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