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Chapter 1

Financial Planning:

The Ties That Bind

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The Role of Personal Financial Planning

To manage income and expenses

To create an awareness of your current financial status

To plan for the future by developing goals and devising ways to achieve those goals

To provide a system of evaluation and revision for your financial progress

To gain control over your financial life

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Why Do You Need a Personal Financial Plan? (Everyone has one whether they know it or not).

For most people, it is easier to spend than save.

To track your expenses, so you don’t spend more than you think you’re spending

To be financially independent

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Why Should You Develop a Personal Financial Plan?

It helps you achieve your financial goals.

It helps you achieve financial independence.

It helps you understand where all your money is spent.

It may even help you support those that have supported you. (Jeff, remember to show this slide to daughters).

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Why Isn’t Personal Financial Planning Easy?

Some people are uncomfortable discussing financial matters; the “fear of finance.” AKA FINANCIAL DENIAL

Motivation and time is required to complete an accurate plan.

Good record keeping is necessary both before and during the planning period.

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What Can You Accomplish as a Result of This Course?

Manage the unplanned.Accumulate wealth for special expenses (car, home, didgeridoo).Save for retirement (yes you need to save while your young to prepare for your rocking chair days.)“Cover your assets.” (Insurance and liquidity)Invest intelligently.Minimize your payments to Uncle Sam.Break free from the control of money (debt).Help my GPA if I attend, participate, and ace the exams.

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The Personal Financial Planning Process

Step 1: Evaluate Your Financial Health (ouch!)Step 2: Define Your Financial Goals (take your time – it’s fun)Step 3: Develop a Plan of Action Flexibility, Liquidity, Protection, Minimization of Taxes Consider Your Goals

Step 4: Implement Your Plan (This is up to the person you see in the mirror)Step 5: Review Your Progress, Reevaluate, and Revise Your Plan (A Must)

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Step 1: Evaluate Your Financial Health

Evaluate your current situation: income, spending, wealth.

Assess your whole financial picture.

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Step 2: Define Your Financial Goals

Specifically define and write down your financial goals to reflect your financial and life situation.

Attach a cost to each goal.

Set a date for when the money is needed to accomplish the goal. Short term, medium term, and long term goals.

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Step 3: Develop a Plan of Action

Flexibility – the ability for your plan to change as your situations or goals change.

Liquidity – your ability to convert noncash assets into cash with relative ease and speed.

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Step 3: Develop a Plan (cont’d)

Protection – your ability to meet the unexpected large expenses without destroying your plan.

Minimization of Taxes – your ability to pay as little as possible to Uncle Sam.

Maximization of savings

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Step 4: Implement Your Plan

Use common sense and moderation; don’t force yourself to track every penny.

Remain positive about your plan; use it as a roadmap.

Stay on track after the detours; rewards await you.

Depending on your goals this will take sacrifice and behavioral control, but its worth it.

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Step 5: Revise Your Plan

Periodically review your progress to see if any fine tuning needs to be done.

Make sure that your plan still matches your goals.

Be prepared to start over if your plan no longer meets your needs.

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Your Income: What Determines It

Earnings determine standard of living.

Education is the key factor in determining income level.

Marriage also seems to be a factor, in that 85% of wealthy households are headed by a married couple.

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Education

70% of wealthy householders finished college.

It may be the best single investment you will ever make!

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Your College Investment Payoff

College graduates earn 19,000 a year more on average than high school graduates.

Average salaries based on 2004 Census Bureau:

High School Graduate Masters Doctorate

30,800 49,900 59,500 95,700

In today’s dollars college graduates can expect to earn 1.1 million more over their lifetimes than HS graduates

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The 15 Principles of Personal Finance

Principle 1: The Risk-Return Tradeoff

Principle 2: The Time Value of Money

Principle 3: Diversification Reduces Risk

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The 15 Principles of Personal Finance (cont’d)

Principle 4: All Risk is Not Equal

Principle 5: The Curse of Competitive Investment Markets

Principle 6: Taxes Affect Personal Finance Decisions

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The 15 Principles of Personal Finance (cont’d)

Principle 7: Stuff Happens, or The Importance of Liquidity

Principle 8: Nothing Happens Without a Plan

Principle 9: The Best Protection is Knowledge

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The 15 Principles of Personal Finance (cont’d)

Principle 10: Protect Yourself Against Major Catastrophes

Principle 11: The Time Dimension of Investing

Principle 12: The Agency Problem – Beware of the Sales Pitch

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The 15 Principles of Personal Finance (cont’d)

Principle 13: Pay Yourself First

Principle 14: Money Isn’t Everything

Principle 15: Just Do It!