chapter 15 - personal financial planning

Chapter 15

Personal Financial Planning

Copyright © Houghton Mifflin Company. All rights reserved. 15 | 2

The Purpose of Personal Financial Planning

• Meeting Current and Future Financial Needs


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


Personal Balance Sheet (part 1)


Personal Balance Sheet (part 2)


Key Concepts (cont’d)

• Setting Financial Goals– Key Knowledge

• Financial success• Independently wealthy• Wealth


Examples of Personal Goals


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)


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.


Financial Planning Specialist Designations


Managing Income

• Budgeting– Key Concepts

• Cash flow• Cash flow budget• Net cash inflow


Cash Flow Budget (part 1)


Cash Flow Budget (part 2)


Estimated Expenses as a Percentage of Net Income


Simple Methods to Cut Expenses


Source: http://yahoo.usatoday.com/news/snapshot.htm?section=M&label=2004-12-01-holspend&csp=1

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$200

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Men Women

2004 Holiday Shopping: Men Plan on Spending More


Managing Income (cont’d)

• The Envelope Budget

• Checkbook Management– Key Concepts

• Bank statement• Bank reconciliation


Jacob LawrenceBank Reconciliation Statement



• Financial Planning Software– Personal financial planning (PFP) software

• Quicken

• Web Resources– Bank of America– Century 21– CNBC – Fannie Mae


• 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

http://www.fidelity.com/

http://www.freddiemac.com/

http://www.hud.gov/

http://www.hud.gov/

http://www.intuit.com/



• Insurance– Key Concept

• Deductible

– Health– Disability– Life– Property and Casualty– Automobile


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


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,.


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?


Investing

• Accumulation of Wealth– Key Concept

• Investment risk


Investments and Relative Risk


Investing (cont’d)

• Managing Investments– Key Concepts

• Assets accumulation• Time horizon• Mutual fund• Unit investment trusts (UIT)• Real estate investment trust (REIT)


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)?


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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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



• Fixed-Income Investments– Key Concept

• Interest rate risk

– Treasury Securities– U.S. Savings Bonds– Corporate Bonds– Municipal Bonds– Other Fixed-Income Investments



• Equity Investments– Stock Quotes on the WWW

• Yahoo! Finance

– Key Concepts• Growth stocks• Income stocks• Value stocks• Dollar cost averaging• Market timing approach



• Your Home– Key Concept

• Mortgage


Retirement and Estate Planning

• Social Security

• IRAs and 401(k) Plans

• A Will


Tax Planning

• Tax Reduction Strategy– Planning Purposefully– Organizing


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.


Ethics of Financial Planning

• Giving

• Repaying Debts

• Paying Taxes

• Providing for Your Family

• Planning for Future Needs

• Keep Money in Perspective


Careers in Personal Financial Planning

• Personal Financial Specialist (PFS)

chapter 15 - personal financial planning

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