financial planning 101

Financial Planning 101Simple strategies to last a lifetime

© 2003 Financial Planning Association

Financial planning is the process of funding your personal desires and goals throughout your life .

The Lifetime Financial Continuum

Birth Death

Childhood

DependencyAdulthood Accumulation

Maturity Retirement

TravelGolfMedical ExpensesNursing Home care

Room & BoardEducationWedding

Early AdulthoodSelf Supporting

Get MarriedBuy a HomeHave ChildrenStart College FundMax out 401kMax out Employee Benefits

Room & BoardBuy a CarRepay College LoansEnroll in 401kBuild Emergency Fund

Where do I start?

1. Get your last month’s paycheck stubs.

2. Get your checkbook register.

3. Get your most recent credit card receipts.

4. Get a calculator, paper, pencil and other

supplies. (Aspirin is optional.)

©2003 Financial Planning Association

Strategy #1Create a Net Worth Statement

• A net worth statement lists everything you own on the left and everything you owe on the right

• What you own –what you owe = net worth

Recent College Graduate Net Worth Statement

Cash$3,200 $85,000

$640 $3,700$1,100 $16,873

Roth IRA $2,300

$15,225

$22,465 - $105,573 = ($83,108)2006 Honda Civic

Auto Loan

Total Assets Total Liabilities

Bank CD

Invested Assets

Personal Use Assets

Student LoansCredit Card Debt

What You Own (ASSETS) What You Owe (LIABILITIES)

Passbook Savings US Savings Bonds

Graduate A’s Net Worth 10 years after graduation

Cash Auto Loan $26,000Tax Free Money Market $18,000 Mortgage $212,000

Invested AssetsRoth IRA $5,965401(k) $311,936Mutual Funds $365,000529 Plans $12,000

Personal Use AssetsPersonal Residence 365,000Honda Civic $16,000Honda Pilot $25,000

Total Assets $1,118,901 - Total Liabilities $238,000 = $615,000

What You Own (ASSETS) What You Owe LIABILITIES)

Graduate B’s Net Worth 10 years after graduation

Cash Mortgage 1 $257,530Checking $2,300 Mortgage 2 $63,323

Credit cards $42,738Invested Assets Student Loans $224,647

IRS Back Taxes $10,735Personal Use Assets

Personal Residence $320,853

Total Assets $323,153 - Total Liabilities $598,973 = ($275,820)

What You Own (ASSETS) What You Owe (Liabilities)

Strategy #2: Create a Cash Flow Statement

A cash flow statement lays out all of your sources of income on the left and all of your expenses on the right to identify where your money is going.

©© 2003 Financial Planning Association

Recent College Graduate Cash Flow Statement

$81,600 Fixed$320 $23,161

$15,500$12,981$3,946$8,292

Utilities $2,348$1,728$6,500$5,430$3,600$3,000$3,000

1,200

Total Income $81,920 Total Expenses $90,686 = ($8,766)

Employment IncomeInvestment Income Income taxes

401k ContributionSallie MaeAuto LoanRent

Variable

Auto GroceriesDining Out

-

Clothing Personal CareEntertainmentVacationMiscellaneous Life Style

Graduate A’s Cash Flow Statement 10 years after graduation

$41,000 Fixed$98,280 $35,855

Investment Income $4,958 $15,500Employment Bonus $9,000 $15,500Stock Option Exercise $22,000 $4,080

$3,267Mortgage Payment $14,856Home Equity Loan (Auto) $2,220Insurance $2,828Childcare $7,618

Savings $9,082Utilities $8,292

$1,728$6,500$5,430$6,000

$12,000$8,000

Cleaning & Landscaping $3,600Professional services $5,600

7,282

Total Income $175,238 Total Expenses $175,238 = $0

INCOME EXPENSESNet Self Employment Income 1Employment Salary 2 Income taxes

401k ContributionSEP IRA Contributions529 Plan ContributionsProperty Taxes

Variable


-

Clothing Personal CareEntertainmentVacation

Miscellaneous Life Style

Graduate B’s Cash Flow 10 years after graduation

$133,000 Fixed$28,010$6,692

$16,740$6,782$1,089

Sallie Mae $8,888Credit Card debt service $42,655Insurance $6,155

Law practice Business expenses $17,374Utilities $5,048

$1,728$5,245$5,430$3,500$2,623

Total Income $133,000 - Total Expenses $157,959 = ($24,959)

Clothing Personal CareEntertainment

Variable


Back taxes penaltiesMortgage 1Mortgage 2Property Taxes

INCOME EXPENSESGross Self Employment Income

Current Income taxes

Income - Expenses = Opportunity

There are two categories in any cash flow statement: Income and Expenses. The difference between the two represents your opportunity.


Strategy 3:Establish Financial Goals


Common Financial Goals

• Buy a house• Pay off student loans• Pay of credit card debt• Purchase a new laptop• Maximize your 401k contributions• Purchase life insurance• Purchase a giant plasma TV• Purchase a new car

Setting Goals

What I Want When I Want It

How Much It Will Cost

How Much Do I Need To Save Per Month or Year

Purchase Home 6 Mos $350,000 $70,000 down payment AND $275,000 Mortgage $1260 per month @ 6% for 30 years

Retire @ 60 with an income of $100,000 per year in today’s dollars

35 years $3 Million 401k Savings

Strategy #4: Establish a Budget

A budget is a spending plan that breaks the details of your cash flow statement into manageable monthly increments so that you can fine-tune your cash management and achieve your life goals.©© 2003 Financial Planning Association

What is a realistic budget?

INCOME FIXED EXPENSES• Salary 1

• Salary 2

• Investments

• Child Support

• Social Security

• Part-Time Job

•Taxes

• Rent or Mortgage

• Insurance

• Student Loans

• Auto Loan

•401k salary deferral


What is a realistic budget?

VARIABLE EXPENSES• Food

• Utilities

• Entertainment

• Savings

• Transportation

• Credit card debt service/ Consumer debt

• Gifts

• Miscellaneous©2003 Financial Planning Association

“Nickel and Dime Category”

- Lunches out

- Happy Hour after work

- Morning visits to the coffee shop

- Dog food, cat food, and other pet expenses

- Haircuts and manicures

- Auto repairs, medical bills


$7/day x 5 days x 50 weeks = $1750 per yr.

$7/day x 3 days x 50 weeks = $1050 per yr.

$7/day x 2 days x 50 weeks = $700 a yr.

It all adds up!


Strategy 5:Take full advantage of Employee Benefits

Most of all take advantage of the fact that TIME is on your side.

©2003, Financial Planning Association

Typical benefits offered by employers

• Core Employee Benefits– Health Insurance– 401(k), 403(b), SIMPLE or SEP retirement plan– Group term life insurance– Short term and long term disability insurance– Additional death and dismemberment insurance (AD&D)

• Additional Employee benefits– Bonus– Dental Insurance– Long-term care Insurance– Stock options– Educational assistance plan– Flexible benefit plans– Stock purchase plans– Deferred Compensation plans

Strategy 6:Limit Your Debt

• Be smart about using credit

•Excessive debt is the result of failure to plan

• Pay cash whenever possible

• Use low-interest rate credit cards

• Set limits for monthly credit card spending

• Pay your cards off in full each month, if possible


Debt Reduction Strategies


1. Prioritize your debt.

Mortgage, student loans = good debt

19.99% interest = bad debt

2. Conventional wisdom says pay off highest interest rate credit cards first, consolidate debt to lower rate cards, always pay more than the minimum due. (Minimum plus finance charges at a minimum.)

3. In the real world you are better off to pay off lowest balance credit cards first .

4. Cut up high rate credit cards, use one card only.

4. Pay attention to terms.

Strategy 7:Pay Yourself First


Savings Strategies

• Always carry a $100 bill in your wallet.• Open a tax free money market account at a brokerage house

and set up it up for automatic deposit• When you accumulate $1,000, invest it in a no-load stock

mutual fund.• When you have saved 6 months of living expenses, start

working on your cash emergency fund• Increase your 401(k) savings to the maximum permitted by law

($15,500 annually)• Establish a vacation savings account for your next vacation.• Establish a new car account so you can start saving for your

next car.• Establish a down payment account to buy a home


Strategy # 8: Understand the Time Value of Money

• The earlier you start saving, the less you have to save because of the time value of money and the magic of compounding.– If you invest $2,000 in an IRA mutual fund at age 25 and add $2,000

for four more years and then forget about it, you will have $1,064,222 at age 65.

– If you wait until age 60 to start saving for retirement, you will have to invest $154,476 for five years to achieve the same goal.

• Leverage your time and productivity to pay employees to do the things you hate and professional advisors to do the things you don’t know how to do

• Productivity or output per hour is the universal variable that determines who gets promotions, bonuses, and raises (and who doesn’t)

• Excuses are not permitted and “incompletes’ are not an option once you graduate. You must meet time deadlines if you expect to remain employed once you graduate

• Record retention and administrative organization are crucial to financial success

Strategy # 9:Hire Competent Professionals

• Tax Return Preparation– Enrolled Agents– CPA

• Estate Planning Documents, Business Filings, Contracts– Attorney At Law

• Financial Planning– Registered Investment Advisor– CFP® Designation


“Competence and Integrity are essential: Nice is a bonus”

• Does the professional maintain credentials relevant to the profession they are practicing

– CPA’s prepare tax returns– Attorneys provide legal services– CFP® certificants provide

financial planning services– CFA’s do money management– Insurance agents sell insurance

products– Registered Representatives sell

securities

• If a professional maintains credentials but does not work in the profession they are certified in, they are not currently practicing their own profession

• A CPA selling insurance is an insurance agent

– An attorney working as a bank lending officer is a lending officer and not a practicing attorney

– A CFA working as a CFO is a CFO– A CFP® selling stocks is a

licensed securities salesperson but not a financial planner

– A PhD of Philosophy is not a licensed psychologist An

– MBA is not a professional certification in any circumstance

Additional Tips For Selecting Professional Advisors

• Check professional associations for disciplinary history and to verify licensing

• Verify that the advisors business is registered with the secretary of state

• Expect to pay for professional services• Professionals usually deliver disclosure

documents for informed consent rather than glossy marketing materials

The

Certified Financial Planner™ designation


A CFP® professional has completed a comprehensive course of study in financial planning and passed an examination, met work experience requirements, and agreed to adhere to a professional code of ethics.

Financial Planning 101: In Summary

1. Create a net worth statement and update it annually 2. Create a cash flow statement and update it annually3. Establish financial goals and monitor your progress

toward reaching your goal 4. Develop a spending plan a.k.a budget and monitor the

variance monthly5. Take full advantage of employee benefits6. Limit your debt7. Pay yourself first8. Understand the time value of money9. Hire appropriate professionals

Financial Planning 102: What’s Next?

• Buying a home and shopping for a mortgage

• Investment management• Tax return preparation• Risk management (insurance)• Estate planning documents

Financial Planning 101Simple strategies to last a lifetime



•www.fpanet.org/public

•800.647.6340•www.PlannerSearch.org

– Referrals– Designations and licenses– Interview several planners– Big-picture approach – Trust

financial planning 101

Documents

financial planning association

financial planningassociation

common financial goals

credit excessive debt

graduate bs cash flow

good debt

debt reductionstrategies

bad debt