Personal Financial Planning – Part IDr. Steve Hays

Personal FinanceBKHS – Spring 2013

The New Economy

• Emphasis in US has shifted• Manufacturing and retailing

to• Telecommunications, high tech, financial

services

• New career opportunities• New perspectives on financial planning

Money, money, money!!!

• People everywhere talk about money

• Three types• Explorer – always searching uncharted

areas• Passenger – just along for the ride• Researcher – seeking answers to questions

Personal Financial Planning

• Definition• Process of managing your money to

achieve personal economic satisfaction• Allows you to control financial situation• Every person, family, household has

unique position• Activities must be planned carefully to

meet specific needs

Advantages of Personal Financial Planning

• Increased effectiveness in obtaining, using, and protecting financial resources

• Increased control of financial affairs by avoiding excessive debt, bankruptcy, and dependence on others

• Improved personal relationships resulting from well planned and effectively communicated financial decisions

• Sense of freedom from financial worries obtained by looking to the future, anticipating expenses, and achieving personal economic goals

Financial Planning Process

1- Determine current financial

situation

2- Develop financial

goals

3- Identify alternative courses of

actions

4 – Evaluate alternatives

5- Create and implement

financial action plan

6- Review and revise plan as

needed

Step 1 – Determine Current Financial Situation

1- Determine Current Financial Situation

• Determine financial situation regarding income, living expenses, and debts

• Prepare a list of current assets, debt balances, and amounts spent for various items

Step 2 – Develop Financial Goals

• Periodically analyze financial values and goals

• How do you feel about money?

• Why?• Factual knowledge

or influence of others?

• SMART Goals

2- Develop Financial

Goals

What are SMART Goals?

Step 3 – Identify Alternative Courses of Action

3- Identify

Alternative Courses of Action

• Categories• Continue same course of action• Expand current situation• Change current situation• Take new course of action

• Creativity in decision making is vital to effective choices

• Consider all possible alternatives

• Doing nothing is a dangerous alternative!!

Step 4 – Evaluate Alternatives

• Evaluate courses of action

• Consider • Life situation• Personal values• Current economic

conditions• Opportunity cost

4- Evaluat

e Alternat

ives

What is Opportunity Cost?

• What you give up by making a choice• Trade-off• The resources you give up (money or

time) have a value you can never regain

Evaluating Risk

• Uncertainty is part of every decision• High degree• Low degree • In many financial decisions, identifying

and evaluating risk is difficult• Gather information based on your

experience and experience of others• Use financial planning information

sources

Types of Risk

• Inflation Risk• Interest Rate Risk• Income Risk• Personal Risk• Liquidity Risk

Inflation Risk

• Rising prices cause lost buying power• Decide whether to buy something now

or later• If you buy, you may have to pay more

Comparing Prices

1963Coca-Cola: $0.05/bottleBread:  $0.21/loaf Milk:  $1.04/gal US Eggs:  $0.96/doz Car:  $2,300 Gas:  $0.30/gal House:  $19,300 Stamp:  $0.05/ea Ave. Income:  $6,998/yr Min Wage:  $1.25/hr DOW Ave:    763

2012Coca-Cola:$1.19/bottleBread:  $1.88/loaf Milk:  $2.79/gal US Eggs:  $1.54/doz Car:  $ 30,748Gas:  $3.72/gal House:  $263,200Stamp:  $0.46/ea Ave. Income:  $47,000/yr Min Wage:  $7.25/hr DOW Ave:    13,553

Interest Rate Risk

• Changing interest rates affect your costs when you borrow and your benefits when you save or invest

• Borrowing at low rates saves you money

• Investing when rates are dropping costs you money

Income Risk

• Loss of job could result in change in consumer spending

• Individuals who face risk of unemployment need to save while employed

• Acquire skills they can use to obtain different type of work

Personal Risk

• Tangible and intangible factors can create less than desirable situations

• Purchasing certain brands pr from certain stores may entail risk (i.e repairs)

• Health risks• Safety risks

Liquidity Risk

• Some investments have potential for higher earnings

• Mat be more difficult to convert to cash or sell without significant loss in value• Art • Jewelry• Sports Collectibles• Precious Metals

Financial Planning Information Sources

• Financial Specialists• Financial planners• Bankers, CPAs• Lawyers

• WWW, Computer Software

• School Courses• Financial Institutions• Printed Materials

Step 5 – Create and Implement Plan

5- Create

and Implement Plan

• Develop an action plan identifying ways to achieve goals

• Prioritize goals• Seek assistance

from others

Step 6 – Review and Revise Plan

• Dynamic process that always changes

• Regularly assess financial decisions

• Changing personal, social, and economic factors require more frequent assessment

6- Review

and Revise Plan

Reviewing the Financial Planning Process

1- Determine current financial

situation

2- Develop financial

goals

3- Identify alternative courses of

actions

4 – Evaluate alternatives

5- Create and implement

financial action plan

6- Review and revise plan as

needed

Developing Personal Financial Goals

• Two factors influence financial aspirations• Time frame• Financial needs

Timing of Goals

• Short-term• Less than one year

• Intermediate • Two to fives years

• Long-term• Greater than five years

Financial Needs

• Consumable Products Goals• Periodic basis

• Food, clothing, entertainment• Can have negative impact on financial situation if made

unwisely

• Durable Product Goals• Infrequently purchased• Expensive items

• Intangible Purchase Goals• Personal relationships, health, education, leisure

Homework – Due Friday, February 1, 2013

• Using Excel, develop two charts

1. Compare the prices of goods for the year you were born with 2012 (see PPT slide for items to compare)• What is the percentage of increase from the year

you were born to 2012?

2. Develop SMART financial goals for both you and your family – short term, intermediate, and long-term.