Chapter 1 Financial Planning: The Ties That Bind

Chapter 1Chapter 1

Financial Planning: Financial Planning:

The Ties That BindThe Ties That Bind

The Role of Personal The Role of Personal Financial PlanningFinancial Planning To manage income and To manage income and

expenses.expenses. To create an awareness of your To create an awareness of your

current financial status.current financial status. To plan for the future by To plan for the future by

developing goals and devising developing goals and devising ways to achieve those goals.ways to achieve those goals.

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

Why Do You Need a Personal Why Do You Need a Personal Financial Plan?Financial Plan?

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

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

To retire To retire someday.someday.

Why Should You Develop a Why Should You Develop a Personal Financial Plan?Personal Financial Plan? It helps you achieve your It helps you achieve your

financial goals.financial goals. It helps you achieve financial It helps you achieve financial

independence.independence. It helps you understand where It helps you understand where

all your money is spent.all your money is spent. It may even help you support It may even help you support

those that have supported you.those that have supported you.

Why Isn’t Personal Financial Why Isn’t Personal Financial Planning Easy?Planning Easy?

Some people are uncomfortable Some people are uncomfortable discussing financial matters, the discussing financial matters, the “fear of finance.”“fear of finance.”

Motivation and time is required Motivation and time is required to complete an accurate plan.to complete an accurate plan.

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

What Can You Accomplish As What Can You Accomplish As a Result of This Course?a Result of This Course?

Manage the unplanned.Manage the unplanned. Accumulate wealth for special Accumulate wealth for special

expenses.expenses. Save for retirement.Save for retirement. ““Cover your assets.”Cover your assets.” Invest intelligently.Invest intelligently. Minimize your payments to Minimize your payments to

Uncle Sam.Uncle Sam.

The Personal Financial The Personal Financial Planning ProcessPlanning Process Step 1: Evaluate Your Financial Step 1: Evaluate Your Financial

HealthHealth Step 2: Define Your Financial GoalsStep 2: Define Your Financial Goals Step 3: Develop a Plan of ActionStep 3: Develop a Plan of Action

Flexibility, Liquidity, Protection, Flexibility, Liquidity, Protection, Minimization of TaxesMinimization of Taxes

Consider Your GoalsConsider Your Goals Step 4: Implement Your PlanStep 4: Implement Your Plan Step 5: Review Your Progress, Step 5: Review Your Progress,

Reevaluate, and Revise Your PlanReevaluate, and Revise Your Plan

Step 1: Evaluate Your Step 1: Evaluate Your Financial HealthFinancial Health Evaluate your Evaluate your

current current situation: situation: income, income, spending, spending, wealthwealth

Assess your Assess your whole financial whole financial picturepicture

Step 2: Define Your Financial Step 2: Define Your Financial GoalsGoals

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

Attach a cost to each goal.Attach a cost to each goal. Set a date for when the money Set a date for when the money

is needed to accomplish the is needed to accomplish the goal.goal.

What Are the Time Horizons What Are the Time Horizons for Financial Goals?for Financial Goals?

Short-term goals can be Short-term goals can be accomplished within a 1-year accomplished within a 1-year period .period .

Intermediate-term goals take 1-Intermediate-term goals take 1-10 years to accomplish.10 years to accomplish.

Long-term goals take more than Long-term goals take more than 10 years to achieve.10 years to achieve.

Goals: The Cornerstone of a Goals: The Cornerstone of a Financial PlanFinancial Plan

Goals keep the future in mind by Goals keep the future in mind by reminding you of the rewards.reminding you of the rewards.

Goals entice you to keep the plan in Goals entice you to keep the plan in effect.effect.

Goals provide tangibility for the Goals provide tangibility for the question, “Why?”question, “Why?”

Step 3: Develop a Plan of Step 3: Develop a Plan of ActionAction Flexibility -- The Flexibility -- The

ability for your ability for your plan to change plan to change as your as your situations or situations or goals change.goals change.

Liquidity -- Your Liquidity -- Your ability to convert ability to convert noncash assets noncash assets into cash with into cash with relative ease relative ease and speed.and speed.

Step 3: Develop a Plan Step 3: Develop a Plan (cont’d)(cont’d)

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

Minimization of Taxes -- Your Minimization of Taxes -- Your ability to pay as little as possible ability to pay as little as possible to Uncle Sam. to Uncle Sam.

Step 3: Develop a Plan Step 3: Develop a Plan (cont’d)(cont’d)

Consider future needs:Consider future needs: Create a budgetCreate a budget Determine investment strategiesDetermine investment strategies Plan for big-ticket purchasesPlan for big-ticket purchases Plan for managing debtPlan for managing debt Plan for insurancePlan for insurance Plan for the expense of children and Plan for the expense of children and

collegecollege Plan for retirementPlan for retirement Plan for estate transferPlan for estate transfer

Step 4: Implement Your PlanStep 4: Implement Your Plan

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

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

Stay on track after the detours; Stay on track after the detours; rewards await you.rewards await you.

Step 5: Revise Your PlanStep 5: Revise Your Plan

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

Make sure that your plan still Make sure that your plan still matches your goals.matches your goals.

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

The Life Cycle of Financial The Life Cycle of Financial PlanningPlanning

Stage 1: The Early Years -- A Stage 1: The Early Years -- A Time of Wealth AccumulationTime of Wealth Accumulation

Stage 2: Approaching Stage 2: Approaching Retirement -- The Golden YearsRetirement -- The Golden Years

Stage 3: The Retirement YearsStage 3: The Retirement Years

Stage 1: The Early Years -- A Stage 1: The Early Years -- A Time of Wealth AccumulationTime of Wealth Accumulation

Develop your Develop your savings plan.savings plan.

Set your initial Set your initial goals of all goals of all lengths.lengths.

Establish your Establish your long-range long-range investment investment strategy.strategy.

Stage 2: Approaching Retirement Stage 2: Approaching Retirement -- The Golden Years-- The Golden Years

Realize Realize intermediate-intermediate-term goals that term goals that were established were established during Stage 1.during Stage 1.

Re-evaluate the Re-evaluate the plan to match plan to match current goals.current goals.

Plan for Plan for retirement.retirement.

Stage 3: The Retirement Stage 3: The Retirement YearsYears

Reduce Reduce investment riskinvestment risk

Concentrate on Concentrate on preservation preservation rather than rather than growth of assetsgrowth of assets

Plan for the Plan for the transfer of your transfer of your estateestate

Managing Your CareerManaging Your Career

Find a career path for the rest of Find a career path for the rest of your lifeyour life Work that is enjoyable and Work that is enjoyable and

satisfyingsatisfying Adequate financial supportAdequate financial support Balance between work and Balance between work and

personal lifepersonal life

Deciding On A CareerDeciding On A Career

Conduct a self-assessmentConduct a self-assessment Research academic and career Research academic and career

alternatives that match your alternatives that match your skills and interestsskills and interests

Talk to people in the career fieldTalk to people in the career field Make a decision and start work Make a decision and start work

on your futureon your future

Getting A JobGetting A Job

Start your job search in summer, Start your job search in summer, before your senior yearbefore your senior year Develop your resume before fallDevelop your resume before fall Starting early tells employers you Starting early tells employers you

are serious and organizedare serious and organized Recruiting cycles often start in fallRecruiting cycles often start in fall

Getting A Job (cont’d)Getting A Job (cont’d)

Prepare for the interviewPrepare for the interview PracticePractice Learn about the company before Learn about the company before

the interviewthe interview Prepare: rest, dress, arrive early, Prepare: rest, dress, arrive early,

make a good impressionmake a good impression Thank the interviewer at the close; Thank the interviewer at the close;

follow-up with a letterfollow-up with a letter

Building Job SecurityBuilding Job Security

Keep up, with education and new skillsKeep up, with education and new skills Do good workDo good work Match your image to that of the companyMatch your image to that of the company Know and use the power structureKnow and use the power structure Take new assignments and make others Take new assignments and make others

aware of your workaware of your work Be loyal and supportive of your bossBe loyal and supportive of your boss Learn to network, in case you need another Learn to network, in case you need another

job job

Your Income: What Your Income: What Determines ItDetermines It

Earnings determine standard of Earnings determine standard of living.living.

Education is the key factor in Education is the key factor in determining income level.determining income level.

70% of wealthy householders 70% of wealthy householders finished college.finished college.

EducationEducation

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

The 15 Axioms of Personal The 15 Axioms of Personal FinanceFinance Axiom 1: The Axiom 1: The

Risk-Return Risk-Return TradeoffTradeoff

Axiom 2: The Axiom 2: The Time Value of Time Value of MoneyMoney

Axiom 3: Axiom 3: Diversification Diversification Reduces RiskReduces Risk

Axiom 4: All Axiom 4: All Risk Is Not EqualRisk Is Not Equal

The 15 Axioms of Personal The 15 Axioms of Personal Finance (cont’d)Finance (cont’d)

Axiom 5: The Curse of Axiom 5: The Curse of Competitive Investment MarketsCompetitive Investment Markets

Axiom 6: Taxes Affect Personal Axiom 6: Taxes Affect Personal Finance DecisionsFinance Decisions

Axiom 7: Stuff Happens, or The Axiom 7: Stuff Happens, or The Importance of LiquidityImportance of Liquidity

The 15 Axioms of Personal The 15 Axioms of Personal Finance (cont’d)Finance (cont’d)

Axiom 8: Axiom 8: Nothing Happens Nothing Happens Without a PlanWithout a Plan

Axiom 9: The Axiom 9: The Best Protection Best Protection is Knowledgeis Knowledge

Axiom 10: Axiom 10: Protect Yourself Protect Yourself Against Major Against Major CatastrophesCatastrophes

The 15 Axioms of Personal The 15 Axioms of Personal Finance (cont’d)Finance (cont’d)

Axiom 11: The Time Dimension Axiom 11: The Time Dimension of Investingof Investing

Axiom 12: The Agency Axiom 12: The Agency Problem-- Beware of the Sales Problem-- Beware of the Sales PitchPitch

The 15 Axioms of Personal The 15 Axioms of Personal Finance (cont’d)Finance (cont’d) Axiom 13: Pay Axiom 13: Pay

Yourself FirstYourself First Axiom 14: Axiom 14:

Money Isn’t Money Isn’t EverythingEverything

Axiom 15: Just Axiom 15: Just Do It!Do It!

SummarySummary Build your financial future around Build your financial future around

this text and a financial plan:this text and a financial plan: Manage the unplanned -- financial Manage the unplanned -- financial

planning withstands minor planning withstands minor setbackssetbacks

Accumulate wealth -- financial Accumulate wealth -- financial planning maps out strategies for planning maps out strategies for meeting your goalsmeeting your goals

Save for retirement -- financial Save for retirement -- financial planning helps you determine the planning helps you determine the costs of retirementcosts of retirement

Summary Summary (cont’d)(cont’d)

““Cover your assets” -- financial Cover your assets” -- financial planning includes protecting your planning includes protecting your assets with insuranceassets with insurance

Invest intelligently -- financial Invest intelligently -- financial planning helps you understand the planning helps you understand the principles of investingprinciples of investing

Minimize taxes -- financial Minimize taxes -- financial planning helps you keep your planning helps you keep your assets where they should be, in assets where they should be, in your own pocketyour own pocket

Summary Summary (cont’d)(cont’d)

Develop a personal financial planDevelop a personal financial plan Evaluate -- know where you are todayEvaluate -- know where you are today Define -- know where you want to goDefine -- know where you want to go Develop a plan -- draw the mapDevelop a plan -- draw the map Implement -- follow the plan with Implement -- follow the plan with

actionaction Review progress-- check the map to Review progress-- check the map to

ensure you are on courseensure you are on course

Summary Summary (cont’d)(cont’d)

Don’t overlook the financial life Don’t overlook the financial life cyclecycle The Early YearsThe Early Years Approaching RetirementApproaching Retirement The Retirement YearsThe Retirement Years

Summary Summary (cont’d)(cont’d)

Manage your career to ensure Manage your career to ensure personal and financial successpersonal and financial success

Remember the 15 axioms, but Remember the 15 axioms, but most importantly remember the most importantly remember the 15th -- Just Do It!15th -- Just Do It!