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Managing YourManaging YourPersonal FinancesPersonal Finances
Managing YourManaging YourPersonal FinancesPersonal Finances
Chapter 23
Chapter 23 Learning GoalsChapter 23 Learning Goals
1.1. WWhat is the personal financial planning process, and how does it facilitate successful financial management?
2.2. HHow can cash flow planning and management of liquid assets help you meet your financial goals?
3.3. WWhat are the advantages and disadvantages of using consumer credit?
4.4. WWhat are the major types of taxes paid by individuals?
Chapter 23 Learning GoalsChapter 23 Learning Goals (cont’d.) (cont’d.)
5.5. WWhat is the most important principle in deciding what types of insurance to purchase?
6.6. WWhat personal characteristics are important when making investment decisions?
7.7. WWhat are the emerging trends in personal financial planning?
8.8. WWhat is risk, and how can it be managed? What makes a risk insurable?
9.9. WWhat types of insurance coverage should businesses consider?
Learning Goal 1Learning Goal 1
• WWhat is the personal financial planning process, and how does it facilitate successful financial management?
– Six steps of financial planningSix steps of financial planning1.1. EEstablishing financial goals2.2. GGathering financial and non-financial information3.3. AAnalyzing the information4.4. DDeveloping a financial plan5.5. IImplementing the plan6.6. MMonitoring the plan
1. Establish financial goals
2. Gather information
3. Analyze the information
4. Develop a plan
5. Implement the plan
6. Monitor the plan
Financial Planning ProcessFinancial Planning Process
Learning Goal 2Learning Goal 2
• HHow can cash flow planning and management of liquid assets help you meet your financial goals?– Cash flow plan
• Plan for managing income and expenses• Based on financial goals, including saving for those goals• Money is set aside to pay for the goals
– Liquid assets• Checking and savings-type accounts are important for:
– Day-to-day spending– Meeting short-term goals– Unexpected expenditures
• Can be held in safe, convenient accounts so money is readily available when needed
Cash Flow ManagementCash Flow Management
• Establish goals & calculate how much to save to meet them
• Estimate income & expenses• Track actual income & expenses for
1 month• Compare planned & actual• Modify estimates & repeat
Income Statement: Tennis PlayerIncome Statement: Tennis PlayerRevenueRevenuePrize money $105,858$105,858ExpensesExpensesHotel, air, other travel $45,679Meals & entertainment 17,650Telephone 487Business expenses & dues 1,656Tennis equipment 4,379Computer 2,383Foreign taxes paid 10,826
$83,060$83,060Earnings before taxesEarnings before taxes $22,492$22,492TaxesTaxes $19,654$19,654Earning after taxesEarning after taxes $2,838$2,838
Source: Fortune, Sept. 28, 1998, p. 58.
Learning Goal 3Learning Goal 3
• WWhat are the advantages and disadvantages of using consumer credit?– Advantages of consumer credit
• Convenience• Purchasing an item sooner• Taking advantage of bargains• Better service• Establishing a credit rating• Convenient record keeping• Meeting a financial emergency
– Disadvantages of consumer credit• Ease of overspending• Cost of credit (interest charges)• Possibility that merchandise may cost more• Reduction in future discretionary income due to legal commitment to repay
debt
Using Consumer CreditUsing Consumer Credit
Pros:Pros:• convenient
• immediate purchase
• establish credit rating
• provides record keeping
• emergencies
• perks like rebates & frequent flyer miles
Cons:Cons:• overspending
• interest charges
• may pay more
• reduced discretionary income
Using Consumer CreditUsing Consumer Credit
• Credit cards– open-end, line of credit, revolving– grace periods
• Loans• Credit history & credit ratings• Europeans rely on personal credit less than
Americans– Continental Europe has $6 billion$6 billion in outstanding
credit card debt, compared with $240 billion$240 billion in the US (Source: Fortune, Sept. 28, 1998, p. 190)
Learning Goal 4Learning Goal 4
• WWhat are the major types of taxes paid by individuals?– Income taxes
• Payroll taxes based on income and deducted from paycheck
– Social Security taxes• Payroll taxes based on income and deducted from
paycheck– Sales tax
• Assessed on purchases made
– Property taxes• Based on the value of property owned, usually real estate
Managing TaxesManaging Taxes
• Income taxes
• Social security & Medicare taxes
• Other taxes– sales
– property
Learning Goal 5Learning Goal 5
• WWhat is the most important principle in deciding what types of insurance to purchase?– Budget for problems that represent a small
financial loss– Set aside money in savings to pay for loss
when it happens– Buy good insurances policies to cover major
losses• Those that would cause large financial loss if they
occurred
Selecting InsuranceSelecting Insurance
• Property & liability insurance– automobile insurance– homeowner’s/renter’s insurance
• Health insurance– major medical– managed care– Health maintenance organizations (HMOs)
• Disability income insurance• Life insurance
Learning Goal 6Learning Goal 6
• WWhat personal characteristics are important when making investment decisions?– Decisions should be based on your goals
and risk tolerance– Examples of investment goals:
• Desire for income from interest and dividends• Need for growth (capital gains)• Need for safety
Making Investment DecisionsMaking Investment Decisions
• Setting goals
• Developing strategy– start early
– diversify
– invest regularly
Personal Investment OptionsPersonal Investment Options• Dividend reinvestment plans (DRIPs):Dividend reinvestment plans (DRIPs): permit small
investors to invest in individual shares inexpensively & easily– only some companies offer DRIPs
• Netstock Direct & Buyandhold.com offer an alternate way to invest small amounts– low monthly minimum contributions ($10 or $20) &
minimal transaction fees– you can buy partial shares of expensive stocks– most company’s stocks are available
Source: The Star Ledger, Dec. 19, 1999, Section 3, p. 3.
Investment Risk PyramidInvestment Risk Pyramid
`
High-grade municipal bonds
Balanced mutual funds
Growth stocks, funds
Junk bonds
Treasury bills, bonds, notes
Futures, commodities
Incr
ea
sing
ris
k of
lost
prin
cip
al
Incr
ea
sing
pot
ent
ial g
ain
Learning Goal 7Learning Goal 7
• WWhat are the emerging trends in personal financial planning?– More employee responsibility for the choices
made in employer fringe benefit plans• Cafeteria benefit plans are being offered in the
insurance area• Self-directed retirement plans are being offered• Emphasizes the importance of all individuals to
understand their financial needs and the best ways to achieve them
Trends in Personal FinanceTrends in Personal Finance
Cafeteria-type benefit plans more responsibility on employees
more choice for employees
Self-directed retirement accounts 401(k), SIMPLE, mutual funds
Retirement ChoicesRetirement Choices Self-directed retirement accounts
Frequency of Employee Benefits in 1999
01020304050607080
Perc
en
tag
e o
f E
mp
loyees
Def
ined
bene
fit
Pro
fit
shar
ing
403(
b)
Source: Bryan, Pendleton, Swats & McAllister survey in The Arizona Republic, Jan. 2, 2000, pg. D3.
401(
k)
ES
OP
Oth
er
Learning Goal 8Learning Goal 8
• WWhat is risk, and how can it be managed? What makes a risk insurable?– Risk is the chance for financial loss due to a peril
• Many risks can be covered by insurance
• Pays insured up to a specified amount in the event of loss from a particular peril
– Risk can be managed by • Avoiding situations known to be risky
• Assuming the responsibility for losses due to certain types of risk
• Adopting safety measures
– Risk is insurable when it meets certain criteria
Learning Goal 9Learning Goal 9• WWhat types of insurance coverage should businesses
consider?– Property insurance
• Covers losses arising from damage to property owned by the insured person or business
– Liability insurance• Covers losses due to injuries to others or their property determined
to be caused by the insured
– Other important business coverages:• Business interruption• Automobile and theft• Fidelity and surety bonds• Personal, professional, and product liability• Companies must be knowledgeable about health and life insurance
packages offered to employees as fringe benefits