Ppt Winger01

8/8/2019 Ppt Winger01

http://slidepdf.com/reader/full/ppt-winger01 1/18

1-1

Personal Finance:

An Integrated Planning

Approach

Winger and Frasca

Chapter 1Financial Planning:

Why It¶s Important to You



1-2

Introduction

Personal financial planning is important because ithelps individuals to achieve financial inde pendence.

Ther e is a tr end to incr eased self-r eliance.

Many employers ar e r equiring that employees plan andmanage their own r etir ement accounts. Traditional pension plans ar e less common today.

The f ederal government is unwilling to deal with the funding problems for Social Security.

Ther e is gr eater economic uncertainty associatedwith job stability and investments. Ther efor e, financial planning is incr easingly important.





1-4

Topic Outline

Why Study Personal Finance?

Achieving Financial Goals through Planning

Making Financial Decisions The Building Blocks of Success



1-5

WHY STUDY PER SONAL FINA NCE?

Many people study personal finance in order toachieve financial success.

Financial success may not have the same meaning to

everyone. Some people think financial success is accumulating a lot

of money.

Some people may define financial success by their abilityto purchase goods and services.

In this textbook , financial success is defined asobtaining the maximum benefits from limitedfinancial r esources.



1-6

Your Goals in Lif e

Nonfinancial goals Family, childr en, education, r eligious, social, etc.

Finances can aff ect your ability to attain these goals.

Financial goals

Financial inde pendence is an important goal for many people. Financial inde pendence is defined as havingenough income or r esources to be self-r eliant.

One of the financial choices that we mak e is between

consumption today versus consumption in the futur e. Researchers have found that most people, r egardless of

their income level, f eel that they need 20% mor e wealththan they curr ently have.



1-7

The Principle of Diminishing Marginal

Satisfaction Economists suggest that satisfaction from curr ent

consumption incr eases but at a decr easing rate.

Stated simply, people enjoy their curr ent purchases but as

they purchase mor e and mor e, their satisfaction decr eases. For example, the enjoyment that an individual experiences with the

purchase of their first DVD is gr eater than the enjoyment that the

individual experiences upon the purchase of their 100th DVD.

At a certain income level, this explains why individuals ar e willing to postpone curr ent consumption and save money.

Saving money facilitates the attainment of financial and

nonfinancial goals.



1-8

Important Economic Tr ends

The economic environment aff ects our ability to achieve our financial goals.

Continuing Inflation

Price levels over the long-run tend to incr ease 1±3% annually.

Inflation must be consider ed in financial goals.

Persistent Business Cycles

Instability in the economy cr eates uncertainty that must be consider ed

in financial goals (job stability, emergency r eserves, etc.).

Continued Instability in Financial Mark ets A High and Selectively Rewarding Tax System

The tax system r ewards and punishes certain behaviors. We will

r eview these in gr eater detail in Chapter 4.



1-9

ACHIEVING FINA NCIAL GOALS

TH

R OUGH

PLA NNING Planning is the k ey to achieving all goals especially

financial goals.

Lif e-cycle planning is the phrase that suggests that

financial planning is a lif elong process. People experience diff er ent phases in their lif e such as

car eer development and family formation, r etir ement, etc.

Major financial planning ar eas

The diff er ent phases of lif e impact the importance of the various components of financial planning. At diff er ent phases, diff er ent financial planning ar eas incr ease or decr ease in importance.



1-10

Major Financial Planning Ar eas

Consumption and Savings Planning

De bt Planning

Insurance Planning Investment Planning

Retir ement Planning

Estate Planning Income Tax Planning

Car eer Planning



1-11

Lif e-Cycle Financial Planning(assumes childr en/marriage)

Lif e-Cycle Phases Financial Planning Ar eas

Young adult (18±25) Consumption and savings; car eer

Family formation (26 ±35)C

onsumption and savings;car eer; de bt; insurance; income

taxes

Family development (36 ±49) Investment; r etir ement; income

taxesFamily maturity (50± 60) Investment; r etir ement; estate

Retir ement (60± ?) Estate; income taxes





1-13

MAK ING FINA NCIAL DECISIONS

Decision making is a complex process because ther e ar e usually multiple choices with diff ering attributes.

Ther e ar e two economic conce pts that ar e helpful in financialdecision making.

1 Marginal Analysis²involves the analysis of the changes in important

variables Example: choosing between a public and private university; the public

university costs $15,000 per year wher eas the private university costs$40,000 per year . Does the private university provide benefits thatcompensate for the additional $25,000 ($40,000±$15,000)?

2

OpportunityC

osts²the benefits given up when one alternative ischosen over another

Example: putting money in a savings account rather than investing in the stock mark et. The opportunity cost is the higher r eturn that could potentially be earned in the stock mark et.



1-14

THE BUILDING BLOCK S OF SUCCESS

First, build a supporting foundation. Give time and attention to building a car eer , buying

adequate insurance, buying a house, and building cashr eserves

Then invest in secur e investments.

Long-term savings de posits, government securities, andannuities

Gradually tak e gr eater risks.

High quality stocks and bonds, r eal estate

Avoid very risky investments until you ar e secur e atthe lower levels.

Growth stocks, gold, undeveloped land



1-15

What¶s a Prof essional Financial Planner²

and Do You Need One?

A financial planner is a prof essional who helps clients cr eate, maintain, and execute a financial plan.

The best known cr edentials ar e the CFP.

Whether or not you need to hir e a financial planner de pendson the answers to the following questions:

How much time ar e you willing to spend managing your finances?

How complex is your financial situation?

How much do you know about each of the aspects of financial

planning?

De pending on your answers to the questions stated above, youmay need to hir e a financial planner to assist you with all or part of your financial management.



1-16

Meet the Steele Family

We will follow a family throughout their decision-making process to illustrate the financial planning

process.

They ar e a typical suburban family consisting of Arnold

(h) and Sharon (w) and two childr en²Nancy and John.

They ar e enjoying the ³good lif e´ associated with an

above-average income.

They ar e curr ently doing virtually no financial planning. to educate the childr en

to enjoy r etir ement





1-18

NEXT:

Chapter 2

The Time Value of Money

Documents

Ppt Winger01