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Copyright 2002 by Harcourt, Inc. All rights reserved. Clip Art 2001 Microsoft Corporation. All rights reserved.Requests for permission to make copies of any part of the work should be mailed to:
Permission Department, Harcourt Brace & Company, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.
CHAPTER 1:
UNDERSTANDING THE FINANCIAL PLANNING
PROCESS
1-2
Copyright 2002 by Harcourt, Inc. All rights reserved.
The Rewards of Sound Financial Planning
Maintain and improve standard of living.
Control spending in order to live well today and tomorrow!
Accumulate wealth.
1-3
Copyright 2002 by Harcourt, Inc. All rights reserved.
Average Propensity to Consume:
The percentage of each dollar of income that is spent, on average,
for current needs rather than saved.
What is your average propensity to consume?
Income spent on current needs
Total income
1-4
Copyright 2002 by Harcourt, Inc. All rights reserved.
The Personal Financial Planning Process
Taking conscientious and systematic steps toward fulfilling your financial goals
1-5
Copyright 2002 by Harcourt, Inc. All rights reserved.
Steps in the Financial Planning Process:
1. Define financial goals.
2. Develop financial plans and strategies to achieve goals.
3. Implement financial plans and strategies.
4. Develop budgets to monitor and control progress toward goals.
5. Evaluate results by using financial statements.
6. Revise goals as situations change.
1-6
Copyright 2002 by Harcourt, Inc. All rights reserved.
1. Define financial goals
2. Develop plans
1-7
Copyright 2002 by Harcourt, Inc. All rights reserved.
3. Implement plans
4. Develop budgets
1. Define financial goals
2. Develop plans
FINANCIAL ACTIONS•Asset decisions•Credit decisions•Insurance decisions•Investment decisions•Retirement and estate decisions
1-8
Copyright 2002 by Harcourt, Inc. All rights reserved.
3. Implement plans
4. Develop budgets
1. Define financial goals
2. Develop plans
5. Evaluate results
6. Revise plans
FINANCIAL ACTIONS•Asset decisions•Credit decisions•Insurance decisions•Investment decisions•Retirement and estate decisions
Prepare financial statements
Clip Art 2001 Microsoft Corporation. All rights reserved.
1-9
Copyright 2002 by Harcourt, Inc. All rights reserved.
Money: Used as a medium of exchange. Financial goals are stated in dollar
amounts. Need to consider utility, or amount
of satisfaction derived from purchases, as well as cost.
May be closely linked to personal psychological concepts.
May play key role in personal relationships.
Clip Art 2001 Microsoft Corporation. All rights reserved.
1-10
Copyright 2002 by Harcourt, Inc. All rights reserved.
To attain your financial goals:
Be specific in defining goals and focus on results.
Make goals realistically attainable. Involve family members and enlist their
cooperation. Prioritize goals and set a definite time
frame.
1-11
Copyright 2002 by Harcourt, Inc. All rights reserved.
Putting target dates on financial goals:
Short-term goals—to be accomplished within the next year.
Intermediate-term goals—to be accomplished in the next 2-5 years.
Long-term goals—to be accomplished in time periods greater than 5 years.
Clip Art 2001 Microsoft Corporation. All rights reserved.
1-12
Copyright 2002 by Harcourt, Inc. All rights reserved.
From Goals to Plans:A Lifetime of Planning
Early childhood High school and college Family formation Career development Pre-retirement Retirement
1-13
Copyright 2002 by Harcourt, Inc. All rights reserved.
Age
Income
10 20 30 40 50 60 70 80
Income Stream
Personal Financial Planning Lifecycle
Retirement/Estate
Tax
Savings/Investment
Asset Acquisition
Liability/Insurance
Benefits
1-14
Copyright 2002 by Harcourt, Inc. All rights reserved.
Benefit of planning:
Your money works more efficiently for you by...
Utilizing the financial wonder—
The power of compounding through time!
1-15
Copyright 2002 by Harcourt, Inc. All rights reserved.
Growth of $1,000 at 8 % interest:
21,725
10,063
4,6612,159
$0
$10,000
$20,000
$30,000
$40,000
$50,000
0 10 20 30 40Years
1-16
Copyright 2002 by Harcourt, Inc. All rights reserved.
Growth of $1000 at 10% interest:
17,449
6,7272,594
$0
$10,000
$20,000
$30,000
$40,000
$50,000
0 10 20 30 40Years
21,725
45,259
1-17
Copyright 2002 by Harcourt, Inc. All rights reserved.
Use the personal computer to:
Prepare financial statements
Plan retirement
Prepare and file tax returns
Track investments
Analyze needs
Clip Art 2001 Microsoft Corporation. All rights reserved.
1-18
Copyright 2002 by Harcourt, Inc. All rights reserved.
The Planning Environment
Financial planning is carried out in an economic environment created by the interactions of
Government Business Consumers
1-19
Copyright 2002 by Harcourt, Inc. All rights reserved.
BUSINESS GOVERNMENT CONSUMERS
Money payments of wages, rentsinterest, and profit
Money payments for goodsand services
1-20
Copyright 2002 by Harcourt, Inc. All rights reserved.
BUSINESS GOVERNMENT CONSUMERS
Money payments of wages, rentsinterest, and profit
Money payments for goodsand services
Land, labor, and financial capital
Goods and services
1-21
Copyright 2002 by Harcourt, Inc. All rights reserved.
BUSINESS GOVERNMENT CONSUMERS
Money payments of wages, rentsinterest, and profit
Money payments for goodsand services
Land, labor, and financial capital
Goods and services
Public goods &services, regulations,
and revenues
Taxes
1-22
Copyright 2002 by Harcourt, Inc. All rights reserved.
Government policy decisions are used to regulate the economy in an effort to:
Provide economic stability Maintain acceptable employment
levels
Clip Art 2001 Microsoft Corporation. All rights reserved.
1-23
Copyright 2002 by Harcourt, Inc. All rights reserved.
Policies seek to control: Economic Cycles
– Stages related to employment and production levels
– Growth measured by changes in GDP
Inflation– Measured by changes in CPI– Affects purchasing power and interest
rates– Affects financial plans and goals
1-24
Copyright 2002 by Harcourt, Inc. All rights reserved.
Controls money supply
Used to stimulate or contract economic growth
Fiscal Policy Controls levels of taxation
Sets levels of government spending on various programs
Monetary Policy
1-25
Copyright 2002 by Harcourt, Inc. All rights reserved.
Economic Cycles
Expansion Recession Depression Recovery
HIGH
LOW
Levels of Employment and Production
1-26
Copyright 2002 by Harcourt, Inc. All rights reserved.
What Determines Your Personal Income?
Age, marital status Education Where you live Career choice
Copyright 2002 by Harcourt, Inc. All rights reserved. Clip Art 2001 Microsoft Corporation. All rights reserved.Requests for permission to make copies of any part of the work should be mailed to:
Permission Department, Harcourt Brace & Company, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.
THE END!