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Chapter 1 – What’s Important

• Discuss financial logic exemplified by the 15 principles of finance

• Importance of financial planning

• Setting up a plan

• Role of goals

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Financial Planning

Objectives of planning:

Avoid financial pitfalls to achieve goals

Understand logic behind financial planning

Why plan?

Needed to achieve financial goals

To reach goals, first must set them

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Planning to Achieve Goals

• Managing the unplanned

• Accumulate wealth for special expenses

• Saving for retirement

• Protecting your assets

• Investing intelligently

• Minimize and defer taxes

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Financial Planning Process

On-going- changes as life changes

1. Evaluate current financial situation

2. Define financial goals

3. Develop the action plan

4. Implement it and stick to it

5. Review and reevaluate as needed

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Budget and Planning Process

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Goals

Define

– Be specific

– Write down

– Attach a cost

– Determine time frame – date to accomplish

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Your Income – What Determines

Earnings determine your standard of living

Education is key factor in determining incomeSome correlation with marital status

Unfortunately, there is much, much more …Gender, race/ethnicity and age discrimination

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The Fifteen Principles

1. The risk-return trade-offWe are risk adverse; won’t accept more risk

unless paid for it

2. Time Value of MoneyA dollar received today more valuable than

one in the future

Compound interest – interest on interest

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Risk-Return Tradeoff

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Principles- Continued

3. Diversification reduces risk

Money in several investments, not just one

4. Not all risk is equal

Not all risk can be eliminated

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Reduce Risk by Diversification

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More Principles

5. Financial markets are competitive

Bargains don’t last long

Difficult to “beat the market”

6. Taxes affect decisions

Understand how taxes affect you

Look at alternatives on after-tax basis

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A Few More Principles

7. Things happen – importance of liquidity

8. Nothing happens without a plan

9.Best protection is knowledge

10. Protect against catastrophes

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Principles – Almost Done

11. Time dimension of investing

12. Agency problem – beware of sales pitches

13. Pay yourself first

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At Last, The End

14. Money isn’t everything

15. Just do it!Commitment to make the plan is the most

difficult step

Once you take control, following steps are easier

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Required Web ReadingIdentity Theft

• Read before next class

• Address in schedule