CHAPTER 1:

UNDERSTANDING THE FINANCIAL PLANNING PROCESS

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The Rewards of Sound Financial PlanningMaintain and improve standard of living.

Control spending in order to live well today and tomorrow!

Accumulate wealth.

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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 needsTotal income

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The Personal Financial Planning ProcessTaking conscientious and systematic steps toward fulfilling your financial goals.

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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.

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1. Define financial goals2. Develop plans

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3. Implement plans4. Develop budgets1. Define financial goals2. Develop plans FINANCIAL ACTIONSBasic asset decisionsCredit decisionsInsurance decisionsInvestment decisionsRetirement and estate decisions

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3. Implement plans4. Develop budgets1. Define financial goals2. Develop plans 5. Evaluate results6. Revise plansFINANCIAL ACTIONSBasic asset decisionsCredit decisionsInsurance decisionsInvestment decisionsRetirement and estate decisionsPrepare financial statements

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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.

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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.

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Putting target dates on financial goals:Short-term goalsto be accomplished within the next year.

Intermediate-term goalsto be accomplished in the next 2-5 years.

Long-term goalsto be accomplished in time periods greater than 5 years.

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From Goals to Plans:A Lifetime of PlanningEarly childhoodHigh school and collegeFamily formationCareer developmentPre-retirementRetirement

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AgeIncome10 20 30 40 50 60 70 80Income StreamPersonal Financial Planning LifecycleRetirement/EstateTaxSavings/InvestmentAsset AcquisitionLiability/InsuranceBenefits

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Benefit of planning:

Your money works more efficiently for you by...

Utilizing the financial wonder

The power of compounding through time!

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Growth of $1,000 at 8 % interest:Years

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Growth of $1000 at 10% interest:Years21,72545,259

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Use the personal computer to:Prepare financial statements

Plan retirement

Prepare and file tax returns

Track investments

Analyze needs

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The Planning EnvironmentFinancial planning is carried out in an economic environment created by the interactions of

GovernmentBusinessConsumers

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Land, labor, and financial capitalGoods and services

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BUSINESSGOVERNMENTCONSUMERSMoney payments of wages, rentsinterest, and profitMoney payments for goodsand servicesLand, labor, and financial capitalGoods and servicesPublic goods &services, regulations,and revenuesTaxes

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Government policy decisions are used to regulate the economy in an effort to:Provide economic stabilityMaintain acceptable employment levels

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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

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Policies seek to control:Economic Cycles

Stages related to employment and production levelsGrowth measured by changes in GDP

Inflation

Measured by changes in CPIAffects purchasing power and interest ratesAffects financial plans and goals

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Economic CyclesExpansionRecessionDepressionRecoveryHIGHLOWLevels of Employment and Production

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What Determines Your Personal Income?Age, marital statusEducationWhere you liveCareer choice

THE END!

Chapter 1Chapter 1Chapter 1Chapter 1Chapter 1