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Chapter 1

Financial Planning: The Ties That Bind

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……Money and Marriage…

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What does a penny mean to you?

• What will you have if you double a penny a day for 30 days?

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ONLY………………• $10,737,418.23• (try this yourself: .01 * 100% for

30 periods

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• If a tiny worthless penny can grow to be that much, imagine what 10% to 20% of your salary could grow to be?

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• How ‘bout those acrylic nails?– $80 month * 12 = $960/year– For 30 years = $28,800– That $960 invested each year at 11%

for 30 years = $91,064!!!– Ladies, you are wearing your new

dream car!

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• What about your coffee?• Your recreational liquid

consumption?• Do you smoke?

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Java• $4.50 @ 3 per day = $13.5• Per week = $94.5• Per year = $4,914• Invested per year for 10 years at

11% = $82,171

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Alcohol• Average 45 drinks per month

(college males) @ average $4.5 per drink = $202.50

• Per year $2,430• Invested for 40 years at 11% =

$1,413,837

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Death Sticks• $20.65 Carton (Camels)• 1.5 cartons per week = $30.98• Per year = $1610.70• Invested for 20 years @ 11% =

$103,411.50

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Think about it….• Your habits TODAY determine your

life style for tomorrow.

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Why Should You Develop a Personal

Financial Plan?

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• Achieve your financial goals.• Achieve financial

independence.• Invest intelligently• Minimize your payments to

Uncle Sam• Cover your assets

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Putting Planning In Context

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The Life Cycle of Financial Planning

• Stage 1: The Early Years -- A Time of Wealth Accumulation

• Stage 2: Approaching Retirement -- The Golden Years

• Stage 3: The Retirement Years

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Stage 1: The Early Years -- A Time of

Wealth Accumulation• Develop your savings

plan.• Set your initial goals of

all lengths.• Establish your long-

range investment strategy.

• Through age 54

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Stage 2: Approaching Retirement -- The Golden

Years• Realize

intermediate-term goals

• Re-evaluate the plan to match current goals.

• Plan for retirement.• Age 55-64

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Stage 3: The Retirement Years

• Reduce investment risk• Concentrate on

preservation rather than growth of assets

• Plan for the transfer of your estate

• Ages 65+

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The Personal Financial Planning Process

• Step 1: Evaluate Your Financial Health• Step 2: Define Your Financial Goals• Step 3: Develop a Plan of Action• Step 4: Implement your plan• Step 5: Review Your progress,

Reevaluate, and Revise your plan

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A question…• If there are only 5 steps to

financial planning, then why is it so difficult to manage your finances?

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Step 1: Evaluate Your Financial Health

• Evaluate your current situation: income, spending, wealth

• Assess your whole financial picture (chpt. 2)

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Step 2: Define Your Financial Goals

• Specifically define and write down your financial goals to reflect your financial and life situation.

• Attach a cost to each goal.• Set a date for when the money is

needed to accomplish the goal.

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Goals: The Cornerstone of a Financial Plan

• Goals keep the future in mind by reminding you of the rewards.

• Goals entice you to keep the plan in effect.

• Goals provide tangibility for the question, “Why?”

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What Are the Time Horizons for Financial

Goals?• Short-term goals can be accomplished

within a 1-year period .• Intermediate-term goals take 1-10

years to accomplish.• Long-term goals take more than 10

years to achieve.

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Step 3: Develop a Plan of Action

• What MUST I do to achieve my goals?– Cut expenses?– Increase income?– Start saving?– Start investing?– Career choice?

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Step 3: Develop a Plan of Action

• Flexibility -- The ability for your plan to change as your situations or goals change.

• Liquidity -- Your ability to convert noncash assets into cash with relative ease and speed. (Chp 5)

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Step 3: Develop a Plan (cont’d)

• Protection -- Your ability to meet the unexpected large expenses without destroying your plan. (Chp 9 & 10)

• Minimization of Taxes -- Your ability to pay as little as possible to Uncle Sam. (Chp 4)

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Step 4: Implement Your Plan

• Your plan is your road map• Use common sense and

moderation; don’t force yourself to track every penny;

• Remain positive about your plan; • Stay on track after the detours.

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Step 5: Revise Your Plan

• Review your progress.• Match your plan to your goals.• Be prepared to start over if your

plan no longer meets your needs.

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A 2nd question…• What road blocks or detours might

you encounter while following your financial plan?

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Financial Detours• Many plans change due to

unanticipated events, but generally they change due to financial life cycle pattern changes.

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Education• It may be the

best single investment you will ever make!

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Your Income: What Determines It

• Earnings determine standard of living.

• Education is the key factor in determining income level.

• 70% of wealthy householders finished college.

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Summary: The Personal Financial Planning

Process• Step 1: Evaluate Your Financial Health• Step 2: Define Your Financial Goals• Step 3: Develop a Plan of Action• Step 4: Implement your plan• Step 5: Review Your progress,

Reevaluate, and Revise your plan