Managing YourManaging YourPersonal FinancesPersonal Finances

Managing YourManaging YourPersonal FinancesPersonal Finances

Chapter 23

Chapter 23 Learning GoalsChapter 23 Learning Goals

1.1. WWhat is the personal financial planning process, and how does it facilitate successful financial management?

2.2. HHow can cash flow planning and management of liquid assets help you meet your financial goals?

3.3. WWhat are the advantages and disadvantages of using consumer credit?

4.4. WWhat are the major types of taxes paid by individuals?

Chapter 23 Learning GoalsChapter 23 Learning Goals (cont’d.) (cont’d.)

5.5. WWhat is the most important principle in deciding what types of insurance to purchase?

6.6. WWhat personal characteristics are important when making investment decisions?

7.7. WWhat are the emerging trends in personal financial planning?

8.8. WWhat is risk, and how can it be managed? What makes a risk insurable?

9.9. WWhat types of insurance coverage should businesses consider?

Learning Goal 1Learning Goal 1

• WWhat is the personal financial planning process, and how does it facilitate successful financial management?

– Six steps of financial planningSix steps of financial planning1.1. EEstablishing financial goals2.2. GGathering financial and non-financial information3.3. AAnalyzing the information4.4. DDeveloping a financial plan5.5. IImplementing the plan6.6. MMonitoring the plan

1. Establish financial goals

2. Gather information

3. Analyze the information

4. Develop a plan

5. Implement the plan

6. Monitor the plan

Financial Planning ProcessFinancial Planning Process

Learning Goal 2Learning Goal 2

• HHow can cash flow planning and management of liquid assets help you meet your financial goals?– Cash flow plan

• Plan for managing income and expenses• Based on financial goals, including saving for those goals• Money is set aside to pay for the goals

– Liquid assets• Checking and savings-type accounts are important for:

– Day-to-day spending– Meeting short-term goals– Unexpected expenditures

• Can be held in safe, convenient accounts so money is readily available when needed

Cash Flow ManagementCash Flow Management

• Establish goals & calculate how much to save to meet them

• Estimate income & expenses• Track actual income & expenses for

1 month• Compare planned & actual• Modify estimates & repeat

Income Statement: Tennis PlayerIncome Statement: Tennis PlayerRevenueRevenuePrize money $105,858$105,858ExpensesExpensesHotel, air, other travel $45,679Meals & entertainment 17,650Telephone 487Business expenses & dues 1,656Tennis equipment 4,379Computer 2,383Foreign taxes paid 10,826

$83,060$83,060Earnings before taxesEarnings before taxes $22,492$22,492TaxesTaxes $19,654$19,654Earning after taxesEarning after taxes $2,838$2,838

Source: Fortune, Sept. 28, 1998, p. 58.

Learning Goal 3Learning Goal 3

• WWhat are the advantages and disadvantages of using consumer credit?– Advantages of consumer credit

• Convenience• Purchasing an item sooner• Taking advantage of bargains• Better service• Establishing a credit rating• Convenient record keeping• Meeting a financial emergency

– Disadvantages of consumer credit• Ease of overspending• Cost of credit (interest charges)• Possibility that merchandise may cost more• Reduction in future discretionary income due to legal commitment to repay

debt

Using Consumer CreditUsing Consumer Credit

Pros:Pros:• convenient

• immediate purchase

• establish credit rating

• provides record keeping

• emergencies

• perks like rebates & frequent flyer miles

Cons:Cons:• overspending

• interest charges

• may pay more

• reduced discretionary income

Using Consumer CreditUsing Consumer Credit

• Credit cards– open-end, line of credit, revolving– grace periods

• Loans• Credit history & credit ratings• Europeans rely on personal credit less than

Americans– Continental Europe has $6 billion$6 billion in outstanding

credit card debt, compared with $240 billion$240 billion in the US (Source: Fortune, Sept. 28, 1998, p. 190)

Learning Goal 4Learning Goal 4

• WWhat are the major types of taxes paid by individuals?– Income taxes

• Payroll taxes based on income and deducted from paycheck

– Social Security taxes• Payroll taxes based on income and deducted from

paycheck– Sales tax

• Assessed on purchases made

– Property taxes• Based on the value of property owned, usually real estate

Managing TaxesManaging Taxes

• Income taxes

• Social security & Medicare taxes

• Other taxes– sales

– property

Learning Goal 5Learning Goal 5

• WWhat is the most important principle in deciding what types of insurance to purchase?– Budget for problems that represent a small

financial loss– Set aside money in savings to pay for loss

when it happens– Buy good insurances policies to cover major

losses• Those that would cause large financial loss if they

occurred

Selecting InsuranceSelecting Insurance

• Property & liability insurance– automobile insurance– homeowner’s/renter’s insurance

• Health insurance– major medical– managed care– Health maintenance organizations (HMOs)

• Disability income insurance• Life insurance

Learning Goal 6Learning Goal 6

• WWhat personal characteristics are important when making investment decisions?– Decisions should be based on your goals

and risk tolerance– Examples of investment goals:

• Desire for income from interest and dividends• Need for growth (capital gains)• Need for safety

Making Investment DecisionsMaking Investment Decisions

• Setting goals

• Developing strategy– start early

– diversify

– invest regularly

Personal Investment OptionsPersonal Investment Options• Dividend reinvestment plans (DRIPs):Dividend reinvestment plans (DRIPs): permit small

investors to invest in individual shares inexpensively & easily– only some companies offer DRIPs

• Netstock Direct & Buyandhold.com offer an alternate way to invest small amounts– low monthly minimum contributions ($10 or $20) &

minimal transaction fees– you can buy partial shares of expensive stocks– most company’s stocks are available

Source: The Star Ledger, Dec. 19, 1999, Section 3, p. 3.

Investment Risk PyramidInvestment Risk Pyramid

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High-grade municipal bonds

Balanced mutual funds

Growth stocks, funds

Junk bonds

Treasury bills, bonds, notes

Futures, commodities

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Learning Goal 7Learning Goal 7

• WWhat are the emerging trends in personal financial planning?– More employee responsibility for the choices

made in employer fringe benefit plans• Cafeteria benefit plans are being offered in the

insurance area• Self-directed retirement plans are being offered• Emphasizes the importance of all individuals to

understand their financial needs and the best ways to achieve them

Trends in Personal FinanceTrends in Personal Finance

Cafeteria-type benefit plans more responsibility on employees

more choice for employees

Self-directed retirement accounts 401(k), SIMPLE, mutual funds

Retirement ChoicesRetirement Choices Self-directed retirement accounts

Frequency of Employee Benefits in 1999

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Source: Bryan, Pendleton, Swats & McAllister survey in The Arizona Republic, Jan. 2, 2000, pg. D3.

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Learning Goal 8Learning Goal 8

• WWhat is risk, and how can it be managed? What makes a risk insurable?– Risk is the chance for financial loss due to a peril

• Many risks can be covered by insurance

• Pays insured up to a specified amount in the event of loss from a particular peril

– Risk can be managed by • Avoiding situations known to be risky

• Assuming the responsibility for losses due to certain types of risk

• Adopting safety measures

– Risk is insurable when it meets certain criteria

Learning Goal 9Learning Goal 9• WWhat types of insurance coverage should businesses

consider?– Property insurance

• Covers losses arising from damage to property owned by the insured person or business

– Liability insurance• Covers losses due to injuries to others or their property determined

to be caused by the insured

– Other important business coverages:• Business interruption• Automobile and theft• Fidelity and surety bonds• Personal, professional, and product liability• Companies must be knowledgeable about health and life insurance

packages offered to employees as fringe benefits