Personal Financial Planning
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Transcript of Personal Financial Planning
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PERSONAL FINANCIALPLANNING
When Should You Start?
M. PiczakJanuary 2006
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WHY A PERSONAL FINANCIAL PLAN?
• As an employer, no one else does it for you
• Need retirement income• Help choose your priorities
between home, vehicles, vacation property, children’s education, travel, early retirement
• Pay less income tax
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THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN1. Evaluate your personal,
current financial situationi. Estimate current net worthii. Estimate income from all
sourcesiii. List all recurring expenses
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2. Choose financial goals.i. Time frames are
importantii. Separate wants from
needs
THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN
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3. Develop saving/investment strategy
i. For desired retirement incomeii. For goals between now &
retirementiii. Make assumptions regarding
income and expenditures over future years
iv. Identify alternative “action plans” (contingency planning)
THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN
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4. Evaluate alternative action plans considering:
i. Economic & employment factorsii. Risk factors – financial & otheriii. Opportunity costsiv. Lifestyle choicesv. Your valuesvi. Family situation
THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN
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5. Develop your plan by:i. Choosing from alternativesii. Using professional adviceiii. Remember the family life
cycleiv. Ensure you have a wise
budgetv. Remember tax
considerations
THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN
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6. Implement by:i. Evaluating periodicallyii. Changing your plans as
needs changeiii. Changing as external
factors changeiv. Focus on goals
THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN
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WEALTH CREATION IN OUR CAPITALISTIC SOCIETY
• Creation of wealth is encouraged so that individuals take care of themselves rather than by the state
• System is designed to “control” the rate of wealth creation to promote stability and induce hard work and risk taking
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WHAT YOU CAN DO WITH YOUR $
• 4 options exist:– Spend it – it’s gone forever– Give it away – you feel better but
it’s also gone for good– Bury it – you’ve outsmarted the tax
man but lowered your worth because of inflation
– Invest it – participating in the power of the time value of money (interest and capital appreciation)
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THE TIME VALUE OF MONEY• Money grows according to the force of
interest• Future Value = P(1 + i)n
• Interest is paid on interest resulting in a power function
• Consider that $1,000 invested annually into an RRSP accumulating beyond the reach of CCRA will grow to $1.5 million depending on the interest rate used
• Remember, that it will be taxable when drawn out at retirement although at a lower rate of tax
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GETTING TO $1,000,000
• Contrary to easy jokes, $1 million is still some serious money
• How much money must be invested to get to the magic $1 million?
• The answer is:_________________
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DEPENDS…
• Depends on:A. Investment return assumptionsB. Amount contributed C. Time involved
• Consider the following piece: Future Value Calculations: Getting to $1,000,000
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INCOME SOURCES
• Salaries• Employment insurance benefits• Self employed income• Business income• Rental income• Pension income• Interest and investment earnings• Inheritances• Unexpected windfalls
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ITEMIZE YOUR EXPENSES
• Food• Shelter• Car• Children• Medical care• Meals outside the home• Entertainment• Travel• Beer
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WHEN TO START?
NOW!
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EASY INVESTMENT OPTIONS• Starting an RRSP and making regular
contributions• Do what Esther Pauls did…get off your
lease, purchase the building reducing your present costs and owning the building after 7 years
• Starting up a mutual fund of your own• “Play” with stocks on e-trader sites
limiting yourself to a particular sum• Buy a house (appreciates tax free for
your principal residence)• Do “forced” savings using CSBs and
then investing it at the end of the year in some other investment instrument
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DEVELOP MULTIPLE INCOME STREAMS
• Rent• Residual income streams• Having several activities that
generate income simultaneously
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CONTROLLING YOUR SPENDING• Budget and stick to it• Learn to say no• Don’t have too many credit cards• Use a line of credit• Stop impulse buying• “do you really need it?”• Don’t go shopping• Control dining out• Don’t carry cash• Pay down debt ASAP so you can
do other things
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CUT DOWN AND SAVE BIG OVER A LIFETIME
• How much money is generated by cutting down on:– Taking own lunch 3 days/week
= $95,000
– Buying bottled water $3/dozen bottles rather than at convenience store at $1/bottle
= $57,000
– Park car, take bus= $110,000
=SUM TOTAL > $260,000(See Spec article Jan. 27, 2006)
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THAT’S ALL THERE IS TO IT…• Decide what you want• Look at where you are now• Establish your priorities• Cut down your spending• Make the investment/saving
commitment• Go relax in the sun
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THE ANSWER TO OUR SKILL TESTING QUESTION: WHEN SHOULD YOU START?
START NOW WHEN YOU ARE YOUNG TO PUT TIME ON YOURSIDE
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PERSONAL FINANCIALPLANNING
M. PiczakJanuary 2006
THE END