chap 1 pfin

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Understanding the Financial Planning Process

#1

The Rewards of Sound Financial Planning

• Maintain and improve standard of living

• Control spending in order to live well today and tomorrow

• Accumulate wealth

Improving Your Standard of Living

Average American Family

The Personal Financial Planning Process

Systematic process that considers important elements of an individual’s financial affairs in order to fulfill financial goals

Six-Step Financial Planning Process

1. Define financial goals2. Develop financial plans and strategies3. Implement financial plans and strategies4. Develop and implement budgets5. Use financial statements to evaluate results6. Redefine goals, revise plans as situations

change

The Role of Money

• Medium of exchange used to measure value

• Utility amount of satisfaction derived from purchases versus cost

• Link to personal psychological concepts and key role in personal relationships

Attain Your Financial Goals

• Set specific goals and focus on results• Make goals realistic• Involve family members

and others• Prioritize goals and set

a time frame

Put Target Dates on Financial Goals

• Short-term in the next year

• Intermediate-term the next 2-5 years

• Long-term 6 years or more

From Goals to Plans:A Lifetime of Planning

• Early childhood• High school and college• Family formation• Career development• Pre-retirement• Retirement

Personal Financial Planning Life Cycle

How a $1,000 Investment Grows over Time

Plans to Achieve Your Financial Goals

• Asset acquisition planning

• Liability and insurance planning

• Savings and investment planning

• Employee benefits planning

• Tax planning• Retirement and estate planning

Using Professional Financial Planners

Types of planners • Commission-based – earn commission

on financial products sold• Fee-only – charge fees based on

complexity of the plan

The Planning Environment

Financial planning takes place in a dynamic economic environment created by the actions of

Government Business Consumers

Financial Planning Environment

Government

• Federal government plays a major role in regulating the level of economic activity

• Taxation and regulation constrain personal financial planning

The Economy

Monetary Policy• Controls money

supply• Used to stimulate or

contract economic growth

Fiscal Policy• Controls levels of

taxation• Sets levels of

government spending

The Economy

Economic Cycles• Stages related to

employment and production levels

• Growth measured by changes in GDP

Inflation• Measured by changes

in CPI• Affects purchasing

power and interest rates

• Affects financial plans and goals

The Economic Cycle

What Determines Your Personal Income?

• Demographics and income– Age, marital status

• Education

• Where you live

• Career