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Chapter 1 – What’s Important
• Discuss financial logic exemplified by the 15 principles of finance
• Importance of financial planning
• Setting up a plan
• Role of goals
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Financial Planning
Objectives of planning:
Avoid financial pitfalls to achieve goals
Understand logic behind financial planning
Why plan?
Needed to achieve financial goals
To reach goals, first must set them
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Planning to Achieve Goals
• Managing the unplanned
• Accumulate wealth for special expenses
• Saving for retirement
• Protecting your assets
• Investing intelligently
• Minimize and defer taxes
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Financial Planning Process
On-going- changes as life changes
1. Evaluate current financial situation
2. Define financial goals
3. Develop the action plan
4. Implement it and stick to it
5. Review and reevaluate as needed
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Budget and Planning Process
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Goals
Define
– Be specific
– Write down
– Attach a cost
– Determine time frame – date to accomplish
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Your Income – What Determines
Earnings determine your standard of living
Education is key factor in determining incomeSome correlation with marital status
Unfortunately, there is much, much more …Gender, race/ethnicity and age discrimination
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The Fifteen Principles
1. The risk-return trade-offWe are risk adverse; won’t accept more risk
unless paid for it
2. Time Value of MoneyA dollar received today more valuable than
one in the future
Compound interest – interest on interest
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Risk-Return Tradeoff
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Principles- Continued
3. Diversification reduces risk
Money in several investments, not just one
4. Not all risk is equal
Not all risk can be eliminated
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Reduce Risk by Diversification
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More Principles
5. Financial markets are competitive
Bargains don’t last long
Difficult to “beat the market”
6. Taxes affect decisions
Understand how taxes affect you
Look at alternatives on after-tax basis
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A Few More Principles
7. Things happen – importance of liquidity
8. Nothing happens without a plan
9.Best protection is knowledge
10. Protect against catastrophes
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Principles – Almost Done
11. Time dimension of investing
12. Agency problem – beware of sales pitches
13. Pay yourself first
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At Last, The End
14. Money isn’t everything
15. Just do it!Commitment to make the plan is the most
difficult step
Once you take control, following steps are easier
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Required Web ReadingIdentity Theft
• Read before next class
• Address in schedule