INTRODUCTION TO PERSONAL FINANCIAL PLANNING PERSONAL FINANCE PLANNING * the process of planning your spending, financing, and investing to optimize your financial situation + helps individuals achieve financial independence. + not a “one-size-fits-all package. It is a set of goals and strategies tailored to meet your specific values, abilities, and needs. * “a process where you stop working for every peso and learn to start putting your money to work for you"(rfp.ph) WHY STUDY PERSONAL FINANCE? + Many people study personal finance to achieve financial success. + Financial success may not have the same meaning to everyone. + To some, success means accumulating money. + To others, it's making the most of why we have. + Financial success is defined as obtaining the maximum benefits from limited financial resources. BENEFITS OF UNDERSTANDING PERSONAL FINANCE + Make your own financial decisions + Judge the advice of other people + Make a career out of it GOALS IN LIFE OF AN INDIVIDUAL + Nonfinancial goals Family, moral, educational, religious, socal, or poncst — Finances con affect your ability to attain these goals, + Financial goals — Financial independence is an important goal for man Finan ree feing enough come-or resources, fobe settreliont = Gne major financial choice is between consumption fouay versus consumption in the future. ~ Researchers find that most people, regardless of their Income level, feel they need 20% more weaith than they currently have LIFE CYCLE PLANNING + Planning is the key to achieving financial goals. * Life-cycle planning suggests that financial planning is a lifelong process. = People experience different phases in their life such ‘as young adult, family formation, retirement, et. * Major financial planning areas = The different phases of life impact the importance of different financial planning areas as they increase or decrease in importance.The Building Blocks of Success + First, build a supporting foundation. ~ Give time and attention to building a cazeer, buying adequate insurance, buying a house, and building cash + Then invest in secure investments. = Long-term savings deposits, government secutities, snnuities, and retirement plans + Gradually take greater risks. — High quality stocks and bonds, real estate investments until you are secure at = Growth stocks, gold, undeveloped land FINANCIAL PYRAMID The Building Blocks of Success = — Beye ‘Wealth, T co a Distribution | a Wealth, ‘Accumulation a IMPORTANT ECONOMIC CONCEPTS IN MAKING FINANCIAL DECISIONS Thre are we econo coneeps tha ar hele fand deiion ne orginal Anlyte—an analy ofthe changes in important varibles so ga arta SR i mieetniin coves rsa Euan aa * Sporn cons—benets ven up when ne erate chosen owt ovate Example: putting money na savings account rater than investngin a se ‘mutual fiona The opportunity costs the Nghe etun tha oul potently Seearnedin the metual fundPERSONAL FINANCIAL PLAN Budget and Tax Planning + aplan that specifies your financial goals and describes the spending, financing, and investing plans that are intended to achieve those goals COMPONENTS OF A FINANCIAL PLAN A Plan to Manage Your Liquidity «« 1 + Budgeting and tax planning + Liquidity: access to funds to cover any * Managing your liquidity short-term cash deficiencies + Financing your large purchases + Money management: decisions regarding how + Protecting your assets and income (insurance) much money to retain in a liquid form and how to allocate the funds among short-term investment instruments + Investing your money + Planning your retirement and estate A Plan for Your Budgeting and Tax A Plan to Manage Your Liquidity 20 2» Planning + Budget planning: The process of forecasting + Credit management: decisions regarding how future expenses and savings much credit to obtain to support your = Evaluate your current nancial position spending and which sources of credit to use + Assets: what you own + Net worth: the value of what you own minus the value of what; qari ‘Plan for Protecting Your Assets and Managing Your Liquidity inearne) + Insurance planning: Determining the types and amount of insurance needed to protect your assets SUnem es + Automobile and homeowner's insurance protect assets + Health insurance limits potential medical expenses + Disability and life insurance protect your income A Plan for Your Financing A Plan for Your Investing + Loans often needed for large + Any funds beyond what you need to maintain expenditures liquidity should be invested — College tuition, car, house + Primary objective to earn a high return + Potential investments include stocks, bonds, — Managing loans ‘mutual funds and realestate + How much can you afford to borrow? * Risk: uncertainty surrounding the potential return + Determining maturity of the loan on an investment «Selecting a loan with a competitive interest + Manage investments to keep risk at a tolerable rate level Financing Your Large Purchases A Plan for Your Retirement and Estate + This includes insurance planning, retirement ernie Bionnlnecand-essatz Rater + Retirement planning: determining how much money should be set aside each year for retirement and how you should invest those funds + Estate planning: determining how your wealth will be distributed before or upon your deathBuilding Your Own Financial Plan + Enhances your net worth * Builds your wealth + All components of your financial plan affect your cash inflows and outflows and how much cash you have available How Financial Plan Decisions Affect Your Cash Flows jor + How the components relate to your cash flows = Cash inflows are cash that you receive — Cash outflows are cash that you spend — Budgeting balances income and spending — Liquidity deals with cash excesses or shortages How Financial Plan Decisions Affect Your Cash Flows aor + Part 1-Tools for Financial Planning College tuition, car, house — Budgeting allows you to plan how you will use the cash you receive in a given period + How much should you work this menth (if your employer allows flexibility)? = Budget decisions determine how much you spend and the amount of your cash outflows each month + What products or services should you purchase this manth? How Financial Plan Decisions Affect Your Cash Flows ots) = it i] i [rereremy su cemecsnsciiaate i TatsOl| How Financial Plan Decisions Affect Your Cash Flows «ora + Part 2— Managing Your Liquidity = If you have excess cash this month, how much cash should you add to your checking or saving account? = If you have a cash deficiency this month, how ‘much cash should you withdraw from your checking or savings account? = Ifyou have a cash deficiency this month, how much credit should you use from credit cards or other sources? How Financial Plan Decisions Affect Your Cash Flows (sf281How Financial Plan Decisions Affect Your Cash How Financial Plan Decisions Affect Flows (oor) Your Cash Flows jor) Port 3 ~ Personal Financing ast .0Ws ROM PROTECTING YOUR ASSET AN INCOME + Part 3 - Personal Fin: = should you lease a car? _ — Should you borrow money to purchase a car? — Should you borrow money to purchase @ home? — How much cash will you need to borrow? ~ How long a period will you need to borrow funds? — What is the ideal source from which you will borrow funds? 3 2 How Financial Plan Decisions Affect Your Cash How Financial Plan Decisions Affect Hows ess Your Cash FIOws «ors » Part 5 — Personal Investing — How much cash should be used to make investments? — What types of investments should you make? i — How much risk should you tolerate when making, | investments? il How Financial Plan Decisions Affect How Financial Plan Decisions Affect Your Cash Your Cash Flows wor) Flows iors) cas FLOWS om ESTING + Part 4— Protecting Your Wealth — What types of insurance do you need? — How much insurance should you purchase to 2 protect your assets? — How much insurance should you purchase to protect your income?How Financial Plan Decisions Affect Your Cash FIOwS «ze + Part 6 - Retirement and Estate Planning — How much cash should you invest toward your retirement each month? — What types of investments should you make for your retirement accounts? How Financial Plan Decisions Affect Your Cash Flows 113023) ‘casi FLows ROM RETIREMENT AND ESTATE PLANING Ea =e Summary of Financial Plan Components io * Notice how the financial plan components are integrated + Each component can be a source of cash or a use of cash Summary of Financial Plan Components i + Summary of sources of cash from each component — Attempt to work more hours (Part 1) = Withdraw cash from savings (Part 2) = obtain a loan (Part 3) = Cash in an insurance policy (Part 4) = Sell some of your investments (Part 5) — Withdraw funds from your retirement account (Part 6) Summary of Financial Plan Components pers: + Summary of uses of cash — Purchase products and services (Part 1) — Deposit cash in your checking or savings account (Part 2) — Pay interest payments on a loan or pay off @ loan (Part 3) — Make insurance payments (Part 4) = Make new investments (Part 5) — Contribute toward your retirement account (Part 6) How Financial Planning Relates to Cash FlowIntegration of the Financial Plan Components jor + Budgeting decisions affect liquidity management decisions + Liquidity management decisions can affect your financing decisions + Financing decisions can affect your insurance decisions + Insurance decisions can affect your investment decisions Integration of the Financial Plan Components iis « Investment decisions can affect your retirement planning decisions + Retirement planning decisions can affect your budgeting decisions How Psychology Affects Your Financial Plan ors + Psychology has a major impact on human behavior and decision making + Psychology has a major impact on spending behavior and ability to implement an effective financial plan * Consider two behavior — Focus on immediate satisfaction and peer pressure ~ Focus on the future jerent types of spending How Psychology Affects Your Financial Plan wor * Assess your own spending behavior Do you pay rent for a single apartment rather than share an apartment? = Do you have large monthly car payments? = Do you have credit card bills that you only make the minimum monthly payment toward each month? How Psychology Affects Your Financial Plan eas) — Do you spend all of your income that is not needed for rent or car loans payments within the first day or ‘two of receiving your paycheck? — Do you always find a reason each month to spend all of your income? Developing the Financial Plan iors) + Step 1. Establish Your — Types of financial goals + Car, home, college, wealth, charity = Set realistic goals + Stronger likethood of reaching goals = Timing of goals + Shor term (within one year) + Intermediate between 1-5 years) + Long term (beyond five years) ancial GoalsDeveloping the Financial Plan ors) + Step 2. Consider Your Current Financial Position — How your future financial position is tied to your education + Consider your skil, interests, and career paths — How your future financial position is tied to your career choice * Choose a career that will be enjoyable and suit your skils Developing the Financial Plan jors) = How your future financial position is tied to the ‘economy + Economic conditions affect types of jobs evalable, salaries offered, price of services, value of assets + Financial crisis of 2008-2008 affected financial psitions in ‘many ways = Reduction n new job opportunities = Elmination of somejobs Lower sans frenting obs = Value of may assets decned Developing the Financial Plan tors: Developing the Financial Plan ors) Developing the Financial Plan crs, — (nuh nee RED Fent Amen aero, a ‘as SSS ee = => ee —— a ir Developing the Financial Plan wensDeveloping the Financial Plan eos: + Step 3. Identify and Evaluate Alternative Plans That Could Achieve Your Goals — Plans could be conservative or aggressive + Step 4. Select and Implement the Best Plan for Achieving Your Goals — The Internet has valuable financial planning information Using the Internet to Facilitate Financial Planning ao + Provides updated information on all parts of your financial plan = Current tax rates and regul ions = Investment performances — New retirement plan rules Using the Internet to Facilitate Financial Planning wo * Online calculators ~ Estimating taxes — Determining how your savings will grow over time = Determining whether buying or leasing a car is more appropriate Developing the Financial Plan worss) + Focus on Ethi Personal Financial Advice ~ Your objective is to get the best advice appropriate toyourneeds — Be wary of unethical behavior = Difficult to eiscern — Be wary of incompetent advice + Be alert, ask questions, carefully consider advice Developing the Financial Plan oors, + Step 5. Evaluate Your Financial Plan — Keep plan in an accessible place and monitor your progress * Step 6. Revise Your Financial Plan = Change plan as financial condition and financial goals changeStep 1. Financial Goals: 1 would like to: boa new ae within year, bay some within swo eas. Trake investments thot wl allow my weath to grow overtime, and tid lrge amount of savings for etireent in 20040 yes Step 2. Current Financial Position: have very i savings at this time and own an old ar My income, whieh bout $300 yor ater txes, should increase overtime. Developing the Financial Plan issor15) Step 3. Plans to Achieve the Goals: Since my caren fnancl poston doesnt provide me with sufi andt ‘eSSce these Sranc goals | need to develop 2 nancl lan for ‘hztng nae gout wot te save enough money o make» downpayment weineche ano teme and to cbt fiancng to cover the rest f Ce cost. Tt Stan atos me acne some of ny come tar west pay tnarcing ecsions wil determine the type oar and home hat wl settee the moun of fonds wt have leo make ter meses Stat! con ula my wea overtime Developing the Financial Plan srs) Step 4. Selecting and Implementing the Best Plan: Fancng the purchase of car and shoe sa more approrat ln for fru reper budget so fat vere an acura saves that wile useato mate a down payment on anew ct Ten wi atemot 0 Sceurne svg: to mae down payment ona ew hme. ness ake ‘Gre tht lean after firancing payment on ay money Wt Boro. Step 5. Evaluating the Plan: ‘Once establish» budget, wll montorit ove te ro deterrine whether Sm achieving the desrad amount of savrgs each mont. Step 6. Revising the Plan: vt eannotsove a much money 251 dese, may have to day my plans or iors ar and home unl can accumulate enough funds to make the aoe am alto exceed ny ngs oa maybe 3.2 so tne and te home scorer than had olgalyexpecte. References + Madura, Personal Finance * Frasca, Personal Finance: An Integrated Planning Approach + rfp.ph