Elements of Financial Planning

Why is Personal Financial

Planning Important

 To manage income and expenses.

 To create an awareness of your current
financial status.
 To plan for the future by developing
goals and devising ways to achieve
those goals.
 To provide a system of evaluation and
revision for your financial progress.
Why Do You Need a Personal
Financial Plan?

 For most people it is easier

to spend than save.
 To track your expenses, so
you don’t spend more than
you think you’re spending.
 You would like to achieve
financial independence or
retire someday.
Why Should You Develop a
Personal Financial Plan?

 To help you achieve your financial goals.

 To help you achieve financial independence.
 To help you understand where all your
money is spent.
 To help you support those that have
supported you.
The Personal Financial Planning
Process

 Step 1: Define Your Financial Goals

 Step 2: Evaluate Your Current Financial Status
 Step 3: Develop a Plan of Action
– Consider Your Goals
 Step 4: Implement Your Plan
 Step 5: Review Your Progress, Reevaluate,
and Revise Your Plan as Your Financial Status
Changes
Step 1: Define Your Financial
Goals

 Specifically define and write down your

financial goals to reflect your financial
and life situation.
 Attach a cost to each goal.
 Set a date for when the money is
needed to accomplish the goal.
What are the time horizons for financial
goals?

 Short-term goals can be

accomplished within a 1-year period
 Intermediate-term goals take 1-10
years to accomplish.
 Long-term goals take more than 10
years to achieve.
Why are goals the cornerstone of a
financial plan?

 Goals keep the future in mind by

reminding you of the rewards.
 Goals entice you to keep the plan in
effect.
 Goals provide tangibility for the
question, “Why?”
Step 2: Evaluate Your Current
Financial Status

 Your
income:
What determines it.

 Yourexpenses:
What determines
them.
Your Income: What Determines It

Earnings determine standard of living.

Education is the key factor in determining
income level.
70% of wealthy householders finished
college.
Your Expenses:
What Determines Them

 Expenses are your costs of living.

 There are two types of expenses:
 Fixed expenses such as rent, car payments,
and day care are expenses that don’t change in
amount and are usually controlled by a contract.
 Variable (flexible) expenses, like your phone bill
or the amount you spend on entertainment, are
expenses over which you have control.
Step 3: Develop a Plan of Action

 Flexibility-- The ability for

your plan to change as
your situations or goals
change.
 Liquidity -- Your ability to
convert non-cash assets
into cash with relative
ease and speed.
Step 3: Develop a Plan (cont’d)

 Protection -- Your ability to meet the

unexpected large expenses without
destroying your plan.
 Minimization of Taxes -- Your ability
to pay as little as possible to the
federal government.
Step 4: Implement Your Plan

 Use common sense and moderation; don’t

force yourself to track every penny.
 Remain positive about your plan; don’t
view your plan as a punishment.
 Rewards await you, so don’t lose sight of
why you developed the plan.
Step 5: Revise Your Plan

 Periodically review your progress to see

if any fine tuning needs to be done.
 Make sure that your plan still matches
your goals.
 Be prepared to start over if your plan no
longer meets your needs.
Summary

 Buildyour financial future around a

financial plan:
– Manage the unplanned -- financial planning
withstands minor setbacks.
– Accumulate wealth -- financial planning maps out
strategies for meeting your goals.
– Save for financial independence and/or
retirement -- financial planning helps you
determine the costs of retirement and how much
you need to save.
Summary (cont’d)

– “Cover your assets” -- financial planning

includes protecting your assets with insurance
– Invest intelligently -- financial planning helps
you understand the principles of investing
– Minimize taxes -- financial planning helps you
keep your assets where they should be, in
your own pocket
Summary (cont’d)

 Define your goals – you must first know where

you want to go before you can decide how to get
there.
 Evaluate your financial health – you must first
know where you are before you can determine
where you are going.
 Develop a personal financial plan – you must
first draw a map before you can follow it.
Summary (cont’d)

 Implement your plan – you must begin

before you can end.
 Review your progress – you must
continue to check the map t ensure you
are staying on course.