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CHAPTER 1:

UNDERSTANDING THE FINANCIAL PLANNING PROCESS

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The Rewards of Sound Financial Planning


Maintain and improve standard of living.

Control spending in order to live well today and tomorrow!


Accumulate wealth.

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Average Propensity to Consume:


The percentage of each dollar of income that is spent, on average, for current needs rather than saved.

What is your average propensity to consume?


Income spent on current needs Total income

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Steps in the Financial Planning Process:

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1. Define financial goals

2. Develop plans

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1. Define financial goals

2. Develop plans

3. Implement plans 4. Develop budgets FINANCIAL ACTIONS Basic asset decisions Credit decisions Insurance decisions Investment decisions Retirement and estate decisions

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1. Define financial goals

2. Develop plans

3. Implement plans 4. Develop budgets FINANCIAL ACTIONS Basic asset decisions Credit decisions Insurance decisions Investment decisions Retirement and estate decisions

Prepare financial statements


5. Evaluate results 6. Revise plans

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Money:
Used as a medium of exchange. Financial goals are stated in dollar amounts. Need to consider utility, or amount of satisfaction derived from purchases, as well as cost. May be closely linked to personal psychological concepts. May play key role in personal relationships.

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To attain your financial goals:


Be specific in defining goals and focus on results. Make goals realistically attainable. Involve family members and enlist their cooperation. Prioritize goals and set a definite time frame.

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Life Situation Factors Affect Financial Planning Activities

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From Goals to Plans: A Lifetime of Planning


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

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Personal Financial Planning Lifecycle


Income Income Stream Retirement/ Estate Savings/ Investmen Liability/Insurance t Asset Acquisition 10 20 30 40 50 Age 60 70 80 Tax Benefits

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Benefit of planning:
Your money works more efficiently for you by...
Utilizing the financial wonder The power of compounding through time!

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Putting target dates on financial goals:


Short-term goals to be accomplished within the next year. Intermediate-term goals to be accomplished in the next 2-5 years. Long-term goals to be accomplished in time periods greater than 5 years.

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Financial Planning in Action

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Growth of $1,000 at 8 % interest:


$50,000 $40,000 $30,000 $20,000 $10,000 2,159 $0 0 10 20
Years

21,725 10,063 4,661

30

40

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Growth of $1000 at 10% interest:


$50,000 $40,000 $30,000 $20,000 $10,000 $0 0 10 20
Years

45,259

17,449 6,727 2,594

21,725

30

40

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Use the personal computer to:


Prepare financial statements Plan retirement Prepare and file tax returns

Track investments
Analyze needs

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The Planning Environment


Financial planning is carried out in an economic environment created by the interactions of

Government Business Consumers

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Money payments of wages, rents interest, and profit

BUSINESS

GOVERNMENT

CONSUMERS

Money payments for goods and services

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Money payments of wages, rents interest, and profit Land, labor, and financial capital

BUSINESS

GOVERNMENT

CONSUMERS

Goods and services Money payments for goods and services

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Money payments of wages, rents interest, and profit Land, labor, and financial capital Public goods & services, regulations, and revenues

BUSINESS

GOVERNMENT

CONSUMERS

Taxes Goods and services Money payments for goods and services

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Government policy decisions are used to regulate the economy in an effort to: Provide economic stability Maintain acceptable employment levels

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Monetary Policy
Controls money supply

Used to stimulate or contract economic growth

Fiscal Policy
Controls levels of taxation

Sets levels of government spending on various programs

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Policies seek to control: 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

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Economic Cycles
Levels of Employment and Production HIGH

LOW Expansion Recessio n Depression Recovery

How does Economic Factors Influences the Financial Planning

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What Determines Your Personal Income?

Age, marital status Education Where you live Career choice

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Career Choice and Financial Planning


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2. 3. 4.

The life work one selects is a key to financial well being and personal satisfaction Career choices have risks and opportunity costs Career choices need to be evaluated periodically Changing personal and social factors require continuous assessments of your work situation

THE END!