Basics of Personal Financial Planning: (Date) (Venue) (Contact Information)

Basics of Personal Financial
Planning
[date]
[venue]
[contact information]
Introduction
About the PFP Section & PFS Credential
The AICPA PFP Section provides information,
resources, advocacy and guidance for CPAs who
specialize in providing estate, tax, retirement, risk
management and investment planning advice to
individuals and their closely held entities
The CPA/Personal Financial Specialist (PFS)
credential distinguishes CPAs as subject-matter
experts who have demonstrated their financial
planning knowledge through experience, education
and testing
Personal Financial Planning Section
Todays Objectives
You gain an enhanced understanding of the basics of financial
planning and how a companys compensation and benefits
programs add to your financial well-being
You gain an enhanced understanding of basic investing
concepts and how to develop your investment plan
You gain an enhanced understanding of how a Companys
compensation and benefits programs can contribute to the
success of your investing
You identify and commit to taking the actions you can to
significantly enhance your financial well-being
Life Events: Will You Be Ready?

Premature Death
Retirement
Serious Illness
Death of Spouse
Aged Parents
Children Getting Married
Second Home
Remarriage
Starting a Business
Divorce
Paying for College
Job Loss
Relocation
Home Purchase
Birth of Children
Marriage
Temporary Disability
Lifes Financial Trade-Offs

CURRENT NECESSITIES
FUTURE NECESSITIES
Basic shelter, food
Basic shelter, food
clothing, transportation
clothing, cash for emergencies
and medical care
and nursing home care
Trade -offs
CURRENT EXTRAS
FUTURE EXTRAS
New kitchen, new car,
Larger home, private
vacation, family gifts
college, retirement travel,

bequests/charity
The Value of a Financial Plan

A financial plan will help you to clarify:
Your financial goals
Strategies to achieve the goals
Specific steps to implement the strategies
Areas to Explore
Saving
Managing debt
Insurance
Investing
Education funding
Retirement funding
Pre-retirement planning
Incapacitation planning
Estate planning
Company stock ownership
The Financial Planning Process

What do you want?
What will you have?
Will you have a shortfall?
What strategy will you employ?
What actions will you take?
What Do You Want?

These are your financial planning goals
Each goal will have its own horizon
For the period of accumulation
For the period over which it will be spent
Make a list and refine as you go along

Start with broad ideas and work toward increasingly
specific and measurable goals
What Will You Have?

What you have now
What you will save from future income
Future investment earnings on the above if invested
Expected future benefits
10
Managing Debt
What Managing Debt Means

Conquering excessive debt
Using debt wisely:
Credit cards
401(k) plan loans
Home mortgages
Home equity loans
Automobile debt
Maintaining a good credit history
12
Debt Ratios
Housing expense ratio
Housing expenses (mortgage, taxes and insurance) should not
exceed 28% of gross pay
Gross pay is before taxes and deductions
Debt to income ratio

Total consumer debt (not including mortgage) should be less
than 20% of take-home-pay
Take-home pay is after taxes and deductions
13
Warning Signs of Too Much Debt

Unable to save 10% or more of gross income
Habitually pay only the minimum monthly payments
on your credit cards
Borrowed from one lender to pay another
Asked a friend or relative to co-sign a loan because
credit record is weak
Unable to figure out how much you owe
Would be in immediate financial trouble if you lost
your job tomorrow
14
Conquering Debt
Stop borrowing
Start using a debit card
Prioritize your debt repayment
Seek lower rates
Determine the maximum you can pay
Repay highest cost debt first
Continue paying the maximum
15
Decrease Debt or Invest?
Pay down debt when you cant invest at a higher rate
Interest Paid /
Received
401(k)
Match*
Credit
Card
Investment
Mortgage
100.0%
18.0%
8.0%
6.5%
--
0.0%
-2.0%
-1.6%
100.0%
18.0%
6.0%
4.9%
Tax effect @ 25%

Net Paid / Received
* 100% of first 3% of your pre-tax regular contributions for ABC Company.
16
Using Home Mortgages Wisely

Determining whether buying is appropriate
Choosing the right type of mortgage
Deciding if you should refinance
Knowing whether to pay points
Deciding whether to prepay mortgage principal
17
Is Buying a Home Right for You?

Buying
Renting
Change location frequently
No
Yes
Maintenance responsibilities
Yes
No
Ability to customize
Yes
Perhaps
Payment increases
Perhaps
Likely
Investment element
Yes
No
Tax benefits
Yes
No
Initial costs
Yes
Yes
18
Tax Benefits of Home Ownership

Mortgage interest
Property taxes
Other itemized deductions
Total itemized deductions
Less: standard deduction you would have
received had you not owned a home
Extra amount you can deduct
Times: your tax rate
Your tax savings
$6,000
2,000
4,250
12,250
-4,750
7,500
25%
$1,875
19
Types of Mortgages
20
Consider a Fixed Rate Mortgage When:

You intend to live in your home for a significant
period of time, or
You anticipate rising interest rates in the future
21
Consider an ARM When:

Fixed rate is at least 2% points greater than
adjustable rate
You expect your income will increase enough to
cover any potential payment increases
You expect to move before the rate increases
(beware of prepayment penalties)
22
Prepaying Mortgage Principal

400
$170,257
360
350
300
250
210
200
$89,279
Standard Payment
Additional $150 Per
Month
150
100
50
0
360
210
Number
Numberof
ofPayments
Payments
TotalInterest
InterestPaid
Paid
Total
Assumes a 30 year fixed-rate mortgage of $100,000 at 8.25%

23
Consider Prepaying Principal When:

You use the standard deduction
You invest conservatively
24
Maintaining a Good Credit History

Establish a good credit history
Obtain your credit report
Understand your credit report
Correct mistakes in your credit report
25
Saving & Investing
Importance of Saving and Investing

If you dont have the following
Sufficient assets fully devoted to your goal(s)
Expected future benefits from third parties
Expected future borrowing
Then you will need the following to reach your

goal(s)
Future savings devoted to your goals
Future earnings from investing the above if you invest those
assets
27
Key Saving and Investing Concepts

Saving versus investing
Combining saving and investing
Saving and investing early
Tax-deferred saving and investing
Tax-deductible saving and investing
Saving and investing using employer
contributions
28
Saving Versus Investing

Saving
Investing
Means
Not spending
money
Doing
something with
money to earn a
return
Needs to
be done
In a regular,
disciplined
manner
Carefully and
with due
consideration
29
Combining Saving and Investing
Stan
Saves $2,000 per year
Starts at age 25
Saves in a non-interest
bearing account
Vickie
Starts at age 25
Invests and earns an
8.9% pretax and 6.68%
after-tax return
30
Combining Saving and Investing
Stan
Vickie
31
Saving and Investing Early
Stan
Starts at age 35
Continues for 30 years
8.9% pre-tax and 6.68%
after-tax return
Vickie
Starts at age 25
Stops after 10 years
after-tax return
32
Saving and Investing Early
Vickie
Stan
33
Tax-Deferred Earnings
Stan
Starts at age 25
Invests in a taxable
account and earns an
after-tax return
Vickie
Starts at age 25
Invests in a Tax-Deferred
account and earns an
8.9% pre-tax return
34
Tax-Deferred Earnings
Stan
Vickie
35
The Saving Process

What do you want?
What will you have?
36
What Do You Want?

Identify your specific savings goals
Identify your time horizon
Quantify your saving goals
Prioritize your saving goals
37
Identify Your Specific Saving Goals

Pay down existing debt
Create an emergency fund
Save for retirement
Accumulate a down payment for a house
Build a college fund for your childrens education
Set aside money for a specific goal (vacation, fun
and games, etc.)
38
Create an Emergency Fund

Set aside 2 to 4 months of living expenses
Use it for a crisis (i.e., roof leaks)
Use it and replace it
Dont use it for discretionary spending (i.e.,
vacation)
39
Save for Retirement

Do everything possible NOW
Start earlyyoull end up with more
40
Identify Your Time Horizon

Identify number of months or years until goal
Allow as much time as possible:
You can accept a lower investment risk
Your monthly saving and investing commitment will be less
41
Examine Your Spending Habits

Keep a list of all spending for one month
Compare total spending to take-home pay
Examine closely if you have a substantial
unexplained gap
Become highly knowledgeable about your expenses
42
Identify Ways to Save More

Save your next raise
Save your next bonus
Reinvest dividends and
interest
Save all cash gifts
Rent instead of buying
(books, videos, etc.)
Delay buying a new car upon

paying off present car loan
Save the donut money
and lose weight!
Buy generic products
Trim your spending by 5%
Be creative
43
What About Investing?

Combined with savings, a key resource for
achieving your financial goals
Investing skills are needed to prudently utilize
Company 401(k) investments
IRAs investments
Savings invested outside these plans
All investments involve risks

Approach investing carefully
44
What Investing Carefully Means

Phase I: Learn investing basics
Phase II: Develop your investment plan
Phase III: Implement your investment plan
45
Investing Basics and Planning
Why Learn Basic Investing Concepts?

ALL investments involve risks
Even so-called risk-free investments like a cash
As such, approach investing carefully

Learning basic investing concepts is part of
investing carefully
47
What Are The Major Asset Classes?

Major Asset
Class
Characteristics
Historical
Average
Returns*
Goals
Cash
Matures in less than

one year
Capital preservation
Liquidity
3-4%
Bonds
Fixed income
Varied maturities
Income
Capital preservation
5-7%
Stocks
Company ownership
Possible dividend
income
Capital appreciation
10-13%
Hard assets
Asset ownership
Capital appreciation
Inflation hedge
Varies
* Pretax return over 75 years through 2008

48
What Risks are Involved in Investing?

Primary long-term
risk
Inflation risk
Loss of purchasing power
Primary short-term
risk
Volatility risk
Instability of investment
Business risk
Inherent risks of a particular

business
Likelihood that the market as a
whole will fall
Risk of not being able to access
money when needed
Loss of principal on fixed-rate
investments due to rising
interest rates
Investments value will be
affected by changes in
exchange rates
Market risk
Other risks
Liquidity risk
Interest rate risk
Currency risk
49
How are These Risks Managed?

Primary long-term
risk
Inflation risk
Invest in stocks
Primary short-term
risk
Volatility risk
Hold investments for the longterm
Business risk
Market risk
Liquidity risk
Diversify within an asset class

Diversify among asset classes
Diversify among asset classes
Have an emergency fund
Ladder portfolios
Diversify among countries or
hedge
Other risks
Interest rate risk

Currency risk
50
However, Stocks Have More Volatility Risk
Higher
Return
20%
15%
Annual
Return
Small Company Stocks

Large Company Stocks
10%
5%
Cash
Intermediate-Term
Government Bonds
Lower
Return
Lower
Deviation
Higher
Deviation
Degree of Volatility
51
Manage Volatility Risk by Investing Over Time

150%
125%
Volatility Risk Over Time
Ranges of Return
100%
One-Year Holding Periods

Five-Year Holding Periods
Twenty-Year Holding Periods
Average Return
75%
50%
25%
12.7%
0%
10.4%
3.7%
5.4%
-25%
-50%
-75%
Small
Company
Stocks
Large
Company
Stocks
Long-Term
Government
Bonds
Cash
Range of compound annual returns over the period 1926-2002. Source: Ibbotson Associates, 2004.
52
Managing Business and Market Risks

Portfolio
Risk
Portfolio Risk=
Market Risk + Business
Risk
Business
Risk
Market Risk
Number of
Holdings
11
13
53
15
Manage Liquidity Risk by Diversifying
Return
Current
Deferred
Real Estate
Bonds
Money market
funds
Convertible bonds
Certificates
of deposit
Small-company stocks
Large-company stocks
Utility stocks
Lower
Zero coupon bonds
Liquidity Risk
Higher
54
Managing Interest Rate Risk

Price
Interest
Rates
Bonds
Managed by Laddering Portfolio of Bonds
55
Risk / Return Trade-Offs: Example 1

Higher
Return
20%
15%
Annual
Return
Small Company Stocks

10%
5%
Cash
Intermediate-Term
Government Bonds
Lower
Return
Lower
Deviation
Higher
Deviation
56

Cash vs. Bonds vs. Stocks
Current yield
Appreciation
Total return
Estimated income taxes @ 30%
After-tax return
Inflation rate
After-tax real rate of return
Relative risk
Cash
Bonds
Stocks
3.3%
0.0%
3.3%
(1.0)%
2.3%
(3.1)%
(0.8)%
4.8%
0.0%
4.8%
(1.4)%
3.4%
(3.1)%
0.3%
2.2%
6.5%
8.7%
(2.6)%
6.1%
(3.1)%
3.0%
Low
Medium
High
57

Sub-Categories Within Major Asset Classes
High Risk/
High Return Potential
Hard Assets
Stocks
Bonds
International
Small Company
Stocks
Long Term
Intermediate Term
Short Term
Low Risk/
Low Return Potential
Cash
58
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662 28

Taxable vs. Tax-Exempt Investments
59
Risk / Return Trade-Offs

Between Differing Portfolios
Portfolio A
Portfolio B
Portfolio C
6.61% Return
6.61% Return
7.06% Return
4.25% Risk*
3.60% Risk*
4.25% Risk*
* Risk = one standard deviation
60
What One Factor Most Influences Your Return?

Your Asset Allocation
Asset Allocation
(91%)
Specific Bond &
Stock Selection (6%)
Market Timing (2%)
Other (1%)
Source: Brinson, Singer, Beebower

61
What Most Influences Your Asset Allocation?

Your desired rate of return
Your risk tolerance
Your time horizon
Stan
Stan and Vickie are

differenttheir asset
allocations will be
different too.
Vickie
62
Importance of Your Desired Rate of Return

The higher the rate of your desired return, the higher
the risk you will most likely will have to take
Desired Return
Likely Risk
63
Importance of Your Risk Tolerance

The higher your risk tolerance the more aggressive
you can be
Be More Aggressive
Risk Tolerance
Be More Conservative
64
Importance of Your Time Horizon

Longer time horizons (5 or more years) can
absorb the ups and downs of investing more
heavily in stocks
Shorter time horizons warrant investing more
heavily in less volatile investments
Use more volatile stocks
Use less volatile investments
Time horizon
65
Developing Your Investment Plan
Use This Investment Planning Process

What do you want?
What will you have?
Note: this process is applied to each of your investing goals
67
What Do You Want?

Take into
account
Your goal in todays dollars

Number of years to your goal
Expected inflation rate
What you want
To arrive at
Be sure to include important others in deciding what you want.
68
How do You Define Your Goals?

Each goal will have its own time horizon
For the period of accumulation
For the period over which it will be spent
Make a list and refine as you go along

Start with broad ideas and work toward increasingly
specific and measurable goals
69
What Will You Have?
Take into
account
Current assets set aside for

your goal
Future saving
Expected return on your
invested assets
What you will have
To arrive at
70
Where Should You Save First?

1. Your Employer 401(k) Plan (at least to the % that
gives you the maximum employer match free
money for you)
2. Roth IRA using after-tax contributions or Traditional
IRA using pre-tax contributions, depending on your
circumstances*
3. Taxable accounts
*
Only Traditional IRAs can accept pre-tax contributions. Although both Traditional and
Roth IRAs can accept after-tax contributions, it is generally preferable to use Roth IRAs. We
will be covering IRAs in more detail later. You can use a Financial Calculator to determine
which type
of IRA is best for your particular situation.
71
Why These Priorities?
Vickie
Taxable
Account
Roth IRA
Using After-Tax
Contributions
Traditional IRA
Using Pre-Tax
Contributions
Employer
401(k)
Plan
Salary
$50,000
$50,000
$50,000
$50,000
Pre-tax $
$2,667
$2,667
$2,667
$2,667
Tax at 25%
$667
$667
After-tax $
$2,000
$2,000
Employee contribution
$2,000
$2,000
$2,667
$2,667
Employer match
assume 3%
n/a
n/a
n/a
$1,500
Total contribution
$2,000
$2,000
$2,667
$4,167
% of salary contributed
4.00%
4.00%
5.33%
8.33%
Outcome
$178,227
What Happens?
72

Vickie
73

Vickie
74
Consider Tax-Advantaged Accounts First

Employer
401(k) Plan
IRAs
529
Plan
Tax-Deferred contributions
(1)
No (2)
Tax-Deferred earnings
(1)
Employer contributions
No
No
Unlimited contributions
No
No
(3)
Automatic saving and investing
Wide-array of professionally
managed funds
Varies
Self-direction of fund allocation
No
No
No (1)
No
Features Available
Immediate penalty-free withdrawal

(1)
Depends on the type of IRA used.
(2)
Some states allow you to deduct your contributions.
(3)
Some states limit contributions.

75
Then Consider Taxable Accounts

Employer
DESPP (1)
Employer
DTP (2)
Mutual
Funds
Brokerage
Accounts
Tax-Deferred contributions
No
No
No
No
Tax-Deferred earnings
No
No
No
No
Employer contributions
No
No
No
No
Unlimited contributions
No
No
No
No
No
No
Self-direction of fund allocation
Buy Emplyr stock at a discount
No
No
No
Buy Emplyr stock without fees
No
No
Immediate penalty-free
withdrawal
Features Available
Automatic saving and investing

Wide-array of professionally
managed funds
(1) Discounted Employee Stock Purchase Plan (2) Direct Transaction Program
76
Now Develop Your Preliminary Plan

Question
Answers = Plan
Your goal?
Your risk tolerance?
Your expected rate of return?
Your time horizon?
Current assets set aside for your goal?
Future periodic savings/investing?
Expected future benefits?
Types of account(s) youll use?
Asset allocation within account(s)?
77
Then Calculate Your Expected Return*

Major Asset
Class
Cash
Bonds
Stocks
Hard assets
Total
Asset
Allocation
__________%
__________%
__________%
__________%
Historical
Return
X
X
X
X
4%
6%
12%
8%
100%
Estimated
Return
__________%
__________%
__________%
__________%
__________%
* Calculated for each account you are using to invest your savings.
78
And Then the Future Value of These Items*

Contribution Toward Goal
your goal
Future periodic
savings/investing
Future Value Calculation

Calculate the future value of
this amount invested at your
expected rate of return over
your time horizon
these payments at your
expected rate of return over
your time horizon
this amount invested at your
expected rate of return from
the date of receipt to the end of
your time horizon
* Calculated for each account you are using to invest your savings.
79
The Result is What You Will Have
Take into
account

your goal
Future saving
Expected return on your
invested assets
What you will have
To arrive at
80
Key Points to Remember

Financial planning will help you clarify goals,
strategies and action steps
Determine whether you have too much debt and
develop a plan to conquer it
Make wise decisions about using debt
Commit to saving and investing
Save and invest early
Pay yourself first
Learn as much as you can about investing to
develop a plan and invest according to your
comfort level
81
Questions?
[insert contact information here]
Special thanks to Kevin Roach, CPA/PFS of Texas A&M University for contributing content.

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Basics of Personal Financial

Personal Financial Planning Section

Personal Financial Planning Section

Life Events: Will You Be Ready?

Personal Financial Planning Section

Lifes Financial Trade-Offs

Basic shelter, food

Basic shelter, food

clothing, cash for emergencies

and medical care

and nursing home care

New kitchen, new car,

Larger home, private

vacation, family gifts

college, retirement travel,

Personal Financial Planning Section

The Value of a Financial Plan

Personal Financial Planning Section

Personal Financial Planning Section

The Financial Planning Process

Personal Financial Planning Section

What Do You Want?

Make a list and refine as you go along

Personal Financial Planning Section

What Will You Have?

Personal Financial Planning Section

What Managing Debt Means

Maintaining a good credit history

Personal Financial Planning Section

Debt to income ratio

Personal Financial Planning Section

Warning Signs of Too Much Debt

Personal Financial Planning Section

Personal Financial Planning Section

Decrease Debt or Invest?

Pay down debt when you cant invest at a higher rate

Tax effect @ 25%

* 100% of first 3% of your pre-tax regular contributions for ABC Company.

Personal Financial Planning Section

Using Home Mortgages Wisely

Personal Financial Planning Section

Is Buying a Home Right for You?

Change location frequently

Personal Financial Planning Section

Tax Benefits of Home Ownership

Personal Financial Planning Section

Personal Financial Planning Section

Consider a Fixed Rate Mortgage When:

Personal Financial Planning Section

Consider an ARM When:

Personal Financial Planning Section

Prepaying Mortgage Principal

Assumes a 30 year fixed-rate mortgage of $100,000 at 8.25%

Consider Prepaying Principal When:

Personal Financial Planning Section

Maintaining a Good Credit History

Personal Financial Planning Section

Saving & Investing

Importance of Saving and Investing

Then you will need the following to reach your

Personal Financial Planning Section

Key Saving and Investing Concepts

Personal Financial Planning Section