Fifth Edition

Personal Finance

An Integrated Planning Approach

Bernard J. Winger
Ralph R. Frasca

© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 5th Ed., Prentice Hall Inc.
Chapter 1: Financial Planning--
Why It’s Important
 Increased Emphasis on Self Reliance
– Less From Government; e.g. Social Security
– Less From Employer; e.g. Reduced Role of
Traditional Retirement Plans
 Achieving Financial Independence
 Coping with Economic Uncertainties and
Shocks

© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 5th Ed., Prentice Hall Inc.
Financial Success and Financial
Independence

 Financial Success: Obtaining Maximum

Benefits from Limited Financial Resources

 Financial Independence: Having Sufficient

Income or Financial Resources To Be Self
Reliant

© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 5th Ed., Prentice Hall Inc.
 What Are Your Goals in Life?

 Non-financial Goals
 Financial Goals
– Current Consumption
– Future Consumption
– Savings

© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 5th Ed., Prentice Hall Inc.
 The Principle of Diminishing
Marginal Satisfaction
 Current consumption is limited by diminishing
marginal satisfaction.
 Example: Would you rather drink 7 soft drinks
right now, or have 1 a day for the next 7 days?
Most people prefer the latter choice because
each additional bottle after the first one (or
two) provides much less satisfaction. Indeed,
the 7th bottle right now might make you sick!

© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 5th Ed., Prentice Hall Inc.
 Important Economic Trends

 Continuing Inflation--How High? 3-4%?

 Persistent Business Cycles
– Is Your Job Safe? Do You Have Cash Reserves
to Weather a Storm?
 A Perplexing Tax System
– High Tax Rates and Selectively Rewarding
 Continued Instability in Financial Markets

© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 5th Ed., Prentice Hall Inc.
 A Planning Approach

 Define a Broad Goal

 Break it Down To Manageable Sub-goals
 Create an Action Plan to Achieve Sub-goals
 Periodically Evaluate the Action Plan
– If Successful, Keep Up Good Work
– If Not, Find New Action Plan or New Goal

© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 5th Ed., Prentice Hall Inc.
 Planning Areas

 Consumption and savings planning

 Debt Planning
 Insurance Planning
 Investment Planning
 Retirement Planning
 Estate Planning
 Income Tax Planning
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 5th Ed., Prentice Hall Inc.
 Marginal Analysis

 Looks at changes in important variables

 Considers whether a decision’s added
benefits are worth its added costs
 Example: you choose not be buy whole life
insurance because the cash build-up in the
policy is less than what you could earn by
buying term insurance and investing the
saved premiums.
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 5th Ed., Prentice Hall Inc.
 Opportunity Costs

 Opportunity costs are benefits that you give

up when you choose one alternative over
another
 Example: the opportunity cost of taking a
course in personal finance is the knowledge
you could have gained by taking another
course in its place

© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 5th Ed., Prentice Hall Inc.
 Meet the Steele Family

 Typical suburban family consisting of

Arnold (h) and Sharon (w) and two kids--
Nancy and John
 Enjoying the “good life” associated with an
above-average income
 Doing virtually no financial planning
– to educate the children
– to enjoy retirement
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 5th Ed., Prentice Hall Inc.
Building Blocks of Success--The
Foundation
 Developing Your Career
 Acquiring Adequate Insurance
 Finding Suitable Housing
 Saving to Build Adequate Cash Reserves

© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 5th Ed., Prentice Hall Inc.
 Building Blocks of Success--
Going Up the Ladder

 First Floor: Invest in Very Secure

Instruments; e.g. Bank CDs
 Second Floor: Gradually Increase Risks to
Earn Higher Returns; e.g. High Quality
Stocks
 Top Floor: Invest in All Types of Assets to
Maximize Wealth; e.g. Risky Growth Stocks

© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 5th Ed., Prentice Hall Inc.
 Next Chapter 2
The Time Value of Money

© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 5th Ed., Prentice Hall Inc.