The Financial Planning Process

Learning Objectives
1. Explain why personal financial planning is so important. 2. Describe the five basic steps of personal financial planning.
3. Set your financial goals.
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Learning Objectives
4. Explain how career management and education can determine your income level.
5. List ten principles of personal finance.

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Introduction
Its easier to spend than to save. Personal financial planning is an ongoing processit changes as your financial situation and position in life change. Manage and control your finances with a personal financial plan. It helps you achieve financial and lifestyle goals.
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Importance of Personal Financial Planning

Accumulate wealth for special expenses Save for retirement

Cover your assets

Invest intelligently Minimize payments to Uncle Sam
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Five basic steps to personal financial planning

1. Evaluate your financial health
2. Define your financial goals

3. Develop a plan of action

4. Implement your plan 5. Review your progress, reevaluate, and revise

your plan

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Step 1: Evaluate Your Financial Health

Examine your current financial situation.
How much money do you make? How much are you spending and on what?

Use careful record keeping to track

finances and spending.

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Step 2: Define Your Financial Goals

Write or formalize them
Attach a financial cost to each one. When will you need the money to

achieve the goal?

Analyze and revise your goals.

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Step 3: Develop a Plan of Action

Flexibility:
Plan for life changes and the unexpected.

Liquidity
Immediate use of cash by quickly and easily

converting an asset.

Protection
Prepare for the unexpected with insurance.

Minimize Taxes
Keep more of what you earn.
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Step 4: Implement Your Plan

Stick to it. Use your financial plan as a road map

to achieve goals.

Keep goals in mind and work towards

them.

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Step 5: Review, Reevaluate, and Revise

Review progress
Reevaluate and revise for changes in

your life

Be prepared to formulate a different

plan to meet your goals.

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Figure 1.1 The Budgeting and Planning Process

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Short-term -- within 1 year Intermediate-term -- 1 to 10 years Long-term -- more than 10 years

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ShortTerm Goals
Accumulate Emergency Funds

Equaling 3 Months Living Expenses Pay Off Bills and Credit Cards Purchase Insurance Purchase a Major Item Finance a Vacation

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Intermediate-Term Goals
Save for Older Childs College
Save for a Down Payment Pay Off Major Debt

Finance Large Items (Weddings)

Purchase a Vacation Home

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Long-Term Goals
Save for Younger Childs College
Purchase Retirement Home Create a Retirement Fund to Maintain

Current Standard of Living Take Care of Elderly Family Members Start a Business

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Figure 1.2 Personal Financial Goals Worksheet

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Figure 1.3 A Typical Individuals Financial Life Cycle

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Stage 1 The Early YearsA Time of Wealth Accumulation

Prior to age 54
Develop a regular savings pattern:
How much can be saved? Is that enough? Where should the savings be invested?

Cost of raising children

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Table 1.1 The Cost of Raising a Child

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Stage 2 Approaching RetirementThe Golden Years

Transition years between ages 55-64. Depends on preparation for retirement. Reassess financial goals and decisions retirement, insurance protection and estate planning.

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Stage 3 The Retirement Years

After age 65, live off savings
Retirement age depends on savings.

Less risky investment strategy Consider extended nursing home protection.

Estate planning decisions and documents are critical.

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A series of positions to show your skills. Is the job important, enjoyable, and satisfying? Does it provide for your desired lifestyle?

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Figure 1.4 Job Search Worksheet

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Figure 1.4 Job Search Worksheet

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Figure 1.4 Job Search Worksheet

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Choosing a Major and a Career

Effective self-assessment
Interests, skills, values, personal traits Desired lifestyle

Research career alternatives and match with your skills and interests Research potential earnings
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Table 1.2 What Different College Majors Earn

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Getting a Job
Start early Prepare and practice for interviews Research the company Dress appropriately, be confident,

and follow-up

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Table 1.3 Most Common Interview Questions

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Being Successful in Your Career

Do good work.
Project the right image. Understand and work within the power structure. Gain visibility.
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Being Successful in Your Career

Take new assignments.
Acquire new skills and keep up with

technology.

Develop a strong network. Be ethical.

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What Determines Your Income?

Skills
Education The wealthy are married

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Figure 1.5 Education and Earnings

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The foundation of personal finance.

Principle 1: The Best Protection Is Knowledge

Understand the basics of personal

finance.

Take responsibility for your lifetime

financial plan.

Seek professional advice wisely.

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Principle 2: Nothing Happens Without a Plan

Easier to think about spending than

about saving.

Saving must be planned.

Putting off a financial plan means

goals are harder to achieve.

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Principle 3: The Time Value of Money

Money received today is worth more than money received in the future.
Understand how savings and investments grow over time Understand compound interest. Understand spending now and paying later
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Table 1.4 Importance of Starting EarlyJust Do It!to Accumulate $1 Million by Age 67 Investing Your Money at 12%

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Principle 4: Taxes Affect Personal Finance Decisions

Know the effect of taxes on the rate of return of investments
Compare investment alternatives on an after-tax basis. Understand tax laws.

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Principle 5: Stuff Happens, or the Importance of Liquidity

Plan for unexpected events
Have money or liquid funds available Liquid funds should cover 3 to 6 months of living expenses

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Principle 6: Waste Not, Want Not - Smart Spending Matters

Differentiate want from need
Do homework before the purchase Make the purchase at the best price

Maintain your purchase

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Principle 7: Protect Yourself Against Major Catastrophes

Have the right kind of insurance before a tragedy occurs.
Know your insurance policy coverage. Focus insurance on major catastrophes

which can be financially devastating.

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Principle 8: The Risk and Return Go Hand in Hand

Saving and investing grows money.
Investors demand a minimum return above anticipated inflation. Investors demand higher return for added risk. Diversification by spreading money in several investments reduces risk
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Figure 1.6 The Risk-Return Trade-Off

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Principle 9: Mind Games and Your Money

Behavioral biases lead to big financial mistakes. Mental accounting impacts financial decisions. Sunk cost effect pours good money after bad money because of bias.
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Principle 10: Just Do It!

Taking the first step towards your goals is

difficult.

The following steps become easier. First step is to pay yourself firstsave then spend. Saving early can make a big difference.
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Summary
Personal financial planning allows you to manage your finances and achieve lifecycle financial goals. There are five basic steps to personal financial planning.

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Summary
Set your financial goals in order to achieve

them with a financial plan.

The more educated your are, the more you

will earn.

There are ten basic principles on which

personal financial planning is built.

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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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