Understanding Financial Planning. The heart of financial planning is making sure your values line up with how you spend and save.

Transcription

1 THEME 1 PART 1: FOUNDATIONS OF FINANCIAL PLANNING Honors Personal Finance The heart of financial planning is making sure your values line up with how you spend and save. That means knowing where you are financially and planning on how to get where you want to be in the future no matter what life throws at you. 2 3 Personal Financial Planning helps define your financial goals and develop appropriate strategies to reach them. 4 We should not solely depend on employee or government benefits such as: 1) steady salary increases or 2) adequate funding from employer paid pensions or 3) Social Security for our retirement. 5 Standard of Living the necessities, comforts, and luxuries enjoyed or desired by an individual or family. Americans define this standard differently based on their level of affluence. 6 For others it s an expensive sports car that defines ultimate affluence. For some it s owning a vacation home. So our quality of life is closely tied to our standard of living. Many factors affect our standard of living: ügeographic location, üpublic facilities, ülocal cost of living, ütraffic, üpopulation density

2 One trend with a profound effect on our standard of living is the: Two-income family. About 75% of married adults say that they and their spouse share all their money and expenses. Two incomes buy more but require greater responsibility to manage. 10 Current vs Future Needs Your current spending is based on the necessities of life. Future needs should be incorporated into every financial plan by setting aside a portion of current income for future spending. 11 Accumulating Wealth Wealth the total value of all items owned by an individual, such as savings accounts, stocks, bonds, home, and automobiles. 12 Accumulating Wealth Financial Assets vs Tangible Assets Financial Assets - intangible assets, such as savings accounts and securities, that are acquired for some promised future return. Tangible Assets - physical assets, such as real estate & cars that can be consumed or held for investment. 13 STEP 1 Determine Your Current Financial Situation STEP 2 Develop Your Financial Goals STEP 3 Identify Your Options 14 STEP 4 Evaluate Your Alternatives STEP 5 Create and Use Your Financial Plan of Action STEP 6 Review and Revise Your Plan 15 vstep 1: Determine Your Current Financial Situation 1) How much income do you have? 2) What are your known current and future expenses? 16 vstep 2: Develop Your Financial Goals: To develop clear financial goals, think about your attitude toward money. Goals The end toward which effort is directed. 17 Short -Term Goals Constituting a financial operation or obligation based on a brief term and especially one of a year or less. Long -Term Goals Constituting a financial operation or obligation based on an extended term of more than six years. 18 2

3 Intermediate -Term Goals Constituting a financial operation or obligation based on a term that bridges the gap. vstep 3: Identify Your Options It is impossible to make a good decision unless you know all your options. The best goals are S.M.A.R.T. Goals 19 Ex: I want to have $1million by the time I m 55 years old vstep 4: Evaluate Your Alternatives You must consider the consequences and risks of each decision you make during the financial planning process. Also remember when we make these decisions there are always the paths not taken. Opportunity Cost what is given up when making one choice instead of another. Or the second best option. v Step 5: Create and Use Your Financial Plan of Action A plan of action is a list of ways to achieve your financial goals v Step 6: Review and Revise Your Plan As you get older, your finances and needs will change. That means that your financial plan will have to change too. You should reevaluate and revise it every year. Asset Acquisition Planning one of the first categories of financial planning we encounter is asset acquisition. Assets Things we own throughout our lives

4 1. Asset Acquisition Planning one of the first categories of financial planning we encounter is asset acquisition. 28 These assets include: Liquid Assets Cash, savings accounts, money market funds used to pay everyday expenses. Investments Stocks, bonds, mutual funds acquired to earn a return on our money Personal Property automobiles, appliances, clothing, jewelry, electronics. Real Property land and anything attached to it, such as a house Another category of financial planning we encounter is liability planning. Liability the owing of a debt, usually caused by the borrowing of money. 3. Savings and Investment planning is a category of financial planning in which as your income begins to increase, so does the importance of savings and Investment planning. At first we save to establish an emergency fund. Emergency Fund the saving of 3 to 6 months worth of expenses. Eventually we switch to investing for the accumulation of wealth Employee benefit planning is matching what your employer offers (health, life, disability insurance, 401k or 403b plans) with your personal strategies. 5. Tax planning is closely tied to investment plans and will often specify certain investment strategies. Taxes can be either active (ordinary portfolio investments) or passive (tax-free or taxdeferred). 6. Finally there is Retirement & estate planning. Throughout our working life we must take into consideration what we want to do when we finish working. Travel, buy a beach house, or simply maintain a current standard of living

5 As people grow older they must also consider how they can most effectively pass their wealth on to their heirs, an activity known as estate planning. Asset Acquisition Liability Planning Savings & Investment Planning Employee Benefit Planning Tax Planning Retirement & Estate Planning Financial success and failure is greatly influenced by the economy. Our economy is influence by interactions among government, business, and consumers as well as by world economic conditions. 40 The governments role, through policy decisions, is to manage the economy to provide economic stability and a high level of employment. Monetary Policy programs for controlling the amount of money in circulation. 41 The governments other principle tool is: Fiscal Policy programs of spending & taxation. Spending usually stimulates the economy, while increasing taxes tends to have a negative affect on economic activity. 42 Economic Cycle (or business cycle) typically contains four stages: 1 Expansion 2 Peak 3 Contraction 4 Trough [Pronounced troff] 43 Expansion the phase of the economic cycle when real GDP increases until it hits a peak. Real GDP is a measure that reflects the value of all goods and services produced by an economy in a given year, & can account for changes in price level & provide a more accurate Peak phase of the economic cycle when an expansion ends and a contraction begins. Contraction phase of the economic cycle when real GDP falls. Trough phase of the economic cycle when an contraction ends and a expansion begins. figure of economic growth

6 Our economy is based on the exchange of goods and services. This exchange is based on prices. Ex: $10/hr for labor. Inflation a state of the economy in which the general price level is increasing. 46 The most common measure of inflation is the: Consumer Price Index (CPI) a measure of inflation based on changes in the cost of consumer goods and services. 47 Inflation is of vital concern to financial planning. It affects not only what we pay for our goods and services, but also what we earn in our jobs. 48 End of Financial planning part 1. Begin Careers As prices rise, we need more income because our Purchasing Power the amount of goods and services that each dollar buys at a given time declines