Lecture 1 (Chapter 1 & 2)

Chapter 1
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.
4. Career management
5. Explain the personal finance lessons learned in the recent

economic downturn.
6. List ten principles of personal finance.
1-2 © 2016 Pearson Education, Inc. All rights reserved.

Introduction
• Avoiding financial planning just creates more

financial problems.
• It’s easier to spend than to save.
• Personal financial planning is an ongoing process

—it changes as your financial situation and
position in life change.
• A plan helps you achieve financial and lifestyle

goals.

Importance of Personal Financial
Planning
• Manage the unplanned
• Accumulate wealth for special expenses
• Save for retirement
• “Cover your assets”
• Invest intelligently
• Minimize your payments to Uncle Sam (Tax)

The Personal Financial Planning
Process
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

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.

Step 2: Define Your Financial
Goals
• Write or formalize your goals.
• Attach a financial cost to each one.
• When will you need the money to achieve

the goal?
• Analyze and revise your goals.

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.
• Minimization of Taxes
– Keep more of what you earn.

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.

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.

Establishing Your Financial Goals
– Short-term—within 1 year
– Intermediate-term—1 to 10 years
– Long-term—more than 10 years

Short–Term Goals
• Accumulate emergency funds equal to 3

months’ living expenses
• Pay off bills and credit cards
• Purchase insurance
• Purchase a major item
• Finance a vacation

Intermediate-Term Goals
• Save for older child’s college

• Save for home improvement
• Save for a down payment
• Pay off major debt
• Finance large items (weddings)
• Purchase a vacation home

Long-Term Goals
• Save for younger child’s college

• Purchase retirement home
• Create a retirement fund to maintain
current standard of living
• Take care of elderly family members
• Start a business

Stage 1 The Early Years—A Time
of Wealth Accumulation
• Prior to age 54 (49-50)
• Develop a regular savings pattern:

– How much can I save?
– Is that enough?
– Where should I invest those savings dollars?
• Cost of raising children

Stage 2 Approaching Retirement
—The Golden Years
• Transition years between ages 55-64 (50-
59)
• Depends on preparation for retirement
• Reassess financial goals and decisions—

retirement, insurance protection, and estate
planning

Stage 3 The Retirement Years
• After age 65 (60), live off savings

– Retirement age depends on savings
• Less risky investment strategy
• Consider extended nursing home protection
• Estate planning decisions and documents

are critical

Thinking About Your Career
• A series of positions to show your skills.
• Is the job important, enjoyable, and

satisfying?
• Does it provide for your desired lifestyle?

Figure 1.4
Job Search Worksheet

Figure 1.4
Job Search Worksheet

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

Getting a Job
• Start early
• Notify potential employers that you are serious

and organized
• Prepare and practice for interviews
• Research the company
• Dress appropriately, be confident, and follow-up

Table 1.3 Common Interview
Questions
1. Tell me a little about yourself.
2. What do your know about our company and this position?
3. What are your short-term and long-term goals?
4. What is your greatest strength and your greatest weakness?
5. What is the hardest thing you have ever had to do?
6. Describe a time you worked with a difficult person, perhaps a fellow student,
professor, co-worker. How did you handle it then and how would you handle it now?
7. How would you rate your performance under pressure?
8. How did you choose your major and what was your most rewarding college
experience?
9. Did you participate in extracurricular activities or clubs while in school?
10. What did you like the most/least about your last job(s)?
11. What motivates you and how do you motivate others?
12. Describe a project you have worked on and your contribution.
13. Why should we hire you? What can you do for our company?
14. Are your grades a good indicator of your professional potential?
15. Is there anything else that we should know about you?

Being Successful in Your Career
• Do your best work.
• Project the right image.
• Understand and work within the power

structure.
• Gain visibility.

Being Successful in Your Career
• Take new assignments.
• Be loyal and supportive of your boss.
• Acquire new skills and keep up with

technology.
• Develop a strong network.
• Be ethical.

Money Isn’t Everything
• Money doesn’t necessarily bring happiness
• But, not having money can bring anxiety

Lessons Learned from the
Economic Downturn
• Crisis led to high rates of unemployment
and a disruption of financial markets
• Not understanding the past could lead to a

repeat of events

Lessons Learned
1. Prepare an adequate emergency fund

2. Plan for retirement early…it will come
sooner than you think
3. Avoid excessive debt
4. Maintain adequate health insurance

The foundation of personal finance.
TEN PRINCIPLES 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.

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.

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

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.

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

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

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.

Principle 8: 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.

Principle 9: Mind Games, Your Financial
Personality, 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.

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 first—save then

spend.
• Saving early can make a big difference.

Chapter 2
Measuring Your
Financial Health
and Making a
Plan
Learning Objectives
1. Calculate your level of net worth or wealth

using a balance sheet.
2. Analyze where your money comes from

and where it goes using an income
statement.
3. Use ratios to identify your financial

strengths and weaknesses.

Learning Objectives
4. Set up a record-keeping system to track

your income and expenditures.
5. Implement a financial plan or budget that

will provide for the level of savings needed
to achieve your goals.
6. Decide if a professional financial planner

will play a role in your financial affairs.

Introduction
• Where does all your money go?
• Planning and budgeting requires control
• Evaluate your financial health
• Develop a plan of action

Using a Balance Sheet to
Measure Your Wealth
• A snapshot of your financial status at a
particular time
• Assets you own
• Debt or liabilities you owe
• Your net worth or equity

Assets: What You Own
• Assets are your possessions even if you owe

money on them.
• List assets using their fair market value.
• All values must be current.

Assets: What You Own
• Monetary assets—cash or liquid asset
• Investments
• Retirement plans
• Tangible assets—physical assets

– House, vehicles, furniture, jewelry, collectibles,
etc.

Liabilities: What You Owe
• Liability is debt that must be repaid in the

future.
• Current liabilities must be paid off within the

next year.
• Long-term liabilities come due beyond a

year.
• List only the unpaid balances.

Liabilities: What You Owe
• Current bills—utility bills, insurance

premiums, credit card balances.
• Long-term liabilities—home, car, or student

loans.
• Other loans—other installment loans, bank

loans, insurance policy loans.

Net Worth: A Measure
of Your Wealth
• Net worth = total assets - total debt
• If liabilities > assets, negative net worth and

insolvent.
• If liabilities < assets, positive net worth.
• Good level of net worth depends on your

goals and your place in the financial life
cycle.
Figure 2.3 (cont.)

Using an Income Statement
to Trace Your Money
• Financial motion picture—tells you where
your money has come from and where it has
gone over some period of time.
• Income and expenditure, net income

statement
• Cash basis—based on actual cash flows
• Income – expenses (over given time period)

Income: Where Your Money
Comes From
• Income or cash inflows:
– Wages, salary, bonuses, tips, commissions
– Other sources: family income, government
payments (veterans benefits, welfare),
investment income
• Subtract federal, state, social security taxes

from earnings to calculate your take-home
pay

Expenditures: Where Your
Money Goes
• Cash transactions may not leave a paper
trail
• Variable or fixed expenditures
• Control over expenditures

Figure 2.6 (cont.)

Using Ratios: Financial
Thermometers
• Financial ratios allow you analyze raw data
in the balance sheet or income statement
then compare it to targets.
• Ratios help you understand how you are

managing financial resources.

Question 1: Do I Have Enough
Liquidity to Meet Emergencies?
– Should be greater than 1.0

– Aim for above 2.0
– Should aim for 3 to 6 months of liquid assets

– Less if enough credit and insurance

Question 2: Can I Meet
My Debt Obligations?
– Should decrease as you get older
– Less than 2.5 is a red flag

Question 3: Am I Saving as Much
as I Think I Am?
– Effective saving is by paying yourself first

Record Keeping
• Without records difficult to prepare taxes.
• You track expenses and know how much

and where you are spending.
• Easier for someone to step in during an

emergency and understand your financial
situation.

Record Keeping Steps
1. Track your financial dealings.

– Credit card and check expenditures are easy to
track, but cash expenditures are more difficult to
track.
2. File and store your financial records so they

are readily accessible.

Putting It All Together:
Budgeting
• Evaluate your financial health by using the
balance sheet and income statement:
– To set financial goals
– To achieve financial goals
• Develop a plan of action and cash budget

using the income statement
• Monitor your progress using the balance

sheet and income statement.

Developing a Cash Budget
• Plan for controlling cash inflows and

outflows
• Allocate dollar amounts for different

spending categories

Preparing a Cash Budget
• Estimate anticipated after-tax income or

take home pay from most recent annual
personal income statement.
• Estimate living fixed and variable expenses.
• Estimate income available for saving and

investing: subtract anticipated living
expenditures from anticipated take-home
pay.

Implementing the Cash Budget
• Put it in place for a month.
• Compare actual expenditures in each category

with budget amounts at the end of the month.
• Evaluate whether you change budget

estimates or exert self-control.
• Stick your desired budget for a month with an

envelope system.

Hiring a Professional
Three options for working with professionals
1. Go it alone and have your plan checked by

a professional.
2. Work with a professional to develop a plan.
3. Leave it all in the hands of a pro.

What Planners Do
• More unique financial situations need

professional help.
• They give advice.
• You still need to know the basics and still

bear ultimate responsibility.

How Financial Planners are Paid
• Fee-only planners
• Fee-and-commission planners
• Fee offset planners
• Commission-based planners

Lecture 1 (Chapter 1 &amp; 2)

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Chapter 1

1. Explain why personal financial planning is so important.

2. Describe the five basic steps of personal financial planning.

3. Set your financial goals.

5. Explain the personal finance lessons learned in the recent

6. List ten principles of personal finance.

1-2 © 2016 Pearson Education, Inc. All rights reserved.

• Avoiding financial planning just creates more

• It’s easier to spend than to save.

• Personal financial planning is an ongoing process

• A plan helps you achieve financial and lifestyle

1-3 © 2016 Pearson Education, Inc. All rights reserved.

• Accumulate wealth for special expenses

• Save for retirement

• “Cover your assets”

• Minimize your payments to Uncle Sam (Tax)

1-4 © 2016 Pearson Education, Inc. All rights reserved.

2. Define your financial goals

3. Develop a plan of action

4. Implement your plan

5. Review your progress, reevaluate, and revise your

1-5 © 2016 Pearson Education, Inc. All rights reserved.

• Use careful record keeping to track finances

1-6 © 2016 Pearson Education, Inc. All rights reserved.

• Attach a financial cost to each one.

• When will you need the money to achieve

• Analyze and revise your goals.

1-7 © 2016 Pearson Education, Inc. All rights reserved.

1-8 © 2016 Pearson Education, Inc. All rights reserved.

• Use your financial plan as a road map to

• Keep goals in mind and work towards them.

1-9 © 2016 Pearson Education, Inc. All rights reserved.

• Reevaluate and revise for changes in your

• Be prepared to formulate a different plan to

1-10 © 2016 Pearson Education, Inc. All rights reserved.

1-12 © 2016 Pearson Education, Inc. All rights reserved.

• Accumulate emergency funds equal to 3

1-13 © 2016 Pearson Education, Inc. All rights reserved.

• Save for older child’s college

1-14 © 2016 Pearson Education, Inc. All rights reserved.

• Save for younger child’s college

1-15 © 2016 Pearson Education, Inc. All rights reserved.

• Develop a regular savings pattern:

• Cost of raising children

1-18 © 2016 Pearson Education, Inc. All rights reserved.

• Depends on preparation for retirement

• Reassess financial goals and decisions—

1-19 © 2016 Pearson Education, Inc. All rights reserved.

• After age 65 (60), live off savings

• Less risky investment strategy

• Consider extended nursing home protection

• Estate planning decisions and documents

1-20 © 2016 Pearson Education, Inc. All rights reserved.

• A series of positions to show your skills.

• Is the job important, enjoyable, and

• Does it provide for your desired lifestyle?

1-21 © 2016 Pearson Education, Inc. All rights reserved.

1-22 © 2016 Pearson Education, Inc. All rights reserved.

1-23 © 2016 Pearson Education, Inc. All rights reserved.

• Research career alternatives and match with

• Research potential earnings

1-24 © 2016 Pearson Education, Inc. All rights reserved.

• Notify potential employers that you are serious

• Prepare and practice for interviews

Lecture 1 (Chapter 1 & 2)

Lecture 1 (Chapter 1 & 2)