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2008 Thomson South-Western

UNDERSTANDINGTHE FINANCIAL

PLANNING PROCESS

CHAPTER 1

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The Rewards ofSound Financial Planning

Maintain and improve standardof living.

Control spending in order to live

well today and tomorrow!

Accumulate wealth.

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Improving Your Standard ofLiving

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Average Propensity toConsumeThe percentage of each dollar of

income that is spent, on average,

for current needs rather than saved.

What is your average propensity to

consume?

Income spent on current needs

Total income

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The Personal FinancialPlanning Process

Taking conscientious and

systematic steps toward

fulfilling your financial goals.

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The Six-Step FinancialPlanning Process

1. Define financial goals.

2. Develop financial plans and strategies.

3. Implement financial plans and

strategies.

4. Develop budgets.

5. Evaluate results by using financialstatements.

6. Revise goals as situations change.

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1. Define financial goals2. Develop plans

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3. Implement plans

4. Develop budgets

1. Define financial goals2. Develop plans

FINANCIAL ACTIONSBasic asset decisions

Credit decisions

Insurance decisions

Investment decisionsRetirement and

estate decisions

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3. Implement plans

4. Develop budgets

1. Define financial goals2. Develop plans

5. Evaluate results

6. Revise plans

FINANCIAL ACTIONSBasic asset decisions

Credit decisions

Insurance decisions

Investment decisionsRetirement and

estate decisionsPrepare financial statements

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Money

Used as a medium of exchange.

Financial goals are stated in dollar

amounts.Need to consider utility, or amount of

satisfaction derived from purchases,as well as cost.

May be closely linked to personalpsychological concepts.

May play key role in personal

relationships.

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Attain Your Financial GoalsBe specific in defining goals and focus

on results.

Make goals realistically attainable. Involve family members and enlist

their cooperation.

Prioritize goals and set a definite timeframe.

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Put Target Dates on FinancialGoalsShort-term goalsto be

accomplished within the nextyear.

Intermediate-term goalsto beaccomplished in the next 2-5

years. Long-term goalsto be

accomplished in time periodsgreater than 5 years.

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From Goals to Plans:A Lifetime of Planning

Early childhood

High school and collegeFamily formation

Career development

Pre-retirementRetirement

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Personal Financial PlanningLifecycle

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Benefit of Planning

Your money works more

efficiently for you by...

Utilizing the financial wonder

The power of compounding

through time!

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Growth of $1000 at 8% and10% Interest

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Using the Personal ComputerPrepare financial

statements

Plan retirementPrepare and file tax

returns

Track investments

Analyze needs

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The Financial PlanningEnvironment

Financial planning is carried out in

an economic environment created by

the interactions of

Government

BusinessConsumers

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The Financial PlanningEnvironment

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Government Policy Decisions

Provide economic stability

Maintain acceptable employmentlevels

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Monetary Policy

Controls money supply

Used to stimulate or contract economicgrowth

Fiscal Policy

Controls levels of taxation

Sets levels of government spending on

various programs

Government Policy Decisions

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Economic Cycles

Stages related to employment andproduction levels

Growth measured by changes in GDP

Inflation

Measured by changes in CPI

Affects purchasing power and interest rates

Affects financial plans and goals

Government Policy Decisions

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Economic Cycles

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What Determines YourPersonal Income?

Age, marital status

Education

Where you live

Career choice