© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Understanding the Financial Planning Process #1
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© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Understanding the Financial Planning Process
#1
The Rewards of Sound Financial Planning
• Maintain and improve standard of living
• Control spending in order to live well today and tomorrow
• Accumulate wealth
Improving Your Standard of Living
Average American Family
The Personal Financial Planning Process
Systematic process that considers important elements of an individual’s financial affairs in order to fulfill financial goals
Six-Step Financial Planning Process
1. Define financial goals2. Develop financial plans and strategies3. Implement financial plans and strategies4. Develop and implement budgets5. Use financial statements to evaluate results6. Redefine goals, revise plans as situations
change
The Role of Money
• Medium of exchange used to measure value
• Utility amount of satisfaction derived from purchases versus cost
• Link to personal psychological concepts and key role in personal relationships
Attain Your Financial Goals
• Set specific goals and focus on results• Make goals realistic• Involve family members
and others• Prioritize goals and set
a time frame
Put Target Dates on Financial Goals
• Short-term in the next year
• Intermediate-term the next 2-5 years
• Long-term 6 years or more
From Goals to Plans:A Lifetime of Planning
• Early childhood• High school and college• Family formation• Career development• Pre-retirement• Retirement
Personal Financial Planning Life Cycle
How a $1,000 Investment Grows over Time
Plans to Achieve Your Financial Goals
• Asset acquisition planning
• Liability and insurance planning
• Savings and investment planning
• Employee benefits planning
• Tax planning• Retirement and estate planning
Using Professional Financial Planners
Types of planners • Commission-based – earn commission
on financial products sold• Fee-only – charge fees based on
complexity of the plan
The Planning Environment
Financial planning takes place in a dynamic economic environment created by the actions of
Government Business Consumers
Financial Planning Environment
Government
• Federal government plays a major role in regulating the level of economic activity
• Taxation and regulation constrain personal financial planning
The Economy
Monetary Policy• Controls money
supply• Used to stimulate or
contract economic growth
Fiscal Policy• Controls levels of
taxation• Sets levels of
government spending
The Economy
Economic Cycles• Stages related to
employment and production levels
• Growth measured by changes in GDP
Inflation• Measured by changes
in CPI• Affects purchasing
power and interest rates
• Affects financial plans and goals
The Economic Cycle
What Determines Your Personal Income?
• Demographics and income– Age, marital status
• Education
• Where you live
• Career
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