Financial Planning:
The Ties That Bind
Personal Financial Planning
• Financial planning is the process of meeting your life
goals through the proper management of your
finances.
• Life goals can include buying a home, savings for
your child’s education, planning for your retirement
or estate planning.
The Role of Personal Financial
Planning
• To manage income and expenses.
• To create an awareness of your current
financial status.
• To plan for the future by developing goals and
devising ways to achieve those goals.
• To provide a system of evaluation and revision
for your financial progress.
Why Should You Develop a Personal
Financial Plan?
• It helps you achieve your financial goals.
• It helps you achieve financial independence.
• It helps you understand where all your money
is spent.
• It may even help you support those that have
supported you.
Why Isn’t Personal Financial Planning
Easy?
• Some people are uncomfortable discussing
financial matters, the “fear of finance.”
• Motivation and time is required to complete
an accurate plan.
• Good record keeping is necessary both before
and during the planning period.
What Can You Accomplish As a Result
of This Course?
• Manage the unplanned.
• Accumulate wealth for special expenses.
• Save for retirement.
• “Cover your assets.”
• Invest intelligently.
• Minimize your tax payments
The Personal Financial Planning
Process
• Step 1: Evaluate Your Financial Health
• Step 2: Define Your Financial Goals
• Step 3: Identify alternative courses of actions
• Step 4: Evaluate alternatives
• Step 5: Develop a Plan of Action
• Step 6: Implement Your Plan
• Step 7: Review Your Progress, Reevaluate, and
Revise Your Plan
Step 1: Evaluate Your Financial
Health
• Evaluate your
current situation:
income, spending,
wealth(assets and
debts)
• Assess your whole
financial picture
Step 2: Define Your Financial Goals
• Specifically define and write down your
financial goals to reflect your financial and life
situation.
• Attach a cost to each goal.
• Set a date for when the money is needed to
accomplish the goal.
What Are the Time Horizons for
Financial Goals?
• Short-term goals can be accomplished within
a 1-year period .
• Intermediate-term goals take 1-10 years to
accomplish.
• Long-term goals take more than 10 years to
achieve.
Goals: The Cornerstone of a Financial Plan
• Goals keep the future in mind by reminding
you of the rewards.
• Goals entice you to keep the plan in effect.
• Goals provide tangibility for the question,
“Why?”
Step 3: Identify alternative courses of
actions
• Continue the same course of action: e.g. save the
same amount
• Expand the current situation: e.g. increase the
amount
• Change the current situation: e.g. change the
investment option
• Take a new course of action: e.g. use savings to pay
off the debt
Step 4: Evaluate alternatives
• Consequence of choice: Trade off between alternatives; opportunity
cost e.g. a decision to invest in stocks means you cannot take a vacation
• Evaluate risk
– Inflation Risk- Rising prices causes lost buying power
– Interest Rate Risk- Changing interest rates affect your cost(when you
borrow) and your benefits(when you save or invest)
– Income Risk- Risk of unemployment
– Personal Risk- health , safety risk
– Liquidity Risk- Higher return at the cost of liquidity
Step 5: Develop a Plan of Action
• Flexibility -- The ability
for your plan to
change as your
situations or goals
change.
• Liquidity -- Your ability
to convert noncash
assets into cash with
relative ease and
speed.
Step 5: Develop a Plan (cont’d)
• Protection -- Your ability to meet the
unexpected large expenses without
destroying your plan.
• Minimization of Taxes -- Your ability to pay as
little as possible to Uncle Sam.
Step 5 :Develop a Plan (cont’d)
• Consider future needs:
– Create a budget
– Determine investment strategies
– Plan for big-ticket purchases
– Plan for managing debt
– Plan for insurance
– Plan for the expense of children and college
– Plan for retirement
– Plan for estate transfer
Step 6: Implement Your Plan
• Use common sense and moderation; don’t
force yourself to track every penny.
• Remain positive about your plan; use it as a
roadmap.
• Stay on track after the detours; rewards await
you.
Step 7: Revise Your Plan
• Periodically review your progress to see if any
fine tuning needs to be done.
• Make sure that your plan still matches your
goals.
• Be prepared to start over if your plan no
longer meets your needs.
The Life Cycle of Financial Planning
• Stage 1: The Early Years -- A Time of Wealth
Accumulation
• Stage 2: Approaching Retirement -- The
Golden Years
• Stage 3: The Retirement Years
Stage 1: The Early Years -- A Time of
Wealth Accumulation
• Develop your savings
plan.
• Set your initial goals
of all lengths.
• Establish your long-
range investment
strategy.
Stage 2: Approaching Retirement -- The
Golden Years
• Realize intermediate-
term goals that were
established during
Stage 1.
• Re-evaluate the plan
to match current
goals.
• Plan for retirement.
Stage 3: The Retirement Years
• Reduce investment
risk
• Concentrate on
preservation rather
than growth of assets
• Plan for the transfer of
your estate
Best Practices When Approaching
Financial Planning
• Set measurable goals.
• Understand the effect your financial decisions have
on other financial issues.
• Revaluate your financial plan periodically.
• Start now. Do not assume that financial planning is
for when you are older.
• Start with what you have got. Do not assume that
financial planning is for the wealthy.
Best Practices When Approaching
Financial Planning
• Look at the bigger picture. Financial planning is more
than retirement planning or tax planning.
• Do not confuse financial planning with investing.
• Do not expect unrealistic returns on the
investments.
• Do not wait for a money crisis to begin financial
planning
