• Financial Planning Process• Establish and define the relationship • Gather data and determine goals• Evaluate and analyze the client’s situation• Develop recommendations and alternatives

Financial Planning Assignment

Financial Planning Assignment

• Current assets & current liabilities• Reinvested interest and dividends• Including employer retirement contributions as planned

savings

And what is the definition of savings anyway?

Financial Statements

Professor Solis Earns $100,000 for 9 mos./paid over 9 mos. or

$11,111/mos. Has $2,775 automatically transferred to MMA so can

pay bills during the summer $667 is withheld for 403(b) contribution & employer

matches that with an additional $667 Sets aside $500/month for down payment on car to

purchase in 2 years & $700/month for children’s education in 10 years

Cash Management Topics

Spending plans

Liquid assets and savings strategies

Credit management and debt reduction

Housing decisions and financing

Spending Plans

• Set goals• Project cash inflow and outflow• Record inflow and outflow (including purchases made

using credit)• Compare and analyze• Adjust (inflows, outflows, and/or goals)

What is Your Money Personality?

Desire to create wealth

Willingness to take riskHoarderAchiever

EntrepreneurThrill seeker

Liquid Assets & Savings Strategies

Saving for:• Goals• Emergencies

Saving for Goals• What do you want?• How much do you need to

save to get it?• Do you have funds already set

aside?• How soon do you want it?• How much can you earn on

savings/investments?• Use time value of money to

calculate annual/monthly savings needed

Emergency Funds

Funds to fall back on if you become ill or disabled and

can't work, or if you or your spouse lose your job, incur

large medical bills, or have an unexpected large bill such as a

major car or home repair.

Keep from reducing assets for other goals or increasing liabilities.

Not to be used for major risks that insurance can cover

Purpose of Emergency Fund

SizeHow much should a client have in an emergency fund?

3 to 6 months is the rule of thumb

Based on Income or Expenses?

What are the considerations regarding size?

Size

depends on things like:

• Personal Financial Situation• Risk Tolerance• Demographic characteristics• Health• Job Stability and Outlook

Investing the Money

• Liquidity- ability to quickly convert an assets to cash with little to no uncertainty in value

• Marketability- ease of buying or selling an asset for its market value

Financial Planning Assignment

Rank order the following from most to least liquid….• Stock mutual fund• Real estate• Certificate of Deposit (CD)• Money Market Account/Mutual Fund• Savings Account

Financial Statements

What rate of return do you expect to earn on an

emergency fund?http://www.bankrate.com/brm/rate/

high_ratehome.asp?params=US,416&product=160

http://www.bankrate.com/brm/rate/high_ratehome.asp?

params=US,416&product=14

Jack and Sarah Thompson Jack (age 30), Sarah (29), married, no kids Jack is a teacher earning $30,000/year Sarah is a pharmacy rep. earning $20,000 to $100,000

over the past 6 years ($95,000 this year) Both are moderately risk tolerant They manage to pay all bills (including CC balances

monthly) and are saving regularly ($20,000 this year) They currently have $35,000 in retirement accounts,

$25,000 in equity MFs, & $3,000 in savings accounts.

How much would you recommend they allocate to their emergency fund?

How would you recommend they accomplish that allocation?

Reallocate assets?Regular savings?Use of lines of credit?Use of investment asset?

What if…• They adopt twins• Both of their salaries are more stable? Closer to equal?• They are very risk tolerant

…how would this change your emergency fund recommendation?

Emergency Fund Strategy

Benchmark—3 to 6 months?Trade-offs• Liquid Funds earn lower returns• Liquidation Costs for Non-Liquid Assets

Layered Emergency Fund• Money Market Account/Fund• Laddered CDs / Bonds / T-Bills• Lines of Credit• Securities

Laddering Your grandmother has

$90,000 she wants to keep in a CD at a local bank;

however, she would like the highest return

possible and she needs the money for short-term

emergencies. Her only other cash is $10,000 in a

money market deposit account. What do you

recommend?

Investing the Money

• Divide the money into 4 accounts of $22,500 each. Invest in: $22,500—3-month CD $22,500—6-month CD $22,500—9-month CD $22,500—12-month CD

• As each CD matures, roll it into a new 12-month CD

LADDERING“Earn a higher rate of return without jeopardizing the number of months of income protection…”

Rate of Return Term

2.5% CD 4 12 months

2.0% CD3 9 months

1.5% CD2 6 months

1.0% CD1 3 months

1.75% Average Microsoft Office Excel Worksheet

Liquid Assets

Systematic savings strategies

Savings instruments

Checking instruments

Develop a Systematic Plan• Set Goals

To determine an appropriate emergency fund

To determine how much to save To guide you on what types of

accounts to use

• Develop a strategy that works• Start early…but it’s only too late if

you don’t start now

FDIC Insurance

• Apply to banks, S&Ls , mutual savings banks, and credit unions only (and MMMFs until December 2013)

• Apply only to deposit accounts (not annuities, etc. sold by one of the above institutions)

• $250,000/institution/legal ownership (through December 2013—then back to $100,000 for everything except retirement accounts)

Mark and Mary Anderson have the following accounts at one Lubbock bank. Under the FDIC protection, how much of their money is insured?

CD in Mark’s name only: $150,000CD in Mark's name only: $200,000Money Market Account in Mary’s name: $100,000Joint checking: $5,000Joint savings: $298,000

FDICINSURED

Max and Sandra Smith have the following balances at the First National Bank in their local community. Assuming this bank is a federally insured institution, how much of their funds are covered by federal deposit insurance?

- joint checking‑ $125,000--joint money market account $180,000--individual CD in Max's name $125,000--individual CD in Sandra’s name $245,000--IRA in Sandra's name (5-year CD) $175,000--joint stock mutual fund shares $227,000

Individual

Joint tenancy (“or”)

Tenancy in common (“and”)

Account Ownership

Savings Instruments

• Savings & share accounts• Certificates of deposit (CD)• Money market accounts (MMA or

MMDA)• Money market mutual funds

(MMMF)• US Treasury bills (T-bill)• US EE savings bonds• US I bonds (inflation-indexed bonds)