© 2008 Thomson South-Western

UNDERSTANDING THE FINANCIAL

PLANNING PROCESS

CHAPTER 1

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The Rewards of Sound Financial Planning

Maintain and improve standard of living.

Control spending in order to live well today and tomorrow!

Accumulate wealth.

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Improving Your Standard of Living

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Average Propensity to Consume

The 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 Financial Planning Process

Taking conscientious and systematic steps toward fulfilling your financial goals.

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The Six-Step Financial Planning 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 financial statements.

6. Revise goals as situations change.

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1. Define financial goals

2. Develop plans

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3. Implement plans

4. Develop budgets

1. Define financial goals

2. Develop plans

FINANCIAL ACTIONS•Basic asset decisions•Credit decisions•Insurance decisions•Investment decisions•Retirement and estate decisions

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3. Implement plans

4. Develop budgets

1. Define financial goals

2. Develop plans

5. Evaluate results

6. Revise plans

FINANCIAL ACTIONS•Basic asset decisions•Credit decisions•Insurance decisions•Investment decisions•Retirement and estate decisions

Prepare 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 personal psychological concepts.

May play key role in personal relationships.

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Attain Your Financial Goals

Be 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 time

frame.

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Put Target Dates on Financial Goals

Short-term goals—to be accomplished within the next year.

Intermediate-term goals—to be accomplished in the next 2-5 years.

Long-term goals—to be accomplished in time periods greater than 5 years.

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From Goals to Plans:A Lifetime of Planning

Early childhood High school and college Family formation Career development Pre-retirement Retirement

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Personal Financial Planning Lifecycle

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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% and 10% Interest

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Using the Personal Computer

Prepare financial statements

Plan retirement

Prepare and file tax returns

Track investments

Analyze needs

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The Financial Planning Environment

Financial planning is carried out in an economic environment created by the interactions of

Government Business Consumers

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The Financial Planning Environment

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Government Policy Decisions

Provide economic stability Maintain acceptable employment

levels

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Monetary Policy Controls money supply Used to stimulate or contract economic

growth

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 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

Government Policy Decisions

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Economic Cycles

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What Determines Your Personal Income?

Age, marital status Education Where you live Career choice