Transcript File

Understanding
the Financial
Planning
Process
Rewards of Sound Financial
Planning
• Improving your standard of living
• Spending money wisely
• Accumulating wealth
Organizational Planning Model
Personal Financial Planning
• Systematic process that considers
important elements of an
individual’s financial affairs to
fulfill financial goals
The Six-Step Financial Planning Process
Financial Goals
• Results that an individual wants to attain
• Utility and cost are to be considered when
evaluating alternative qualities of life,
spending patterns, and forms of wealth
accumulation
• Money and utility are linked to psychological
concepts of values, emotion, and personality
• Financial planning is an important part of
the conflict resolution process
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part.
PFIN4 | CH1
6
Target Dates on Financial Goals
• Goal dates: Target dates in the future when
certain financial objectives are expected to be
completed
• Long-term goals
• Indicates wants and desires for a period covering
about 6 years out to the next 30 or 40 years
• Short-term financial goals
• Set each year and cover a 12-month period
• Intermediate goals
• Bridge the gap between short- and long-term goals
The Personal Financial Planning Life Cycle
Types of Financial Planning
• Asset acquisition
• Liability and insurance
• Savings and investment
• Employee benefit
• Tax
• Retirement and estate
How a $1,000 Investment
Grows Over Time
Financial Planning Concerns
• Managing two incomes
• Managing employee benefits
• Managing finances in tough
economic times
Financial Planning Players
• Government
• Source of revenue for business and wages for
consumers
• Business
• Important part of the circular flow of income
that sustains a free enterprise system
• Consumers
• Consumer choices determine the kinds of
goods and services that businesses provide
The Financial Planning Environment
Factors that Determine the Personal
Income
• Place of residence
• Difference in salaries earned
• Difference in living costs
• Career
• Social, demographic, economic, and
technological trends influence decisions
regarding the fields that offer best
opportunities for future
Steps for Career Planning
• Identify interests, skills, needs, and
values
• Set specific long- and short-term
career goals
• Develop and use an action plan to
achieve those goals
• Review and revise career plans as the
situation changes
SUMMARY
• Sound financial planning is necessary for
achieving financial objectives
• Planning what to do with one’s money and
spending and investing it wisely involves
personal financial planning
• Financial goals help in achieving financial goals
• Financial planning constitutes a dynamic
environment including business and consumers
There are Four Basic Economic
Activities of Consumers
• Earning
• Spending
• Savings
• Borrowing
Earning
• Earning --- gaining money by working, owning a
business, or receiving investment returns.
Money gained from earning is called earnings.
A person’s career
choices, ability to find
employment, and ability
to advance determine
his or her expected
earnings and standard of
living.
Factors Affecting Earnings
Career Choices
•
•
Type of career/job
Place of
employment
Ability to Find
Employment
•
•
•
•
•
Standard of
Living
Education level
Employability skills
Prior job performance
Economic conditions
Workplace trends and
opportunities
Ability to Advance
• Type of career/job
• Education level
• Job performance
• Economic
conditions
• Workplace trends
and opportunities
Earnings
Education pays…
Income
Earning Ability
Education
Unemployment
Spending
• Spending --- using money to purchase goods and
services.
• The way a person
spends money
determines the value
received and influences
the economy.
• Each purchase
contributes to the
demand for the product
or service purchased
Law of Scarcity
• Law of Scarcity: An economic system cannot
produce all goods and services that consumers
want, and most consumers do not have the
resources to purchase everything they want.
– Choices must be made about how limited resources
(time, money) are used.
Trade-offs and Opportunity Costs
• Because of scarcity, any time a choice is made there
are alternatives that are not chosen.
• When making a choice, other alternatives
must be sacrificed.
• The highest-valued alternative that must be
given up when a choice is made is the
opportunity cost of the choice.
• The choice of one item while giving up another
is called a trade-off.
Responsible spending
• Responsible spending
includes researching and
planning purchases in
advance and making wise
choices in light of
opportunity costs and
trade-offs that apply
Saving
• Saving --- putting aside money for later use.
– Money may be “saved” in a bank account or in a wallet.
• The form of savings used determines the financial return
“Later Uses” For Savings
• Emergencies
• Recurring expenses
• Future purchases
• Financial goals
• Retirement
Benefits of Saving
– Provide money for future purchases
– Can be used to earn income
– Produce a healthy economy
– Increase personal financial security
– Provide growth opportunities for business ventures
Responsible Saving forming the habit of saving
regularly & finding forms of
saving that yield high
returns
Borrowing
• Borrowing --- obtaining money, goods, or
services at present in exchange for the promise
of future payment . . . “Buy now, pay later.”
Examples of Borrowing
• Buying with a credit card
• Buying on installment
• Payday loans
• Cash advances
• Layaway purchases
Reasons for Borrowing
– Major purchases
– Emergencies
– Convenience
– Prepare for future goals
– Take advantage of good sales/offers
Responsible borrowing means borrowing
only what can be paid back when due
Education Tower – Education Affecting
Earnings
Goal
Challenge
• Build the
tallest freestanding tower
using only the
supplies
provided
• Each group
has a different
education
level with
certain skills
and limitations
Education Tower
High School Dropout
• Can use one hand only, the other must be kept behind their back
and all communication must be done nonverbally
High School Graduate
• Can use one hand only and the other must be kept behind their
back
Associate degree
• Have full use of their hands but all communication must be done
nonverbally
Bachelor’s degree
• Have full use of their hands but the team must designate one
person only who can talk; others must communicate nonverbally
Doctorate degree
• Have no limitations
Education Tower Discussion
Which group had to
work the hardest to
build the tower? Why?
Why were some
groups more successful
than others?
How does this activity
relate and not relate to
real life?
How did the education
level relate to the
degree of the assigned
limitations?
How might a person
get the “skills” needed
for the opportunity to
add to their
occupational level and
earn a higher income?
QUESTIONS