Personal Finance: An Integrated Planning Approach Winger and

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Personal FinanceAn Integrated Planning Approach

• Winger and Frasca
• Chapter 1
• Financial Planning
• Why Its Important to You

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Introduction

• Personal financial planning is important because
  it helps individuals to achieve financial
  independence.
• There is a trend to increased self-reliance.
• Many employers are requiring that employees plan
  and manage their own retirement accounts.
  Traditional pension plans are less common today.
• The federal government is unwilling to deal with
  the funding problems for Social Security.
• There is greater economic uncertainty associated
  with job stability and investments. Therefore,
  financial planning is increasingly important.

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Chapter Objectives

• To understand why setting goals is an important
  first step in financial planning
• To appreciate that trends in the financial
  environmentinflation, taxes, and economic
  cyclesaffect financial success and enhance the
  need for planning
• To see why life-cycle financial planning is
  important and to understand the nature of a
  planning approach
• To understand what is meant by marginal analysis
  and opportunity costs and to know how these
  concepts are used in financial decision making
• To appreciate that financial success builds on a
  strong foundation and follows a building-block
  approach through time
• To meet the Steele family, a family we will
  follow through the text

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Topic Outline

• Why Study Personal Finance?
• Achieving Financial Goals through Planning
• Making Financial Decisions
• The Building Blocks of Success

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WHY STUDY PERSONAL FINANCE?

• Many people study personal finance in order to
  achieve financial success.
• Financial success may not have the same meaning
  to everyone.
• Some people think financial success is
  accumulating a lot of money.
• Some people may define financial success by their
  ability to purchase goods and services.
• In this textbook, financial success is defined as
  obtaining the maximum benefits from limited
  financial resources.

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Your Goals in Life

• Nonfinancial goals
• Family, children, education, religious, social,
  etc.
• Finances can affect your ability to attain these
  goals.
• Financial goals
• Financial independence is an important goal for
  many people. Financial independence is defined as
  having enough income or resources to be
  self-reliant.
• One of the financial choices that we make is
  between consumption today versus consumption in
  the future.
• Researchers have found that most people,
  regardless of their income level, feel that they
  need 20 more wealth than they currently have.

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The Principle of Diminishing Marginal Satisfaction

• Economists suggest that satisfaction from current
  consumption increases but at a decreasing rate.
• Stated simply, people enjoy their current
  purchases but as they purchase more and more,
  their satisfaction decreases.
• For example, the enjoyment that an individual
  experiences with the purchase of their first DVD
  is greater than the enjoyment that the individual
  experiences upon the purchase of their 100th DVD.
• At a certain income level, this explains why
  individuals are willing to postpone current
  consumption and save money.
• Saving money facilitates the attainment of
  financial and nonfinancial goals.

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Important Economic Trends

• The economic environment affects our ability to
  achieve our
• financial goals.
• Continuing Inflation
• Price levels over the long-run tend to increase
  13 annually. Inflation must be considered in
  financial goals.
• Persistent Business Cycles
• Instability in the economy creates uncertainty
  that must be considered in financial goals (job
  stability, emergency reserves, etc.).
• Continued Instability in Financial Markets
• A High and Selectively Rewarding Tax System
• The tax system rewards and punishes certain
  behaviors. We will review these in greater detail
  in Chapter 4.

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ACHIEVING FINANCIAL GOALS THROUGH PLANNING

• Planning is the key to achieving all goals
  especially financial goals.
• Life-cycle planning is the phrase that suggests
  that financial planning is a lifelong process.
• People experience different phases in their life
  such as career development and family formation,
  retirement, etc.
• Major financial planning areas
• The different phases of life impact the
  importance of the various components of financial
  planning. At different phases, different
  financial planning areas increase or decrease in
  importance.

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Major Financial Planning Areas

• Consumption and Savings Planning
• Debt Planning
• Insurance Planning
• Investment Planning
• Retirement Planning
• Estate Planning
• Income Tax Planning
• Career Planning

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Life-Cycle Financial Planning(assumes
children/marriage)
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A Planning Approach

• Step 1. Determine concrete goals.
• First state your broad goal such as the purchase
  of a home.
• Determine the specific pieces to achieve that
  goal such as the cost of the house, the down
  payment amount, etc.
• Step 2. Create an action plan.
• How will you achieve the goals stated in step 1?
  How much will you save each month and where will
  the money be invested?
• Step 3. Evaluate performance.
• At least annually, evaluate steps 1 and 2 to
  determine if any adjustments should be made in
  the action plan or goals.
• Step 4. Decide on a future course of action.
• Is your goal realistic or should it be
  reevaluated?

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MAKING FINANCIAL DECISIONS

• Decision making is a complex process because
  there are usually multiple choices with differing
  attributes.
• There are two economic concepts that are helpful
  in financial decision making.
• Marginal Analysisinvolves the analysis of the
  changes in important variables
• Example choosing between a public and private
  university the public university costs 15,000
  per year whereas the private university costs
  40,000 per year. Does the private university
  provide benefits that compensate for the
  additional 25,000 (40,00015,000)?
• Opportunity Coststhe benefits given up when one
  alternative is chosen over another
• Example putting money in a savings account
  rather than investing in the stock market. The
  opportunity cost is the higher return that could
  potentially be earned in the stock market.

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THE BUILDING BLOCKS OF SUCCESS

• First, build a supporting foundation.
• Give time and attention to building a career,
  buying adequate insurance, buying a house, and
  building cash reserves
• Then invest in secure investments.
• Long-term savings deposits, government
  securities, and annuities
• Gradually take greater risks.
• High quality stocks and bonds, real estate
• Avoid very risky investments until you are secure
  at the lower levels.
• Growth stocks, gold, undeveloped land

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Whats a Professional Financial Plannerand Do
You Need One?

• A financial planner is a professional who helps
  clients create, maintain, and execute a financial
  plan.
• The best known credentials are the CFP.
• Whether or not you need to hire a financial
  planner depends on the answers to the following
  questions
• How much time are you willing to spend managing
  your finances?
• How complex is your financial situation?
• How much do you know about each of the aspects of
  financial planning?
• Depending on your answers to the questions stated
  above, you may need to hire a financial planner
  to assist you with all or part of your financial
  management.

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Meet the Steele Family

• We will follow a family throughout their
  decision- making process to illustrate the
  financial planning process.
• They are a typical suburban family consisting of
  Arnold (h) and Sharon (w) and two childrenNancy
  and John.
• They are enjoying the good life associated with
  an above-average income.
• They are currently doing virtually no financial
  planning.
• to educate the children
• to enjoy retirement

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Discussion Questions

• What are some of the benefits of personal
  financial planning?
• How do economic cycles affect the personal
  financial planning process?
• What is meant by life-cycle financial planning?
• Explain marginal analysis and its importance to
  financial decision making.
• Opportunity cost is a very important concept in
  financial decision making. Can you think of an
  example of opportunity cost in your financial
  planning?

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