Planning Personal Finances

1
Planning Personal Finances

• The Importance of Planning
• Rule 1
• If you want to enjoy a successful and rewarding
  life, you have to plan for it.
• Dont count on the winning lottery.
• Create your own success.
• Design a plan and follow it.

Investing in Your Future. NAIC National
Association of Investors Corporation. 2001. p.
5
2
What is a Plan

• A method or process worked out in advance that
  leads to the achievement of some goal
• It is systematic
• Relies on using a step-by-step procedure
• Needs to be flexible
• Adapts to gradual changes in your goal

3
The Planning Process

• Step 1 Set a Goal
• Identify what you want to achieve or obtain
• Step 2 Acquire Knowledge
• Understand what it will require to achieve your
  goal. Fill in the picture by research,
  conversation, and thought
• Step 3 Compare Alternatives
• Weigh your options, analyze pluses and minuses of
  each--the costs, demands, the likelihood of
  success

4
The Planning Process

• Step 4 Choose a Strategy
• Select one option as the best plan of action
• The choice is based on sound information, the
  experience of others, and your own interests and
  abilities.
• Step 5 Make a Commitment
• Resolve to proceed step by step toward achieving
  your goal.
• Step 6 Keep Flexible
• Evaluate your progress and revise your plan to
  deal with change

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Example

• Step 1 Set a Goal
• Purchase a stereo system
• Step 2 Acquire Knowledge
• Visit friends to hear their systems
• Study standards and specification
• Check dealers, brands, models, and prices
• Consult Consumer Reports

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Example

• Step 3 Compare Alternatives
• Alternative 1 Buy a 2nd hand system for 250
• Pro Affordable high-end equipment. Can buy
  right now.
• Con Uncertain condition of equipment. No
  warranty or service agreement.
• Alternative 2 Buy a compact shelf system for
  325
• Pro Can afford now. New--has warranty
• Con Not suitable for adding extra speakers or
  using with TV. Not best sound quality.

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Example

• Step 3 Compare Alternatives (cont)
• Alternative 3 Buy a high-quality component
  system for 775
• Pro Excellent sound. Greatest flexibility.
  New equipment with warranty.
• Con Cost more than prepared to pay now.
• Step 4 Choose a Strategy
• Decide to buy Alternative 3
• Will delay purchase for 6 months instead of
• using credit card with high interest.

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Example

• Step 5 Make a Commitment
• Start a Stereo Fund
• Need to save 130 per month
• Pack your lunch instead of eating out
• Cut back on entertainment cost (movies)
• Step 6 Keep Flexible
• Four months into the plan, a discontinued model
  sale provides an opportunity to buy comparable
  equipment for 550.
• You have saved 520 in your Stereo Fund
• Make the purchase paying cash

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Planning vs Dreams

• Planning is not the same as dreaming, but it
  uses dreams as raw materials. p8
• Dream Become a trial lawyer
• Dream Go to Spain as an exchange student
• Dreams can become goals
• Requires a plan
• Fits the 6 steps of the planning process

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Financial Planning Process

• Step 1 Determine your current financial
  situation
• Step 2 Begin developing financial goals
• Step 3 Identify alternative courses of action
• Step 4 Evaluate these alternatives
• Step 5 Create and implement your financial plan
• Step 6 Reevaluate and revise your financial plan

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Financial Goals

• Short-term goal
• Attain within one year
• Intermediate-term goal
• Reach in 2 - 5 years
• Long-term goals
• Reached after six to ten years or 30 years

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Effective Goals

• Written Down
• Measurable
• Realistic
• It is critical that you make a commitment to
  achieve the goals you set.

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Examples of Financial Planning

• Describe a situation in your life where either
  you or a family member used the planning process
  to obtain goals
• Describe a situation where a financial plan was
  used to obtain financial goals