Chapter 1

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Chapter 1 Whats Important

• Discuss financial logic exemplified by the 15
  principles of finance
• Importance of financial planning
• Setting up a plan
• Role of goals

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Financial Planning

• Objectives of planning
• Avoid financial pitfalls to achieve goals
• Understand logic behind financial planning
• Why plan?
• Needed to achieve financial goals
• To reach goals, first must set them

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Planning to Achieve Goals

• Managing the unplanned
• Accumulate wealth for special expenses
• Saving for retirement
• Protecting your assets
• Investing intelligently
• Minimize and defer taxes

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Financial Planning Process

• On-going- changes as life changes
• Evaluate current financial situation
• Define financial goals
• Develop the action plan
• Implement it and stick to it
• Review and reevaluate as needed

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Goals

• Define
• Be specific
• Write down
• Attach a cost
• Determine time frame date to accomplish

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Budget and Planning Process
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Your Income What Determines

• Earnings determine your standard of living
• Education is key factor in determining income
• Some correlation with marital status
• Unfortunately, there is much, much more
• Gender, race/ethnicity and age discrimination

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The Fifteen Principles

• The risk-return trade-off
• We are risk adverse wont accept more risk
  unless paid for it
• Time Value of Money
• A dollar received today more valuable than one in
  the future
• Compound interest interest on interest

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Risk-Return Tradeoff
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Principles- Continued

• 3. Diversification reduces risk
• Money in several investments, not just one
• 4. Not all risk is equal
• Not all risk can be eliminated

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Reduce Risk by Diversification
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More Principles

• 5. Financial markets are competitive
• Bargains dont last long
• Difficult to beat the market
• 6. Taxes affect decisions
• Understand how taxes affect you
• Look at alternatives on after-tax basis

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A Few More Principles

• 7. Stuff happens importance of liquidity
• 8. Nothing happens without a plan
• 9.Best protection is knowledge
• 10. Protect against catastrophes

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Principles Almost Done

• 11. Time dimension of investing
• 12. Agency problem beware of sales pitches
• 13. Pay yourself first

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At Last, The End

• 14. Money isnt everything
• 15. Just do it!
• Commitment to make the plan is the most difficult
  step
• Once you take control, following steps are easier

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Required Web ReadingIdentity Theft

• Read before next class
• Address in schedule