GITMAN/ JOEHNK/
BILLINGSLEY
PFIN
4
1
Understanding
the Financial
Planning
Process
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
1. Define Personal Financial
Planning.
Personal Financial Planning
• Systematic process that considers important
elements of an individual’s financial affairs
to fulfill financial goals
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
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2. What are the rewards of sound
financial planning?
Rewards of Sound Financial Planning
• Improving your standard of living
• Spending money wisely
• Accumulating wealth
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
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Exhibit 1.1 Organizational Planning Model
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3. What are the six steps in the
Financial Planning Process?
Exhibit 1.3 The Six-Step Financial Planning
Process
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
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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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
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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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
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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
4. What are the major plan
categories in achieving financial
goals?
Types of Financial Planning
•
•
•
•
•
•
Asset acquisition
Liability and insurance
Savings and investment
Employee benefit
Tax
Retirement and estate
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
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Exhibit 1.4 The Personal Financial
Planning Life Cycle
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
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5. What are the two important
aspects of the financial planning
environment?
The Players - 1
• 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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH1
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Exhibit 1.6 The Financial Planning Environment
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Government
• Federal government plays a major
role in regulating the level of
economic activity
• Taxation and regulation constrain
personal financial planning
The Economy - 2
Monetary Policy
Fiscal Policy
• Controls money supply
• Used to stimulate or
contract economic
growth
• Controls levels of
taxation
• Sets levels of government
spending
The Economy
Economic Cycles
Inflation
• Stages related to
employment and
production levels
• Growth measured by
changes in GDP
• Measured by changes in
CPI
• Affects purchasing power
and interest rates
• Affects financial plans and
goals
Phases of Economic Cycles
Expansion
• Real GDP increases until it hits a peak
Peak
• Expansion ends and a contraction begins
Contraction
• Real GDP falls
Trough
• Contraction ends and an expansion begins
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
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Exhibit 1.7 The Business Cycle
Source: Adapted from William Boyes and Michael Melvin, Economics, 8th ed. (Cengage, 2011), p. 135.
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Economy
Inflation
• General price level is increasing
Consumer price index (CPI)
• Measure of inflation based on changes in the
cost of consumer goods and services
Purchasing power
• Amount of goods and services that each dollar
buys at a given time
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
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6. What determines your personal
income?
Factors that Determine the Personal Income
• Demographics and 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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
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