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.
LEARNING OUTCOMES
1 Identify the benefits of using personal
financial planning techniques to manage
your finances
2 Describe the personal financial process and
define your goals
3 Explain the life cycle of financial plans, the
role they play in achieving your financial
goals, how to deal with special planning
concerns, and the use of professional
financial planners
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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LEARNING OUTCOMES (continued)
4
Examine the economic environment’s
influence on personal financial planning
5 Evaluate the impact of age, education, and
geographic location on personal income
6 Understand the importance of career choices
and their relationship to personal financial
planning
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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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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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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Exhibit 1.3 The Six-Step Financial Planning
Process
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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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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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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 1.5 How a $1,000 Investment
Grows Over 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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Financial Planning Concerns
• Managing two incomes
• Managing employee benefits
• Managing finances in tough economic times
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 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
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Exhibit 1.6 The Financial Planning
Environment
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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.
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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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
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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
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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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
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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KEY TERMS
• Standard of living
• Average propensity to
consume
• Wealth
• Tangible assets
• Personal financial
planning
• Utility
• Goal dates
•
•
•
•
•
•
•
•
Peak
Contraction
Trough
Inflation
Consumer price index
Purchasing power
Expansion
Flexible-benefit
(cafeteria) plans
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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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
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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