CHAPTER 1:
UNDERSTANDING
THE FINANCIAL PLANNING
PROCESS
1-2
The Rewards of
Sound Financial Planning
Maintain and improve standard
of living.
Control spending in order to live
well today and tomorrow!
Accumulate wealth.
1-3
Average Propensity to Consume:
The percentage of each dollar of
income that is spent, on average,
for current needs rather than saved.
 What is your average propensity to
consume?
Income spent on current needs
Total income
1-4
The Personal Financial
Planning Process
Taking conscientious and
systematic steps toward
fulfilling your financial goals.
1-5
Steps in the Financial Planning Process:
1. Define financial goals.
2. Develop financial plans and strategies to
achieve goals.
3. Implement financial plans and strategies.
4. Develop budgets to monitor and control
progress toward goals.
5. Evaluate results by using financial
statements.
6. Revise goals as situations change.
1-6
1. Define financial goals
2. Develop plans
1-7
1. Define financial goals
2. Develop plans
3. Implement plans
4. Develop budgets
FINANCIAL ACTIONS
•Basic asset decisions
•Credit decisions
•Insurance decisions
•Investment decisions
•Retirement and
estate decisions
1-8
1. Define financial goals
2. Develop plans
3. Implement plans
4. Develop budgets
Prepare financial statements
5. Evaluate results
6. Revise plans
FINANCIAL ACTIONS
•Basic asset decisions
•Credit decisions
•Insurance decisions
•Investment decisions
•Retirement and
estate decisions
1-9
Money:
 Used as a medium of exchange.
 Financial goals are stated in dollar
amounts.
 Need to consider utility, or amount
of satisfaction derived from
purchases, as well as cost.
 May be closely linked to personal
psychological concepts.
 May play key role in personal
relationships.
1-10
To attain your financial goals:
 Be specific in defining goals and focus
on results.
 Make goals realistically attainable.
 Involve family members and enlist
their cooperation.
 Prioritize goals and set a definite time
frame.
1-11
Putting target dates
on financial goals:
 Short-term goals—to be
accomplished within the next year.
 Intermediate-term goals—to be
accomplished in the next 2-5 years.
 Long-term goals—to be accomplished
in time periods greater than 5 years.
1-12
From Goals to Plans:
A Lifetime of Planning
Early childhood
High school and college
Family formation
Career development
Pre-retirement
Retirement
1-13
Personal Financial Planning Lifecycle
Income
Income Stream
Retirement/
Estate
Tax
Benefits
Savings/
Investmen
Liability/Insurance
t
Asset Acquisition
10
20
30
40
50
Age
60
70
80
1-14
Benefit of planning:
Your money works more
efficiently for you by...
Utilizing the financial wonder—
The power of compounding
through time!
1-15
Growth of $1,000 at 8 % interest:
$50,000
$40,000
$30,000
21,725
$20,000
10,063
$10,000
2,159
4,661
$0
0
10
20
Years
30
40
1-16
Growth of $1000 at 10% interest:
$50,000
45,259
$40,000
$30,000
17,449
$20,000
21,725
6,727
$10,000
2,594
$0
0
10
20
Years
30
40
1-17
Use the personal computer to:
 Prepare financial
statements
 Plan retirement
 Prepare and file
tax returns
 Track investments
 Analyze needs
1-18
The Planning Environment
Financial planning is carried out in an
economic environment created by the
interactions of
Government
Business
Consumers
1-19
Money payments of wages, rents
interest, and profit
BUSINESS
GOVERNMENT
Money payments for goods
and services
CONSUMERS
1-20
Money payments of wages, rents
interest, and profit
Land, labor, and financial capital
BUSINESS
GOVERNMENT
Goods and services
Money payments for goods
and services
CONSUMERS
1-21
Money payments of wages, rents
interest, and profit
Land, labor, and financial capital
Public goods &
services, regulations,
and revenues
BUSINESS
GOVERNMENT
Taxes
Goods and services
Money payments for goods
and services
CONSUMERS
1-22
Government policy decisions are used
to regulate the economy in an effort to:
 Provide economic stability
 Maintain acceptable employment
levels
1-23
Monetary Policy
 Controls money supply
 Used to stimulate or contract
economic growth
Fiscal Policy
 Controls levels of taxation
 Sets levels of government spending
on various programs
1-24
Policies seek to control:
Economic Cycles
– Stages related to employment and
production levels
– Growth measured by changes in GDP
Inflation
– Measured by changes in CPI
– Affects purchasing power and interest
rates
– Affects financial plans and goals
1-25
Economic Cycles
Levels of Employment and
Production
HIGH
LOW
Expansion Recessio
n
Depression
Recovery
1-26
What Determines Your
Personal Income?
Age, marital status
Education
Where you live
Career choice
THE END!