PFIN 4

Understanding the Financial Planning Process

1

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.

GITMAN/ JOEHNK/ BILLINGSLEY

2Copyright ©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 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

LEARNING OUTCOMES

PFIN4 | CH1

3Copyright ©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.

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

LEARNING OUTCOMES (continued)

PFIN4 | CH1

Rewards of Sound Financial Planning

4Copyright ©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.

• Improving your standard of living• Spending money wisely• Accumulating wealth

PFIN4 | CH1

Exhibit 1.1

5Copyright ©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.

Organizational Planning Model

PFIN4 | CH1

Personal Financial Planning

6Copyright ©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.

• Systematic process that considers important elements of an individual’s financial affairs to fulfill financial goals

PFIN4 | CH1

Exhibit 1.3

7Copyright ©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.

The Six-Step Financial Planning Process

PFIN4 | CH1

Financial Goals

8Copyright ©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.

• 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

PFIN4 | CH1

Target Dates on Financial Goals

9Copyright ©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. PFIN4 | CH1

• 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

Exhibit 1.4

10Copyright ©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.

The Personal Financial Planning Life Cycle

PFIN4 | CH1

Types of Financial Planning

11Copyright ©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.

• Asset acquisition• Liability and insurance• Savings and investment• Employee benefit• Tax• Retirement and estate

PFIN4 | CH1

Exhibit 1.5

12Copyright ©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.

How a $1,000 Investment Grows Over Time

PFIN4 | CH1

Financial Planning Concerns

13Copyright ©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.

• Managing two incomes• Managing employee benefits• Managing finances in tough economic

times

PFIN4 | CH1

Financial Planning Players

14Copyright ©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.

• 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

PFIN4 | CH1

Exhibit 1.6

15Copyright ©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.

The Financial Planning Environment

PFIN4 | CH1

Phases of Economic Cycles

16Copyright ©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. PFIN4 | CH1

Exhibit 1.7

17Copyright ©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.

The Business Cycle

PFIN4 | CH1

Source: Adapted from William Boyes and Michael Melvin, Economics, 8th ed. (Cengage, 2011), p. 135.

Economy

18Copyright ©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. PFIN4 | CH1

Factors that Determine the Personal Income

19Copyright ©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.

• 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

PFIN4 | CH1

Steps for Career Planning

20Copyright ©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.

• 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

PFIN4 | CH1

21Copyright ©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.

• Standard of living • Average propensity to

consume• Wealth• Tangible assets• Personal financial

planning• Utility• Goal dates

KEY TERMS

• Peak• Contraction• Trough• Inflation• Consumer price index• Purchasing power• Expansion• Flexible-benefit

(cafeteria) plans

PFIN4 | CH1

22Copyright ©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.

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

PFIN4 | CH1