Financial Planning;

Category: Education

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Presentation Transcript

PowerPoint Presentation:

1 How to prepare your Personal Financial Plan Send to [email protected]

Financial Planning Why It’s Important:

2 Financial Planning Why It’s Important What causes some people to feel financially secure and others not? Conditions that promote financial well being include: • income to meet current needs • savings to meet financial emergencies • insurance to cover major risks (health, life, property and disability insurance) • savings and investment programs to meet future goals

The Financial Planning Process:

3 The Financial Planning Process Develop a plan Navigating competently through the life stages of education , employment/career , marriage , home ownership , parenting , retirement and estate planning -- requires knowledge acquired through continual self-education. The conscious management of your financial circumstances, will enable you to anticipate opportunities and prepare for contingencies. This approach should give you better choices when life's inevitable events, adverse or otherwise, occur.

Financial Plan Goals :

4 Financial Plan Goals Education Employment/career Marriage Home ownership (where you want to live) Family Retirement Estate planning

Planning Areas:

5 Planning Areas Consumption and savings planning Insurance Planning Investment Planning Income Tax Planning Debt Planning Retirement Planning Estate Planning

Investment Instruments How and what stages of life to use them:

6 Investment Instruments How and what stages of life to use them Economic Environment and the Psychology of Investing How might you be affected by recessions, inflation, unemployment The Ages and Stages Approach to Investing (see web site)

Education Use the websites provided or other sources to answer the questions about::

7 Education Use the websites provided or other sources to answer the questions about: Education Where? How much will it cost? How will you pay for it? Web sites

Goals Cont. Career:

8 Goals Cont. Career

Planning for Your Family:

9 Planning for Your Family What are your domestic plans for the future. What costs must you plan for?

Buying a Home: :

10 Buying a Home: Your home can represent most of your savings, and normally appreciates in value.


11 Investments: Assets that are invested for the future are used to accumulate wealth and satisfy goals: stocks, bonds, mutual funds etc.

Risk Management or how much and what kind of insurance do I need:

12 Risk Management or how much and what kind of insurance do I need

Retirement Plan: :

13 Retirement Plan: It will be mostly up to you to save for retirement Pensions?, IRAs, 401(k), 403(b), Keogh, or SEP-IRA plans

Personal Property: :

14 Personal Property: Tangible assets that represent your lifestyle Reported as fair market value, but normally depreciate in value Examples -- boats, furniture, electronics, clothing, jewelry

Other Assets: :

15 Other Assets: Any other tangible or intangible asset that may or may not be of value Examples -- business ownership, collections, money owed you

Calculating the Bottom Line:

16 Calculating the Bottom Line

Your Net Worth: A Measure of Your Wealth:

17 Your Net Worth: A Measure of Your Wealth Insolvency: do you owe more than you own? How age affects net worth guidelines Uses of a balance sheet

Your Liabilities: What You Owe:

18 Your Liabilities: What You Owe Current liabilities are liabilities that must be paid-off within the next year. examples -- credit cards and utility bills Long-term liabilities are liabilities that extend beyond one year. examples -- home mortgage and auto loans

Using an Income Statement to Trace Your Money:

19 Using an Income Statement to Trace Your Money Personal income statement -- the financial motion picture Cash basis: statement based entirely on actual cash flows

Income: Where Your Money Comes From:

20 Income: Where Your Money Comes From Sources of income: wages, tips, royalties, salary, and commissions Income is amount earned, not necessarily amount received.

Expenditures: Where Your Money Goes:

21 Expenditures: Where Your Money Goes The two major expenditure categories: taxes and living expenses Fixed expenses: Expenses you don’t directly control -- e.g., mortgage, rent, cable TV Variable expense: Expenses you can control -- e.g., food, entertainment, clothing

Where Does It Go, On Average?:

22 Where Does It Go, On Average? Taxes, Food, Housing, Medical Care The more earned, the more spent on education and entertainment.

Using Ratios: A Financial Thermometer:

23 Using Ratios: A Financial Thermometer Question 1: Do you have adequate liquidity to meet emergencies? Question 2: Do you have the ability to meet your debt obligations? Question 3: Are you saving as much as you think you are?

Putting It All Together: A Review:

24 Putting It All Together: A Review Evaluate your financial health: balance sheet, income statement, and ratios Define your financial goals: must know how much you can save Develop a plan of action: use the income statement and a cash budget Implement your plan: Just do it! Review your progress, reevaluate, and revise your plan: back to the balance sheet, income statement, ratios, and budget

Question 1: Do You Have Adequate Liquidity:

25 Question 1: Do You Have Adequate Liquidity Ratios to determine whether or not you have enough monetary assets (1) to pay for an unexpected large expense or (2) to tide you over during periods of reduced or eliminated earnings. Current ratio Month’s living expenses covered ratio

Current Ratio:

26 Current Ratio monetary assets current liabilities This ratio shows you whether you have enough liquid assets to cover expenses currently due.


27 Interpretation Ratio greater than 2 recommended Track the trend and if going down --make changes

Month’s Living Expenses Covered Ratio:

28 Month’s Living Expenses Covered Ratio monetary assets month’s living expenses This ratio tells you how many months living expenses you can cover with your present level of monetary assets.


29 Interpretation The rule of thumb: 3 to 6 months of expenses Factors that affect the rule of thumb: Available credit cards or home equity loans Potential for higher earnings on less liquid accounts Stability of income Track the trend and if going down--make changes

Question 2: Can You Meet Your Debt Obligations?:

30 Question 2: Can You Meet Your Debt Obligations? Ratios to determine whether or not you can meet current or long-term debt obligations: Debt ratio Long-term debt coverage ratio

Debt Ratio:

31 Debt Ratio total liabilities total assets This ratio tells you whether you could payoff all your liabilities if you liquidated all your assets.


32 Interpretation Represents percentage of assets financed with borrowing Track the trend; ratio should go down with age

Long-term Debt Coverage Ratio:

33 Long-term Debt Coverage Ratio total income available for living expenses total long-term debt payment This ratio tells you how many times you could make your debt payments with your current income.


34 Interpretation Ratio of 2.5 or greater recommended Track the trend and if going down -- make changes Consider the inverse --the percentage of take-home pay needed to repay debt

Question 3: Are You Saving As Much As You Think?:

35 Question 3: Are You Saving As Much As You Think? Ratio to determine whether you are saving as much of your income as you think. Savings ratio

Savings Ratio:

36 Savings Ratio income available for savings income available for living expenses This ratio tells you what proportion of your after-tax income is being saved.


37 Interpretation U.S. rate typically 3% - 8% Varies with stage of the financial life cycle and goals

Record Keeping:

38 Record Keeping The three reasons for accurate record keeping Preparing taxes Tracking expenses Providing information for others to use in the event of an emergency

Record Keeping (cont’d):

39 Record Keeping (cont’d) The two steps of record keeping Tracking your personal financial dealings Storing your financial records in an accessible manner

Ways to Track Expenditures:

40 Ways to Track Expenditures Using checks and credit cards: Those expenditures leave a paper trail Using cash: Record expenditures in a notebook or ledger Generating a monthly income and expense statement Using computer programs to track all financial transactions Learning what and where to keep records


41 Taxes Keep all tax-related receipts and records for 6 years. Always keep accurate tax records in the event of an audit.

A Cash Budget:

42 A Cash Budget A plan for controlling cash inflows and outflows Purpose: To balance income with expenditures AND savings

Putting It All Together: Budgeting:

43 Putting It All Together: Budgeting Evaluate your financial health and your financial plan Develop a cash budget Implement a cash budget

Developing a Cash Budget:

44 Developing a Cash Budget Examine last year’s total income and adjust for the current year. Estimate your tax liability. Identify all fixed expenditures. Identify all variable expenditures. Look for ways to reduce your variable expenses. Consider the effect of credit payments on future income

Implementing a Cash Budget:

45 Implementing a Cash Budget Try the budget for a month. Adjust the plan or your expenses as necessary to maintain the plan. Try the envelope system.

Managing Your Own Affairs Versus Hiring a Professional:

46 Managing Your Own Affairs Versus Hiring a Professional The 3 options Go it alone,make a plan and have it checked by a professional. Work with a professional and develop a plan. Let the professional do it all.

Paying Your Financial Planner::

47 Paying Your Financial Planner: Fee-only planners derive income from charging the client for the service provided or for a financial plan. Commission-based planners derive income from the sale of financial products. Some planners charge a combination of fees and commissions.

Choosing a Professional Planner:

48 Choosing a Professional Planner Pick a competent planner with accreditation(s) from a professional organization(s). Pick a planner with whom you are comfortable. Pick a planner with experience.

Choosing a Professional Planner (cont’d):

49 Choosing a Professional Planner (cont’d) Before hiring a planner, ask lots of questions about his/her history. Call professional organizations to get recommendations.


50 Summary Balance sheet -- determines net worth based on a comparison of assets and liabilities Income statement -- summarizes cash inflows and cash outflows Financial ratios -- diagnose your financial health

Summary (cont’d):

51 Summary (cont’d) Record keeping -- implement strategies to accurately track expenses and maintain necessary financial records for the future Cash budget -- provides a plan for achieving your goals by balancing cash inflows and outflows Financial planners -- can provide many levels of assistance for your planning needs