Chapter 1

The Financial Planning

Process

Learning Objectives
1. Explain why personal financial planning is
so important.
2. Describe the five basic steps of personal
financial planning.

3. Set your financial goals.

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Learning Objectives
4. Explain the personal finance lessons
learned in the recent economic downturn.
5. Explain how career management and
education can determine your income level.

6. List ten principles of personal finance.

7. Understand that achieving financial security
is more difficult for women.

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Introduction
Its easier to spend than to save.

Personal financial planning is an ongoing

processit changes as your financial
situation and position in life change.
Manage and control your finances with a
personal financial plan.
It helps you achieve financial and lifestyle
goals.

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Importance of Personal Financial

Planning
Accumulate wealth for special expenses

Save for retirement

Cover your assets

Invest intelligently
Minimize payments to Uncle Sam

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Five basic steps to personal

financial planning
1. Evaluate your financial health
2. Define your financial goals
3. Develop a plan of action

4. Implement your plan

5. Review your progress, reevaluate, and
revise your plan

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Step 1: Evaluate Your Financial

Health
Examine your current financial situation.
How much money do you make?
How much are you spending and on what?

Use careful record keeping to track finances

and spending.

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Step 2: Define Your Financial

Goals
Write or formalize your goals.

Attach a financial cost to each one.

When will you need the money to achieve
the goal?
Analyze and revise your goals.

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Step 3: Develop a Plan of Action

Flexibility:
Plan for life changes and the unexpected.

Liquidity
Immediate use of cash by quickly and easily
converting an asset.

Protection
Prepare for the unexpected with insurance.

Minimize Taxes
Keep more of what you earn.
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Step 4: Implement Your Plan

Stick to it.

Use your financial plan as a road map to

achieve goals.
Keep goals in mind and work towards
them.

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Step 5: Review, Reevaluate, and

Revise
Review progress.

Reevaluate and revise for changes in your

life.
Be prepared to formulate a different plan to
meet your goals.

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Figure 1.1 The Budgeting and

Planning Process

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ESTABLISHING YOUR
FINANCIAL GOALS

Short-termwithin 1 year
Intermediate-term1 to 10 years
Long-termmore than 10 years

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ShortTerm Goals
Accumulate Emergency Funds Equaling 3
Months Living Expenses
Pay Off Bills and Credit Cards
Purchase Insurance
Purchase a Major Item
Finance a Vacation

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Intermediate-Term Goals

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Save for Older Childs College

Save for a Down Payment
Pay Off Major Debt
Finance Large Items (Weddings)
Purchase a Vacation Home

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Long-Term Goals
Save for Younger Childs College
Purchase Retirement Home
Create a Retirement Fund to Maintain
Current Standard of Living
Take Care of Elderly Family Members
Start a Business

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Figure 1.2
Personal
Financial
Goals
Worksheet

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Figure 1.3
A Typical
Individuals
Financial
Life Cycle

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Stage 1 The Early YearsA Time

of Wealth Accumulation
Prior to age 54

Develop a regular savings pattern:

How much can be saved?
Is that enough?
Where should the savings be invested?

Cost of raising children

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Table 1.1 The Cost of Raising a

Child

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Stage 2 Approaching
RetirementThe Golden Years
Transition years between ages 55-64.

Depends on preparation for retirement.

Reassess financial goals and decisions
retirement, insurance protection and
estate planning.

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Stage 3 The Retirement Years

After age 65, live off savings
Retirement age depends on savings.

Less risky investment strategy

Consider extended nursing home protection.
Estate planning decisions and documents are
critical.

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Thinking About Your Career

A series of positions to show your skills.

Is the job important, enjoyable, and
satisfying?
Does it provide for your desired lifestyle?

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Figure 1.4 Job Search Worksheet

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Figure 1.4 Job Search Worksheet

(cont.)

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Figure 1.4 Job Search Worksheet

(cont.)

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Choosing a Major and a Career

Effective self-assessment
Interests, skills, values, personal traits
Desired lifestyle

Research career alternatives and match with

your skills and interests
Research potential earnings

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Table 1.2 What Different College

Majors Earn

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Getting a Job
Start early
Prepare and practice for interviews
Research the company

Dress appropriately, be confident, and

follow-up

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Table 1.3 Most Common

Interview Questions

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Being Successful in Your Career

Do good work.

Project the right image.

Understand and work within the power
structure.
Gain visibility.

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Being Successful in Your Career

Take new assignments.

Acquire new skills and keep up with

technology.
Develop a strong network.
Be ethical.

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What Determines Your Income?

Skills

Education
The wealthy are married

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Figure 1.5 Education and

Earnings

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The foundation of personal finance.

Principle 1: The Best Protection

Is Knowledge
Understand the basics of personal finance.

Take responsibility for your lifetime financial

plan.
Seek professional advice wisely.

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Principle 2: Nothing Happens

Without a Plan
Easier to think about spending than about
saving.
Saving must be planned.
Putting off a financial plan means goals are
harder to achieve.

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Principle 3: The Time

Value of Money
Money received today is worth more than
money received in the future.
Understand how savings and investments
grow over time
Understand compound interest.
Understand spending now and paying later

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Table 1.4 Importance of Starting EarlyJust Do It!to

Accumulate $1 Million by Age 67 Investing Your Money
at 12%

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Principle 4: Taxes Affect Personal

Finance Decisions
Know the effect of taxes on the rate of
return of investments.
Compare investment alternatives on an
after-tax basis.
Understand tax laws.

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Principle 5: Stuff Happens, or the

Importance of Liquidity
Plan for unexpected events

Have money or liquid funds available

Liquid funds should cover 3 to 6 months of
living expenses

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Principle 6: Waste Not, Want Not

- Smart Spending Matters
Differentiate want from need

Do homework before the purchase

Make the purchase at the best price

Maintain your purchase

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Principle 7: Protect Yourself

Against Major Catastrophes
Have the right kind of insurance before a
tragedy occurs.
Know your insurance policy coverage.

Focus insurance on major catastrophes

which can be financially devastating.

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Principle 8: Risk and Return Go

Hand in Hand
Saving and investing grows money.

Investors demand a minimum return above

anticipated inflation.
Investors demand higher return for added
risk.
Diversification by spreading money in
several investments reduces risk.

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Figure 1.7 The Risk-Return

Trade-Off

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Principle 9: Mind Games, Your

Financial Personality, and Your Money
Behavioral biases lead to big financial
mistakes.
Mental accounting impacts financial
decisions.
Sunk cost effect pours good money after
bad money because of bias.

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Principle 10: Just Do It!

Taking the first step towards your goals is
difficult.
The following steps become easier.
First step is to pay yourself firstsave then
spend.
Saving early can make a big difference.

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Women and Personal Finance

Tougher to achieve financial security.

Generally earn less.

Less likely to have pensions.

Qualify for less Social Security.

Live longer than men.
Planning for financial independent more
difficult for them than it is for men.
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Women and Personal Finance

Need to take charge of their money and
financial future.
Acquire knowledge.

Make things happenneed a plan.

See a financial planner about specific
concerns.

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Summary
Personal financial planning allows you to
manage your finances and achieve lifecycle
financial goals.
There are five basic steps to personal
financial planning.
Set your financial goals in order to achieve
them with a financial plan.

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Summary
An emergency fund can help protect
yourself in the event of an economic
downturn.
The more educated your are, the more you
will earn.
There are ten basic principles on which
personal financial planning is built.
Planning is especially important for the
financial future of women.
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Figure 1.6 How Long Households Go

Without Income Before Hardship Sets In

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