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Personal Finance
Financial Planning:Why It’s Important to You
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WHY STUDY PERSONAL FINANCE?
Achieve financial success. Financial success may not have the same meaning to
everyone. Accumulating a lot of money. Ability to purchase goods and services. Live credit-free.
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What makes you happy now?
What do you think will make you happy in 5 years?
What are your financial planning concerns?
Are your financial planning concerns the same as your parents or grandparents?
What would you do if you won the lottery?
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Your Goals in Life Financial goals
Financial independence is defined as having enough income or resources to be self-reliant.
Consumption today versus consumption in the future. Nonfinancial goals
Family, children, education, religious, social, etc. Finances can affect your ability to attain these goals.
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The Principle of Diminishing Marginal Satisfaction
Satisfaction from current consumption increases but at a decreasing rate.
People enjoy their current purchases but as they purchase more and more, their satisfaction decreases.
At a certain income level, individuals are willing to postpone current consumption and save money.
Saving money facilitates the attainment of financial and nonfinancial goals.
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ACHIEVING FINANCIAL GOALS THROUGH PLANNING
Key to achieving all goals Life-cycle planning suggests that financial planning
is a lifelong process. Career development Family formation Retirement
Major financial planning areas Different phases of life impact the importance of the
various components of financial planning
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Major Financial Planning Areas
Consumption and Savings Planning Debt Planning Insurance Planning Investment Planning Retirement Planning Estate Planning Income Tax Planning Career Planning
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Life-Cycle Financial Planning(assumes children/marriage)
Life-Cycle Phases Financial Planning Areas
Young adult (18–25) Consumption and savings; career
Family formation (26–35) Consumption and savings; career; debt; insurance; income taxes
Family development (36–49)
Investment; retirement; income taxes
Family maturity (50–60) Investment; retirement; estate
Retirement (60–?) Estate; income taxes
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A Planning ApproachStep 1. Determine concrete goals.
1. Broad goals
2. Determine the specific pieces to achieve that goal
Step 2. Create an action plan. How will you achieve the goals stated in step 1? How much
will you save each month and where will the money be invested?
Step 3. Evaluate performance. At least annually, evaluate steps 1 and 2 to determine if any
adjustments should be made in the action plan or goals.
Step 4. Decide on a future course of action. Is your goal realistic or should it be reevaluated?
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Financing your Goals
Determine the amount of annual savings to finance your goals.
Establish a Savings Plan.
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