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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.