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CHAPTER 1: UNDERSTANDING THE FINANCIAL PLANNING PROCESS 1-2 The Rewards of Sound Financial Planning Maintain and improve standard of living. Control spending in order to live well today and tomorrow! Accumulate wealth. 1-3 Average Propensity to Consume: The percentage of each dollar of income that is spent, on average, for current needs rather than saved. What is your average propensity to consume? Income spent on current needs Total income 1-4 The Personal Financial Planning Process Taking conscientious and systematic steps toward fulfilling your financial goals. 1-5 Steps in the Financial Planning Process: 1. Define financial goals. 2. Develop financial plans and strategies to achieve goals. 3. Implement financial plans and strategies. 4. Develop budgets to monitor and control progress toward goals. 5. Evaluate results by using financial statements. 6. Revise goals as situations change. 1-6 1. Define financial goals 2. Develop plans 1-7 1. Define financial goals 2. Develop plans 3. Implement plans 4. Develop budgets FINANCIAL ACTIONS •Basic asset decisions •Credit decisions •Insurance decisions •Investment decisions •Retirement and estate decisions 1-8 1. Define financial goals 2. Develop plans 3. Implement plans 4. Develop budgets Prepare financial statements 5. Evaluate results 6. Revise plans FINANCIAL ACTIONS •Basic asset decisions •Credit decisions •Insurance decisions •Investment decisions •Retirement and estate decisions 1-9 Money: Used as a medium of exchange. Financial goals are stated in dollar amounts. Need to consider utility, or amount of satisfaction derived from purchases, as well as cost. May be closely linked to personal psychological concepts. May play key role in personal relationships. 1-10 To attain your financial goals: Be specific in defining goals and focus on results. Make goals realistically attainable. Involve family members and enlist their cooperation. Prioritize goals and set a definite time frame. 1-11 Putting target dates on financial goals: Short-term goals—to be accomplished within the next year. Intermediate-term goals—to be accomplished in the next 2-5 years. Long-term goals—to be accomplished in time periods greater than 5 years. 1-12 From Goals to Plans: A Lifetime of Planning Early childhood High school and college Family formation Career development Pre-retirement Retirement 1-13 Personal Financial Planning Lifecycle Income Income Stream Retirement/ Estate Tax Benefits Savings/ Investmen Liability/Insurance t Asset Acquisition 10 20 30 40 50 Age 60 70 80 1-14 Benefit of planning: Your money works more efficiently for you by... Utilizing the financial wonder— The power of compounding through time! 1-15 Growth of $1,000 at 8 % interest: $50,000 $40,000 $30,000 21,725 $20,000 10,063 $10,000 2,159 4,661 $0 0 10 20 Years 30 40 1-16 Growth of $1000 at 10% interest: $50,000 45,259 $40,000 $30,000 17,449 $20,000 21,725 6,727 $10,000 2,594 $0 0 10 20 Years 30 40 1-17 Use the personal computer to: Prepare financial statements Plan retirement Prepare and file tax returns Track investments Analyze needs 1-18 The Planning Environment Financial planning is carried out in an economic environment created by the interactions of Government Business Consumers 1-19 Money payments of wages, rents interest, and profit BUSINESS GOVERNMENT Money payments for goods and services CONSUMERS 1-20 Money payments of wages, rents interest, and profit Land, labor, and financial capital BUSINESS GOVERNMENT Goods and services Money payments for goods and services CONSUMERS 1-21 Money payments of wages, rents interest, and profit Land, labor, and financial capital Public goods & services, regulations, and revenues BUSINESS GOVERNMENT Taxes Goods and services Money payments for goods and services CONSUMERS 1-22 Government policy decisions are used to regulate the economy in an effort to: Provide economic stability Maintain acceptable employment levels 1-23 Monetary Policy Controls money supply Used to stimulate or contract economic growth Fiscal Policy Controls levels of taxation Sets levels of government spending on various programs 1-24 Policies seek to control: Economic Cycles – Stages related to employment and production levels – Growth measured by changes in GDP Inflation – Measured by changes in CPI – Affects purchasing power and interest rates – Affects financial plans and goals 1-25 Economic Cycles Levels of Employment and Production HIGH LOW Expansion Recessio n Depression Recovery 1-26 What Determines Your Personal Income? Age, marital status Education Where you live Career choice THE END!