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Managing Your Personal Finances. Chapter 23. Chapter 23 Learning Goals. W hat is the personal financial planning process, and how does it facilitate successful financial management? H ow can cash flow planning and management of liquid assets help you meet your financial goals?

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Managing your personal finances l.jpg

Managing YourPersonal Finances

Chapter 23


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Chapter 23 Learning Goals

  • What is the personal financial planning process, and how does it facilitate successful financial management?

  • How can cash flow planning and management of liquid assets help you meet your financial goals?

  • What are the advantages and disadvantages of using consumer credit?

  • What are the major types of taxes paid by individuals?


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Chapter 23 Learning Goals (cont’d.)

  • What is the most important principle in deciding what types of insurance to purchase?

  • What personal characteristics are important when making investment decisions?

  • What are the emerging trends in personal financial planning?

  • What is risk, and how can it be managed? What makes a risk insurable?

  • What types of insurance coverage should businesses consider?


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Learning Goal 1

  • What is the personal financial planning process, and how does it facilitate successful financial management?

    • Six steps of financial planning

      • Establishing financial goals

      • Gathering financial and non-financial information

      • Analyzing the information

      • Developing a financial plan

      • Implementing the plan

      • Monitoring the plan


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Financial Planning Process

6. Monitor the plan

5. Implement the plan

4. Develop a plan

3. Analyze the information

2. Gather information

1. Establish financial goals


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Learning Goal 2

  • How can cash flow planning and management of liquid assets help you meet your financial goals?

    • Cash flow plan

      • Plan for managing income and expenses

      • Based on financial goals, including saving for those goals

      • Money is set aside to pay for the goals

    • Liquid assets

      • Checking and savings-type accounts are important for:

        • Day-to-day spending

        • Meeting short-term goals

        • Unexpected expenditures

      • Can be held in safe, convenient accounts so money is readily available when needed


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Cash Flow Management

  • Establish goals & calculate how much to save to meet them

  • Estimate income & expenses

  • Track actual income & expenses for 1 month

  • Compare planned & actual

  • Modify estimates & repeat


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Income Statement: Tennis Player

RevenuePrize money $105,858ExpensesHotel, air, other travel $45,679Meals & entertainment 17,650Telephone 487Business expenses & dues 1,656Tennis equipment 4,379Computer 2,383Foreign taxes paid 10,826$83,060Earnings before taxes$22,492Taxes$19,654Earning after taxes$2,838

Source: Fortune, Sept. 28, 1998, p. 58.


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Learning Goal 3

  • What are the advantages and disadvantages of using consumer credit?

    • Advantages of consumer credit

      • Convenience

      • Purchasing an item sooner

      • Taking advantage of bargains

      • Better service

      • Establishing a credit rating

      • Convenient record keeping

      • Meeting a financial emergency

    • Disadvantages of consumer credit

      • Ease of overspending

      • Cost of credit (interest charges)

      • Possibility that merchandise may cost more

      • Reduction in future discretionary income due to legal commitment to repay debt


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Using Consumer Credit

  • Cons:

  • overspending

  • interest charges

  • may pay more

  • reduced discretionary income

Pros:

  • convenient

  • immediate purchase

  • establish credit rating

  • provides record keeping

  • emergencies

  • perks like rebates & frequent flyer miles


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Using Consumer Credit

  • Credit cards

    • open-end, line of credit, revolving

    • grace periods

  • Loans

  • Credit history & credit ratings

  • Europeans rely on personal credit less than Americans

    • Continental Europe has $6 billion in outstanding credit card debt, compared with $240 billion in the US (Source: Fortune, Sept. 28, 1998, p. 190)


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Learning Goal 4

  • What are the major types of taxes paid by individuals?

    • Income taxes

      • Payroll taxes based on income and deducted from paycheck

    • Social Security taxes

      • Payroll taxes based on income and deducted from paycheck

    • Sales tax

      • Assessed on purchases made

    • Property taxes

      • Based on the value of property owned, usually real estate


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Managing Taxes

  • Income taxes

  • Social security & Medicare taxes

  • Other taxes

    • sales

    • property


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Learning Goal 5

  • What is the most important principle in deciding what types of insurance to purchase?

    • Budget for problems that represent a small financial loss

    • Set aside money in savings to pay for loss when it happens

    • Buy good insurances policies to cover major losses

      • Those that would cause large financial loss if they occurred


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Selecting Insurance

  • Property & liability insurance

    • automobile insurance

    • homeowner’s/renter’s insurance

  • Health insurance

    • major medical

    • managed care

    • Health maintenance organizations (HMOs)

  • Disability income insurance

  • Life insurance


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Learning Goal 6

  • What personal characteristics are important when making investment decisions?

    • Decisions should be based on your goals and risk tolerance

    • Examples of investment goals:

      • Desire for income from interest and dividends

      • Need for growth (capital gains)

      • Need for safety


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Making Investment Decisions

  • Setting goals

  • Developing strategy

    • start early

    • diversify

    • invest regularly


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Personal Investment Options

  • Dividend reinvestment plans (DRIPs): permit small investors to invest in individual shares inexpensively & easily

    • only some companies offer DRIPs

  • Netstock Direct & Buyandhold.com offer an alternate way to invest small amounts

    • low monthly minimum contributions ($10 or $20) & minimal transaction fees

    • you can buy partial shares of expensive stocks

    • most company’s stocks are available

Source: The Star Ledger, Dec. 19, 1999, Section 3, p. 3.


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Investment Risk Pyramid

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Futures, commodities

Junk bonds

Growth stocks, funds

Increasing risk of lost principal

Increasing potential gain

Balanced mutual funds

High-grade municipal bonds

Treasury bills, bonds, notes


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Learning Goal 7

  • What are the emerging trends in personal financial planning?

    • More employee responsibility for the choices made in employer fringe benefit plans

      • Cafeteria benefit plans are being offered in the insurance area

      • Self-directed retirement plans are being offered

      • Emphasizes the importance of all individuals to understand their financial needs and the best ways to achieve them


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Trends in Personal Finance

  • Cafeteria-type benefit plans

    • more responsibility on employees

    • more choice for employees

  • Self-directed retirement accounts

    • 401(k), SIMPLE, mutual funds


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Retirement Choices

  • Self-directed retirement accounts

    Frequency of Employee Benefits in 1999

Definedbenefit

Profit sharing

401(k)

ESOP

Other

403(b)

Source: Bryan, Pendleton, Swats & McAllister survey in The Arizona Republic, Jan. 2, 2000, pg. D3.


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Learning Goal 8

  • What is risk, and how can it be managed? What makes a risk insurable?

    • Risk is the chance for financial loss due to a peril

      • Many risks can be covered by insurance

      • Pays insured up to a specified amount in the event of loss from a particular peril

    • Risk can be managed by

      • Avoiding situations known to be risky

      • Assuming the responsibility for losses due to certain types of risk

      • Adopting safety measures

    • Risk is insurable when it meets certain criteria


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Learning Goal 9

  • What types of insurance coverage should businesses consider?

    • Property insurance

      • Covers losses arising from damage to property owned by the insured person or business

    • Liability insurance

      • Covers losses due to injuries to others or their property determined to be caused by the insured

    • Other important business coverages:

      • Business interruption

      • Automobile and theft

      • Fidelity and surety bonds

      • Personal, professional, and product liability

      • Companies must be knowledgeable about health and life insurance packages offered to employees as fringe benefits


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