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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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chapter 23 learning goals
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?
chapter 23 learning goals cont d
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?
learning goal 1
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
financial planning process
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

learning goal 2
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
cash flow management
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
income statement tennis player
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.

learning goal 3
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
using consumer credit
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
using consumer credit11
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)
learning goal 4
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
managing taxes
Managing Taxes
  • Income taxes
  • Social security & Medicare taxes
  • Other taxes
    • sales
    • property
learning goal 5
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
selecting insurance
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
learning goal 6
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
making investment decisions
Making Investment Decisions
  • Setting goals
  • Developing strategy
    • start early
    • diversify
    • invest regularly
personal investment options
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.

investment risk pyramid
Investment Risk Pyramid

`

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

learning goal 7
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
trends in personal finance
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
retirement choices
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.

learning goal 8
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
learning goal 9
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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