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Financial Planning. The process of developing and implementing a coordinated series of financial plans to achieve financial success. Financial Planning. No clear goals Disorganized records Lack of economic understanding Flawed decision making. Common Financial Behaviors. BEWARE!.

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Financial Planning

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Financial planning

Financial Planning

Financial planning1

The process of developing and implementing a coordinated series of financial plans to achieve financial success.

Financial Planning

Common financial behaviors

No clear goals

Disorganized records

Lack of economic understanding

Flawed decision making

Common Financial Behaviors


Components of successful financial planning

Components of Successful Financial Planning

  • Specified values

  • Explicitly stated goals

  • Informed economic projections

  • Logical and consistent financial strategies

Financial planning

Economic Data






Managerial Effort


Decision Making




Coping and Adapting












Of Financial


Financial Plans

For Spending/Saving

Financial Plans

For Risk Management

Financial Plans

For Capital Accumulation




Financial statements

Financial Statements

  • Compilation of financial data

  • Communicate information

  • Indicate financial condition

  • Prepares user to read corporate financial statements


The balance sheet

The Balance Sheet

  • Assets – Items owned

  • Liabilities- Items owed

  • Net worth– Difference between what one owns and owes.


Assets- Liabilities = Net Worth



  • Monetary or Liquid assets

  • Tangible or Household assets

  • Investment assets



  • Short-term liabilities – anything that will be paid off in 12 months or less.

  • Long-term liabilities—anything that will still have a balance after 12 months.

Income expense statement

Income - Expense Statement

  • Income – How much you made.

  • Expenses – How much you spent.

  • Net gain or loss—How much you have left.

  • Income – Expenses = Net gain or loss




  • Salaries or wages

  • Bonuses and commissions

  • Child support and alimony

  • Public assistance

  • Social Security and pensions



  • Scholarships and grants

  • Interest and dividends

  • Income from the sale of assets

  • Other income (gifts, tax refunds, rent, royalties)


Fixed expenses—items that are the same every month (you don’t have control over these).

e.g. house payment, car payment, insurance premium

Variable expenses—expense changes based on the way you live (you have control over these).

e.g. meals, utilities, entertainment


Income statement

Income Statement

Balance sheet

Balance Sheet

Financial ratios

Basic liquidity ratio

Debt-to-asset ratio

Debt-service-to-income ratio

Investment-assets-to-net-worth ratio

Financial Ratios


Financial planning

Basic Liquidity Ratio

Using the information from the Balance Sheet earlier in this presentation

Basic Liquidity Ratio =

Monetary (Liquid) Assets

Monthly Expenses

= $1,800


= 1.25

This ratio shows that this person could pay their monthly expenses for 1.25 months using monetary assets.

Liquidity ratio

Liquidity Ratio

Using the information from the Balance Sheet earlier in this presentation

Liquidity Ratio =

Liquid Assets

Current Liabilities

= $1,800


= 1.11

This ratio shows that this person has $1.11 liquid assets for every $1 of current liabilities.

Debt to asset ratio

Debt-to-Asset Ratio

Debt-to-Asset Ratio =

Total Debt

Total Assets

= $3,620


= .58

If your debt is greater than your assets you are technically insolvent.

Debt service to income ratio

Debt Service-to-Income Ratio



Gross Income

Debt Service-to-Income Ratio =

= $1,800


= .15 or 15%


  • The Annual Debt Payment for this calculation includes mortgage

  • Annual debt payment in this example is the car loan monthly payment x 12 months ($150 x 12 = $1,800).

A ratio of 36% or less indicates that gross income is adequate to make debt repayments.

Debt payment to disposable income ratio

Debt Payment-to-Disposable Income Ratio

Debt Payment-to- Disposable Income Ratio =

Monthly nonmortgage debt payments

Disposable income

Disposable income is the amount of take-home pay remaining after all deductions are withheld for taxes.

A ratio greater than 20% is considered problematic.

Savings rate

Savings Rate

Savings Rate

Savings Rate =

Savings during the period

Disposable income during the period

= $55


= .044 or 4.4%

Describes what percent of disposable income you are saving.

*$1,500 - $250 = $1,250

Good debt vs bad debt

Good Debt vs. Bad Debt

  • Debt incurred for consumption is bad debt.

Bad Debt

= Debt Danger Ratio

Annual Income

Debt Danger Ratio beyond 25% can spell trouble.

Assessing financial progress

Balance sheet

Income - expense statement

Financial ratios

Am I spending, saving, and investing money where I really want to?

Assessing Financial Progress

Financial recordkeeping

Financial Recordkeeping

  • Where you are

  • Where you have been

  • Where you are going


Recordkeeping issues

Recordkeeping Issues

  • Original source records

  • Safeguarding/storage of records

  • Use of computer software

Financial planning

Key Words and Concepts

Assets include everything you own that has monetary value.

Balance Sheet (or net worth statement) describes an individual’s or family’s financial condition on a specified date.

Diversification of investments means the investor puts money in a variety of investments.

Fair Market Value is the amount a buyer would pay a willing seller.

Financial Goals are the specific long- and short-term objectives to be attained through financial planning and management efforts.

Financial Planning is the process of developing and implementing a coordinated series of financial plans to achieve financial success.

Financial Ratios are objective numerical calculations designed to simplify making judgmental assessments of financial strength over time.

Financial Statements are compilations of personal financial data designed to communicate information on money matters

Financial Strategies are preestablished plans of action to be implemented in specific situations.

Fixed Expenses are usually paid in the same amount during each time period.

Income and Expense (or cash flow) Statement lists and summarizes income and expense transactions that have taken place over a specific period of time.

Financial planning

Key Words and Concepts (Cont.)

Insolvent means net worth is negative.

Investment assets (also known as capital assets) include tangible and intangible items acquired for the monetary benefits they provide.

Liquidity is the speed and ease with which an asset can be converted into cash.

Liabilities are your debt (what you owe).

Long-term Liability is an obligation that will be paid off in more than one year.

Monetary Assets (or liquid assets) include cash and near-cash items that can be readily converted to cash.

Net Gain/Loss shows the amount of money left after you subtract expenses from income.

Net Worth is the dollar amount left when what is owed is subtracted from the dollar value of what is owned. Everything should be calculated at fair market value.

Short-term (or current) Liability is an obligation that will be paid off within one year.

Tangible (or use) Assets are physical assets that have fairly long lifespans and could be sold to raise cash but whose primary purpose is to provide maintenance of one’s lifestyle.

Values are fundamental beliefs about what is important, desirable, and worthwhile.

Variable Expenses are expenditures over which and individual has considerable control.

Financial planning

Key Words and Concepts (Concl.)

Financial Ratios:

Basic Liquidity Ratio: monetary (liquid) assets

monetary expenses

Reveals the number of months a family could continue to meets its expenses from monetary assets after a total loss of income. Families should have a basic liquidity ratio of 3.

Debt-to-Asset Ratio: total debt

total assets

Measures the solvency and ability to pay debt

Debt Service-to-Income Ratio:annual debt repayments

gross income

Provides an incisive view of the total debt burden of an individual. A ratio of .36 or less indicates that gross income is adequate to make debt repayments.

Investment Assets-to-Net Worth Ratio:investment assets

net worth

Expresses how well an individual is advancing toward their financial goals for capital accumulation. Experts recommend 50% or higher.

Savings Rate:savings during the period

disposable income during the period

Calculates the percent of disposable income an individual is saving.

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