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FIN 200: Personal Finance. Topic 25–Integrating Your Financial Plan Lawrence Schrenk, Instructor. Learning Objectives. Explain the goals and strategies of lifetime financial planning. ▪ Discuss role of human capital in financial planning. Develop an integrated financial plan. ▪.

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fin 200 personal finance

FIN 200: Personal Finance

Topic 25–Integrating Your Financial Plan

Lawrence Schrenk, Instructor

learning objectives
Learning Objectives
  • Explain the goals and strategies of lifetime financial planning. ▪
  • Discuss role of human capital in financial planning.
  • Develop an integrated financial plan. ▪
goal of life happiness
Goal of Life: Happiness
  • Supreme happiness would be nice, but… ▪
  • We might need to settle for happiness that is
    • Evenly Distributed, and
    • Smooth
  • We want to avoid
    • Ups and Downs, and
    • Spikes ▪
rule of financial planning
Rule of Financial Planning ▪
  • Derive financial goals from your life goals.
    • Financial goals should support life goals.
    • Financial decisions are ethical decisions.
  • Consider the financial implications of every decision you make.
  • Decide nothing solely on its financial implications. ▪
goal of financial planning consumption
Goal of Financial Planning: Consumption
  • What is consumption?
    • ‘Buying’ Leisure
    • Opportunity Cost
  • For happiness to be even and smooth,
    • Should consumption be even and smooth?
  • Preferences change over your lifetime
  • Value of consumption changes over your lifetime.
    • Value to you of a dollar changes over your lifetime.
strategy
Strategy

Life Goals

Financial Goals

Consumption Levels

Short Term Horizon Long Term Horizon

income and wealth cycles
Income and Wealth Cycles

College

Career

Retirement

Wealth

Income

Age ▪

Borrowing

Dis-saving ▪

Saving

objectives
Objectives
  • Short Term
    • Smooth Consumption
    • Avoid Consumption ‘Shocks’
  • Long Term
    • Reach Desired Consumption Levels
methods and tools short term
Methods and Tools: Short Term
    • How to Smooth Consumption
    • Liquidity
      • Credit
      • Short Term Savings
    • Flexibility
      • Job Characteristics
    • Insurance
  • ‘Reactive’ Strategies
digression money and time i
Digression: Money and Time I
  • Function of Saving and Borrowing
    • Transfer Wealth across Time
    • Rate of Return
  • ‘Saving’ versus ‘investing’
    • Investment Portfolio
  • ‘Borrowing’ versus ‘XXX’?
    • Borrowing Portfolio
digression money and time ii
Digression: Money and Time II
  • Ideally, what would you like?
    • Limits to Transferring Wealth across Time
      • Uncertainty
      • Incentive Problems
    • Structures for Transferring Wealth across Time
      • Contracts
      • Legal System
methods and tools long term
Methods and Tools: Long Term
  • How to Reach Consumption Levels
    • Increase Income
      • Education
      • Experience
      • Effort
    • Adjust Wealth
      • Saving and Investment
      • Borrowing
      • Inflation Issues
  • ‘Proactive’ Strategies
remember human capital
Remember: Human Capital
  • What is human capital?
  • Facts about Human Capital
    • Low Risk
    • Changing Proportion of Wealth
  • Counterexamples
sources of value
Sources of Value
  • Financial Assets
    • Investment Portfolio and Short Term Savings
    • Credit
  • Human Capital
    • Labor Income
  • Real (Non-Financial) Assets
    • House
    • Collections, Other Property
    • People
diversification
Diversification

Being Well-Diversified

versus

Holding a Well-Diversified Portfolio

Differences:

  • Human Capital
  • Real (Non-Financial) Assets
interdependencies
Interdependencies

Income

House Portfolio ▪

your risk profile
Your Risk Profile
  • To what risks are you exposed?
  • A Small Sampling
    • Investment Risk
    • Job Loss/Reduced Income
    • Longevity Risk
    • Theft
    • Health Problems
    • Correlation Risk
    • Etc...
responses to risks
Responses to Risks
  • Passive: Diversification
    • Dampening Consumptions Shocks
    • Low Costs
    • Incomplete
  • Active: Hedging
    • Managing Consumptions Shocks
    • More Cost
    • More Complete
hedging
Hedging
  • What is hedging?
  • Examples
    • Insurance
    • Structured ‘Stand of Living’ Products
    • ‘Targeted’ Products
    • ‘Bundled’ Products
    • Future Developments?
two approaches
Two Approaches
  • Simple
    • Follow Practical Guidelines
  • Complex
    • Statistical Analysis
      • Excel
      • Web Resources if available
practical issues
Practical Issues
  • Lifetime Horizon
  • Review and Revise Insurance
  • Avoid or Divest Company Stock
  • Plan for Inflation
  • Habit Formation
  • Consider a Financial Planner/Advisor

On life-cycle planning, read Paula H. Hogan, “Life-Cycle Investing Is Rolling Our Way”

exam coverage
Exam Coverage
  • Main Focus–Topics 20-25
  • A Few Earlier Questions
how to study for the short answer questions
How to Study for the Short Answer Questions
  • Study the slides–full slide ‘rule’.
  • Read the textbook and know the key words.
  • Answer the selected end of chapter questions.
  • Review the PowerPoint slides and your class notes.
  • Know the bold words on the slides.
how to study for the calculation problems
How to Study for the Calculation Problems
  • Study the examples done in class and the worked problem set.
  • Practice with your calculator.
  • Answer the selected end of chapter problems.