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CHAPTER 1: UNDERSTANDING THE FINANCIAL PLANNING PROCESS. The Rewards of Sound Financial Planning. Maintain and improve standard of living. Control spending in order to live well today and tomorrow! Accumulate wealth. Average Propensity to Consume:.

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Presentation Transcript
the rewards of sound financial planning
The Rewards of Sound Financial Planning
  • Maintain and improve standard of living.
  • Control spending in order to live well today and tomorrow!
  • Accumulate wealth.
average propensity to consume
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

the personal financial planning process
The Personal Financial Planning Process
  • Taking conscientious and systematic steps toward fulfilling your financial goals.
steps in the financial planning process
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.

slide6

1. Define financial goals

2. Develop plans

slide7

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
slide8

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

Prepare financial statements

5. Evaluate results

6. Revise plans

money
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.
to attain your financial goals
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.
putting target dates on financial goals
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.
from goals to plans a lifetime of planning
From Goals to Plans:A Lifetime of Planning
  • Early childhood
  • High school and college
  • Family formation
  • Career development
  • Pre-retirement
  • Retirement
slide13

Personal Financial Planning Lifecycle

Income

Income Stream

Retirement/

Estate

Tax

Benefits

Savings/

Investment

Liability/Insurance

Asset Acquisition

10 20 30 40 50 60 70 80

Age

benefit of planning
Benefit of planning:
  • Your money works more efficiently for you by...
  • Utilizing the financial wonder—

The power of compounding

through time!

use the personal computer to
Use the personal computer to:
  • Prepare financial statements
  • Plan retirement
  • Prepare and file tax returns
  • Track investments
  • Analyze needs
the planning environment
The Planning Environment

Financial planning is carried out in an economic environment created by the interactions of

  • Government
  • Business
  • Consumers
slide19

Money payments of wages, rents

interest, and profit

BUSINESS

GOVERNMENT

CONSUMERS

Money payments for goods

and services

slide20

Money payments of wages, rents

interest, and profit

BUSINESS

GOVERNMENT

CONSUMERS

Money payments for goods

and services

Land, labor, and financial capital

Goods and services

slide21

Money payments of wages, rents

interest, and profit

Land, labor, and financial capital

Public goods &

services, regulations,

and revenues

BUSINESS

GOVERNMENT

CONSUMERS

Taxes

Goods and services

Money payments for goods

and services

government policy decisions are used to regulate the economy in an effort to
Government policy decisions are used to regulate the economy in an effort to:
  • Provide economic stability
  • Maintain acceptable employment levels
slide23

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
policies seek to control
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
economic cycles
Economic Cycles

Levels of Employment and Production

HIGH

LOW

Expansion

Recession

Depression

Recovery

what determines your personal income
What Determines Your Personal Income?
  • Age, marital status
  • Education
  • Where you live
  • Career choice