Table
of Con
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tents tr
Part I: FO
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UNDAT
ONS OF FINANCIAL PLANNING.
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1. Understanding the Financial Planning Process.
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,2. Developing Your Financial Statements and Plans.
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3. Preparing Your Taxes.
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Part II: MANAGING BASIC ASSETS.
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4. Managing Your Cash and Savings.
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5. Making Automobile and Housing Decisions.
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Part III: MANAGING CREDIT.
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6. Using Credit.
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7. Using Consumer Loans.
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Part IV: MANAGING INSURANCE NEEDS.
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8. Insuring Your Life.
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9. Insuring Your Health.
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10. Protecting Your Property.
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Part V: MANAGING INVESTMENTS.
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11. Investment Planning.
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12. Investing in Stocks and Bonds.
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13. Investing in Mutual Funds and Real Estate.
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Part VI: RETIREMENT AND ESTATE PLANNING.
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14. Planning for Retirement.
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15. Preserving Your Estate.
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Chapter 1 tr
Understanding the Financial Planning Process tr tr tr tr
How Will This Affect Me?
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The heart of financial planning is making sure your values line up with how you spend and save.That me
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ans knowing where you are financially and planning on how to get where you want to bein the future n
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o matter what life throws at you. For example, how should your plan handle the projection that Social S
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,ecurity costs may exceed revenues by 2035? And what if the governmentdecides to raise tax rates to
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help cover the federal deficit? An informed financial plan should reflect such uncertainties and more.
tr tr tr tr tr tr tr tr tr tr tr tr tr tr
This chapter overviews the financial planning process and explains its context. Topics include how fin
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ancial plans change to accommodate your current stage in life and the role that financialplanners ca
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n play in helping you achieve your objectives. After reading this chapter you will have a good perspe
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ctive on how to organize your overall personal financial plan.
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LEARNING GOALS tr
LG1 Identify the benefits of using personal financial planning techniques to manage yourfinan
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ces.
Key concept in this section is the planning model as displayed in Exhibit 1.1. Your standard of living is g
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reatly impacted by your spending habits and your commitment to saving. Your spending is measured by
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your propensity to consume. Wealth is the total value of all propertyyou own less the amount that yo
r tr tr tr tr tr tr tr tr tr tr tr rt tr tr tr tr tr tr
u owe to others.
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ACTIVITY: Ask the students to assume that they have just inherited $100,000. What will youdo with t
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he money? Write down three ways you will spend or use the money.
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, Ask the students to share one item with the class and record what they say so that the entire classcan refl
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ect on the answers. Hopefully, at least a few will mention investing even if only $10,000of the amount.
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Use their answers to discuss taking care of current needs versus future needs.
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Focus on their propensity to consume and its impact on accumulating wealth. Point out theFinancial Plan
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ning Tip, ―Be SMART in Planning Your Financial Goals.‖
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Use Exhibit 1.2 to show how the average person earns and spends their money and Exhibit 1.6 tohelp t
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he student identify where they are now.
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LG2 Describe the personal financial planning process and define your goals.
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Dwight Eisenhower, army general and president, is quoted as saying ―Plans are useless; Planning is pric
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eless‖. The process of planning allows you to focus on the issues that are most important and to be read
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y when things change.
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Exhibit 1.3 lists the Six Step Financial Planning Process. The first and most important is defining your fi
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nancial goals. Exhibit 1.6 lists goals by age to demonstrate how goals change over time. Use the exa
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mples in Exhibit 1.5 to ask students if the assumptions are realistic. Yes,the answer is in the exhibit, but
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many will not have read chapter at this point. For your use, the assumptions are:
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Assumption 1: Saving a few thousand dollars a year should provide enough to fund my child‘scolleg tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr rt
e Education.
tr
Assumption 2: An emergency fund lasting 3 months should be adequate. tr tr tr tr tr tr tr tr tr tr
Assumption 3: I will be able to retire at 65 and should have plenty to live on in retirement.Assu tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr rt
mption 4: I‘m relying on the rule of thumb that I will need only 70 percent of my pre-
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retirement income to manage nicely in retirement.
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There are several worksheets in the book. Worksheet 1.1 gives the student a format to write down the
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ir Personal Financial Goals. There is power in writing down goals [and most any otherplan]. Recording
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the goal and then reviewing three months later will help you to keep focus on the goal.
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
LG3 Explain the life cycle of financial plans, their role in achieving your financial goals, how to
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
deal with special planning concerns, and the use of professional financial planners.
tr tr tr tr tr tr tr tr tr tr tr
Exhibit 1.7 can help focus the attention on how goals differ between the various stages of life. Section
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1-3b lists various decisions that you will have to make over your life. The section 1-
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3c addresses Special Planning Concerns. Worksheet 1.2 focuses on the financial benefit to the family
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of the second income. If the second income is from a minimum wage job, it may not be agood financial d
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ecision. Of course having a job, even a minimum wage job, may give the personpsychic income that will
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override the financial impact. tr tr tr
While perhaps off topic, I recall a high school science teacher who was a smoker. He walked through th
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
e amount of money he spent on purchasing tobacco products. That computation had a
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of Con
tr
tents tr
Part I: FO
tr tr
UNDAT
ONS OF FINANCIAL PLANNING.
tr tr tr
1. Understanding the Financial Planning Process.
tr tr tr tr tr
,2. Developing Your Financial Statements and Plans.
tr tr tr tr tr tr
3. Preparing Your Taxes.
tr tr tr
Part II: MANAGING BASIC ASSETS.
tr tr tr tr
4. Managing Your Cash and Savings.
tr tr tr tr tr
5. Making Automobile and Housing Decisions.
tr tr tr tr tr
Part III: MANAGING CREDIT.
tr tr tr
6. Using Credit.
tr tr
7. Using Consumer Loans.
tr tr tr
Part IV: MANAGING INSURANCE NEEDS.
tr tr tr tr
8. Insuring Your Life.
tr tr tr
9. Insuring Your Health.
tr tr tr
10. Protecting Your Property.
tr tr tr
Part V: MANAGING INVESTMENTS.
tr tr tr
11. Investment Planning.
tr tr
12. Investing in Stocks and Bonds.
tr tr tr tr tr
13. Investing in Mutual Funds and Real Estate.
tr tr tr tr tr tr tr
Part VI: RETIREMENT AND ESTATE PLANNING.
tr tr tr tr tr
14. Planning for Retirement.
tr tr tr
15. Preserving Your Estate.
tr tr tr
Chapter 1 tr
Understanding the Financial Planning Process tr tr tr tr
How Will This Affect Me?
tr tr tr tr
The heart of financial planning is making sure your values line up with how you spend and save.That me
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr rt tr
ans knowing where you are financially and planning on how to get where you want to bein the future n
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr rt tr tr tr
o matter what life throws at you. For example, how should your plan handle the projection that Social S
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
,ecurity costs may exceed revenues by 2035? And what if the governmentdecides to raise tax rates to
tr tr tr tr tr tr tr tr tr tr tr rt tr tr tr tr tr tr
help cover the federal deficit? An informed financial plan should reflect such uncertainties and more.
tr tr tr tr tr tr tr tr tr tr tr tr tr tr
This chapter overviews the financial planning process and explains its context. Topics include how fin
tr tr tr tr tr tr tr tr tr tr tr tr tr tr
ancial plans change to accommodate your current stage in life and the role that financialplanners ca
tr tr tr tr tr tr tr tr tr tr tr tr tr tr rt tr
n play in helping you achieve your objectives. After reading this chapter you will have a good perspe
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
ctive on how to organize your overall personal financial plan.
tr tr tr tr tr tr tr tr tr
LEARNING GOALS tr
LG1 Identify the benefits of using personal financial planning techniques to manage yourfinan
tr tr tr tr tr tr tr tr tr tr tr tr tr
ces.
Key concept in this section is the planning model as displayed in Exhibit 1.1. Your standard of living is g
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
reatly impacted by your spending habits and your commitment to saving. Your spending is measured by
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr t
your propensity to consume. Wealth is the total value of all propertyyou own less the amount that yo
r tr tr tr tr tr tr tr tr tr tr tr rt tr tr tr tr tr tr
u owe to others.
tr tr tr
ACTIVITY: Ask the students to assume that they have just inherited $100,000. What will youdo with t
t r tr tr tr tr tr tr tr tr tr tr tr tr tr rt tr tr
he money? Write down three ways you will spend or use the money.
tr tr tr tr tr tr tr tr tr tr tr tr
, Ask the students to share one item with the class and record what they say so that the entire classcan refl
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr rt tr
ect on the answers. Hopefully, at least a few will mention investing even if only $10,000of the amount.
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr rt tr tr
Use their answers to discuss taking care of current needs versus future needs.
t r tr tr tr tr tr tr tr tr tr tr tr tr
Focus on their propensity to consume and its impact on accumulating wealth. Point out theFinancial Plan
tr tr tr tr tr tr tr tr tr tr tr tr tr tr rt tr
ning Tip, ―Be SMART in Planning Your Financial Goals.‖
tr tr tr tr tr tr tr tr
Use Exhibit 1.2 to show how the average person earns and spends their money and Exhibit 1.6 tohelp t
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr rt tr
he student identify where they are now.
tr tr tr tr tr tr
LG2 Describe the personal financial planning process and define your goals.
tr tr tr tr tr tr tr tr tr tr
Dwight Eisenhower, army general and president, is quoted as saying ―Plans are useless; Planning is pric
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
eless‖. The process of planning allows you to focus on the issues that are most important and to be read
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
y when things change.
tr tr tr
Exhibit 1.3 lists the Six Step Financial Planning Process. The first and most important is defining your fi
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
nancial goals. Exhibit 1.6 lists goals by age to demonstrate how goals change over time. Use the exa
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
mples in Exhibit 1.5 to ask students if the assumptions are realistic. Yes,the answer is in the exhibit, but
tr tr tr tr tr tr tr tr tr tr tr tr rt tr tr tr tr tr tr tr
many will not have read chapter at this point. For your use, the assumptions are:
tr tr tr tr tr tr tr tr tr tr tr tr tr tr
Assumption 1: Saving a few thousand dollars a year should provide enough to fund my child‘scolleg tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr rt
e Education.
tr
Assumption 2: An emergency fund lasting 3 months should be adequate. tr tr tr tr tr tr tr tr tr tr
Assumption 3: I will be able to retire at 65 and should have plenty to live on in retirement.Assu tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr rt
mption 4: I‘m relying on the rule of thumb that I will need only 70 percent of my pre-
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
retirement income to manage nicely in retirement.
rt tr tr tr tr tr tr
There are several worksheets in the book. Worksheet 1.1 gives the student a format to write down the
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
ir Personal Financial Goals. There is power in writing down goals [and most any otherplan]. Recording
tr tr tr tr tr tr tr tr tr tr tr tr tr tr rt tr
the goal and then reviewing three months later will help you to keep focus on the goal.
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
LG3 Explain the life cycle of financial plans, their role in achieving your financial goals, how to
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
deal with special planning concerns, and the use of professional financial planners.
tr tr tr tr tr tr tr tr tr tr tr
Exhibit 1.7 can help focus the attention on how goals differ between the various stages of life. Section
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
1-3b lists various decisions that you will have to make over your life. The section 1-
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
3c addresses Special Planning Concerns. Worksheet 1.2 focuses on the financial benefit to the family
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
of the second income. If the second income is from a minimum wage job, it may not be agood financial d
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr rt tr tr
ecision. Of course having a job, even a minimum wage job, may give the personpsychic income that will
tr tr tr tr tr tr tr tr tr tr tr tr tr tr rt tr tr tr tr
override the financial impact. tr tr tr
While perhaps off topic, I recall a high school science teacher who was a smoker. He walked through th
tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr
e amount of money he spent on purchasing tobacco products. That computation had a
tr tr tr tr tr tr tr tr tr t r tr tr tr
