FINA200 Personal Finance ©
Lesson 1 Overview of a Financial Plan: Summary Notes
Lesson/Chapter sections not subject to examination:
LO 1. Become a Financial Planner
LO 3. Focus on Ethics
Quote:
“Planning is bringing the future into the present so that you can do something about
it now.”
– Alan Lakein, author of How to Get Control of Your Time and Your Life
Lesson Objectives
1. Explain how you could benefit from personal financial planning
2. Identify the key components of a financial plan
3. Outline the steps involved in developing a financial plan
LO1: Explain How You Could Benefit from Personal Finance
Personal finance is the process of planning your spending, financing, and
investing activities, while taking into account uncontrollable events such as death
or disability, in order to optimize your financial situation over time.
A personal financial plan is a plan that specifies your financial goals, describes
the spending, financing, and investing activities that are intended to achieve
those goals over time, and uses the risk management strategies that are required
to protect against uncontrollable events such as death or disability.
By understanding personal finance, you can:
o Make your own financial decisions
Know there is an opportunity cost to your decisions – what have
you given up as a result of your decision?
o Judge the advice of Financial Planners
Is their advice in your best interests?
© May not be copied or duplicated
without the permission of the owner. 1
, LO2: Identify Key Components of a Financial Plan
The 5 key components of a financial plan are:
1. Budgeting and tax planning
Budgeting is the process of forecasting future income, expenses and savings
goals.
It helps you estimate how much of your income is required to cover monthly
expenses so that you can set reasonable and practical savings goals.
o Big spenders focus on spending with little or no money for savings.
o Big savers focus on saving and consider spending only after setting
aside a portion of their cash flow.
The first step in budgeting requires you to evaluate your current financial
position: Income, expenses, assets (what you own), and liabilities (what you
owe).
o Net worth is the value of what you own minus the value of what you
owe.
o Budgeting enables you to build net worth by setting aside income to
either invest in additional assets or pay down debt.
o Budgeting is influenced by your income and your life stage (refer to
Exhibit 1.2).
Tax planning involves knowing how financial decisions are affected by tax
laws. By understanding how alternative financial choices affect taxes, you can
make financial decisions that improve your after-tax cash flows.
o Taxes permeate our daily lives as we pay taxes on almost everything
we consume or do.
o The Canadian tax system is complex, but given that personal income
taxes are probably the biggest single expense you will incur in your
lifetime, it is a good idea to understand how the system works and how
to legally control the level of your tax bill.
2. Managing your Financial Resources
Liquidity refers to access to ready cash, including savings and credit, to
cover short-term cash needs or unexpected expenses. It also refers to the
ease with which an investor can convert an investment into cash without a
loss of capital.
Money management involves decisions regarding how much money to retain
in liquid form and how to allocate the funds among short-term investments.
o An emergency fund refers to the savings that you have allocated to
cover short-term needs, including unexpected expenses.
© May not be copied or duplicated
without the permission of the owner. 2
Lesson 1 Overview of a Financial Plan: Summary Notes
Lesson/Chapter sections not subject to examination:
LO 1. Become a Financial Planner
LO 3. Focus on Ethics
Quote:
“Planning is bringing the future into the present so that you can do something about
it now.”
– Alan Lakein, author of How to Get Control of Your Time and Your Life
Lesson Objectives
1. Explain how you could benefit from personal financial planning
2. Identify the key components of a financial plan
3. Outline the steps involved in developing a financial plan
LO1: Explain How You Could Benefit from Personal Finance
Personal finance is the process of planning your spending, financing, and
investing activities, while taking into account uncontrollable events such as death
or disability, in order to optimize your financial situation over time.
A personal financial plan is a plan that specifies your financial goals, describes
the spending, financing, and investing activities that are intended to achieve
those goals over time, and uses the risk management strategies that are required
to protect against uncontrollable events such as death or disability.
By understanding personal finance, you can:
o Make your own financial decisions
Know there is an opportunity cost to your decisions – what have
you given up as a result of your decision?
o Judge the advice of Financial Planners
Is their advice in your best interests?
© May not be copied or duplicated
without the permission of the owner. 1
, LO2: Identify Key Components of a Financial Plan
The 5 key components of a financial plan are:
1. Budgeting and tax planning
Budgeting is the process of forecasting future income, expenses and savings
goals.
It helps you estimate how much of your income is required to cover monthly
expenses so that you can set reasonable and practical savings goals.
o Big spenders focus on spending with little or no money for savings.
o Big savers focus on saving and consider spending only after setting
aside a portion of their cash flow.
The first step in budgeting requires you to evaluate your current financial
position: Income, expenses, assets (what you own), and liabilities (what you
owe).
o Net worth is the value of what you own minus the value of what you
owe.
o Budgeting enables you to build net worth by setting aside income to
either invest in additional assets or pay down debt.
o Budgeting is influenced by your income and your life stage (refer to
Exhibit 1.2).
Tax planning involves knowing how financial decisions are affected by tax
laws. By understanding how alternative financial choices affect taxes, you can
make financial decisions that improve your after-tax cash flows.
o Taxes permeate our daily lives as we pay taxes on almost everything
we consume or do.
o The Canadian tax system is complex, but given that personal income
taxes are probably the biggest single expense you will incur in your
lifetime, it is a good idea to understand how the system works and how
to legally control the level of your tax bill.
2. Managing your Financial Resources
Liquidity refers to access to ready cash, including savings and credit, to
cover short-term cash needs or unexpected expenses. It also refers to the
ease with which an investor can convert an investment into cash without a
loss of capital.
Money management involves decisions regarding how much money to retain
in liquid form and how to allocate the funds among short-term investments.
o An emergency fund refers to the savings that you have allocated to
cover short-term needs, including unexpected expenses.
© May not be copied or duplicated
without the permission of the owner. 2
