Financial Planning

Chapter 9

Looking at Your Finances

Section 1

Benefits of Financial Planning

Allows you to identify priorities Clarify Financial Goals Determine how to reach the goals Helps you pay expenses

Benefits of Financial Planning Continued…

Live within your income Reduce the need to buy on credit Reduces anxiety about money Helps you stay in control of financial matters Develop a sense of financial independence

What does it mean to be financially sound?

Live within your means Postpone some purchases to stay out of debt Know where your money is going

False Sense of Wealth

Teens don’t have to pay all the living expenses that other working-adults do

They have more spending freedom Premature Affluence- a false sense of wealth

Elements of Financial Planning

1. Budget- a plan for spending and saving money

2. Choose Investments

3. Establish credit

4. Obtain adequate insurance

5. Make decisions about retirement plans

6. Setting up an estate plan

Start Financial Planning by:

1. Identifying your goals

2. Taking stock of your current finances

3. Analyze your spending habits

Identify Financial Goals

Planning for college Pay off debt Go on vacation

Assessing Current Finances

Balance Sheet- a statement of what you own and what you owe

Assets- Items of value that you own-including $ Liabilities- debts or obligations owed to

others Net Worth- the difference between your

assets and liabilities

Assets Liabilities

Checking Account $500 Cell Phone Bill $75

Savings Account $1500 Amount owed on Credit Cards

$200

Cash $75 Car loan $700

Total $2075 Total $975

Net Worth $1100

Balance Sheet

How much would it cost you each year to have a Starbucks coffee everyday? (364 days)

$2 Everyday

= $728

$3 Everyday

= $1092

$4 Everyday

= $1456

$5 Everyday

= $1820

Analyzing Spending Habits

Save receipts Record spending Add up over a month Separate spending by categories Analyze your expenses

– Look for ways to cut costs– Look for things that are high in cost– Look for poor spending habits

Planning for Financial Goals

1. Specific goals

2. Identify resources

3. create, organize, implement, and evaluate your plan

4. Follow decision making steps

5. Take personal responsibility for your own financial plan

Adapting to Changing Needs

Family Life Stages– Marriage– Parenthood– Children moving out– Aging

Demographic Trends- population Family Crises- loss of job, death, injury,

divorce

What Can You Do?

Have an emergency fund Have life, health, car, and home insurance Seek help from others to manage the strain

Using Financial Software

Section 2

What can Financial Software Do?

1. Expense tracking

2. Budgeting

3. Financial Review

4. Tax planning

5. Investment tracking

Online Banking Features

1. Online Banking- conducting business with financial institutions over the internet

2. Online Bill Payment- means paying bills electronically over the internet

3. Online Bill Presentment- receiving bills over the internet

Should you use Financial Software?

Pros Easier to organize and

manage personal finances

Errors eliminated Stay in Control

Cons Costs $ Upgrading Need computer skills Time to learn

Choosing a Package

Determine your needs and wants for a program

Look for one that meets both needs and wants

Tips for Using Software

Backup data Take time getting comfortable with it Seek Help Decide how much time you want to invest Stay aware of upgrades

Creating a Budget

Section 3

Why make a budget?

Avoid running out of money Evaluate spending habits Set aside savings Work toward financial goals

Setting up a budget

Estimating income Estimating expenses Bringing the two into balance

Estimating Income

Gross Income- total amount of money you expect to earn before taxes and other paycheck deductions

Net Income- amount you expect to receive after paycheck deductions

Don’t Know? Estimate based on past paychecks, tips, bonuses, etc

Estimate Expenses

Fixed Expenses- regular payments that don’t vary in amount

Variable- (flexible) normally increase or decrease Discretionary Expenses- expenses that aren’t

absolutely necessary : vacation and entertainment Irregular Expenses- expenses that come only once

(annually), twice (semi-annually), or four (quarterly) times a year

Estimate Expenses Continued

Put into Categories Look at Your past spending Expert recommendations National averages: Consumer Expenditure

survey

Recommendations for Spending

10-15% on Charitable giving 5-10% on Savings 30-35% on Housing (mortgage/rent, utilities, fixing

up) 5-15% on Food 10-15% on Transportation 2-7% on Clothing 5-10% on Health, on Personal, on recreation, on

debts

Plan for Savings

Savings shouldn’t just be “leftover” money Necessary for unexpected events or job loss Put a part of budget

Balance Budget

Add all expenses $1350 Subtract from income - $1500 Result should be zero +$150 If not move some money around…add to

savings or subtract from discretionary expenses, reduce fixed expenses, or increase income

Using Your Budget

Use discipline to follow through Monitor it each week Compare what you really spent with

projected amount Adjust your spending Revise budge amounts

Evaluating the Budget

Adjust each month Evaluate if it is working or not Are you reaching your financial goals? Adapt to circumstances as they change

Organizing your Records

Section 4

Why Keep Records?

Identification Legal proof Loan applications Tax purposes Budgeting purposes Verify transactions Reference Medical reasons

How long to keep records

Some permanent Depends on what it is General rule: more important the longer you

keep it 7 yrs for Taxes

Storing Records and Documents

Safe Deposit Box- locked box that can be rented in a secure area of a bank

Home safe or lock box Home filling system

Reviewing Records

Once a year Prepare for tax return Discard or archive old records Review contents of safe deposit box Update list of accounts Update inventory of where records are stored

Updating Documents

When you move: address and phoneWith: Financial institutions Voter registration office Your employer State motor vehicle Post office Clubs, magazines, etc Friends and family members

Archive

Put in long-term storage in a less accessible area

Seeking Professional Advice

Section 5

What help do you need?

Know what help you are looking for– Tax returns– Investing advice– Checking over contracts

Who is Qualified to help?

Credentials- licenses, certifications, or degrees that indicate that a person is qualified to perform a certain service

Financial planner Financial advisor Financial consultant

Certified Financial Planner

CFP Evaluate your financial status Make recommendations for ways to reach

financial goals

Chartered Financial Consultant

ChFC CFP + courses in insurance, economics,

taxation, real estate, other areas related to investing and financial planning

Accountant

Tax advice and preparation Investment advice Financial Planning Certified Public Accountants: CPA Personal Financial Specialist: PFS

Insurance Agent

Chartered Life Underwriter- CLU Training in retirement and estate planning

Attorney

Prepares wills Review documents connected to home

purchases Enforce contracts Handles complicated tax situations

Pro bono

No charge for service to clients who face extreme financial hardship

Fees and Commissions

Conflict of interest- choose what would earn them most money rather than what is best for the client

Fee –the only arrangements eliminate all questions of conflict of interests

Choosing a Professional

Financial Planning Associations National Association of Personal Financial

Advisors American Bar Association Family and Friends

Ask Questions

1. What is your training and experience?2. Will some services be provided by other staff

members or outside sources?3. Are you paid fees, commissions, or both?4. What is the estimated cost of all the services I will

be receiving?5. Can I have that in writing6. Can I have names of references?Verify credentials

Stay Focused on your Goals

Stay informed Ask questions Make sure you understand everything Don’t sign unless you understand Evaluate the Advisor