Section 1 Personal Financial Planning

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Section 1 Personal Financial Planning

• The personal financial process
• Developing personal financial goals
• Influences in personal financial planning
• Time Value of Money

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Personal Financial Planning (PFP)

• is the process of managing your money to achieve
  personal economic satisfaction.

• There are several advantages of personal
  financial planning.

• Increased effectiveness in obtaining, using, and
  protecting your financial resources.
• Improved personal relationships.
• A sense of freedom from financial worries
  obtained by looking to the future.

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The Financial Planning Process

• Is a logical (circular) six-step procedure

• Determine your current financial situation
• Develop your financial goals
• Identify alternative courses of action
• Evaluate the alternatives
• Create and implement a financial action plan
• Reevaluate and revise the financial plan

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Step 1. Determine your current financial situation

• Determine the current status of your
• Personal property
• Income
• Cash savings
• Living expenses
• Debts
• Prepare a net worth statement (or personal
  balance sheet) and Cash Flow Statement (with all
  auxiliary budgets)

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Step 2. Develop your financial goals

• What you want to achieve, or where do you want to
  be at a particular point in the future
• Be aware of the dependency of the different
  components of your financial situation
• Consider what do you need vs. what you desire

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Needs vs. Wants

• A need is something you cant do without.

• A want is a non-essential item that follows
  self-oriented reasons.

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Step 2. Develop your financial goals

• Types of financial goals
• Short-term goals - 1 year
• Intermediate-term goals - 2 to 5 years
• Long-Term goals - 5 years or more
• Frequency of financial goals
• Goals pertaining to consumable goods occur more
  periodically than those pertaining to durable
  goods

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Step 2. Develop your financial goals

• Desirable characteristics of financial goals

• Be realistic
• Be stated in specific, measurable terms
• Have a time frame of completion
• suggest the type of action course to be taken

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Influences In PFP

• What personal factors influence our spending and
  our saving patterns?
• Religion, values, growing environment, culture,
  risk aversion, time preferences on consumption
• The adult life-cycle

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Influences In PFP

• What external factors influence our spending and
  our saving patterns?
• Technology, the environment, politics,
  demographics
• The economy and market forces
• Inflation, interest rates, unemployment, taxes,
  the social security system
• Institutional and legal factors

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Step 3. Identify alternative courses of action

• In general, you can continue your actual course
  of action, expand on it, adjust it a little,or
  completely discard it.
• Knowing and considering all the alternatives
  will help you make more effective and satisfying
  decisions.
• Doing nothing is an alternative, but it is a
  costly one.

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Step 4. Evaluate alternatives

• Every alternative has benefits and costs
• Direct costs
• Opportunity Costs
• Personal
• Financial

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Step 4. Evaluate alternatives

• In financial decision making, many times the
  risks are difficult to identify and evaluate
• There is country-, industry-, company-, or
  instrument-specific risks
• Inflation risk
• Interest rate risk
• Personal risk
• Liquidity risk

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Step 5. Create and implement a financial action
plan

• The financial plan ultimately takes to form of a
  document (or a set of documents) detailing
  in-depth Steps 1 - 6 of the financial planning
  process.
• In the creation of the PFP, many people use the
  services of a professional financial planner (you
  wont!)
• In the implementation you will require the
  services of financial intermediaries.

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Step 6. Reevaluate and revise your plan

• Due to the changing personal, social and economic
  conditions, you will need to continually
  supplement and update your knowledge and
  financial plan.
• As you will see in this class, I will teach you
  the financial tools necessary for you to evaluate
  your different alternatives however, it will be
  up to you to assess the particular state of the
  social and legal environment that surrounds you,
  so that you are prepared to understand and
  confront any future potential scenarios you may
  find.

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Whats your role as a PFP?

• Financial planners provide individuals and their
  family with guidance on how to secure themselves
  financially over their lifetimes, or work with
  them to address specific concerns as needed.
• A planner plays a central role in helping people
  meet their life goals and achieve financial
  security and well-being.
• Financial planers work on a fixed-fee basis, on a
  percentage of assets under management basis, or
  on a combination of both. In the case of the
  CWCs, we provide our services for free.

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What does it take to be a PFP?

• PFP typically have special training in finance, a
  bachelor or master degree in finance, and
  marketing or retailing formation.
• A certification as a financial planner typically
  helps you market your services easier.
• The government does not regulate financial
  planners as financial planners instead, it
  regulates planners by the other services they
  provide.
• For example, a planner who also provides
  securities transactions or advice is regulated as
  a stockbroker or investment adviser.
• Insurance agents, estate planners, accountants
  also require a government certification or
  license to operate as such, but not to provide
  financial planning services.

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Should we get certified?

• The Certified Financial Planner Board of
  Standards Inc. (CFP Board) helps individuals
  identify financial planners who are committed to
  competent and ethical behavior when providing
  financial planning services.
• CFP practitioners have taken the extra step to
  demonstrate their professionalism by voluntarily
  submitting to the rigorous CFP certification
  process.
• In addition to significant education and
  experience requirements, they must pass a
  comprehensive exam that tests their personal
  financial planning knowledge and skills,
  continually update their abilities and abide by
• CFP Board's Code of Ethics and Professional
  Responsibility (Code of Ethics)
• Financial Planning Practice Standards (Practice
  Standards).

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Interesting Sites to visit on PFP

• Certified Financial Planner Board of Standards
• National Association of Personal Financial
  Advisors
• American Financial Services Association
• The Financial Planning Association
• Association of Advanced Retirement Planners
  Network

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Time Value of Money

• 1 million today is not the same as 1 million in
  the year 2045.
• Moneys purchasing power changes by the mere
  passage of time due to
• Inflationary forces
• Temporal consumption preferences
• The uncertain nature of the future

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Measuring the change in money value

• Interest rates represent the change in the value
  of the cash flow through time (typically
  represented by i,r or k)
• To see how money grows overtime, think what
  happens to a dollar you deposit intoa savings
  account.

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Interest Rates

• Example
• What would happen to 100 deposited in a bank
  for five years at a rate of 6 per year?

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Interest Rates
Example What would happen to 100 deposited in
a bank for five years at a rate of 6 per
year? Today Future Years
1 2 3 4 5 Interest
Earned Value 100
6.00 106.00
6.36 112.36
6.74 119.10
7.15 126.25
7.57 133.82
Value at the end of Year 5 133.82
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Effect of time and compounding on Future Values
Interest Rates