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					Financial Planning and Money                      1



Management
  Spring 2012, BUS-121
  Financial Planning & Money Management
  Frank Paiano – “Paco”
  Professor, Business, Professional &
  Technical Studies


                             Welcome, Everyone!
                                      2


 First – A Perspective
“It is a gloomy moment in history.
Never has the future seemed so
dark and incalculable. The United
States is beset with racial,
industrial and commercial chaos,
drifting we know not where. Of our
troubles, no one can see the end.”
            Harper’s Magazine, 1847
                                                                  3


CHAPTER 1
 Personal Financial Planning in Action




  “It is not money that brings happiness, it is lots of money.”
                                           – Russian Proverb
                                                                4


Financial Planning, Definition
   Personal financial planning is the process of
    managing your money to achieve personal
    economic satisfaction
     This is our book’s definition
   The ability to use knowledge and skills to
    manage one's financial resources effectively
    for lifetime financial security
     Here is another that I thought was useful

            How would you define personal financial planning?
                                                           5


The Benefits of Financial Planning
    There are several advantages of effective
     personal financial planning
      Increased effectiveness in obtaining, using, and
       protecting your financial resources
      Increased control of your financial affairs
      A sense of freedom from financial worries obtained
       by being able to look optimistically toward the
       future
      Improved personal relationships
         What is the number 1 reason for divorce in America?
                                                      6


Developing a Flexible Financial Plan
   A financial plan is a formalized report that...
     Summarizes your current financial situation
       Analyzes your financial needs
       Recommends future financial activities
   Your financial plan can be created by you,
    done with assistance from a financial planner,
    or made using a money management
    software package
                                                     7


The Financial Planning Process
 1. Determine your current financial situation
 2. Develop your financial goals
 3. Identify alternative courses of action
 4. Evaluate your alternatives
       Keep in mind opportunity costs and risks
 5.   Create and implement a financial action plan
       Write it down!
 6.   Reevaluate and revise your plan

 “My Goodness! Does anybody really do all this?!”
What is a More Realistic and Typical              8



Financial Planning Process?
 1. Make money
 2. Spend it
 3. Make some more money
 4. Spend that …
      … and then spend some more
 5.   Go into debt
 6.   Panic!
 7.   Take BUS-121, Financial Planning and
      Money Management
                “Lots of anybodies have done this!”
Simply Put, It All Comes Down to                                   9



the Choices We Make!
    Opportunity cost
      What you give up by making a choice
         The opportunity cost is sometimes referred to as
          the trade-off of a decision.
         It cannot always be measured in dollars.
          Sometimes the cost is your time or your health.
         Consider the lost opportunities that will invariably
          result from your decisions.

  Example/Discussion: “There is no such thing as a free lunch!”
            What are the opportunity costs of attending college?
Opportunity Costs and Financial Results
                                                                 10



Evaluated When Making Decisions

      Personal                                  Financial
   Opportunity Costs                          Acquisitions
   (time, effort, health)                  (automobile, home,
                             versus         college education,
      Financial                                investments,
                                                insurance,
   Opportunity Costs                         retirement fund,
   (interest, liquidity,                          lifestyle)
           safety)


         Your Money or Your Life, Joe Dominguez & Vicki Robin
                     www.simplelivingforum.net
Every Financial Decision                                           11



Involves Evaluating Types of Risk
   Inflation risk
     Rising prices cause lost buying power
   Interest-rate risk
     Affect costs of borrowing and rate of return
   Income risk                                    Discussion:
     The loss of a job
                                                Can you guard
   Personal risk                             against all risks?
     Health or safety                         Should you try?
   Liquidity risk
     Higher return may mean less liquidity
   Culture of Consumerism risk
     a.k.a. Die-Working-and-in-Debt-Up-to-Your-Eyeballs risk
                                                           12


Implementing Your Financial Plan
   Developing good financial habits
       Use a well-conceived spending plan to help you
        stay within your income, while allowing you to
        save and invest for the future
       Have appropriate insurance protection to prevent
        financial disasters
       Become informed about tax and investment
        alternatives
   Achieving your financial objectives requires…
       A willingness to learn, and
       Appropriate information sources
                                                                  13


Financial Planning Information Sources
     Printed materials
       Books, magazines
     Financial institutions
       Credit unions, banks, brokerages, etc.
     School courses and educational seminars
     Computer software and on-line information
      sources
       The Internet is an inexhaustible supply
          Sometimes useful, sometimes not…
     Financial specialists
                           Taking this course is a great start!
                                                                    14


Influences on Personal Financial Planning
         Life situation and personal values
    Marital status, household size, and employment
    Major events
      Marriage, Birth or adoption of child, Divorce!, Bankruptcy
    Values
      What are the ideas and principles you consider correct,
         desirable and important?
    Where are you in the Adult Life Cycle stage?
        “Traditionalist / Mature” – Pre 1946 – 62 million
        “Baby Boomer” – 1946 to 1964 – 78 million
        “Gen Xer” – 1965 to 1981 – 59 million
        “Millennial” – 1981 to 2000 – 78 million
          (a.k.a. Digital Generation, Gen Y)
      The next generation? – 2001+
                                                               15


Influences on Personal Financial Planning
                                        (continued)




               Millennial tee-shirt worn by an SDSU student.
                                                        16


Influences on Personal Financial Planning
                                       (continued)

 Economic factors:
   Market Forces
       Supply and demand
       Production costs and competition
     Financial institutions
       Influence of the Federal Reserve Bank and the
        global financial markets
     Global influences
       Level of exports and imports
     Economic conditions....
                                                                         17


Changing Economic Conditions
 Consumer Prices and Inflation
 Consumer Spending
 Interest Rates
 Money Supply
 Unemployment
 Housing Starts
 GDP: Gross Domestic Product
 Trade Balance (a.k.a. Trade Inbalance!)
 Budget Deficit
 Financial Markets
    But since none of us has much, if any, control over these matters,
    we will focus on the things that we can and do have control over.
                                                    18


Components of Financial Planning
     Planning (chapters 1, 2)
     Taxes (chapter 3)
     Saving (chapter 4)
     Borrowing (chapter 5)
     Spending (chapters 6, 7)
     Managing risk (chapters 8, 9, 10)
     Investing (chapters 11, 12, 13)
     Retirement and estate planning (chapter 14)
                                                          19


Developing Personal Financial Goals
   Types of financial goals include those...
     Influenced by the time frame in which you want to
      achieve your goals
     Influenced by the financial need that drives your
      goals
   Timing of goals must be identified
     Short-term, intermediate-term and long-term goals
   Financial goals should...
       Be realistic, be stated in specific, measurable
        terms, have a time frame, have a priority, and
        indicate the action or actions to be taken
                                                           20


Timing of Financial Goals

   Short-term – up to 1 year “or so”
   Intermediate-term – 2 to 5 years
   Long-term – more than 5 years

    The above are the book’s time frames. Here are mine:
     Short-term – 1 to 3 years
     Intermediate-term – 3 to 5, 6 or even 7 years
     Long-term – 7 years or longer (10 to 30 years)
                                                               21


Financial Goal: Example
    Pay off VISA
      Balance: $3,500
      Time frame: Within 12 months
      Actions to be taken
         Reduce dating and clubbing to twice a month
         Cancel cable service and mobile phone
         Stop buying coffee at FiveBuck$
         Pay extra $300 per month
      Priority: High
                      Which time frame does this belong to?
              How would you measure the success of the goal?
                                    Is the goal reasonable?
                                                      22


Financial Goal: Example
    Save up for a Home Theater system
      Amount needed: $2,000
      Time frame: Within 12 months
      Actions to be taken
         Take part-time job at Home Cheapo
         Put $150 per month into a special savings
          account at the bank
      Priority: Medium
                                                                   23


Financial Goal: Example
    Save for down payment on a condo
      Amount needed: $15,000
      Time frame: 5 years
      Actions to be taken
         Set up $200 automatic investment per month to
          be taken from our checking account
         Expected rate of return: 7%
      Priority: High

      Will $200 per month at 7% be enough to reach this goal?
      We are going to learn how to calculate the future value of
                                    this stream of investments.
                                                                24


Non-Financial Goal: Example
    Be able to do 15 “good” push-ups
      Can currently only do 7 “good” push-ups
      Time frame: Within 3 months
      Actions to be taken
         Start with 7 push-ups, three times a day
         Increase by 2 or 3 push-ups every three to four
          weeks
         Work up to 15 push-ups within 3 months
      Priority: Medium

                                     Is this goal reasonable?
                                                         25


Goal Setting
      Which of the following goals would be
      the easiest to implement and measure
      its accomplishment?
 A.   Spend less so we can save more each month
 B.   Save $10,000 for a down payment on a condo
 C.   Save $100 each month to create a $4,000
      emergency fund in 40 months by canceling the
      cable service
 D.   Save enough for a $4,000 vacation next year
                                The correct answer is (C).
                                                          26


The Financial Goal of Most Americans

    Spend everything
      that you earn!
         And then spend some more!
    Most Americans Live Beyond Their Means
    “Honey, Can We Make It to the Next Paycheck?”
          Discussion: How do we do it? Why do we do it?
                                       27


The Most Important Financial Goal!

   Spend less
 than you earn!
        “Live Beneath Your Means”

         “Pay Yourself First” – 10%?

       “MAKE L VE, NOT LOAN$!”
                                                           28


The Most Important Financial Goal!
                                       (continued)

    Pay Yourself First
      By having the money come out of your
       paycheck or checking account automatically,
       most individuals easily adjust to investing
      Works like a pay raise, only in reverse
    The 10% Solution
      Many financial planners recommend saving at
       least 10% of your income for long-term,
       compounded growth
      The Wealthy Barber, David Chilton

                               Is 10% a reasonable goal?
                                                               29


The Most Important Financial Goal!
                                            (continued)

“The magic of compound interest. Thirty dollars a month, a
dollar a day, can magically turn into over a million dollars.
And do you know what is even more impressive? You know
someone who has done it,” Roy, our barber, said proudly.
“Thirty-five years ago, I started my savings with thirty dollars
a month, approximately 10% of my earnings. I have
achieved just under 13% return per year. In addition, as my
income rose, my savings rose accordingly. Thirty dollars a
month became sixty dollars, then a hundred, and eventually
hundreds of dollars a month.”
“You three are looking at a very wealthy man.”
                           The Wealthy Barber, David Chilton
                                                               30


The Most Important Financial Goal!
                                           (continued)

“One of my early students only followed the ‘Pay Yourself
10% First’ lesson. He bought the wrong life insurance,
abused credit cards, overpaid for his mortgage, did not take
advantage of his 401(k) at work, and lost all $15,000 of an
inheritance playing the commodities market.”
“This is a real upbeat, encouraging story, Roy,” said Tom.
“Today, his net worth is $850,000, Tom. $300,000 of it is
the equity in his house but the rest is his 10% savings.”
“He did everything else wrong but –” Cathy started.
“Because he had saved 10% of each paycheck and invested
it for long-term, compounded growth, today he is in great
shape,” Roy finished.
                          The Wealthy Barber, David Chilton
                                                                31


The Rule of 72
   A Quick ‘n’ Dirty Method for Calculating
    Compound Interest (or Inflation)
     Divide the interest (or inflation) rate into 72
     That is approximately how long it will take the
      amount to double
     Example: 10% Interest Rate
        72 / 10 = 7.2 years – It will take about 7 years
         for your investment to double if you earn 10%
     Example: 3% Consumer Price Index (inflation)
        72 / 3 = 24 years – It will take about 24 years for
         prices to double if inflation runs about 3%
                                 But let us get more precise…
                                                             32


Simple versus Compound Interest
  Simple Interest
    Interest = Principal * Rate * Time
    Interest = $100 * 6% * 1 year = $6.00
    In one year you have $106 ($100 + $6.00)

  Compound Interest
    But the next year, you will earn interest on your
    interest…
    $106 x 6% x 1 = $6.36
    After the next year, you will have $112.36

         I know what you are thinking, “Big Deal, Paiano!”
                                           33


   Time Value of Money
 Increases in an amount of money as a
 result of interest earned

Amount                            Future
 Now                              Value
            (compounding)

Present                           Amount
 Value                             Later
             (discounting)
                                                                  34


      Future Value of Money
   The amount to which a sum you invest now
    will increase based on a specified interest
    rate and time period
     Future value is also called compounding
     Future value can be computed for a single
      amount – a.k.a. a lump sum or principal
     Future value can also be determined for a series
      of deposits – a.k.a. stream of investments, “annuity”

                   Start investing now to take advantage of the
                                         future value of money.
                                                            35


    Future Value of Money
                       (continued)

   Future value formula for Lump Sum Principal

    Future Value = Principal * (1 + Rate)Time


   Future value formula for Series of Deposits
                                 (1+Rate)Time - 1
     Future Value = Deposit * ──────────
                                 Rate
                    Do not worry about the math. We use
                        the future value of money tables.
                                                                    36


     Present Value of Money
   The current value for a future amount
    based on a certain interest rate and a
    certain time period
     Present value is also called discounting
     Present value of a single lump sum
     Present value of a series of withdrawals


              Not only is present value harder to comprehend,
               it is also not as important for personal finance.
                  (We use present value very much in the BUS-
                        123, Introduction to Investments, class.)
                                                               37


     Present Value of Money
                        (continued)

   Present value formula for Lump Sum
                               Lump Sum
        Present Value = ───────────
                          (1 + Rate)Time

   Present value formula for Series of Withdrawals
                                        1
                                1- ───────
                                  (1+Rate)Time
    Present Value = Deposit * ───────────
                                  Rate
                   Please do not drop the class. We are not
                 going to do any present value calculations.
                                             38


  Future Value of Money


Okay, let us do some exercises…




                     Future value handouts
                                        39


Hope For Your Future




              As of December 31, 2011
                                                                 40


Financial Aspects of Career Planning
        Do you have a Job or a Career?
    A Job –
      An employment position obtained mainly to
       earn money, without regard for interests or
       opportunities for advancement
    A Career –
      A commitment to a profession that requires
       continued training and offers a clear path for
       occupational growth
        “A job is something you do for a paycheck. A career is
                something you do regardless of the paycheck.”
                                                                       41


How Education Relates to Income
  Level of Education                 Annual           Lifetime

 High School Graduate                 $34,000        $1,360,000

 Associate’s Degree                   $46,000        $1,840,000

 Bachelor’s Degree                    $65,000        $2,600,000

 Master’s Degree                      $83,000        $3,320,000

 Professional Degree                 $103,000        $4,120,000
  Source: U.S. Census Bureau Survey, 2004
  http://en.wikipedia.org/wiki/Household_income_in_the_United_States
Service Industries Expected to Have
                                                   42



the Greatest Employment Potential
   Computer Technology
   Health Care                 “Biotechnology.”
   Business Services
   Social Services
   Sales and Retailing
   Hospitality and Food Services
   Management and Human Resources
   Education
   Financial Services
                                                                     43


But What Is Your Career Goal?
   Most people believe you must become a
    doctor or lawyer or high-powered executive
    to become wealthy
     But what if you want to be a writer or a teacher
      or an artist or a janitor or mechanic or plumber?
   Can you become wealthy while doing what
    you love...
     Even if it does not command a large salary?
   As we saw, the answer is, “Yes!”
         The key is to set a goal for yourself & start investing early.
 In fact, your career is not your most important financial decision.
   But if your career is not your most important decision, what is?
What is Your Most Important                               44




Financial Decision?

  Who You
   Marry!
                       And then subsequently divorce …
   “Marriage is grand. Divorce is more like 100 grand.”
                                           – Anonymous
                                                                                         45


The Millenials Go To Work                                                Fortune
                                                                         says…

 “They are ambitious, they are demanding and they question
 everything, so if there is not a good reason for that long
 commute or late night, do not expect them to do it. When it
 comes to loyalty, the companies they work for are last on their
 list – behind their families, their friends, their communities,
 their co-workers and, of course, themselves.
 But there are a whole lot of them. And as the baby-boomers
 begin to retire, triggering a … worker shortage, businesses are
 realizing that they may have no choice but to accommodate
 these curious Gen Y creatures. Especially because if they do
 not, the creatures will simply go home to their parents, who in
 all likelihood will welcome them back.”
 http://money.cnn.com/magazines/fortune/fortune_archive/2007/05/28/100033934/index.htm
                                         46


Could not have said it better myself…


   “Choose  a job you love,
    and you will never have to
    work a day in your life.”

                            Confucious

				
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