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

Financial Planning and Money
Management
Spring 2012, BUS-121
Financial Planning & Money Management
Frank Paiano – “Paco”
Professor, Business, Professional &
Technical Studies
Welcome, Everyone!
1
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
2
CHAPTER 1
Personal Financial Planning in Action
“It is not money that brings happiness, it is lots of money.”
– Russian Proverb
3
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?
The Benefits of Financial Planning

5
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
Determine your current financial situation
2. Develop your financial goals
3. Identify alternative courses of action
4. Evaluate your alternatives
1.
 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
Financial Planning Process?
1.
2.
3.
4.
8
Make money
Spend it
Make some more money
Spend that …
… and then spend some more
5.
6.
7.
Go into debt
Panic!
Take BUS-121, Financial Planning and
Money Management
“Lots of anybodies have done this!”
Simply Put, It All Comes Down to
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?
9
Opportunity Costs and Financial Results
Evaluated When Making Decisions
Financial
Personal
Opportunity Costs
(time, effort, health)
Financial
Opportunity Costs
(interest, liquidity,
Acquisitions
versus
(automobile, home,
college education,
investments,
insurance,
retirement fund,
lifestyle)
safety)
Your Money or Your Life, Joe Dominguez & Vicki Robin
www.simplelivingforum.net
10
Every Financial Decision
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
 The loss of a job

Personal risk
 Health or safety

Discussion:
Can you guard
against all risks?
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
11
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
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!
13
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)
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
19
20
Timing of Financial Goals
– up to 1 year “or so”
 Intermediate-term – 2 to 5 years
 Long-term – more than 5 years
 Short-term
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.
B.
C.
D.
Spend less so we can save more each month
Save $10,000 for a down payment on a condo
Save $100 each month to create a $4,000
emergency fund in 40 months by canceling the
cable service
Save enough for a $4,000 vacation next year
The correct answer is (C).
The Financial Goal of Most Americans
Spend everything
that you earn!
And then spend some more!
Most Americans Live Beyond Their Means
“Honey, Can We Make It to the Next Paycheck?”
Discussion: How do we do it? Why do we do it?
26
27
The Most Important Financial Goal!
Spend less
than you earn!
“Live Beneath Your Means”
“Pay Yourself First” – 10%?
“MAKE L VE, NOT LOAN$!”
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!”
Time Value of Money
Increases in an amount of money as a
result of interest earned
Amount
Now
Present
Value
(compounding)
(discounting)
Future
Value
Amount
Later
33
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.
34
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.
35
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 BUS123, 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
Hope For Your Future
As of December 31, 2011
39
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.”
40
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
$103,000
$4,120,000
Professional Degree
Source: U.S. Census Bureau Survey, 2004
http://en.wikipedia.org/wiki/Household_income_in_the_United_States
41
Service Industries Expected to Have
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
42
But What Is Your Career Goal?

43
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
Financial Decision?
Who You
Marry!
And then subsequently divorce …
“Marriage is grand. Divorce is more like 100 grand.”
– Anonymous
44
The Millenials Go To Work
45
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
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
46