Lecture Notes on Financial Planning

In these times of tight economy, being able to plan and achieve your financial goals is important and relevant. If you have been failing in the past, it must be a good time to check and assess your strategies in achieving your goals especially when it comes to money matters. Therefore having a goal is essential to managing your money properly. After all, money is not an ‘end’ in itself. It is merely a ‘means’ to an end. This means we don’t save money for the sake of money but we save it for things such as ‘peace of mind’, college education, retirement, vacation home, etc.

The more you understand this, the better equipped you will be for dealing with your own portfolio. So we now know that having a goal of achieving a particular rate of return is not enough. Instead a better goal would be a goal to achieve “X” rate of return for the purpose of (insert personal objective here). It is only when we know the ultimate purpose of our money that we can manage it properly. This is why we set retirement funds aside in specialized accounts and this is also why we put money for emergencies in accounts that are more liquid and easier to access.

Essentially, it is the ultimate “purpose” of the money that determines where, how and why we invest it. First you have to create a list. Understanding how goals play into our financial life is only part of the equation though. The next step is to actually go through the process and begin to create a list of all the financial goals you have whether they are short term or long term. This should be one of the first steps in financial planning. However, most people tend to invest first and then later on decide what to do with the money and which money will be used to accomplish that objective.

The wise investor will decide the purpose of his or her money first. What you need to do is take a moment and make a list of all your goals that have a financial commitment behind them. Think of the following: retirement, vacations, college education, a new car, etc. All of these goals require a certain amount of money and therefore they should be budgeted and planned for over a period of time rather than simply taking the money out of present income or investments. The first step toward goal planning is simply being aware of the many goals that you have.

To do this look at each area of your life and determine what goals there are that require a financial commitment. Life areas would include: family, personal, professional, etc. If you look at each area separately you will probably come up with unique goals and desires that you would like to achieve in that particular sphere of life. Make a list of all of these and then beside them write down the amount needed. The next step is to prioritize them according to necessity. Find the ones most important and list them first while the ones that are extraneous should be listed last.

Once you have done this then you need to see exactly what kind of return you need and how long you have to reach the intended goal. This information will give you the rate of return required and the amount of time invested. It is only with those two numbers that you can determine whether or not a particular investment is appropriate or not. Unfortunately most people never even go through the thought process of determining either of these attributes and as a result they end up in the wrong investment for the intended goal. Because people change, so do financial plans.

Therefore don’t expect this plan to be written in stone. Instead expect to revise it as plans changes and new needs arise. A financial plan is dynamic and should change as life changes. Therefore do a regular check to make sure your goals are still the same and that the money intended for those goals are in the proper type of investment. In general usage, a financial plan can be a budget, a plan for spending and saving future income. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings.

A financial plan can also be an investment plan, which allocates savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business, or real estate. In business, a financial plan can refer to the three primary financial statements (balance sheet, income statement, and cash flow statement) created within a business plan. Financial forecast or financial plan can also refer to an annual projection of income and expenses for a company, division or department.

A financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as through borrowing or issuing additional shares in a company. While a financial plan refers to estimating future income, expenses and assets, a financing plan or finance plan usually refers to the means by which cash will be acquired to cover future expenses, for instance through earning, borrowing or using saved cash. In today’s constantly changing marketplace, stay up-to-date on the latest products, tax laws and regulations, and best practices with the Tools ; Techniques of Financial Planning.

Delivering the most current and essential strategies, this discussion will somehow guide all students and professionals who must master the fundamentals of financial planning. It is important to know the steps and tools in the financial planning process as well as in-depth reviews of the various strategies in today’s market with emphasis on cash-flow management within personal financial planning. Financial planning is the task of determining how a business will afford to achieve its strategic goals and objectives.

Usually, a company creates a Financial Plan immediately after the vision and objectives have been set. The Financial Plan describes each of the activities, resources, equipment and materials that are needed to achieve these objectives, as well as the timeframes involved. The Financial Planning activity involves the following tasks; Assess the business environment Confirm the business vision and objectives Identify the types of resources needed to achieve these objectives Quantify the amount of resource (labor, equipment, materials) Calculate the total cost of each type of resource

Summarize the costs to create a budget Identify any risks and issues with the budget set Assess the business envionment The business environment includes the marketplace, you and your business partners, and any external factor that may positively or negatively affect the level of your business success. Today we are going to look at three aspects of the environment; transformation, opportunities and obstacles, and two groups of environment handling strategies; consolidation strategies, and exit strategies. 1. The Amount of Transformation Required To Reach Your Goal achieving any goal requires change.

It is important when setting business goals to determine the amount of change required. If the change is great it may be better to break the goal down to sub-goals in order to make success more accessible. Start with the question; why hasn’t the business already attained that goal? This will help determine exactly what needs to be changed as well as the amount of change needed. It is important to determine how those changes can be accomplished in the current environment by looking at the opportunities and threats in the environment and the strengths and weakness within the business. . Opportunities, Strengths and Advantages every environment provides opportunities to those who develop the skill of seeing them. Every business has its own strengths and its own advantages over other businesses. The wise business manager can determine the best combination of these opportunities, strengths and advantages and then implement strategies to maximize profit at this point in the environment. Even in the toughest times, when most businesses are in trouble, there are always some businesses that are prospering.

If you develop the skills for assessing opportunities, strengths and advantages and the habit of acting on that assessment by taking appropriate goal directed action, then your business will always be one of those that are prospering. 3. Obstacles, Threats and Limitations the environment always contains opportunities and it also always contains obstacles. Your business always has some limitations at any particular point in time and there are always threats to your success and profitability.

Since we know that these “problems” will always exist the wise business manager develops the skill of recognizing them early and develops and implements risk management strategies to guide the business through the difficulties while at the same time the business is focusing its efforts on profiting from the opportunities. 4. Consolidation Strategies a business requires change in order to grow but constant change can be destabilizing. The wise business manager determines when it is appropriate to consolidate the gains made so that those gains become a strong foundation on which to build the next campaign of positive change.

A thorough understanding of the business environment can help determine the best point at which to consolidate and the best strategy to implement that consolidation. 5. Exit Strategies No matter how skilled the manager is, or how well the environment is analyzed for opportunities, and threats, or how good the consolidation strategy may be, there is always the possibility that things don’t go to plan. For this reason there is a golden rule that needs to be followed in every campaign; never enter any business campaign without a predetermined exit strategy.

The best time to determine strategies for how to exit a campaign with the minimum of difficulty or loss is before the campaign starts. This is when you are calm and clear thinking. If you wait until things are going wrong and the pressure is at a peak you are far less likely to find the best solution. That was a brief introduction to capitalizing on the business environment. Now it’s up to you to put aside some time to use these five points to help you look at the current environment for your business and determine how you can capitalize on that environment to increase your business success.

Performing Financial Planning is critical to the success of any organization. It provides the Business Plan with rigor, by confirming that the objectives set are achievable from a financial point of view. It also helps the CEO to set financial targets for the organization, and reward staff for meeting objectives within the budget set. The role of financial planning includes three categories: 1. Strategic role of financial management: 2. Objectives of financial management: 3.

The planning cycle: An “investment adviser” can be anyone whose vocation is consulting with clients with intent to better their financial situations. The term can apply to Certified Financial Planners (CFP®), Certified Public Accountants (CPA), investment representatives, insurance consultants, attorneys whose practice surrounds personal financial or estate matters, or financial planners. A financial planner is one who specializes in outlining comprehensive financial plans and strategies encompassing most or all of a client’s financial areas.

Business start-up budget The process of calculating the costs of starting a small business begins with a list of all necessary purchases including tangible assets (for example, equipment, inventory) and services (for example, remodeling, insurance), working capital, sources and collateral. The budget should contain a narrative explaining how you decided on the amount of this reserve and a description of the expected financial results of business activities. The assets should be valued with each and every cost.

All other expenses are like labour factory overhead all freshmen expenses are also included into business budgeting Corporate budget The budget of a company is often compiled annually, but may not be. A finished budget, usually requiring considerable effort, is a plan for the short-term future, typically one year (see Budget Year). While traditionally the Finance department compiles the company’s budget, modern software allows hundreds or even thousands of people in various departments (operations, human resources, IT etc) to list their expected revenues and expenses in the final budget.

If the actual figures delivered through the budget period come close to the budget, this suggests that the managers understand their business and have been successfully driving it in the intended direction. On the other hand, if the figures diverge wildly from the budget, this sends an ‘out of control’ signal, and the share price could suffer as a result. Event management budget A budget is a fundamental tool for an event director to predict with reasonable accuracy whether the event will result in a profit, a loss or will break-even. A budget can also be used as a pricing tool. Government budget

For more details on this topic, see Government budget. The budget of a government is a summary or plan of the intended revenues and expenditures of that government. United States The United States federal budget is prepared by the Office of Management and Budget, and submitted to Congress for consideration. Invariably, Congress makes many and substantial changes. Nearly all American states are required to have balanced budgets, but the federal government is allowed to run deficits. United Kingdom The UK Budget is prepared by the Treasury under the direction of the Chancellor of the Exchequer.

Parliament rarely makes any significant amendments. Personal or family budget For more details on this topic, see Personal budget. In a personal or family budget all sources of income (inflows) are identified and expenses (outflows) are planned with the intent of matching outflows to inflows (making ends meet. ) In consumer theory, the equation restricting an individual or household to spend no more than its total resources is often called the budget constraint. Budget types Sales budget: The sales budget is an estimate of future sales, often broken down into both units and dollars. It is used to create company sales goals.

Production budget: Product oriented companies create a production budget which estimates the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labor and material. Cash Flow/Cash budget: The cash flow budget is a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short term future. The cash flow budget helps the business determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.

Marketing budget: The marketing budget is an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service. Project budget: The project budget is a prediction of the costs associated with a particular company project. These costs include labor, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each. Revenue budget: The Revenue Budget consists of revenue receipts of government and the expenditure met from these revenues. Tax revenues are made up of taxes and other duties that the government levies.

Expenditure budget: A budget type which include of spending data items. Fundamentals of financial Planning Fundamentals of Financial Planning introduces students to the financial planning process and to the technical skills a competent financial planner must possess in order to serve his or her clients successfully. Students will learn the fundamental elements of financial planning (insurance, investments, taxation, retirement planning and employee benefits, and estate planning) and their corresponding interrelationship in providing comprehensive personal financial planning.

This course explores the financial planning industry and how to develop a financial planning practice: including the current economic environment, regulation and licensing, reporting and compliance, and compensation methods Fundamental Financial Planning offers a free initial consultation to give you the opportunity, without further obligation, to experience how our advisers can assist you in achieving your financial objectives. It is a comprehensive and individually tailored financial planning meeting during which, we will answer your questions and assist you to better understand different strategies and outcomes.

The meeting includes: Assisting you to identify and prioritize your objectives A brief analysis of your assets and liabilities A discussion about your income and expenditure Discussion about some of your potential options and strategies You will need to bring with an accurate knowledge of: What you own (including superannuation balances) How much it is worth What you owe Details of income and expenditure Our Process We have developed a unique, consultative approach to ensure you understand our recommendations and are comfortable with the strategies to be undertaken.

Planning Planning in organizations and public policy is both the organizational process of creating and maintaining a plan; and the psychological process of thinking about the activities required to create a desired goal on some scale. As such, it is a fundamental property of intelligent behavior. This thought process is essential to the creation and refinement of a plan, or integration of it with other plans, that is, it combines forecasting of developments with the preparation of scenarios of how to react to them.

An important, albeit often ignored aspect of planning, is the relationship it holds with forecasting. Forecasting can be described as predicting what the future will look like, whereas planning predicts what the future should look like. [1] The term is also used to describe the formal procedures used in such an endeavor, such as the creation of documents, diagrams, or meetings to discuss the important issues to be addressed, the objectives to be met, and the strategy to be followed. Beyond this, planning has a different meaning depending on the political or economic context in which it is used.

Two attitudes to planning need to be held in tension: on the one hand we need to be prepared for what may lie ahead, which may mean contingencies and flexible processes. On the other hand, our future is shaped by consequences of our own planning and actions. Overview Planning is a process for accomplishing purpose. It is a blue print of business growth and a road map of development. It helps in deciding objectives both in quantitative and qualitative terms. It is setting of goals on the basis of objectives and keeping in the resources. What should a plan be?

A plan should be a realistic view of the expectations. Depending upon the activities, a plan can be long range, intermediate range or short range. It is the framework within which it must operate. For management seeking external support, the plan is the most important document and key to growth. Preparation of a comprehensive plan will not guarantee success, but lack of a sound plan will almost certainly ensure failure. Planning can be summarized in 3 easy steps: 1. choosing a destination, 2. evaluating alternative routes, and 3. deciding the specific course of your plan. [2] Purpose of a plan

Just as no two organizations are alike, so also their plans. It is therefore important to prepare a plan keeping in view the necessities of the enterprise. A plan is an important aspect of business. It serves the following three critical functions: Helps management to clarify, focus, and research their business’s or project’s development and prospects. Provides a considered and logical framework within which a business can develop and pursue business strategies over the next three to five years. Offers a benchmark against which actual performance can be measured and reviewed.

Importance of the planning process A plan can play a vital role in helping to avoid mistakes or recognize hidden opportunities. Preparing a satisfactory plan of the organization is essential. The planning know the business and that they have thought through its development in terms of products, management, finances, and most importantly, markets and competition. Planning helps in forecasting the future, makes the future visible to some extent. It bridges between where we are and where we want to go. Planning is looking ahead. Types of plans or planning Architectural planning Business plan

Comprehensive planning Enterprise Architecture Planning Event Planning and Production Family planning Financial planning Land use planning Life planning Marketing plan Network resource planning Strategic planning Succession planning Urban planning Operational planning Service Overview Financial Advice Consider your financial objectives. These may be retirement, debt reduction, children’s education, estate or succession planning. Seeking professional assistance to get your affairs in order now can enhance your lifestyle now and set you on the path to a stress free retirement.

Investment Portfolio administration, management and reporting Fundamental Financial Planning Pty Ltd utilizes a core portfolio and satellite portfolio methodology, with the capacity to adjust the respective weightings of each segment of the portfolio in accordance with the level of market risk and the risk profile of the investor. Core Portfolio – Consists of sector stalwarts which offer a degree of earnings certainty, a positive growth profile over the medium to long term and a level of secure dividend income.

These selections should always sit comfortably in the portfolios of both seasoned investors as well as investors new to the market. This sector of the total portfolio includes the cash account. Value Portfolio – Also known as bargain hunting or opportunistic buying. Selections favour stocks that possess the potential for market re-rating by virtue of their earnings recovery prospects, low valuation relative to assessed worth or a relative discount to their peer group. While these companies are frequently not included in the “growth” rated groups due to less optimistic earnings growth forecasts, they are ypically identifiable from a low earnings model indicator showing it is priced at a discount to its fair value based on current earnings. Growth Portfolio – This sector favours investments offering an enhanced level of earnings growth driven by a strong return on equity1, sectoral dynamics or competitive advantage. More suited to higher risk investors, these selections often include companies trading at higher multiples of current earnings per share, reflecting earnings growth potential.

Income Portfolio – This sector favours investments offering a degree of both earnings and dividend income certainty, with a bias towards a higher stream of tax effective dividend income. These companies suit investors seeking a reliable dividend yield, usually utilising franking credits, while limit the risk taken on the growth outlook. Capital Protected – Includes structured investment arrangements that provide a guarantee over the capital invested at commencement if the investment is retained for a set term.

This type of portfolio suits the highly risk averse prepared to sacrifice potential returns in the interests of protecting their capital over the long term. Alternative Portfolio – Represents investments aimed at reducing the direct correlation between performance and the Australian share market. That is, an asset that produces a positive return when the market is falling, through the application of strategic risk allocation techniques or derivative overlays. Superannuation In addition to providing financial security in retirement, superannuation offers significant taxation benefits.

The returns on your money in your own superannuation fund and the tax benefits can make your money accumulate faster providing financial security in retirement. This is why a sound well thought through financial strategy is crucial. More information is available though the First Step Program. Managed Superannuation Suitable for people … Just starting work and deciding where to save their retirement funds. In work who wish to take advantage of the super choice legislation. Who do not want the responsibility of participating in the management of their own superannuation.

Who want a worry free and simpler super service. Who prefer their superannuation to be managed by a financial institution. Self Managed Superannuation Funds The Benefits of “Do it yourself” Superannuation Having your own superannuation fund rather than a fund with a bank or fund manager gives you greater control and more flexibility in how you can have the money invested tailoring it to your own individual needs. You can invest in shares, property and other investments based on a well considered investment strategy.

Some of the benefits of a Self Managed Superannuation Fund: Self Managed Superannuation fund rules allow more flexibility in investments and management; Your fund’s portfolio could be more tax effective, You can use a variety of investment tools to leverage and maximize returns that are normally not available within institutional funds; You can better organize your affairs in case you die; A Self Managed Superannuation fund could be less expensive; Having control of your own fund means you can conduct tax planning better. Taxation Planning Tax is a part of life.

However, without structuring your affairs appropriately, you may end up paying more tax than are legally required to. A few fundamental changes can assist you to organize your financial situation to be more legally tax effective. Succession Planning The dilemma for business owners who want to pass their business activity on to family members is that the business owner wishes to maximize the sale price but does not want to burden those family members acquiring the business with excessive debt. We can design a strategy, which achieves these objectives.

When families consider the internal sale or transfer of an asset they need to consider where the money will come from. There are other processes and methods to complete this transfer which will provide the same result without the struggle of borrowing vast amounts of cash. The tax effective strategy we design and implement will enable the senior members of the family selling the business to attain the best sale price. Those members of the family seeking to own the business can acquire it without the cost being a burden. Estate Planning

Have you unwittingly made the Commissioner of Taxation a beneficiary of your Estate? Estate planning is a specialist field. The ownership of assets, your Company, Trust and Superannuation structures, and the terms of your Will and Insurances must be carefully considered to the best advantage of yourself and the people you care about. If you think about the structure you have, or are presently thinking about getting your affairs in order, then you should consider how your financial situation and estate is structured in relation to taxation and how tax will affect your estate on death.

What happens if you are disabled or unable to look after yourself? Fundamental Financial Planning Pty Ltd can assist you in addressing these issues to ensure your estate is left as you intended. Fundamental Principles of Wealth and Resource Management An objective of this website is to help you learn how to find financial success. However, there is more to doing that than just crunching numbers and making investments. The main reasons most people do not achieve financial success is because they fail to apply fundamental lessons that apply on a much wider basis than finance alone.

This section will discuss some of those various areas and suggest ways in which you can improve and learn the skills necessary to not only be a success financially but to be a success in life in general. You will notice that we use the phrase “resource management” as opposed to financial management. This is because many of the lessons covered below are fundamental to success in many areas of life and can be applied beyond the arena of finance. Essentially, for our purposes, a resource comprises anything, which we use to achieve a desired end or objective.

Thus, the body is a resource as well as our talents and abilities and anything else that would fall under this criterion. Keep this in mind as you read the following topical subjects and try to imagine how they apply to your life on a broader basis. Below you will find brief descriptions about the topic as well as an overview of what is covered and basic ways in which it applies to finances and other aspects of resource management: Balancing Income and Expenses – This topic is concerned with understanding the concept of a zero-sum system which we call basic money management.

No matter how much money you make it has to be accounted for somewhere and no matter how much you spend it has to come from somewhere. This section deals with finding out where you may or may not be having problems from a budgetary standpoint and how to make improvements. Credit Cards – This is a general overview of credit cards and a discussion on when they are appropriate and things to know when using credit. Debt – The concept of debt is applied on a much larger basis here. The good types of debt are discussed as well as the bad types as well as how to manage it once it has been incurred.

Saving Money – The main topic is saving money but the larger issue is learning how to make do with less and in so doing accumulate wealth that can begin to work for you and provide a larger return in the long run. Your Estate – This is a basic discussion of what an estate is and how it helps you to achieve a clearer view of your finances. We discuss no details on estate planning in this article. Discipline – This is a general discussion on the quality of discipline and how it can make for success or misery in finance and other aspects of life. Risk – Risk as a concept central to compensation is the topic discussed in this article.

This article also helps you to define your own risk profile. Using Goals In Your Financial Plan – Goals are important for measuring performance and evaluating proficiency in resource management. We discuss how using goals in a financial plan helps you make more intelligent decisions and better prepare for the future. Emergency Money – Emergency money is important for any financial plan. Here we discuss why it is important and some rough guidelines on how much to set aside. Inflow v. Outflow – This articles goes deeper into the income and expense issue, which was touched on in a previous article.

Record Keeping – Record Keeping is an often-neglected aspect of finances. This article discusses why it is important and pros and cons of various storage methods. Wish Lists and The Purpose of Money – This article looks at money from a philosophical standpoint and helps you to place proper emphasis on it in life and achieve goals far more important than wealth. Managing Your Finances Yourself – This article gives general guidelines for those who choose to manage their portfolio by themselves. Money as Energy – This article gives another philosophical view of money and shows how this iew can help you achieve success in financial management. You, Incorporated – This article challenges you to look at yourself as a corporation and shows you how this viewpoint can give insights to meaningful changes that can make a profound difference qualitatively and quantitatively. Wealth Consciousness – This article discusses why some people achieve wealth and others do not. The Law of Exchange – This article applies the concept of exchange on a much larger basis and show how it functions as a basic law involving the management of any resource.

Why Some Accumulate Wealth and Others Do Not – This goes deeper into the “wealth factor” and explains other key differences in behavior and psychology that the wealthy have when compared to other people. Delayed Gratification – This is one of the most important lessons and one of the biggest keys to achieving success in many areas of life. Abundance – Abundance is the key mindset required for high level of achievements in finance. This article discusses how to evaluate your own attitude and how to make changes for the better.

Paying Yourself First – This article discusses a very old principal that is one of the first keys to accumulating money. The Law of Diminishing Returns – This is the last philosophical based article as well as the last of the fundamental principles. Understanding this concept helps you to know when it is time to cut your losses or focus in another direction. Finance addresses the ways in which individuals, business entities and other organizations allocate and use monetary resources over time. The term finance may thus incorporate any of the following: The study of money and other assets

The management of those assets As a verb, “to finance” is to provide funds for business. Examples of some basic financial concepts The activity of finance is the application of a set of techniques that individuals and organizations use to manage their financial affairs, particularly the differences between income and expenditure. An individual or organization whose income exceeds their expenditure can lend or invest the excess. On the other hand, an individual or organization whose income is less than their expenditure can borrow, decrease their expenses, or increase their income.

The lender can find a matching borrower, or can resort to a financial intermediary, such as a bank or the bond market. The lender receives interest, the borrower pays interest, and the financial intermediary pockets the difference. A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders of different sizes to coordinate their activity. General areas of finance Edit

Financial markets | Fund management | Financial institutions | Personal finance | Public finance |Financial mathematics | Financial economics The application of financial principles to individuals, business, and states Finance is used by Individuals personal finance, by governments, public finance, by businesses corporate finance as well as by a wide variety of organizations including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments, with consideration to their institutional setting.

Personal finance – Definition Personal finance is the application of the principles of financial economic to an individual’s (or a family’s) financial decisions. It asks, “How much money will you need at various points in the future? ” and “How do you go about getting that money? “. It deals with questions like: What is my annual income? How can I increase my income? What are my annual expenses? How can I reduce my expenses? How do I best budget my available income each year? How much money can I save each year? How much will I accumulate over my working lifetime? Will this be enough to support me after I retire?

How much will it cost each year after I retire? How many years will I be retired? How do I pay for large expenses (like children’s education, or buying a house) when they arise? How can I reduce my financial risk? Through insurance? Through pensions? What do I do with the savings that I have accumulated? What is the best way of investing this capital? How much debt do I have? What are the monthly debt servicing payments? What is the value of my assets? What effect will taxes have on these issues? How do I minimize the taxes I must pay? What effect will inflation have on these issues?

How will these issues change as I go through the stages of my life? Personal finance is a detailed analysis of financial flows at various points in time. For example, we may receive employment income today, but have to pay college tuition fees next year. Mortgage payments, interest earned, insurance premiums, and numerous other financial flows are recurring events that repeat at monthly or yearly intervals. Because these involve several time periods, we have to ask “What role does time have in these financial calculations? “. We know that if we deposit money in a bank account we will receive interest.

Because of this, we prefer to receive money today rather than in the future. Money we receive today is more valuable to us than money received in the future by the amount of interest we can earn with the money. This is referred to as the time value of money. To adjust for this time value, we use two simple formulas. The present value formula is used to discount future money streams, that is, to convert future amounts to their equivalent present day amounts. The future value formula is used to convert today’s money into the equivalent amount at some time in the future.

All personal financial planning done by professionals uses these time value formula, as well as several more complicated variants of the formulas. To ignore the role that time plays in financial planning is to ignore one of the most important principles of personal finance. The financial planning process The financial planning process is a dynamic process that requires regular monitoring and reevaluation. In general, it has five steps: (assessing your situation, setting goals, crafting a plan, taking action, and monitoring your progress) Assessing your financial situation is usually done by compiling several lists.

These lists are simplified versions of corporate balance sheets and income statements. On your personal balance sheet, you list all your assets (e. g. , car, house, clothes, stocks, bank account) and give their values. You also list all your liabilities (e. g. , credit card debt, bank loan, mortgage) and give their values. Subtracting your total liabilities from your total assets will indicate your personal net worth. To understand how your personal net worth will change in the future, you compile what is called a personal cash flow statement. This lists your income, and your expenses.

By subtracting your expenses from your income, you obtain your net cash flow for the period. If your net cash flow is positive, your personal net worth will increase. Most people grossly underestimate how much they spend each year. Setting goals gives your life a financial direction. Examples of financial goals are: “To retire at age 50 with a personal net worth of $800,000”, or “To buy a house in 3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income”. It is not uncommon to have several goals, some short term, and some long term. The financial plan details how you will accomplish your goals.

It could include for example, reducing unnecessary expenses, increasing your employment income, or investing in pork belly futures. However you plan to do it, detailed calculations have to be made for each period (usually yearly). The effects of taxation and inflation must be considered. When you have decided on the best plan for your goals and circumstances, you implement it. This involves taking specific actions. It often requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisors, and lawyers.

As time passes, it is important to monitor your progress. If it looks like you will not obtain your goal, you can either alter your plan or adjust your goal. The financial life-cycle On our journey through life we tend to go through stages. The stage we find our self in will have an impact on our financial planning. Modigliani and Brumberg (1954) devised a model to explain these stages. Here is a simplified version: Individual supported by parents income very low few financial decisions Young single income barely matches expenditures – no significant savings

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