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Personal Finance: An Integrated Planning Approach Winger and


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Title: Personal Finance: An Integrated Planning Approach Winger and

Personal FinanceAn Integrated Planning Approach
  • Winger and Frasca
  • Chapter 1
  • Financial Planning
  • Why Its Important to You

  • Personal financial planning is important because
    it helps individuals to achieve financial
  • There is a trend to increased self-reliance.
  • Many employers are requiring that employees plan
    and manage their own retirement accounts.
    Traditional pension plans are less common today.
  • The federal government is unwilling to deal with
    the funding problems for Social Security.
  • There is greater economic uncertainty associated
    with job stability and investments. Therefore,
    financial planning is increasingly important.

Chapter Objectives
  • To understand why setting goals is an important
    first step in financial planning
  • To appreciate that trends in the financial
    environmentinflation, taxes, and economic
    cyclesaffect financial success and enhance the
    need for planning
  • To see why life-cycle financial planning is
    important and to understand the nature of a
    planning approach
  • To understand what is meant by marginal analysis
    and opportunity costs and to know how these
    concepts are used in financial decision making
  • To appreciate that financial success builds on a
    strong foundation and follows a building-block
    approach through time
  • To meet the Steele family, a family we will
    follow through the text

Topic Outline
  • Why Study Personal Finance?
  • Achieving Financial Goals through Planning
  • Making Financial Decisions
  • The Building Blocks of Success

  • Many people study personal finance in order to
    achieve financial success.
  • Financial success may not have the same meaning
    to everyone.
  • Some people think financial success is
    accumulating a lot of money.
  • Some people may define financial success by their
    ability to purchase goods and services.
  • In this textbook, financial success is defined as
    obtaining the maximum benefits from limited
    financial resources.

Your Goals in Life
  • Nonfinancial goals
  • Family, children, education, religious, social,
  • Finances can affect your ability to attain these
  • Financial goals
  • Financial independence is an important goal for
    many people. Financial independence is defined as
    having enough income or resources to be
  • One of the financial choices that we make is
    between consumption today versus consumption in
    the future.
  • Researchers have found that most people,
    regardless of their income level, feel that they
    need 20 more wealth than they currently have.

The Principle of Diminishing Marginal Satisfaction
  • Economists suggest that satisfaction from current
    consumption increases but at a decreasing rate.
  • Stated simply, people enjoy their current
    purchases but as they purchase more and more,
    their satisfaction decreases.
  • For example, the enjoyment that an individual
    experiences with the purchase of their first DVD
    is greater than the enjoyment that the individual
    experiences upon the purchase of their 100th DVD.
  • At a certain income level, this explains why
    individuals are willing to postpone current
    consumption and save money.
  • Saving money facilitates the attainment of
    financial and nonfinancial goals.

Important Economic Trends
  • The economic environment affects our ability to
    achieve our
  • financial goals.
  • Continuing Inflation
  • Price levels over the long-run tend to increase
    13 annually. Inflation must be considered in
    financial goals.
  • Persistent Business Cycles
  • Instability in the economy creates uncertainty
    that must be considered in financial goals (job
    stability, emergency reserves, etc.).
  • Continued Instability in Financial Markets
  • A High and Selectively Rewarding Tax System
  • The tax system rewards and punishes certain
    behaviors. We will review these in greater detail
    in Chapter 4.

  • Planning is the key to achieving all goals
    especially financial goals.
  • Life-cycle planning is the phrase that suggests
    that financial planning is a lifelong process.
  • People experience different phases in their life
    such as career development and family formation,
    retirement, etc.
  • Major financial planning areas
  • The different phases of life impact the
    importance of the various components of financial
    planning. At different phases, different
    financial planning areas increase or decrease in

Major Financial Planning Areas
  • Consumption and Savings Planning
  • Debt Planning
  • Insurance Planning
  • Investment Planning
  • Retirement Planning
  • Estate Planning
  • Income Tax Planning
  • Career Planning

Life-Cycle Financial Planning(assumes
A Planning Approach
  • Step 1. Determine concrete goals.
  • First state your broad goal such as the purchase
    of a home.
  • Determine the specific pieces to achieve that
    goal such as the cost of the house, the down
    payment amount, etc.
  • Step 2. Create an action plan.
  • How will you achieve the goals stated in step 1?
    How much will you save each month and where will
    the money be invested?
  • Step 3. Evaluate performance.
  • At least annually, evaluate steps 1 and 2 to
    determine if any adjustments should be made in
    the action plan or goals.
  • Step 4. Decide on a future course of action.
  • Is your goal realistic or should it be

  • Decision making is a complex process because
    there are usually multiple choices with differing
  • There are two economic concepts that are helpful
    in financial decision making.
  • Marginal Analysisinvolves the analysis of the
    changes in important variables
  • Example choosing between a public and private
    university the public university costs 15,000
    per year whereas the private university costs
    40,000 per year. Does the private university
    provide benefits that compensate for the
    additional 25,000 (40,00015,000)?
  • Opportunity Coststhe benefits given up when one
    alternative is chosen over another
  • Example putting money in a savings account
    rather than investing in the stock market. The
    opportunity cost is the higher return that could
    potentially be earned in the stock market.

  • First, build a supporting foundation.
  • Give time and attention to building a career,
    buying adequate insurance, buying a house, and
    building cash reserves
  • Then invest in secure investments.
  • Long-term savings deposits, government
    securities, and annuities
  • Gradually take greater risks.
  • High quality stocks and bonds, real estate
  • Avoid very risky investments until you are secure
    at the lower levels.
  • Growth stocks, gold, undeveloped land

Whats a Professional Financial Plannerand Do
You Need One?
  • A financial planner is a professional who helps
    clients create, maintain, and execute a financial
  • The best known credentials are the CFP.
  • Whether or not you need to hire a financial
    planner depends on the answers to the following
  • How much time are you willing to spend managing
    your finances?
  • How complex is your financial situation?
  • How much do you know about each of the aspects of
    financial planning?
  • Depending on your answers to the questions stated
    above, you may need to hire a financial planner
    to assist you with all or part of your financial

Meet the Steele Family
  • We will follow a family throughout their
    decision- making process to illustrate the
    financial planning process.
  • They are a typical suburban family consisting of
    Arnold (h) and Sharon (w) and two childrenNancy
    and John.
  • They are enjoying the good life associated with
    an above-average income.
  • They are currently doing virtually no financial
  • to educate the children
  • to enjoy retirement

Discussion Questions
  • What are some of the benefits of personal
    financial planning?
  • How do economic cycles affect the personal
    financial planning process?
  • What is meant by life-cycle financial planning?
  • Explain marginal analysis and its importance to
    financial decision making.
  • Opportunity cost is a very important concept in
    financial decision making. Can you think of an
    example of opportunity cost in your financial

NEXTChapter 2The Time Value of Money