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Financial Planning



Set well defined goals.

Determine your current financial position.
Prepare a budget.
Use creative solutions to stay on budget.
Select the right savings instrument for
your goals.

Your financial health determines standard of living.
Basic human needs include food, clothing,
transportation, and shelter.
Lifestyle choices include hobbies, travel, career,
entertainment, vehicles and homes.
Although shelter is a basic human need, our
choice of a home is often a lifestyle choice.
The ability to afford a preferred lifestyle is
financial independence.

Record Keeping
Critical documents need to be stored safely.
Examples of common financial records:

Bank reconciliation records

birth certificates
social security cards
insurance documents and claim forms
tax records
credit agreements
retirement account statements
warranty information
titles and deeds

Set up a filing system for your documents so you

can stay organized and easily find your documents
when they are needed. There are three main types
of filing systems:

Home Files
Electronic Files use to store you
electronic records.
Safety Deposit Boxes

Records should generally be

kept for two years.
Keep a two year record of your bank and
credit accounts.
There are some exceptions to this rule.
Tax records need to be kept for seven years.
records like birth certificates and social
security cards need to be kept for life.
Titles and deeds are kept as long as you
own the property.
Dispose of old records safely.

Creating a Financial Plan

The financial planning process is broken into
six steps:
1) Create a list of financial goals.
2) Analyze your current financial situation.
3) Create a budget.
4) Select appropriate savings vehicles.
5) Measure the performance of your plan.
6) Adjust the plan as necessary.

Step 1: Create a List of

Financial Goals
Approach the task of setting financial goals
Start with general ideas and then work to
make a specific plan to achieve the desire.
Start by asking yourself what do you want
and when do you want to achieve it?
Make sure you set goals for the near future,
the next stage of your life, and for the distant

Brainstorming is the process of generating
ideas without censoring your thoughts.
To brainstorm get a pad of paper and a
pen and write down any thoughts that
come to mind.
Dont censor your thoughts.
Then go over your list of ideas and select
the ones you would like to turn into goals.

Turn Desires into

Measurable Goals
1) A goal is more specific than a wish.
2) It includes an action plan of how to obtain
the desire.
3) A well-defined goal is:

action orientated
Time focused

Example 2.1
Becky Shuet is a 21 year old college student
from Enid, Oklahoma. She still lives at
home with her single mother and she
works part time at Masons Auto Parts.
She started her financial plan in the spring
semester of 2009. She plans to graduate
with a B.A. in accounting in May of 2011.
She set the following goals for herself:

Short Term Goals

1. Pay off my MasterCard balance of $256
in 3 months by paying $90 a month.
2. Pay Mom back the $500 I borrowed in 10
months by paying her $50 a month.

Mid-Term Goals
3. Accumulate $5,000 in my savings account by May of 2011. The money will
be used for moving expenses to get my own apartment after graduation. I
will save for 26 months. I currently have $400 dollars in my account, so I
need to save an additional $4,600. I need to save $177 a month.
4. Buy a home 2 years after I graduate. I will need to save $10,000 between
2011 and 2013 to pay for the down payment and closing cost. I plan to buy a
small house for about $100,000. I will put 5% down. I will save $417/month
from my salary from my first full time job after graduation.

Long Term Goals

5. I plan to retire at 65. I would like to stay in the Midwest where I hope to
someday own some acreage. When I begin working after college, I will take
advantage of any company-sponsored pension plan or company match to a
401K. After I purchase a home in 2013, I will put the $417 a month in my
Roth IRA. This will allow me to save the maximum current allowable amount
in my Roth IRA.

Notice Beckys short term goals are more specific than her long term goals.
Since she is still a college student she doesnt know what her future income
or expenses will be. Still she set clear goals in the long term. Each year as
she works toward her goals and revises them she will be able to become
more specific with her long term goals. Even though her long term goals
dont set an exact amount for her 401K, she will be better prepared to make
wise decisions when she first starts out on her own. Instead of spending the
maximum amount she can afford on an apartment or buying a new car
immediately, she will be thinking about her retirement and saving to buy a
house. Her goals will help her avoid some of the common pitfalls of
overspending in the first years of her career.

Example 2.2
Becky currently has a Roth IRA. She started with
$2500 she had in a savings account when she
graduated from high school. Since the stock market
is currently so volatile she has $1500 in money
market account and $1034 of it in a mutual fund.
Her account pays 1.05% interest on the money
market account and the mutual fund fluctuates with
the stock market. Assume she can average 7% on
the mutual fund for the next 4 years. How much will
Beckys Roth IRA be worth when she can afford to
start making contributions to it again?

Beckys future value of the

$1500 in cash:

PV = $1,500
i = 1.05%
n = 4 years
PV(1 + i)n = FV
$1,500(1 + .0105)4 = $1,564

Beckys future value of $1,034

in mutual funds:

PV = $1,034
i = 7%
n = 4 years
$1,034(1 + .07)4 = $1,355.36

Beckys future value of her Roth IRA = $1,564 + $1,355.36 =

Now if Becky deposits $5,000 a year starting when she is 25 how much
will she have in her Roth IRA when she is 60? Since Becky will have
35 years to save she will invest in mutual funds. Use the historical
stock market return rate of 10% annually.
Solution: Becky will make monthly deposits of ($5,000/12) = $416.67
She will make (35 years)(12 months) = 420 deposits
She will earn (10% annually)/(12 months) = 0.83% monthly i = 0.0083
Using the equation for a FV of a series of deposits

If Beckys monthly deposits of $416.67 for

35 years grows to be $1,565,705.69 what
is her total Roth IRA balance at that time?
Remember she had $2,919.36 when she
starting making these additional deposits.
Assume she decided to invest the
whole$2,919.36 in mutual funds that earn
a 10% return annually, when she begins
making her additional deposits.

$2,919.36(1 + .10)35 = $82,041.13
Beckys Roth IRA is worth
$1,565,705.79 + $82,041.13 = $1,647,746.92

If Becky decided the future values calculations

werent worth the time to calculate, she would
have multiplied the $416.67 by 420 deposits.
She would have calculated a savings of
$175,001.40. She then would have added her
$2,534. She would have calculated her total Roth
IRA balance as $177,535.40. That is a
miscalculation of over 1.4 million dollars.

Step 2: Determine Your

Current Financial Position
Personal financial statements are the tools
we will use to determine your current
financial situation.

Personal Financial

A cash flow statement lists your income

and expenses
A balance sheet lists your assets and

Balance Sheet

The balance sheet lists your assets and liabilities on a

specific date.
Used to determine a persons net worth.
Net worth = total assets minus total liabilities.
The date you write your balance sheet is the date listed on
the balance sheet.
The balance sheet is accurate on the day it is written.
Think of a balance sheet like a financial snapshot.
View the example balance sheets found on the web
component under the Resources > Sample Excel Sheets link.
A balance sheet is broken into three main parts: assets,
liabilities and net worth.
assets at the top
liabilities in the middle

Cash Flow Statement

The cash flow statement shows your income and expenses

over a period of time, typically a month.
You can write a cash flow statement for any period of time: a
day, a week, a year, but a month is the most common time
frame for a personal cash flow statement.
At the top of the cash flow statement, it typically says For the
month ending, followed by a date.
The cash flow statement can be written for the month ending
January 31st, which obviously means for January 1st 31st.
The cash flow statement can also be written for the month
ending March 15th, which means it covers the period from
February 16th to March 15th.
View the example cash flow statements found on the web
component under the Resources > Sample Excel Sheets link.

The cash flow statement is

divided into two main
1) income
2) expenses
Calculate your net cash flow by subtracting your
total monthly expenses from your total monthly
Net cash flow = Income expenses
A positive net income is the amount saved for the
A negative net income indicates the amount of
increased debt for the month.


interest on savings accounts
unemployment benefits
child support
Record your net income.
Net income is your gross income minus taxes and
other paycheck deductions.
Record what you receive.
The cash flow statement records actual amounts
received, not estimated amounts.

fixed expenses -- dont change from
month to month
Mortgage payments
car loan payments

variable expenses -- vary in amount from

month to month
Food expenditures

Step 3: Create a Budget

In step 1 you determined where you want
to go.
In step 2 you found out where you are.
In step 3 you will plan how to get there.

A budget is similar to a cash

flow statement
The two look alike, but they look in
opposite directions.
A cash flow statement is a look back at
what you earned and spent last month.
A budget is an estimate of what you will
earn and spend next month.

To Create a Budget
Start with last months cash flow statement and your written
Add a line item for each of your goals and record the dollar
amount per month.
If you have a goal of saving $50 a month to build an
emergency fund, then add Savings for emergency fund, as a
fixed expense.
Once you add your goals, recalculate your net income.
If your net income is still positive or zero you can afford your
current goals.
If your net income is negative you need to readjust your goals
and/or your spending.
View Beckys example balance sheets found on the web
component under the Resources > Sample Excel Sheets link.

Characteristics of a Good

Open to the family

Making a Budget Work

Buy Used
Buy Staples
Make Gifts
Go Back to the Basics
Shop Off Season
Shop Thrift Stores and Garage Sales
Use Coupons
Buy Generics
Play Together

Step 4: Selecting the Right

Savings Vehicle

Savings Accounts
Money Market Accounts
CDs Certificates of Deposit
Roth IRAs
Money Market Funds
Mutual Funds

Step 5: Measure the

Performance of the Plan
Review your plan periodically, as is appropriate to
how rapidly your finances change.
six months

Update your balance sheet.

If you have been using your budget and comparing
your actual amounts to your budgeted amounts,
your cash flow statement is already updated.
Look at the new balance sheet. Check to see that
your net worth is increasing.

Step 6: Make Changes and

Adjustments to the Plan

The purpose of reviewing your financial plan

is to make adjustments.
You may want to move money from one
form of savings to another as you accrue
higher account balances.
If you paid off a debt last year, you will want
to adjust your plan to re-allocate those
Life and our personal circumstances are
constantly changing.