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HECOL321 (3)
Chapter 1

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Human Ecology
Patricia French

Financial Planning and Its Benefits Personal financial planning is the process of managing your money to achieve personal economic satisfaction. Advantages of personal financial planning; Increased effectiveness in obtaining, using, and protecting your financial resources Increased control of your financial affairs Improved personal relationships Asense of freedom from financial worries The Financial Planning Process Step 1: Determine your current financial situation. Prepare a list of current asset and debt balances and amounts spent for various items Step 2: Develop financial goals. Analyze your financial values and attitudes towards money What is your financial decision making process? Step 3: Identify alternative courses of action. Continue as you are, expand or change the current situation, or take a new course of action The Financial Planning Process Step 4: Evaluate alternatives. Take into consideration your life situation, personal values and current economic situation. Opportunity cost is what you give up by making a choice. The cost, referred to as the trade-off of a decision, can be measured in money or time Consider lost opportunities that will result from your decisions. Evaluate the risks faced Types of Risks Evaluate your Economic or Product Risks Interest Rate Risk Changing interest rates affect your costs when you borrow and your benefits when you invest Inflation Risk Rising prices cause lost buying power Liquidity risk Some investments may be more difficult to convert to cash or sell without significant loss in value Product Risk Products or services flawed or not meet your expectations Retailers may not honour their obligations Types of Risks Evaluate your Personal Risks Risk of Death Premature death can cause financial hardship to family members left behind Risk of Income Lost Your income could stop as a result of job loss or because you fall ill or are hurt in an accident Health Risk Poor health may increase your medical costs, may reduce your working capacity or life expectancy Asset and Liability Risk Assets may be stolen or damaged Others may sue you for negligence or for damages caused by your accidents The Financial Planning Process Step 5: Create and implement a financial action plan. Choose ways to achieve your goals May require assistance from others Financial Planning Information Sources; Printed materials Financial institutions School courses and educational Seminars Computer software, World Wide Web, and on-line information sources Financial specialists The Financial Planning Process Step 6: Reevaluate and revise your plan. Your plan should be reviewed regularly based on your life circumstances Learning Objective # 2 Develop personal financial goals. Developing Personal Financial Goals Financial goals are influenced by; Personal values and attitudes towards money Time frame in which you want to achieve your goals. Type of financial need that drives your goals. Your life situation Developing Personal Financial Goals Factors that influence your financial goals: Timing of goals Short-term, intermediate and long-term goals Goals for different financial needs Consumable products goals Food, clothing Durable product goals Appliances, cars, sporting equipment Developing Personal Financial Goals – Your Life Situation Life Situation takes into consideration personal factors Age, income, marital status, household size, personal beliefs and employment situation Influences your spending and savings patterns As society changes, different types of financial needs evole; Married at later age More households with two incomes Single parents Living longer Caring for children and aging parents Developing Personal Financial Goals – Your Life Situation Average person goes through four basic stages in personal financial management Referred to as the life cycle approach to financial planning 1. Early years (until the mid-30’s) Focus on creating an emergency fund, saving for down payment on house or condo, purchasing life insurance, start thinking about retirement 2. Middle years (mid-30’s to mid-50’s) Focus on building wealth by paying down mortgage and increasing savings and investments Developing Personal Financial Goals – Your Life Situation 3. Middle Years (50’s+) Focus is on providing an adequate retirement fund 4. Retirement Years Focus is on the efficient management of previously acquired wealth Developing Personal Financial Goals – Your Life Situation Other events that influence your life situation include; Graduation Engagement and marriage Birth or adoption of a child Career change or move to a new area Dependant children leaving home Changes in health Divorce Retirement Death of spouse or other family member Developing Personal Financial Goals – Your Life Situation Common financial goals and activities include; Obtain appropriate career training Create an effective financial record keeping system Develop a regular savings and investment program Accumulate an appropriate emergency fund Purchase appropriate types and amounts of insurance coverage Create and implement a flexible budget Evaluate and select appropriate investments Establish and implement a plan for retirement goals Make a will and develop an estate plan Developing Personal Financial Goals Financial goals should... Be realistic Be stated in specific, measurable terms Have a time frame Indicate the type of action to be taken. Setting Goals “SMART” Goals Specific Measurable Attainable Realistic Time Bound Determining Where You Want to Go Every financial plan requires goals Determine Your Goals Short-term (1 – 2 years) Medium-term (3 - 4 years) Long-Term (5 years or longer) Give your goals “LIFE” by making your goals SMART: Specific, Measurable, Attainable, Realistic, Timely Base your goals on your values Write down your goals and post them Determining Your Goals Tip: Make sure you have a detailed list of goals. Not only does it help you chart your cours
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