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Dealing with Your Own Funds

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  1. Managing YourPersonal Finances Chapter 23

  2. Chapter 23 Learning Goals • What is the personal financial planning process, and how does it facilitate successful financial management? • How can cash flow planning and management of liquid assets help you meet your financial goals? • What are the advantages and disadvantages of using consumer credit? • What are the major types of taxes paid by individuals?

  3. Chapter 23 Learning Goals (cont’d.) • What is the most important principle in deciding what types of insurance to purchase? • What personal characteristics are important when making investment decisions? • What are the emerging trends in personal financial planning? • What is risk, and how can it be managed? What makes a risk insurable? • What types of insurance coverage should businesses consider?

  4. Learning Goal 1 • What is the personal financial planning process, and how does it facilitate successful financial management? • Six steps of financial planning • Establishing financial goals • Gathering financial and non-financial information • Analyzing the information • Developing a financial plan • Implementing the plan • Monitoring the plan

  5. Financial Planning Process 6. Monitor the plan 5. Implement the plan 4. Develop a plan 3. Analyze the information 2. Gather information 1. Establish financial goals

  6. Learning Goal 2 • How can cash flow planning and management of liquid assets help you meet your financial goals? • Cash flow plan • Plan for managing income and expenses • Based on financial goals, including saving for those goals • Money is set aside to pay for the goals • Liquid assets • Checking and savings-type accounts are important for: • Day-to-day spending • Meeting short-term goals • Unexpected expenditures • Can be held in safe, convenient accounts so money is readily available when needed

  7. Cash Flow Management • Establish goals & calculate how much to save to meet them • Estimate income & expenses • Track actual income & expenses for 1 month • Compare planned & actual • Modify estimates & repeat

  8. Income Statement: Tennis Player RevenuePrize money $105,858ExpensesHotel, air, other travel $45,679Meals & entertainment 17,650Telephone 487Business expenses & dues 1,656Tennis equipment 4,379Computer 2,383Foreign taxes paid 10,826$83,060Earnings before taxes$22,492Taxes$19,654Earning after taxes$2,838 Source: Fortune, Sept. 28, 1998, p. 58.

  9. Learning Goal 3 • What are the advantages and disadvantages of using consumer credit? • Advantages of consumer credit • Convenience • Purchasing an item sooner • Taking advantage of bargains • Better service • Establishing a credit rating • Convenient record keeping • Meeting a financial emergency • Disadvantages of consumer credit • Ease of overspending • Cost of credit (interest charges) • Possibility that merchandise may cost more • Reduction in future discretionary income due to legal commitment to repay debt

  10. Using Consumer Credit • Cons: • overspending • interest charges • may pay more • reduced discretionary income Pros: • convenient • immediate purchase • establish credit rating • provides record keeping • emergencies • perks like rebates & frequent flyer miles

  11. Using Consumer Credit • Credit cards • open-end, line of credit, revolving • grace periods • Loans • Credit history & credit ratings • Europeans rely on personal credit less than Americans • Continental Europe has $6 billion in outstanding credit card debt, compared with $240 billion in the US (Source: Fortune, Sept. 28, 1998, p. 190)

  12. Learning Goal 4 • What are the major types of taxes paid by individuals? • Income taxes • Payroll taxes based on income and deducted from paycheck • Social Security taxes • Payroll taxes based on income and deducted from paycheck • Sales tax • Assessed on purchases made • Property taxes • Based on the value of property owned, usually real estate

  13. Managing Taxes • Income taxes • Social security & Medicare taxes • Other taxes • sales • property

  14. Learning Goal 5 • What is the most important principle in deciding what types of insurance to purchase? • Budget for problems that represent a small financial loss • Set aside money in savings to pay for loss when it happens • Buy good insurances policies to cover major losses • Those that would cause large financial loss if they occurred

  15. Selecting Insurance • Property & liability insurance • automobile insurance • homeowner’s/renter’s insurance • Health insurance • major medical • managed care • Health maintenance organizations (HMOs) • Disability income insurance • Life insurance

  16. Learning Goal 6 • What personal characteristics are important when making investment decisions? • Decisions should be based on your goals and risk tolerance • Examples of investment goals: • Desire for income from interest and dividends • Need for growth (capital gains) • Need for safety

  17. Making Investment Decisions • Setting goals • Developing strategy • start early • diversify • invest regularly

  18. Personal Investment Options • Dividend reinvestment plans (DRIPs): permit small investors to invest in individual shares inexpensively & easily • only some companies offer DRIPs • Netstock Direct & Buyandhold.com offer an alternate way to invest small amounts • low monthly minimum contributions ($10 or $20) & minimal transaction fees • you can buy partial shares of expensive stocks • most company’s stocks are available Source: The Star Ledger, Dec. 19, 1999, Section 3, p. 3.

  19. Investment Risk Pyramid ` Futures, commodities Junk bonds Growth stocks, funds Increasing risk of lost principal Increasing potential gain Balanced mutual funds High-grade municipal bonds Treasury bills, bonds, notes

  20. Learning Goal 7 • What are the emerging trends in personal financial planning? • More employee responsibility for the choices made in employer fringe benefit plans • Cafeteria benefit plans are being offered in the insurance area • Self-directed retirement plans are being offered • Emphasizes the importance of all individuals to understand their financial needs and the best ways to achieve them

  21. Trends in Personal Finance • Cafeteria-type benefit plans • more responsibility on employees • more choice for employees • Self-directed retirement accounts • 401(k), SIMPLE, mutual funds

  22. Retirement Choices • Self-directed retirement accounts Frequency of Employee Benefits in 1999 Definedbenefit Profit sharing 401(k) ESOP Other 403(b) Source: Bryan, Pendleton, Swats & McAllister survey in The Arizona Republic, Jan. 2, 2000, pg. D3.

  23. Learning Goal 8 • What is risk, and how can it be managed? What makes a risk insurable? • Risk is the chance for financial loss due to a peril • Many risks can be covered by insurance • Pays insured up to a specified amount in the event of loss from a particular peril • Risk can be managed by • Avoiding situations known to be risky • Assuming the responsibility for losses due to certain types of risk • Adopting safety measures • Risk is insurable when it meets certain criteria

  24. Learning Goal 9 • What types of insurance coverage should businesses consider? • Property insurance • Covers losses arising from damage to property owned by the insured person or business • Liability insurance • Covers losses due to injuries to others or their property determined to be caused by the insured • Other important business coverages: • Business interruption • Automobile and theft • Fidelity and surety bonds • Personal, professional, and product liability • Companies must be knowledgeable about health and life insurance packages offered to employees as fringe benefits