Chapter

1
Overview
of a
Financial
Plan

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Chapter Objectives
Explain how you benefit from
personal financial planning
Identify the key components of a
financial plan
Outline the steps involved in
developing your financial plan

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Definitions
Personal Finance: the process of
planning your spending, financing,
and investing activities, while
taking into account uncontrollable
events such as death or disability,
in order to optimize your financial
situation over time.

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Definitions (contd)
Personal Financial Plan: a plan that
specifies your financial goals,
describes the spending, financing,
and investing activities that are
intended to achieve those goals over
time, and uses the risk management
strategies that are required to
protect against uncontrollable
events such as death or disability.
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Benefits of Understanding
Personal Finance
Make Your Own Financial Decisions
Know there is an opportunity cost to your
decisions
Opportunity cost: what you give up as a
result of a decision

Judge the Advice of Financial Advisers

Be informed
Evaluate potential financial advisers using
questions created by the Financial Planners
Standards Council (FPSC)
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Benefits of Understanding
Personal Finance (contd)
Become a Financial Advisor
Take courses to gain the education and
experience you would need to become a
financial adviser

Earning the Certified Financial Planner

(CFP) designation
Education, examination, experience, and
ethical requirements must be met
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Components of a Financial
Plan
Budgeting and tax planning
Managing your liquidity
Financing your large purchases
Protecting your assets and income
(insurance)
Investing your money
Planning your retirement and estate
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A Plan for Your Budgeting and

Tax Planning
Budget planning: The process of
forecasting future income, expenses
and savings goals
Evaluate your current financial position
Assets: what you own
Liabilities: what you owe; your debt
Net worth: the value of what you own
minus the value of what you owe
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Budgeting and Tax

Planning

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Financial Planning Life

Stages
Life Stages

Age Group

Pre-Career

Early Earning

23 to 30

Mid Earning

31 to 44

Prime Earning

45 to 59

Retirement

60 to 74

Post-Retirement
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Pre-Career Life Stage

Establish good money
management habits
Establish a credit rating

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Early Earning Life Stage

Follow the pay-yourself-first
principle
Manage your debt, dont let your
debt manage you
Balance your savings goals
Build your investment portfolio by
starting with a mutual fund
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Mid Earning Life Stage

Consider RESPs
Have an adequate amount of life
insurance
Continue with your RRSPs
Have a will and power of attorney
Investigate your pension plan at
work
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Prime Earning Life Stage

How much do you need to save?
Are all debts paid?
Job security?
Elder care?

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Retirement Life Stage

What can you expect from
government programs?
RRSP/LIRA maturity options?
Review workplace pension benefits
Account for all assets
Retirement income distribution
patterns
What happens if a spouse dies?
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Post-Retirement Life Stage

RRSP/LIRA maturity options?
Wealth management: how, who,
where?
Estate planning

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Financial Planning Life

Stages

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A Plan to Manage Your

Liquidity

Liquidity: access to ready cash,

including savings and credit, to cover
short-term or unexpected expenses
Money management: decisions
regarding how much money to retain
in liquid form and how to allocate the
funds among short-term investment
instruments
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A Plan to Manage Your

Liquidity (contd)
Emergency fund: a portion of savings
that you have allocated to short-term
needs such as unexpected expenses
in order to maintain adequate liquidity
Credit management: decisions
regarding how much credit to obtain
to support your spending and which
sources of credit to use
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Managing Your Liquidity

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A Plan for Your Financing

Loans often needed for large
expenditures
College tuition, car, house
Managing loans
How much can you afford to borrow?
Determining maturity of the loan
Selecting a loan with a competitive interest
rate
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Financing Large Purchases

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A Plan for Protecting Your

Assets and Income
Risk: Exposure to events (or perils)
that can cause a financial loss
Risk management: decision about
whether and how to protect against
risk
Insurance planning: determining the
types and amount of insurance
needed to protect your assets
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A Plan for Your Investing

Any funds you have beyond what
you need to maintain liquidity should
be invested
Stocks, bonds, mutual funds, real estate

All investments have some level of risk

Investment risk: uncertainty
surrounding the potential return on an
investment and its future potential
value
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A Plan for Your Retirement

and Estate
This includes insurance planning,
retirement planning, and estate planning
Retirement planning: determining how
much money should be set aside each year
for retirement and how those funds should
be invested
Estate planning: determining how your wealth
will be distributed before and/or after your
death

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Components of Your Financial

Plan

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How the Text Organization

Relates to the Financial Plans
Components
Each of the six parts of the text
covers one specific component of the
financial plan

An effective financial plan enhances

net worth and builds wealth
Follow the steps to a complete
financial plan at the end of the school
term
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How the Text Organization

Relates to the Financial Plans
Components
How the components relate to your
cash flows

Income is cash that you receive

Expenses are cash that you spend
Budgeting balances income and
spending
Liquidity deals with cash excesses
or shortages
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How Financial Planning

Relates to Cash Flow

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How the Text Organization

Relates to the Financial Plans
Financing focuses on obtaining cash
Components
for large purchases or repaying loans

Protecting your assets and income

focuses on determining your
insurance needs and costs
Investing uses cash to build wealth
Retirement focuses on building wealth
in your retirement account
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Developing the Financial

Plan
1. Establish your financial goals

Ensure they are specific, measurable,

realistic, and timely

2. Consider your current financial position

3. Identify and evaluate alternative plans
4. Select and implement the best plan
5. Evaluate your financial plan
6. Revise your financial plan
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Developing the Financial Plan

(contd)
Step 1. Establish Your Financial Goals
Specify your goals
Down payment on a house, pay down your
debt

Measure your goals

Use financial calculators

Set realistic goals

Stronger likelihood of reaching goals
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Developing the Financial Plan

(contd)
Timing of goals
Short term (within one year)
Purchase a car within 6 months

Medium term (between 15 years)

Pay off a school loan in the next three years

Long term (beyond five years)

Save enough money for retirement

Aggressive goals require a more

ambitious financial plan
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Developing the Financial Plan

(contd)
Step 2. Consider Your Current
Financial Position
How your future financial position is
tied to your current level of debt
Individuals with lower levels of debt will
make different decisions than someone
who has mounting debt

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Developing the Financial Plan

(contd)
How your future financial position is tied
to your age and wealth
A 20 year-old with less assets will have a
different financial plan than a 65 year-old
with many assets

Step 3. Identify and Evaluate

Alternative Plans That Could Achieve
Your Goals
Plans could be conservative or
aggressive
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Developing the Financial Plan

(contd)
Step 4. Select and Implement the
Best Plan for Achieving Your Goals
Individuals in the same financial
position with the same goals may
select different plans
Saving a specific amount every month vs.
making some risky investments

The Internet has valuable financial

planning information
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Developing the Financial Plan

(contd)
Focus on Ethics: Personal Financial
Advice
Your objective is to get the best advice
appropriate to your needs
Be wary of unethical behavior
Difficult to discern

Be wary of incompetent advice

Be alert, ask questions, carefully
consider advice
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Developing the Financial Plan

(contd)
Step 5. Evaluate Your Financial Plan
Keep plan in an accessible place and
monitor your progress

Step 6. Revise Your Financial Plan

Change plan as financial condition and
financial goals change

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