Throughout life, our needs usually can be satisfied with the intelligent use of financial resources. Financial planning involves deciding how to obtain, protect, and use those resources. By using the eight major areas of personal financial planning to organize your financial activities, you can avoid many common money mistakes.

COMPONENTS OF PERSONAL FINANCIAL PLANNING

This book is designed to provide a framework for the study and planning of personal financial decisions. Exhibit 1-9 presents an overview of the eight major personal financial planning areas. To achieve a successful financial situation, you must coordinate these components through an organized plan and wise decision making.

Exhibit 1-9   Components of personal financial planning

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Financial Planning Calculations

TIME VALUE OF MONEY CALCULATION METHODS The time value of money may be calculated using a variety of techniques. When achieving specific financial goals requires regular deposits to a savings or investment account, the computation may occur in one of several ways. For example, Jonie Emerson plans to deposit $10,000 in an account for the next 10 years. She estimates these funds will earn an annual rate of 5 percent. What amount can Jonie expect to have available after 10 years? <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0073106712/tbl01-0021-02.gif','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> Note: The slight differences in answers are the result of rounding.

OBTAINING (Chapter 2)   You obtain financial resources from employment, investments, or ownership of a business. Obtaining financial resources is the foundation of financial planning, since these resources are used for all financial activities.

PLANNING (CHAPTERS 3, 4)   Planned spending through budgeting is the key to achieving goals and future financial security. Efforts to anticipate expenses and financial decisions can also help reduce taxes. The ability to pay your fair share of taxes—no more, no less—is vital to increasing your financial resources.

SAVING (Chapter 5)   Long-term financial security starts with a regular savings plan for emergencies, unexpected bills, replacement of major items, and the purchase of special goods and services, such as a college education, a boat, or a vacation home. Once you have established a basic savings plan, you may use additional money for investments that offer greater financial growth.

An amount of savings must be available to meet current household needs. LiquidityThe ability to readily convert financial resources into cash without a loss in value refers to the ability to readily convert financial resources into cash without a loss in value. The need for liquidity will vary based on a person’s age, health, and family situation. Savings plans such as interest-earning checking accounts, money market accounts, and money market funds earn money on your savings while providing liquidity.

SPENDING (CHAPTERS 8, 9)   Financial planning is designed not to prevent your enjoyment of life but to help you obtain the things you want. Too often, however, people make purchases without considering the financial consequences. Some people shop compulsively, creating financial difficulties. You should detail your living expenses and your other financial obligations in a spending plan. Spending less than you earn is the only way to achieve long-term financial security.

MANAGING RISK (CHAPTERS 10, 11, 12)   Adequate insurance coverage is another component of personal financial planning. Certain types of insurance are commonly overlooked in financial plans. For example, the number of people who suffer disabling injuries or diseases at age 50 is greater than the number who die at that age, so people may need disability insurance more than they need life insurance. Yet surveys reveal that most people have adequate life insurance but few have disability insurance. The insurance industry is more aggressive in selling life insurance than in selling disability insurance, thus putting the burden of obtaining adequate disability insurance on you.

Many households have excessive or overlapping insurance coverage. Insuring property for more than it is worth may be a waste of money, as may both a husband and a wife having similar health insurance coverage.

INVESTING (CHAPTERS 13, 14, 15, 16, 17)   While many types of investment vehicles are available, people invest for two primary reasons. Those interested in current income select investments that pay regular dividends or interest. In contrast, investors who desire long-term growth choose stocks, mutual funds, real estate, and other investments with potential for increased value in the future.

You can achieve investment diversification by including a variety of assets in your portfolio—for example, stocks, bond mutual funds, real estate, and collectibles such as rare coins. Obtaining general investment advice is easy; however, it is more difficult to obtain specific investment advice to meet your individual needs and goals.

Online Sources for Investing “Information is power”—this is especially true when investing. You can obtain company information and investment assistance at finance.yahoo.com, www.fool.com, and www.marketwatch.com.

RETIREMENT AND ESTATE PLANNING (CHAPTERS 18, 19)   Most people desire financial security upon completion of full-time employment. But retirement planning also involves thinking about your housing situation, your recreational activities, and possible part-time or volunteer work.

Transfers of money or property to others should be timed, if possible, to minimize the tax burden and maximize the benefits for those receiving the financial resources. A knowledge of property transfer methods can help you select the best course of action for funding current and future living costs, educational expenses, and retirement needs of dependents.

Online Sources for Retirement and Estate Planning Whether you are 40 years or 40 minutes away from retiring, you can obtain assistance at retireplan.about.com, www.aarp.org, and www.estateplanninglinks.com.

DEVELOPING A FLEXIBLE FINANCIAL PLAN

A financial planA formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities is a formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities. You can create this document on your own, seek assistance from a financial planner, or use a money management software package. Exhibit 1-10 offers a framework for developing and implementing a financial plan, along with examples for several life situations.

Exhibit 1-10   Financial planning in action

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IMPLEMENTING YOUR FINANCIAL PLAN

You must have a plan before you can implement it. However, once you have clearly assessed your current situation and identified your financial goals, what do you do next? The most important strategy for success is to develop financial habits that contribute to both short-term satisfaction and long-term financial security, including the following:

1. Using a well-conceived spending plan will help you stay within your income while you save and invest for the future. The main source of financial difficulties is overspending.
2. Having appropriate insurance protection will help you prevent financial disasters.
3. Becoming informed about tax and investment alternatives will help you expand your financial resources.

STUDYING PERSONAL FINANCE

Within each chapter of this book are various learning devices to help you build knowledge. The Personal Financial Planner provides a framework for creating and implementing your financial activities. The CD-ROM and Web site (www.mhhe.com/kdh) connect you to additional resources and activities. As you move into the following chapters, we leave you with this advice:

• Read and study the book carefully. Use the Concept Checks and end-of-chapter activities.
• Watch television and read newspapers and magazines for the latest personal finance information.
• Talk to others, experts and friends, who have knowledge of various money topics.
• Search the Web for answers to questions that result from your desire to know more.

Achieving your financial objectives requires two things: (1) a willingness to learn and (2) appropriate information sources. You must provide the first element; the material that follows will provide the second. For successful financial planning, know where you are now, know where you want to be, and be persistent in your efforts to get there.