Financial Planning Pdf Notes – What are you doing financially? You should ask yourself this question from time to time, and this should be your starting point when you decide to start a more or less formal financial plan. The first step to solving this problem is to collect and analyze records of what you do
) The difference between your assets and your liabilities. Thus, the formula for determining the net price is;
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. To find out if your net worth is high or low, you can prepare a personal net worth sheet that shows the difference between the value of the things you own, the amount you owe others, and your “net worth.” ” . like the Net Worth Statement in Figure 14.6, which we created with the fictitious caption Joe College. (Note that we’ve added lines for articles that might apply to some net worth claims, but we’ve left them blank because they don’t belong to Joe.)
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Note that we have attempted to calculate Joe’s assets at fair market value. You can purchase goods at the current sale price. – not what he can buy or the price he can get in the future, but the selling price now.
Finally, it should be noted that Joe has a positive net worth. At this point in the life of the average college student, a positive net worth may seem a bit unusual. If you currently have a negative net worth, technically you are
But remember that the main purpose of getting a college degree is to work to the best of your ability to create enough wealth to turn things around.
. It’s a function of your cash flow or income statement that shows where your money came from and where it’s going to go. it shows where your money is coming from and where it is going.
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-incoming income) comes from two sources: student loans and part-time income. Price (cash
– Cash flow) divided into different categories: housing, food, transportation, personal and health, recreation/entertainment, education, insurance, savings, and other expenses. If you want to find Joe
Joe was able to maintain a positive cash flow for the year ended August 31, 2012, but he will close it. Plus, it’s only in the black because of the flow of student loans, which, as you’ll recall from the net worth statement, is also a long-term liability. However, we’re willing to give Joe the benefit of the doubt: even though he’s facing huge educational expenses, he’s willing to take on debt when he’s looking at education (and we’re guessing he’s spending it wisely). an investment that will pay off in the future.
Remember that when you’re compiling a financial statement, you only need to record income and expenses for a specific period of time, whether it’s a month, a semester, or (as with Joe) a year. Also remember that you need to flow and flow
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: you don’t report income until you get paid and not until you pay. For example, when Joe used his credit card to buy his computer, he didn’t actually pay anything. However, each MONTHLY PAYMENT credit in the balance is a flow that must be recorded in the cash report (according to the type of expenses, for example, recreation, hospitality, food, transportation, etc.).
, because you deserve more. Finally, the net worth and cash flow statements are most valuable when used together. While your net statement lets you know what you deserve and how much wealth you have, your cash statement lets you know your operating expenses and savings habits are your wealth.
From Joe’s statement of cash flows, we know that despite his low income, he is able to save $1,200 a year. He certainly knows that it makes sense to have some cash in reserve for emergencies (car repairs, medical needs, and the like), but he also knows that he’s running out of money (probably every week). Develop the attitude you need if you hope to achieve your long-term financial goals.
What are Joe’s goals? We’ve included them in Figure 14.8 Joe’s Goals, where, as you can see, we’ve divided them into three tables: short-term (less than two years), medium (two to five years); and long-term (more than five years). Although Joe is still in the early stages of his financial career, he has identified and structured his goals very effectively. Specifically, they satisfy four aspects of well-thought-out objectives: they
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Jack R. Kapoor, Les R. Dlabay, and Robert J. Hughes, Personal Finance, 8th ed. (Leipzig: McGraw-Hill, 2007), 81.
They are also smart. Joe, for example, sees no reason why he can’t pay off his car loan, credit card and balance within two years. Remember that Jo Jo (rightly or wrongly) uses credit cards to pay for most of her personal consumption (furniture, electronics) with no income other than loan money and part-time student fees. decided (right or wrong) devices, etc.). Solving these problems won’t be easy, so we’ll give him some credit (so to speak) that it’s important that he includes them among his short-term goals. After graduating from college, he shoots and lasts for a long month. Financially, it might not be the best deal, but he knows he can get wide roaming that way. Classifying student loan repayments and home purchases as long term is realistic. But he wanted to reconsider his decision and wanted to make the deposit seem long-term. We believe this should start as soon as full-time work begins.
After reviewing the financial statements, Joe has a much better idea of the cash inflows and cash inflows for the year ended August 31, 2012. Now he can ask himself whether he is satisfied with the annual inflow (cost) or not. If he’s like most people, he’ll want to make some changes, perhaps to increase income, decrease expenses, or, if possible, both. The first step in these changes is to prepare a personal budget document that shows the sources of income and expenses for the future period (often per year). – a document showing the sources of income and expenses for the next year, along with details related to each fund.
So, looking at his numbers, Joe’s budget in Figure 14.9 is “Joe’s Budget” as of August 31, 2013. Consider the first step in the “Budget” column. If things go as planned, Joe expects to have $1,600 in cash at the end of the year—enough to pay off his credit card debt and leave him with an extra $400.
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Now we can look at the other two columns in Joe’s budget. Throughout the year, Joe tracks his expenses and activities and enters the totals in a column called “Actual.” But like most people, Joe doesn’t expect his actual numbers to match his budget numbers. So if there is a difference between the amount in the Budget column and the amount due in the Actual column, Joe will more or less report the difference as the difference between the actual and budgeted amount. . . Two types of variances appear in Joe’s budget:
Before we leave the topic of the financial planning process, let’s revisit the topic of Joe’s goals. “Joe’s Goals” Another look at Figure 14.8 reminds us that Joe has kept his goals very simple at this stage of his financial life cycle. We know, for example, that Joe wants to buy a house, but when does he want to take that important financial step? And of course Joe wants to retire, but what kind of lifestyle does he want in retirement? Does he, like most, expect to live in retirement more or less comparable to his peak earning years? Will he be able to afford such a comfortable vacation, let’s say, send his children to college? As Joe and his finances mature, he will need to articulate these goals (and some others) more clearly.
A decade or so ago, when the picture of the 2nd and 3rd players in Joe’s financial career came into sharper focus. If he hasn’t already done so, Joe is now ready to accomplish his first goal to guide and guide all of his other goals. See Bernard J. Winger and Ralph R. Frasca, Personal Finance: An Integrated Planning Approach, 6th ed. (Upper Saddle River, NJ: Prentice Hall, 2003), 57-58. Let’s say Joe’s investment in a college education goes bad
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