Fin1 - Stage 1 Gearning Up

F1 – Project-Stage1: Gearing up
TCHE322
Lawrence et al (2011). Chapter 1
Thomas (2009). Chapter 1
CFP Handbook (2015). Chapter 6
Lecture of Shahnawaz Ali
1
Schedule of lectures
Project topic covered
• The rewards of a sound financial planning
• The financial planning processes
• Setting financial goals
Groupwork project activities
• Group formation
• What-Why-When-How activities
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Rewards of Sound Financial Planning
• Improving your standard of living
• Spending money wisely
• Accumulating wealth – an abundance of money and other financial
resources.
Financial success – achievement of financial aspiration.
Financial security – being able to fulfil any needs and most wants.
Financial freedom – the state where work is an option, you choose.
Not compelled to opt.
3
Exhibit 1.1 Organizational Planning Model
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH1 4
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The financial planning processes
• Systematic process that considers important elements of an individual’s
financial affairs to fulfill financial goals
• The process translates personal financial goals into specific financial
plans, which then helps you implement those plans through financial
strategies.
6
Exhibit 1.3 The Six-Step Financial Planning
Process
The financial planning processes
The personal financial planning process as defined by
the Financial Planning Practice Standards.
From the financial planners’ perspective
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Breakdown the financial planning processes
Develop/gather data of financial goal
Is it more important to spend your money now or to
save for the future?
Would you rather get a job right after high school or
continue your education?
Will your chosen career require additional training or
education in the future?
Do your personal values affect your financial
decisions?
Values – Beliefs and principles you consider important, correct

and desirable
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Develop/gather data of financial goal
NEEDS VS. WANTS
NEEDS WANTS
Something you must have to Something you desire or
survive would like to have or do
• Food • ________________
• Clothing • ________________
• __________ • ________________
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Personal values and financial decision making
Values – Beliefs and principles you consider important, correct and desirable
Talavera, O., Yin, S., & Zhang, M. (2018). Age diversity, directors' personal values,
and bank performance. International review of financial analysis, 55, 60-79.
Delis, M. D., & Mylonidis, N. (2015). Trust, happiness, and households’ financial
decisions. Journal of financial stability, 20, 82-92.
Naeem, M. A., Farid, S., Faruk, B., & Shahzad, S. J. H. (2020). Can happiness predict
future volatility in stock markets?. Research in International Business and
Finance, 54, 101298.
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Financial Goals
• Results that an individual wants to attain

• Utility and cost are to be considered when
evaluating alternative qualities of life,
spending patterns, and forms of wealth
accumulation
• Money and utility are linked to psychological
concepts of values, emotion, and personality
• Financial planning is an important part of
the conflict resolution process
Target Dates on Financial Goals
• Goal dates: Target dates in the future when
certain financial objectives are expected to be
completed
• Long-term goals
• Indicates wants and desires for a period covering
about 6 years out to the next 30 or 40 years
• Short-term financial goals
• Set each year and cover a 12-month period
• Intermediate goals
• Bridge the gap between short- and long-term goals
Evaluate current financial status
Financial statement and ratios

Income statement:
monthly income,
monthly expenses
Balance sheet:
assets, including savings,
debts
 Your current net worth
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Develop and evaluate alternatives
It is impossible to make a good decision

unless you know your options
Consider the consequences and risks of each

decision you make
 Make the decision on the planning
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Opportunity costs and trade-off in decision making
Opportunity costs:
value/benefits of the next best alternative that must be foregone
it is what is given up when making a choice instead of another option
 Choosing involves knowing what you would gain and knowing what you might
give up
 Personal opportunity costs vs. financial opportunity cost
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 Personal opportunity costs – making choices about how to spend your

personal resources, health, time…
Do you study for a test or go to a concert you were invited to?
Not likely to do both because people have a limited amount of time
 Financial opportunity cost – making choices about how you use/spend

your money
Do you buy a Iphone 15 for $2,000 pus tax or do you save your money?
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Opportunity costs:
value/benefits of the next best alternative that must be foregone
it is what is given up when making a choice instead of another option
 Choosing involves knowing what you would gain and knowing what you might
give up
Evaluating risks – when making a financial decision, you also accept relevant
financial risks.
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Marginal analysis in decision making
 Utility – the ability of a good or service to satisfy a human want
 Marginal Utility – Extra satisfaction from one more incremental unit of a

good or service
 Marginal cost – Additional cost of one more unit of some item
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Income taxes in decision making
 Marginal tax rate – Tax rate at which your last dollar earned is taxed
 Tax-Exempt income – Income that is totally and permanently free for taxes
 Tax-Sheltered income – Income exempt from income taxes in the current year
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Time value of money in decision making
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Create a plan based on the decision
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Exhibit 1.4 The Personal Financial Planning
Life Cycle
Implement – review and revise the plan
As you get older, your finance and needs will change
Your financial plan will have to change as well
Could consider re-evaluating and revising your

financial plan (if necessary) every year
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How the Economic Environment Will Affect Personal Finance
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Phases of Economic Cycles
Expansion
• Real GDP increases until it hits a peak
Peak
• Expansion ends and a contraction begins
Contraction
• Real GDP falls
Trough
• Contraction ends and an expansion begins
Exhibit 1.7 The Business Cycle
Source: Adapted from William Boyes and Michael Melvin, Economics, 8th ed. (Cengage, 2011), p. 135.
Economy
Inflation
• General price level is increasing
Consumer price index (CPI)
• Measure of inflation based on changes in the

cost of consumer goods and services
Purchasing power
• Amount of goods and services that each

dollar buys at a given time
How the Economic Environment Will Affect Personal Finance
It is important to
 predict the future directions for the Economy
 GDP
 Index of leading economic indicators (LEI)
 predict the future directions of prices and inflation
 Consumer price index
 Personal inflation rate – the rate of increase in prices of items purchased

by a particular person
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Essential Information of personal financial plans *
1. A summary of the goals
2. Significant assumptions and justification
3. Estimates
4. Recommendations
5. A description of limitations on the work performed
6. The recommendations in the engagement should contain qualifications to the
recommendations if the effects of certain planning areas on the client’s overall
financial picture were not considered.
* Adapted from Paragraph .35, Statement on Standards in Personal Financial Planning Services No. 1
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F1 – Project-Stage1: Gearing up

From the financial planners’ perspective

Values – Beliefs and principles you consider important, correct

NEEDS VS. WANTS

• Results that an individual wants to attain

Financial statement and ratios

It is impossible to make a good decision

Consider the consequences and risks of each

 Make the decision on the planning

value/benefits of the next best alternative that must be foregone

it is what is given up when making a choice instead of another option

 Personal opportunity costs vs. financial opportunity cost

 Personal opportunity costs – making choices about how to spend your

Do you study for a test or go to a concert you were invited to?

Not likely to do both because people have a limited amount of time

 Financial opportunity cost – making choices about how you use/spend

value/benefits of the next best alternative that must be foregone

it is what is given up when making a choice instead of another option

 Personal opportunity costs vs. financial opportunity cost

 Utility – the ability of a good or service to satisfy a human want

 Marginal Utility – Extra satisfaction from one more incremental unit of a

 Marginal cost – Additional cost of one more unit of some item

As you get older, your finance and needs will change

Your financial plan will have to change as well

Could consider re-evaluating and revising your

• Real GDP increases until it hits a peak

• Expansion ends and a contraction begins

• Real GDP falls

• Contraction ends and an expansion begins

• General price level is increasing

Consumer price index (CPI)

• Measure of inflation based on changes in the

• Amount of goods and services that each

 predict the future directions for the Economy

 Index of leading economic indicators (LEI)

 predict the future directions of prices and inflation

 Consumer price index

 Personal inflation rate – the rate of increase in prices of items purchased

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