Personal Financial Planning For Accountants - Apex CPE

“putting 20,000 in an investment account within four years” is a less ambiguous guide toplanning than the goal of “putting money into an investment account.”Financial goals should have a time frame. A time frame helps you measure your progress towardyour financial goals. In the previous example, the goal is to be achieved in four years. Dividingyour clear goal into manageable pieces will allow you to better achieve your financial objective.Step 3: Identify alternative courses of actionIdentifying alternatives is critical for making good decisions. Although many external factors willinfluence the available alternatives, your possible courses of action will usually fall into these categories:Keep on the same course of action. For example, you may determine that the amount you havesaved each month is still appropriate.Enhance the current situation. You may choose to save a larger amount each month.Alter the current situation. You may decide to buy a money market fund instead of using aregular savings account.Undertake a new course of action. You may decide to use your monthly budget to pay off creditcard debts.Step 4: Evaluate alternatives, including appraising current financial status.You need to assess possible courses of action, taking into consideration your life situation and currenteconomic conditions. In the assessment process, you should also look at the consequences and risksassociated with each alternative. Every option in life can have positive or negative effects. Variousinformation sources are available to help you assess these possible outcomes. Every decision has atrade-off. For example, a decision to invest in stock may mean you cannot take a vacation. You mustunderstand the effect of each financial decision. Each financial decision you make can affect severalother areas of your life. For example, an investment decision may have tax consequences that areharmful to your estate plans. Or a decision about your child's education may affect when and how youmeet your retirement goals. Remember that all of your financial decisions are interrelated.Step 5: Formulate an action plan to meet goals.The fifth step of the financial planning process is to develop a plan of action—a blueprint. This requireschoosing ways to achieve your goals. For example, you can increase your savings by reducing yourspending or by increasing your income through extra time on the job. Don't delay your financial planningand implement your plan in accordance with your blueprint.Step 6: Review your plan periodically and making necessary revisions.Financial planning is a dynamic and on-going process that does not end when you take a particularaction. You need to regularly assess your financial decisions. You should do a complete review of yourfinances at least once a year. Your goals may change over the years due to changes in your lifestyle orcircumstances, such as an inheritance, marriage, birth, house purchase or change of job status. Revisitand revise your financial blueprint as time goes by to reflect these changes so that you stay on track4

with your long-term goals. Note: External events beyond your control such as inflation or changes in thestock market or interest rates can affect your financial planning results.Common Mistakes Consumer Make When Approaching Financial PlanningDon't set measurable financial goals.Make a financial decision without understanding its effect on other financial issues.Confuse financial planning with investing.Neglect to re-evaluate their financial plan periodically.Think that financial planning is only for the wealthy.Think that financial planning is for when they get older.5

Think that financial planning is the same as retirement planning.Wait until a money crisis to begin financial planning.Expect unrealistic returns on investments.Think that using a financial planner means losing control.Believe that financial planning is primarily tax planning.What are the negative effects of inadequate planning?The adverse consequences of not planning include inadequate protection if personal catastrophe occurs(for example, death, illness, accident, unemployment); insufficient funds for children's education;inadequate retirement funds; payment of higher taxes than necessary (for example, income tax, estatetax, gift tax); excessive costs to settle the estate; and not meeting lifetime objectives.Caution: Do not waste financial resources by planning excessively (for example, excessive insurancecoverage such as insuring your house for more than it's worth).Changing Economic Situations and Financial Planning and DecisionsYour personal financial decisions are heavily influenced by economic variables such as inflation, GrossDomestic Product (GDP), retail sales, consumer spending, and higher interest rates. Numerous Websitesand newspapers and business periodicals regularly publish current economic statistics. Exhibit 2provides an overview of some economic barometers and indicators that influence financial decisions.Several are explained below.InflationInflation is the general rise in prices of consumer goods and services. The federal government measuresinflation with four key indices: Consumer Price Index (CPI), Producer Price Index (PPI), GDP Deflator, andEmployment Cost Index (ECI). Inflation is most harmful to people who live on fixed incomes. Due toinflation, retired people whose incomes may not change are able to afford smaller amounts of goodsand services. Inflation can also adversely affect lenders of money. Unless an adequate interest rate ischarged, amounts repaid by borrowers in times of inflation have less buying power than the money theyborrowed. If you pay 10 percent interest on a loan and the inflation rate is 12 percent, the dollars youpay the lender have lost buying power. For this reason, interest rates rise in periods of inflation.Gross Domestic Product (GDP)GDP measures the value of all goods and services produced by the economy within its boundaries and isthe nation's broadest gauge of economic health. GDP is reported as a “real” figure, that is, economicgrowth minus the impact of inflation.6

Retail Sales, Consumer Spending, and Consumer ConfidenceThe retail sales figure is the estimate of total sales at the retail level. It includes everything from bags ofgroceries to durable goods such as automobiles. It is used as a measure of future economic conditions. Along slowdown in sales could spell cuts in production. Retail sales are a major concern of analystsbecause they represent about half of overall consumer spending. Consumer spending, in turn, accountsfor about two-thirds of the nation's GDP. Total demand for goods and services in the economyinfluences employment opportunities and the potential for income. As consumer purchasing increases,the financial resources of current and prospective employees expand. This situation improves thefinancial condition of many households. In contrast, reduced spending causes unemployment, since staffreduction commonly results from a company’s reduced financial resources. A low or decreased level ofconsumer confidence indicates concern about consumers’ employment prospects and their earnings inthe months ahead. The Consumer Confidence Index measures consumer optimism and pessimism aboutgeneral business conditions, jobs, and total family income.Interest RatesInterest rates are a major factor to be considered in many financial planning decisions. Simply put,interest rates represent the costs of lending and borrowing. The earnings you receive as a saver or aninvestor reflect current interest rates as well as a risk premium based on such factors as the term of theloan, expected inflation, and the extent of risk. Risk is also a factor in the interest rates on auto, creditcard, or mortgage loans you pay as a borrower. If you have poor credit ratings you pay a higher interestrate. Exhibit 3 summarizes the effect of cutting the discount rate, one of the key interests, on theeconomy.Exhibit 2:Changing Economic Situations and Financial Planning and DecisionsEconomicBarometerEleven leadingeconomicindicatorsEconomic Indicators/SourcesIndex of Leading Economic Indicators tGaugesAdvancesignals abouteconomichealthGross DomesticProduct (GDP)GDP, Factory orders, Industrial production,purchasing manager’s indexwww.fedstats.gov/The total valueof goods andservicesproducedwithinaHow It Affects FinancialPlanning and DecisionsEconomic series of indicatorsthat tends to predict futurechanges in economic activityfor the next six to ninemonths; especially a sustainedrise in LEI implies more jobsand opportunities for personalfinancial well-being.The GDP is an indication of anation’s economic health;especially a sustained growthin GDP results in more jobsand opportunities for personal7

country’sboundaryThe number ofpeople withoutjobs who arewillingandable to yment, Help-wanted index, InitialJobless claimswww.stats.bls.govInflationConsumer Price Index (CPI), Producer PriceIndex (PPI), GDP Deflator, Employment CostIndex (ECI), mer expectations index,confidence etail SalesRetail saleswww.bloomberg.comwww.census.gov/econThe estimateof total sales atthe retail level.Interest RatesFed funds, discount, and prime rates; Treasurybill and bond yieldswww.bloomberg.comMoney SupplyM1, M2, and M3www.federalreserve.govThe cost ofmoney;thecost of creditwhenyouborrow;thereturn on yourmoney whenyou save orinvestThedollaravailableforspending in theeconomyHousing StartsHousing starts, Construction spendingwww.fedstats.gov/ConsumerThe measureof cost ofliving;thepurchasingpower of thedollarThe demandfor goods andservices by theconsumingpublicThe number ofnewhomesbuiltfinancial well-being.People who are unemployedshould reduce their umerspending.Anunemployment rate of 8percent would be indicative ofa recession.With inflation, you are unableto purchase the same amountof goods and services; highconsumer prices and inflationare likely to spark high interestrates.Increased consumer spendingis likely to create more jobs;high levels of consumerspending and borrowing canalso fuel inflation and lead tointerest ratesA measure of future economicconditions: a long slowdown insales could spell cuts inproduction and jobs.Higher interest rates makebuying on credit more costly;investing more attractive, anddampen borrowing; impactmortgage rates.Interest rates tend to declineas more people save andinvest; but higher savings(lower spending) may alsoreduce job opportunities.Increasedhomebuildingresults in more jobs, ic growth8

Trade BalanceU.S. Balance of Payments, Value of the dollarwww.bloomberg.comThe differencebetweenacountry’sexports and itsimports.With trade deficit, interestrates may rise and foreigngoods and foreign travel willbe more expensiveExhibit 3:The Effects of Lowering the Discount Rate on Personal FinanceThe players:The Federal Reserve is the nation's central bank. It regulates theflow of money through the economy.The action:Discount rate is what the Federal Reserve charges on short-termloans to member banks. When the Fed cuts the discount rate, itmeans banks can get cash cheaper and thus charge less on loans.The first effect:Within a few days, banks are likely to start passing on thediscounts by cutting their prime rate, which is what banks chargeon loans to their best corporate customers.Impact:Businesses are more likely to borrow. Adjustable consumerloans are tied to the prime rate, such as credit card rates. Thesebecome cheaper, stimulating spending.The second effect:Within a few weeks, rates on mortgage and auto loans drop.The goal:To kick start

What are the objectives of personal financial planning? The goals of personal financial planning include: preserve financial security, have a program to meet financial requirements, evaluate and select available options, manage risk effectively, take care of records, and avoid areas where impending legislation threatens profitability or tax .