CHAPTER 22
I. THE NEED FOR PERSONAL FINANCIAL
PLANNING.
LEARNING GOAL 1. Describe the six
steps one should take to generate capital.
A. The planning budgeting,
controlling and self- disciplining needed to save money will prove invaluable
to those starting their own businesses.
1. You have to start thinking and
acting like an entrepreneur long before you start your own business.
2. The only way to accumulate enough
money to start your own business is to make more than you spend.
B. SIX STEPS IN LEARNING TO CONTROL
YOUR ASSETS.
1. STEP 1: TAKE AN INVENTORY OF YOUR
FINANCIAL ASSETS.
a. This means you need to develop a
balance sheet for yourself.
(i) A balance sheet starts with the
formula: Assets - Liabilities = Equity.
(ii) Assets include anything you
own, and should be evaluated based on their current value.
(iii) If the value of your
liabilities exceeds the value of your assets, you need some discipline in your
life.
b. An income statement starts with
revenue, then subtracts costs and expenses to get net worth.
2. STEP 2: KEEP TRACK OF ALL YOUR
EXPENSES.
a. Write down every single penny you
spend each day.
b. The only way to trace where the
money goes is to keep track of every cent you spend.
c. Develop certain categories based
on what is important to you
3. STEP 3: PREPARE A BUDGET.
a. Your personal budget should be
based on your financial goals.
b. The idea is to spend less than
you take in.
c. Running a household's finances is
similar to running a small business's-it takes careful record keeping,
budgeting, and the need to borrow funds.
4. STEP 4: PAY OFF YOUR DEBTS.
a. Use any extra money you have to
pay off your debts.
b. Start with the debts that carry
the highest interest rates.
5. STEP 5: START A SAVINGS PLAN.
a. The best way to save money is to
pay yourself first.
b. Take money out of your paycheck
for savings, and then plan what to do with the rest.
6. STEP 6: IF YOU HAVE TO BORROW
MONEY, ONLY BORROW IT TO BUY ASSETS THAT HAVE THE POTENTIAL TO INCREASE IN
VALUE, SUCH AS A HOUSE.
a. Don't borrow for expenses.
b. If you have budgeted for
emergencies, you should be able to stay financially secure.
C. EDUCATION-THE BEST INVESTMENT.
1. As the world moves toward an
information economy, education will become a more and more important
investment.
2. Education is an investment that
has paid off regardless of the state of the economy or political ups and downs.
3. Many people use their education
to find successful careers.
4. However, less than 10% of the
U.S. population has accumulated enough money by retirement age to live
comfortably.
D. HOW MUCH CAPITAL DOES A BUDDING
ENTREPRENEUR NEED?
1. It's surprising how little
capital an entrepreneur needs to get started in business.
2. People in their twenties and
early thirties started almost 2 million businesses in 1996.
3. It is never too soon to start
thinking about saving money to invest.
II. BUILDING YOUR CAPITAL ACCOUNT.
LEARNING GOAL 2. Explain the best
way to preserve capital and begin investing.
A. Accumulating capital takes
discipline and careful planning.
1. To accumulate capital, YOU HAVE
TO EARN MORE THAN YOU SPEND.
2. The first step is to find
employment.
3. Try to live as frugally as
possible, saving a percentage of your income each month.
4. The savings can then be used to
generate even more capital through investment.
5. A capital-generating strategy may
require forgoing most of the 'luxuries' such as new cars and clothes.
6. After six years of careful
saving, the first investment might be a low-priced home.
B. APPLYING THE STRATEGY.
1. Some people have used the
strategy to buy duplex homes.
2. Living in one and renting the
other, the couple can live very cheaply while their investment in a home
appreciates.
3. This is basically a capitalist
society, and in such a society you're lost without capital.
4. Money that earns 12% annually
doubles in just six years.
C. REAL ESTATE: A RELATIVELY SECURE
INVESTMENT.
1. Homes have historically grown in
value each year (the price declines of the 1980s and early 1990s are likely a
short-term phenomenon).
2. A home is the one investment that
you can live in.
3. The payments are relatively
fixed.
4. Paying for a home is a good way
of forcing yourself to save.
D. TAX DEDUCTION AND HOME OWNERSHIP.
1. Buying a home is likely to be the
largest and most important investment you'll make.
2. Interest on home mortgage
payments are tax-deductible.
3. Real estate taxes are
tax-deductible.
4. Since almost all of the mortgage
payments in the first few years goes toward interest, almost all the early
payments are tax deductible.
5. The key to getting the optimum
return on a home is location.
E. WHERE TO PUT YOUR SAVINGS.
1. One of the WORST PLACES to keep
your long-term investments is in a BANK or SAVINGS AND LOAN.
2. However, it is important to have
a month or two of savings in the bank for emergencies.
3. One of the BEST PLACES to invest
over time has been the STOCK MARKET.
4. Bonds have traditionally lagged
behind stock as a long-term investment.
III. LEARNING TO MANAGE CREDIT AND
INSURANCE.
LEARNING GOAL 3. Compare and
contrast various types of life, health, and other insurance alternatives.
A. CREDIT CARDS.
1. Credit cards charge 12-20%
interest annually. This means credit card purchases are much more expensive
than those paid in cash.
2. Credit cards are important to
have even if they are rarely used.
a. Some merchants require credit
cards as form of identification. It is difficult to buy certain goods or even
rent a car without a credit card.
b. Credit cards are a way to keep
track of purchases.
c. Credit cards are more convenient.
3. If you do use a credit card, pay
the balance in full each month.
4. Choose a card, like Discover,
that pays you cash back or gives you frequent flier miles.
5. The dangers of credit cards are:
a. You may buy goods and services
you normally would not buy.
b. You can pile up debt to the point
when you can't pay.
c. Credit cards are helpful for the
financially careful buyer; they are a financial disaster to those with little
financial restraint and tastes beyond their income.
B. BUYING LIFE INSURANCE.
1. To provide protection from the
loss of a spouse or business partner, you should buy life insurance.
2. TERM INSURANCE is pure insurance
protection for a given number of years; this is the preferred form of life
insurance today.
C. BUYING HEALTH INSURANCE.
1. Both individuals and businesses
need to consider protecting themselves from losses due to health problems.
a. You may have health insurance
coverage through your employer.
b. If not, you can buy insurance
from a health insurance provider.
2. HEALTH MAINTENANCE ORGANIZATIONS
(HMOs) stress prevention of illness, although hospital care is also provided.
3. It is a good idea to supplement
health insurance with DISABILITY INSURANCE because the chances of becoming
disabled at an early age are higher than your chances of dying from an
accident.
4. It is very dangerous not to have
health insurance.
D. BUYING OTHER INSURANCE.
1. When buying auto insurance be
sure to include LIABILITY INSURANCE to protect yourself against being sued by
someone accidentally injured by you.
2. Get a large deductible ($500) to
keep the premiums low.
IV. PLANNING YOUR RETIREMENT.
LEARNING GOAL 4. Outline a strategy
for retiring with enough money to last a lifetime.
A. Successful financial planning
means long-range planning, including retirement.
B. SOCIAL SECURITY.
1. Social security is the term used
to describe the Old-Age, Survivors, and Disability Insurance program
established by the Social Security Act of 1935.
2. By the time students retire,
there will huge changes in the Social Security system since the system can't
afford to pay out more than it takes in.
3. The number of people retiring and
living longer is increasing while the number of workers paying into the fund is
declining.
4. Don't count on Social Security to
provide you with funds for retirement.
C. INDIVIDUAL RETIREMENT ACCOUNTS.
1. INDIVIDUAL RETIREMENT ACCOUNTS
(IRAs) are tax-deferred investment plans that enable you and your spouse to
save part of your income for retirement.
a. A TRADITIONAL IRA allows people
to deduct from their reported income the money they put into an account.
b. People who invest in a ROTH IRA
don't get up-front deductions on their taxes, but withdrawals are tax free.
2. Opening an IRA account may be one
of the wisest investments you make.
a. Banks, savings and loan, and
credit unions all have IRA savings plans.
b. Insurance companies also offer
plans.
c. You can put your IRA funds into
stocks, bonds, or mutual funds.
3. A wide range of choices is
available.
4. You cannot take the money out of
an IRA until you are 59 years old without paying a 10% penalty and paying taxes
on the income.
5. An IRA is a sure path to having
funds available to further enjoy your retirement years.
D. SIMPLE IRAs.
1. Companies with 100 or fewer
employees can provide their workers with a SIMPLE IRA.
2. Employees can contribute up to
$6,000 of their income annually and the company matches the contribution.
E. 401(k) PLANS.
1. 401(k) PLANS have three benefits:
a. The money you put in reduces your
present taxable income.
b. Tax is deferred on the earnings.
c. Employers often match part of
your de posit.
2. You cannot withdraw from 401(k)
plans without penalty until you are 59, but you can borrow from the account.
3. You can select how the money is
invested (stocks, bonds, and real estate.)
4. There is a Simple 401(k) plan for
those firms with 100 or fewer employees.
F. KEOGH PLANS.
1. KEOGH PLANS are retirement plans
for small-business people who do not have the benefit of a corporate retirement
system.
2. The amount invested in Keogh
plans is NOT LIMITED TO $2,000 as they are in IRAs. The maximum that can be
invested is more than $30,000 per year.
3. Both IRA and Keogh plans could be
considered backup plans to Social Security.
4. Like IRAs, Keogh funds are not
taxed, nor are the returns the funds earn.
5. As with IRAs, there is a 10%
penalty for early withdrawal.
G. FINANCIAL PLANNERS.
1. FINANCIAL PLANNERS are people who
assist in developing a comprehensive program that covers investments, taxes,
insurance, and other financial matters.
2. Many people claim to be financial
planners; some are simply life insurance or mutual fund salespeople.
3. Some companies are called
one-stop financial centers or financial supermarkets.
4. It pays to shop around for
financial advice.
5. Most financial planners begin
with life insurance and health insurance plans.
6. Financial planning covers all
aspects of in vesting, all the way to retirement and death.