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.