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• Financial Planning Process
  • Establish and define the relationship
  • Gather data and determine goals
  • Evaluate and analyze the client’s situation
  • Develop recommendations and alternatives



               Financial Planning Assignment
Financial Statements

• Current assets & current liabilities
• Reinvested interest and dividends
• Including employer retirement contributions as planned
  savings

And what is the definition of savings anyway?



               Financial Planning Assignment
Professor Solis
 Earns $100,000 for 9 mos./paid over 9 mos. or
  $11,111/mos.
 Has $2,775 automatically transferred to MMA so can
  pay bills during the summer
 $667 is withheld for 403(b) contribution & employer
  matches that with an additional $667
 Sets aside $500/month for down payment on car to
  purchase in 2 years & $700/month for children’s
  education in 10 years
Spending plans
Liquid assets and savings strategies
Credit management and debt reduction
Housing decisions and financing




Cash Management Topics
• Set goals
• Project cash inflow and outflow
• Record inflow and outflow (including purchases made
  using credit)
• Compare and analyze
• Adjust (inflows, outflows, and/or goals)

                                  Spending Plans
What is Your Money Personality?
            Desire to create wealth

            Willingness to take risk
                             Hoarder
                            Achiever
                        Entrepreneur
                         Thrill seeker
Liquid Assets & Savings Strategies

Saving for:
   • Goals
   • Emergencies
Saving for Goals
• What do you want?
• How much do you need to
  save to get it?
   • Do you have funds already set
     aside?
• How soon do you want it?
   • How much can you earn on
     savings/investments?
• Use time value of money to
  calculate annual/monthly
  savings needed
Emergency Funds
     Funds to fall back on if you
      become ill or disabled and
    can't work, or if you or your
     spouse lose your job, incur
  large medical bills, or have an
 unexpected large bill such as a
       major car or home repair.
Keep from reducing assets for other
goals or increasing liabilities.

Not to be used for major risks that
insurance can cover

Purpose of Emergency Fund
Size
How much should a client have in an
emergency fund?
  3 to 6 months is the rule of thumb

Based on Income or Expenses?

What are the considerations
regarding size?
Size
depends on things like:

   •   Personal Financial Situation
   •   Risk Tolerance
   •   Demographic characteristics
   •   Health
   •   Job Stability and Outlook
• Liquidity- ability to quickly convert an assets to cash
  with little to no uncertainty in value

• Marketability- ease of buying or selling an asset for its
  market value



                               Investing the Money
Financial Statements

Rank order the following from most to least liquid….
   • Stock mutual fund
   • Real estate
   • Certificate of Deposit (CD)
   • Money Market Account/Mutual Fund
   • Savings Account




                Financial Planning Assignment
What rate of return do you
     expect to earn on an
         emergency fund?
      http://www.bankrate.com/brm/rate/high_ra
       tehome.asp?params=US,416&product=160

      http://www.bankrate.com/brm/rate/high_ra
         tehome.asp?params=US,416&product=14
Jack and Sarah Thompson
 Jack (age 30), Sarah (29), married, no kids
 Jack is a teacher earning $30,000/year
 Sarah is a pharmacy rep. earning $20,000 to $100,000
  over the past 6 years ($95,000 this year)
 Both are moderately risk tolerant
 They manage to pay all bills (including CC balances
  monthly) and are saving regularly ($20,000 this year)
 They currently have $35,000 in retirement accounts,
  $25,000 in equity MFs, & $3,000 in savings accounts.
How much would you recommend they
allocate to their emergency fund?
How would you recommend they
accomplish that allocation?


Reallocate assets?
Regular savings?
Use of lines of credit?
Use of investment asset?
What if…
• They adopt twins
• Both of their salaries are more stable? Closer to equal?
• They are very risk tolerant

…how would this change your emergency fund
recommendation?
Benchmark—3 to 6 months?
Trade-offs
   • Liquid Funds earn lower returns
   • Liquidation Costs for Non-Liquid Assets


             Emergency Fund Strategy

Layered Emergency Fund
   • Money Market Account/Fund
   • Laddered CDs / Bonds / T-Bills
   • Lines of Credit
   • Securities
Laddering
    Your grandmother has
     $90,000 she wants to
    keep in a CD at a local
bank; however, she would
    like the highest return
  possible and she needs
the money for short-term
   emergencies. Her only
other cash is $10,000 in a
   money market deposit
   account. What do you
              recommend?
Investing the Money
• Divide the money into 4 accounts of $22,500 each.
  Invest in:
   $22,500—3-month CD
   $22,500—6-month CD
   $22,500—9-month CD
   $22,500—12-month CD
• As each CD matures, roll it into a new 12-month CD
LADDERING
“Earn a higher rate of return without jeopardizing the
number of months of income protection…”

     Rate of
     Return                            Term
      2.5%           CD 4            12 months
      2.0%            CD3            9 months
      1.5%            CD2            6 months
      1.0%            CD1            3 months

     1.75%          Average
Systematic savings strategies
Savings instruments
Checking instruments
Develop a Systematic Plan
• Set Goals
   To determine an appropriate
    emergency fund
   To determine how much to save
   To guide you on what types of
    accounts to use

• Develop a strategy that works
• Start early…but it’s only too late if
  you don’t start now
• Apply to banks, S&Ls , mutual savings banks, and credit
  unions only (and MMMFs until December 2013)
• Apply only to deposit accounts (not annuities, etc. sold
  by one of the above institutions)
• $250,000/institution/legal ownership (through
  December 2013—then back to $100,000 for everything
  except retirement accounts)

                                     FDIC Insurance
Mark and Mary Anderson have the following accounts at
one Lubbock bank. Under the FDIC protection, how much
of their money is insured?
CD in Mark’s name only:                 $150,000
CD in Mark's name only:                 $200,000
Money Market Account in Mary’s name:    $100,000
Joint checking:                         $5,000
Joint savings:                          $298,000
FDIC
Max and Sandra Smith have the following balances at the
First National Bank in their local community. Assuming this
bank is a federally insured institution, how much of their




INSURED
funds are covered by federal deposit insurance?

--joint checking                      $125,000
--joint money market account          $180,000
--individual CD in Max's name         $125,000
--individual CD in Sandra’s name      $245,000
--IRA in Sandra's name (5-year CD)    $175,000
--joint stock mutual fund shares      $227,000
Individual
Joint tenancy (“or”)
Tenancy in common (“and”)

Account Ownership
• Savings & share accounts
• Certificates of deposit (CD)
• Money market accounts (MMA or
  MMDA)
• Money market mutual funds
  (MMMF)
• US Treasury bills (T-bill)
• US EE savings bonds
• US I bonds (inflation-indexed bonds)




   Savings Instruments

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Cashflow management

  • 1. • Financial Planning Process • Establish and define the relationship • Gather data and determine goals • Evaluate and analyze the client’s situation • Develop recommendations and alternatives Financial Planning Assignment
  • 2. Financial Statements • Current assets & current liabilities • Reinvested interest and dividends • Including employer retirement contributions as planned savings And what is the definition of savings anyway? Financial Planning Assignment
  • 3. Professor Solis  Earns $100,000 for 9 mos./paid over 9 mos. or $11,111/mos.  Has $2,775 automatically transferred to MMA so can pay bills during the summer  $667 is withheld for 403(b) contribution & employer matches that with an additional $667  Sets aside $500/month for down payment on car to purchase in 2 years & $700/month for children’s education in 10 years
  • 4. Spending plans Liquid assets and savings strategies Credit management and debt reduction Housing decisions and financing Cash Management Topics
  • 5. • Set goals • Project cash inflow and outflow • Record inflow and outflow (including purchases made using credit) • Compare and analyze • Adjust (inflows, outflows, and/or goals) Spending Plans
  • 6. What is Your Money Personality? Desire to create wealth Willingness to take risk Hoarder Achiever Entrepreneur Thrill seeker
  • 7. Liquid Assets & Savings Strategies Saving for: • Goals • Emergencies
  • 8. Saving for Goals • What do you want? • How much do you need to save to get it? • Do you have funds already set aside? • How soon do you want it? • How much can you earn on savings/investments? • Use time value of money to calculate annual/monthly savings needed
  • 9. Emergency Funds Funds to fall back on if you become ill or disabled and can't work, or if you or your spouse lose your job, incur large medical bills, or have an unexpected large bill such as a major car or home repair.
  • 10. Keep from reducing assets for other goals or increasing liabilities. Not to be used for major risks that insurance can cover Purpose of Emergency Fund
  • 11. Size How much should a client have in an emergency fund? 3 to 6 months is the rule of thumb Based on Income or Expenses? What are the considerations regarding size?
  • 12. Size depends on things like: • Personal Financial Situation • Risk Tolerance • Demographic characteristics • Health • Job Stability and Outlook
  • 13. • Liquidity- ability to quickly convert an assets to cash with little to no uncertainty in value • Marketability- ease of buying or selling an asset for its market value Investing the Money
  • 14. Financial Statements Rank order the following from most to least liquid…. • Stock mutual fund • Real estate • Certificate of Deposit (CD) • Money Market Account/Mutual Fund • Savings Account Financial Planning Assignment
  • 15. What rate of return do you expect to earn on an emergency fund? http://www.bankrate.com/brm/rate/high_ra tehome.asp?params=US,416&product=160 http://www.bankrate.com/brm/rate/high_ra tehome.asp?params=US,416&product=14
  • 16. Jack and Sarah Thompson  Jack (age 30), Sarah (29), married, no kids  Jack is a teacher earning $30,000/year  Sarah is a pharmacy rep. earning $20,000 to $100,000 over the past 6 years ($95,000 this year)  Both are moderately risk tolerant  They manage to pay all bills (including CC balances monthly) and are saving regularly ($20,000 this year)  They currently have $35,000 in retirement accounts, $25,000 in equity MFs, & $3,000 in savings accounts.
  • 17. How much would you recommend they allocate to their emergency fund?
  • 18. How would you recommend they accomplish that allocation? Reallocate assets? Regular savings? Use of lines of credit? Use of investment asset?
  • 19. What if… • They adopt twins • Both of their salaries are more stable? Closer to equal? • They are very risk tolerant …how would this change your emergency fund recommendation?
  • 20. Benchmark—3 to 6 months? Trade-offs • Liquid Funds earn lower returns • Liquidation Costs for Non-Liquid Assets Emergency Fund Strategy Layered Emergency Fund • Money Market Account/Fund • Laddered CDs / Bonds / T-Bills • Lines of Credit • Securities
  • 21. Laddering Your grandmother has $90,000 she wants to keep in a CD at a local bank; however, she would like the highest return possible and she needs the money for short-term emergencies. Her only other cash is $10,000 in a money market deposit account. What do you recommend?
  • 22. Investing the Money • Divide the money into 4 accounts of $22,500 each. Invest in:  $22,500—3-month CD  $22,500—6-month CD  $22,500—9-month CD  $22,500—12-month CD • As each CD matures, roll it into a new 12-month CD
  • 23. LADDERING “Earn a higher rate of return without jeopardizing the number of months of income protection…” Rate of Return Term 2.5% CD 4 12 months 2.0% CD3 9 months 1.5% CD2 6 months 1.0% CD1 3 months 1.75% Average
  • 24. Systematic savings strategies Savings instruments Checking instruments
  • 25. Develop a Systematic Plan • Set Goals  To determine an appropriate emergency fund  To determine how much to save  To guide you on what types of accounts to use • Develop a strategy that works • Start early…but it’s only too late if you don’t start now
  • 26. • Apply to banks, S&Ls , mutual savings banks, and credit unions only (and MMMFs until December 2013) • Apply only to deposit accounts (not annuities, etc. sold by one of the above institutions) • $250,000/institution/legal ownership (through December 2013—then back to $100,000 for everything except retirement accounts) FDIC Insurance
  • 27. Mark and Mary Anderson have the following accounts at one Lubbock bank. Under the FDIC protection, how much of their money is insured? CD in Mark’s name only: $150,000 CD in Mark's name only: $200,000 Money Market Account in Mary’s name: $100,000 Joint checking: $5,000 Joint savings: $298,000
  • 28. FDIC Max and Sandra Smith have the following balances at the First National Bank in their local community. Assuming this bank is a federally insured institution, how much of their INSURED funds are covered by federal deposit insurance? --joint checking $125,000 --joint money market account $180,000 --individual CD in Max's name $125,000 --individual CD in Sandra’s name $245,000 --IRA in Sandra's name (5-year CD) $175,000 --joint stock mutual fund shares $227,000
  • 29. Individual Joint tenancy (“or”) Tenancy in common (“and”) Account Ownership
  • 30. • Savings & share accounts • Certificates of deposit (CD) • Money market accounts (MMA or MMDA) • Money market mutual funds (MMMF) • US Treasury bills (T-bill) • US EE savings bonds • US I bonds (inflation-indexed bonds) Savings Instruments