Setting Financial Goals - Personal Financial Planning - Lecture Slides, Slides of Finance

Download Setting Financial Goals - Personal Financial Planning - Lecture Slides and more Slides Finance in PDF only on Docsity!

Setting Financial Goals

This Chapter

• Has two basic points:

1. Goals must have amounts and dates before they can be

analyzed or used in personal finance

2. All personal finance problems can be expressed in terms

of the formal mathematical model.

Financial Goals

• Everyone has financial goals that must be met

to satisfy our desires

• Yet we often reject formal acknowledgement

and planning that would help to ensure that

we meet those goals.

• Finance is about human life. It is a tool to help

us get to where we want to be!

Desires vs. Goals

• Desires:

– to retire early

– to send the children to university

– to move to a bigger and better home

• Financial Goals:

– to have $1 million in ten years’ time

– to send a child now 17 to university which will

cost $20,000 per year

SCENARIO 1 - 4 YEARS UNDERGRAD - 4 YEARS GRADUATE SCHOOL

COSTS SOURCES OF FINANCING Surplus/

YEAR Tuition Books Clothes/misc. Food Housing** Transportation* TOTAL CST Bursary Scholarships Employment TOTAL Deficit

UNDERGRADUATE

1st 1998 3,300 1,000 1,800 0 0 5,400 11,500 1,600 3,300 1,250 3,000 9,150 -2,

2nd 1999 3,630 1,000 1,800 0 0 5,400 11,830 1,700 3,630 1,250 3,000 9,580 -2,

3rd 2000 3,993 1,000 1,800 0 0 5,400 12,193 1,800 3,993 1,250 3,000 10,043 -2,

4th 2001 4,392 1,000 1,800 0 0 5,400 12,592 1,800 4,392 1,250 3,000 10,442 -2,

GRADUATE/PROFESSIONAL 0 0

1st 2002 4,832 1,200 2,000 3,600 5,400 5,500 22,532 0 3,000 3,000 -19,

2nd 2003 5,315 1,300 2,000 3,600 5,670 5,500 23,385 0 3,000 3,000 -20,

3rd 2004 5,580 1,400 2,000 3,600 5,954 5,500 24,034 0 3,000 3,000 -21,

4th 2005 5,859 1,400 2,000 3,600 6,251 5,500 24,611 0 3,000 3,000 -21,

TOTALS 36,901 9,300 15,200 14,400 23,275 43,600 142,676 6,900 15,315 5,000 24,000 51,215 -91,

*Assumes $450 per month for gas, insurance, repairs and payments. **Assumes $450 per month for 12 months a year for rent/lease. ***Assumes $300 per month for food for 12 months a year.

Here is a sample outlook for a 17 year old looking to attend

university for the first time in the fall of 1998.

Planning Horizon

• The shorter the length of time between the

start of planning and the deadline to meet,

the fewer alternatives you will have

available….

Keys to PFP

• Identify/articulate your goals

• specifically measure your goals

• prioritize your goals

• measure and control your financial means

• monitor your progress to your goals

• manage important risks

• stick to it.

The Financial Planning Process

• Goal setting

• action plan

• take action

• feedback (monitoring progress)

Problem 3 - 1

Financial goal is $1,500,000.00 when he retires in 30 years.

His current action plan:

Savings = $5,000.00 per year, n=30, I=10% p.a.

Wn = $5,000((1+0.10)

30

a. No, he will not achieve his goal with his current action

plan.

Problem 3 – 1 …

b. He can choose any of the following actions:

– He can change his goal (Wn)

– He can add an initial investment, W 0

– He can increase the amount of the annual investment (E t – Ct)

– He can change the investment horizon, n

– He can choose a different investment that has a higher rate of

return, k

– He can borrow at a lower rate and invest at a higher rate

– Any combination of the above.

Problem 3 - 3

A. $1,000,000 = PV(1.16)

10

10

PV = $212,

That is, invest $212,314 in the mutual fund and $5,040 p.a. in

the GIC. The remaining principal of $362,686 can be

invested in real estate.

B. FV = $212,314 (1.16)

10

10

10

FV = $ 1,590,

Problem 3 - 4

W

n

= $500,000.00 W

0

= $250,000.00 n = 4

$500,000 = $250,000 (1 + k)

4

k = 18.92%

 - Problem 3 - 

• a. PMT = 40,
  • %I =
  • n =
  • PVA = 486,
• b. FV = 486,
  • %I =
  • n =
  • PMT = 1,
    • Problem 3 -
• C. FV = 486,
  • %i =
  • n =
  • PMT due =