• 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