PERSONAL FINANCE - Apex CPE

431 Pages·2014·4.94 MB·English

Personal Financial
Planning for
Accountants
Personal Financial Planning
for Accountants

Copyright 2014 by
DeltaCPE LLC

All rights reserved. No part of this course may be reproduced in any form or by any means, without
permission in writing from the publisher.

The author is not engaged by this text or any accompanying lecture or electronic media in the rendering
of legal, tax, accounting, or similar professional services. While the legal, tax, and accounting issues
discussed in this material have been reviewed with sources believed to be reliable, concepts discussed
can be affected by changes in the law or in the interpretation of such laws since this text was printed.
For that reason, the accuracy and completeness of this information and the author's opinions based
thereon cannot be guaranteed. In addition, state or local tax laws and procedural rules may have a
material impact on the general discussion. As a result, the strategies suggested may not be suitable for
every individual. Before taking any action, all references and citations should be checked and updated
accordingly.
This publication is designed to provide accurate and authoritative information in regard to the subject
matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal,
accounting, or other professional service. If legal advice or other expert advice is required, the services of
a competent professional person should be sought.
—-From a Declaration of Principles jointly adopted by a committee of the American Bar Association and
a Committee of Publishers and Associations.

All numerical values in this course are examples subject to change. The current values may vary and
may not be valid in the present economic environment.
Preface

Personal Financial Planning for Accountants is a comprehensive course on personal finance. What is
more important to the "average person”' than making sure their finances are secure proper planning
and money management? This course includes all the major areas in personal financial planning—
planning your personal finances, managing your personal finances, making your purchase decisions,
insuring your resources, investing tour financial resources, and controlling your financial future. Topics
covered include time value calculations, budgeting, career planning, banking, insurance, home buying,
consumer credits and money management, investment planning, retirement planning, and estate
planning. Personal Financial Planning for Accountants has text discussion and numerous examples. To
clarify and supplement the discussion in each chapter, we will make use of charts, tables, illustrations,
exhibits, and checklists.

Field of Study Administrative Practice
Level of Knowledge Overview
Prerequisite Basic Math
Advanced Preparation None

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Table of Contents
Preface ........................................................................................................................................................... i
Chapter 1: What You Should Know About Financial Planning .................................................................... 1
Learning Objectives ................................................................................................................................... 1
The Benefits of Financial Planning ............................................................................................................ 2
Chapter 2: Time Value Applications .......................................................................................................... 21
Learning Objectives: ................................................................................................................................ 21
Time Value of Money .............................................................................................................................. 22
Chapter 3: Personal Financial Statements and Budgeting ....................................................................... 35
Learning Objectives ................................................................................................................................. 35
Developing a Financial Statement .......................................................................................................... 36
Chapter 4: Career Planning and Financial Success ................................................................................... 61
Learning Objectives ................................................................................................................................. 61
Career Plans ............................................................................................................................................ 61
Chapter 5: Planning for College Education .............................................................................................. 77
Learning Objectives ................................................................................................................................. 77
College Education Financials ................................................................................................................... 77
Strategies for Funding College Tuition .................................................................................................... 79
Chapter 6: The Return and Risk of Your Investments ............................................................................... 98
Learning Objectives ................................................................................................................................. 98
Investing .................................................................................................................................................. 98
Chapter 7: Banking and Cash Management ........................................................................................... 119
Learning Objectives ............................................................................................................................... 119
Banking .................................................................................................................................................. 119
Chapter 8: Managing Debt ..................................................................................................................... 140
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Learning Objectives ............................................................................................................................... 140
Credit Cards ........................................................................................................................................... 140
Bankruptcy Law ..................................................................................................................................... 161
Chapter 9: How to Reduce the Costs of Living ....................................................................................... 170
Learning Objectives ............................................................................................................................... 170
Reducing the Cost of Living ................................................................................................................... 170
Chapter 10: Where and How You Choose to Live .................................................................................. 182
Learning Objectives ............................................................................................................................... 182
Home Ownership .................................................................................................................................. 182
Chapter 11: Life, Health, Property, and Liability Insurance ................................................................... 200
Learning Objectives ............................................................................................................................... 200
Insurance ............................................................................................................................................... 201
Chapter 12: Investments and Planning .................................................................................................. 234
Learning Objectives ............................................................................................................................... 234
Getting Started as an Investor .............................................................................................................. 234
Chapter 13: Investing in Common Stock ................................................................................................ 245
Learning Objectives ............................................................................................................................... 245
Common Stock ...................................................................................................................................... 245
Chapter 14: Fixed-Income Securities ..................................................................................................... 283
Learning Objectives ............................................................................................................................... 283
Fixed Income Securities ........................................................................................................................ 283
Chapter 15: Investing in Tangibles – Real Estate and Other Real Assets ............................................... 307
Learning Objectives ............................................................................................................................... 307
Real Estate ............................................................................................................................................ 308
Indirect Real Estate Investments .......................................................................................................... 314
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Chapter 16: Mutual Funds and Diversification ...................................................................................... 321
Learning Objectives ............................................................................................................................... 321
Mutual Fund Investing .......................................................................................................................... 321
Chapter 17: Retirement Planning ........................................................................................................... 342
Learning Objectives ............................................................................................................................... 342
Retirement Planning ............................................................................................................................. 342
Chapter 18: Estate Planning ................................................................................................................... 368
Learning Objectives ............................................................................................................................... 368
Estate Plans ........................................................................................................................................... 368
Wills ....................................................................................................................................................... 372
Glossary ..................................................................................................................................................... 381
Valuation Tables ........................................................................................................................................ 420

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Chapter 1:
What You Should Know About Financial
Planning

Learning Objectives
After reading this chapter you will be able to:
Define the personal financial planning process.
List the objectives and key areas of personal financial planning.
Understand how the stages in life affect financial planning.
Recognize how inflation and other economic factors affect financial planning

Financial planning is the process of meeting your life goals through the proper management of your
finances. Life goals can include buying a home, saving for your child's education or planning for
retirement. Financial planning is the way to arrive at solutions to your financial concerns and problems
and to take advantage of your earning years to become financially independent. It involves
implementation of total, coordinated plans for the achievement of overall personal objectives. Financial
planning can start at any age, but the sooner the better. You may want to have substantial assets during
midlife to buy a business or just to enjoy yourself.
You should define your financial goals and establish plans to accomplish them, which may involve some
sacrifices. You should learn how to manage your own money including how to save and invest so that at
retirement you will have adequate funds. Even with a moderate level of income, you can build
substantial wealth by exercising discipline in your financial affairs.

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The Benefits of Financial Planning
Financial planning provides direction and meaning to your financial decisions. It allows you to
understand how each financial decision you make affects other areas of your finances. For example,
buying a particular investment product might help you pay off your mortgage faster or it might delay
your retirement significantly. By viewing each financial decision as part of a whole, you can consider its
short and long-term effects on your life goals. You can also adapt more easily to life changes and feel
more secure that your goals are on track.

How does personal financial planning help you?
Personal financial planning helps you to:
Obtain what you really want through each life cycle.
Preserve assets.
Use credit prudently.
Exercise good risk management including establishing risk tolerance for investing.
Provide adequate insurance protection. Protection against personal risk is needed for death,
disability, income loss, medical care, property and liability, and unemployment.
Increase your wealth.
Control costs.

What are the objectives of personal financial planning?
The goals of personal financial planning include: preserve financial security, have a program to meet
financial requirements, evaluate and select available options, manage risk effectively, take care of
records, and avoid areas where impending legislation threatens profitability or tax treatment of the
investment. Certain goals may have to be modified because of changing times.
The key areas in personal financial planning
The major areas of personal financial planning include
Proper insurance coverage to protect against personal risk such as death, disability, and losses.
For example, adequate life insurance is needed for dependents. Insurance coverage should be
modified periodically, as necessary.
Capital accumulation. There should be a regular savings and investment program. A balanced
investment portfolio should exist (for example, certificates of deposit, equity securities,
fixed-income securities) taking into account financial goals and risk tolerance.

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Investment and property management. You should manage your assets for high return without
undue risk.
Tax planning. Tax saving techniques should be employed.
Debt and credit management. You should not be overextended.
Planning for retirement. Adequate retirement income should be provided for.
Estate planning. Proper estate planning is needed to assure assets are transferred to
beneficiaries, as desired. Some assets may be arranged in such a way as to provide your heirs
protection from creditors' claims in bankruptcy. Examples are spendthrift provisions in life
insurance settlement options and personal trust agreements.

The steps in personal financial planning
As Exhibit 1 shows, personal financial planning process involves the following steps:
Step 1: Determine your current financial situation.
In this first step of the financial planning process, you must determine your current financial situation
with regard to income, savings, living expenses, and debts. You need to obtain needed information (for
example, current investments, provisions in insurance policies, retirement benefits, tax law
provisions).The personal financial statements discussed in Chapter 2 will provide the information you
need to match your goals with your current income and your potential earning power.
Step 2: Set goals.
Specific financial goals are vital to financial planning. Your financial goals can range from spending all of
your current income to developing an extensive savings and investment program for your future
financial security. The goals you choose should be based on your current situation, your values, and your
financial situation. Further, you should determine desired risk level. The best way to consider risk is to
gather information based on your own and others’ experiences and to use financial planning sources.
The goals can be short-, intermediate-, and long-term. Short-term goals are goals to be achieved within
the next year or so, such as saving for a vacation or paying off small debts. Intermediate goals have a
time frame of two to five years. Long-term goals involve financial plans that are more than five years off,
such as retirement savings, money for children’s college education, or the purchase of a vacation home.
Goal frequency is another ingredient in the financial planning process. Some goals, such as vacations or
money for gifts, may be set annually. Other goals, such as a college education, a car, or a house, occur
less frequently. Your financial goals should have the following characteristics:
Goals should be realistic. Goals should be based on your income and life situation. For example,
it may not be realistic to buy a house if you are a full-time student.
Financial goals should be stated in specific, measurable terms. Defining exactly what your goals
are will allow you to create a plan that is designed to achieve them. For example, the goal of

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“putting $20,000 in an investment account within four years” is a less ambiguous guide to
planning than the goal of “putting money into an investment account.”
Financial goals should have a time frame. A time frame helps you measure your progress toward
your financial goals. In the previous example, the goal is to be achieved in four years. Dividing
your clear goal into manageable pieces will allow you to better achieve your financial objective.
Step 3: Identify alternative courses of action
Identifying alternatives is critical for making good decisions. Although many external factors will
influence the available alternatives, your possible courses of action will usually fall into these categories:
Keep on the same course of action. For example, you may determine that the amount you have
saved each month is still appropriate.
Enhance the current situation. You may choose to save a larger amount each month.
Alter the current situation. You may decide to buy a money market fund instead of using a
regular savings account.
Undertake a new course of action. You may decide to use your monthly budget to pay off credit
card debts.
Step 4: Evaluate alternatives, including appraising current financial status.
You need to assess possible courses of action, taking into consideration your life situation and current
economic conditions. In the assessment process, you should also look at the consequences and risks
associated with each alternative. Every option in life can have positive or negative effects. Various
information sources are available to help you assess these possible outcomes. Every decision has a
trade-off. For example, a decision to invest in stock may mean you cannot take a vacation. You must
understand the effect of each financial decision. Each financial decision you make can affect several
other areas of your life. For example, an investment decision may have tax consequences that are
harmful to your estate plans. Or a decision about your child's education may affect when and how you
meet your retirement goals. Remember that all of your financial decisions are interrelated.
Step 5: Formulate an action plan to meet goals.
The fifth step of the financial planning process is to develop a plan of action—a blueprint. This requires
choosing ways to achieve your goals. For example, you can increase your savings by reducing your
spending or by increasing your income through extra time on the job. Don't delay your financial planning
and implement your plan in accordance with your blueprint.
Step 6: Review your plan periodically and making necessary revisions.
Financial planning is a dynamic and on-going process that does not end when you take a particular
action. You need to regularly assess your financial decisions. You should do a complete review of your
finances at least once a year. Your goals may change over the years due to changes in your lifestyle or
circumstances, such as an inheritance, marriage, birth, house purchase or change of job status. Revisit
and revise your financial blueprint as time goes by to reflect these changes so that you stay on track

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