The Financial Planning Process - Essay Example

 The Financial Planning Process Budget for the Financial Year Particulars Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Opening Balance 4000 7400 10800 14200 17600 21000 24400 27800 31200 34600 38000 41400 Receipts                         Annual Household 5000 5000 5000 5000 5000 5000 5000 5000 5000 5000 5000 5000 Total receipts 9000 12400 15800 19200 22600 26000 29400 32800 36200 39600 43000 46400 Payment                         Credit Card Payment 200 200 200 200 200 200 200 200 200 200 200 200 Monthly Payment for Car 400 400 400 400 400 400 400 400 400 400 400 400 Monthly Payment for mortgage 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 Total Payments 1600 1600 1600 1600 1600 1600 1600 1600 1600 1600 1600 1600 Surplus/ (Deficit) 7400 10800 14200 17600 21000 24400 27800 31200 34600 38000 41400 44800 Strengths and weaknesses of Jan and Bill’s current financial scenario Strengths- From the above financial budget it can be seen that their surplus has been increased over the period of time. It will beneficial for them as savings is increasing. The main weakness is that they have various debts to be repaid. Income is constant and not increasing. The fundamentals steps in Financial Planning Process Step 1 Determination of Current Financial Situation In this first venture of the financial planning process, we will focus on the current financial condition which is concerned savings, income, cost of living, and debts. Setting up an arrangement of debt balances and current asset and the total amounts used for different things provides an establishment for the financial planning exercises. Step 2 Develop Financial Goals We need to analyze the financial goals and values after a certain interval in a specific time period. It includes distinguishing how a person feels about money and why he/she is feeling about his/her current financial situation in that way. The main aim for the analysis is to understand the difference between our needs and wants. Particular financial objectives are essential to financial planning. Others can propose financial objectives for us; on the other hand, we need to choose the objectives for which we are planning our financial situations for future needs. Financial objectives can go from using the greater part of the current income to creating a far reaching reserve funds and investment program for the financial security of our future. Step 3 Identification of Alternative Courses of Action Developing other options is most important part of making effective decisions. Although there are many factors which will influence the available options but we need to consider the possible course of action under the following categories- Continue with the current course of action. Expansion of current situation. Bring changes in the current situation. Opt for a new course of option. Creativity should be present in decision making process to create a perfect portfolio which will serve our financial goals. Step 4 Evaluation of Alternatives We need to assess conceivable approaches, contemplating the life circumstance, current economic condition and personal goals and values. We have to assess the Outcomes of Decisions. Each choice shuts off options. For instance, a choice to put resources into stock may mean that we can't take an excursion. Opportunity cost is the important thing that we need to give up while settling on a decision. This cost, generally alluded to as the exchange off of a choice, can't generally be measured in dollars. Choice making will be a progressing a piece of your individual and financial circumstance. Hence, investors will need to consider the lost opportunities which will be needed to face by the investors as a result of their decisions. Step 5 Creation and Implementation of a financial Action Plan In this step of financial planning activities, investors need to develop a plan of action. It requires choosing correct ways to achieve our targets. After achieving the short term goals investors need to focus on the long term financial goals of our life. For planning our financials investors can take help of any professional person who will help them to achieve their target. Step 6 Reevaluate and Revise the financial plan Financial planning is a dynamic process which does not end after taking a particular cause of action. We need to analyze and revise it regularly to ensure that it is matching with our changing needs, economic, social factors which may need more assessments. Thus reevaluation and rechecking of financial planning process is necessary to cope up with the changing external situations in the economy (MCGRAW HILL, 2003). Financial Goals for Jan and Bill Smith They need to reduce their debts and credit card payments. They are considering for buying a new car but before that they need to sell their existing car as it may increase the cost of maintain two cars. Their annual household is $60000. They need to try to increase it as it will help them to save more for buying new house. Their short term financial goal should be increasing their income by investing the surplus amount in various stocks, mutual funds and to reduce the level of credit. Their long term financial goal should be increasing their savings for purchasing a new house or a car. Key steps involved in implementing the goals The first step in implementing the goals is to take help of any professional accountant or any mutual fund manager who can guide them to achieve their targets. Analyzing the financial targets after a certain interval will be useful to track the progress of the financial plan. Discuss the decisions that Jan and Bill Smith should make concerning their housing and automobiles Jan and Bill Smith want to buy a new house and want to sell their existing one. They are also planning to buy a new car as the older one is paid off. But according to their current financial condition, they need to reduce their credit debts as they need to pay $5000 in their credit card. In this situation they should not take any more credit facilities as the interest burden will reduce their savings. Their short term financial goals should be paying off the credit balances and long term goals should be create an amount of savings which will help to buy the new car or the house. Two Factors that they need to consider How much amount they have in their savings They need to consider the amount of savings before making any purchasing decisions. They should not take any more credit facility because they need to reduce their credit card debt and any further credit will increase their credit burden. How much resale value they would get from the old house They also need to compare the market value of their old house before purchasing a new house. The resale value will help them to make the payment of the new house. Two different methods that Jan and Bill could use in order to buy a new car There are two different methods to make decision about buying a new car- Method 1 Firstly they need to consider the price of the new car. Body style of the car. Fuel type and mileage provided by the car. Driving facilities of the new car which means is it FWD, AWD, 4WD or RWD. Passenger and seating capacity of the car. Comfort provided by the new car like leather seats, keyless entry, heated seats, sunroof and dual-zone climate control. Safety measures provided by the car like Stability control, Side Airbags, Run-Flat tires, Traction Control, Rain sensing wipers and Anti-lock Brakes (MSN AUTOS, 2014). Method 2 Affordability of purchasing the new car, cost, reputation of the brand, safety, mileage, cost of repairing, ability to fulfill the long term needs. Whether they need to take a loan to buy the car or not. Finding the dealership, classifieds and information about the car. They need to do some quality research before going to the dealer and the best time to purchase a car which is mainly between July to October and at the end of December. Before making the purchase of the new car they need to make sure that every arts of the car are worki8ng and in a stable condition. They need to recheck it before making the final payment (Duke University, 2012). Reference MSN AUTOS. (2014). Decision Guide. Retrieved from : http://editorial.autos.msn.com/decision-guide.aspx. DUKE UNIVERSITY. (2012). How should I go about buying a car?. Retrieved from : http://www.personalfinance.duke.edu/make-todays-decisions/transportation/how-should-i-go-about-buying-car. MCGRAW HILL.com. (2003). THE FINANCIAL PLANNING PROCESS. Retrieved from : http://highered.mcgraw-hill.com/sites/0079876543/student_view0/junior_year-999/your_finances14/financial_planning.html. THE CANADIAN INSTITUTE OF FINNACIAL PLANNERS. (2014). The Financial Planning Process. 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