FP - Module Overview

Financial Planning and Risk Management

Introduction

Investing is only one aspect of creating a financial plan. In this module, you will discover the difference between saving and investing. We will also learn the importance of establishing financial goals and re-evaluating them periodically as they go through various life stages. Finally, you will take the steps necessary to begin creating your own financial plan by learning the value of having an emergency fund and how estate planning will affect your financial plan.

Essential Questions

• How do I create a life-long financial plan?
• How do I choose investments and savings vehicles that fit my plan?
• How do taxes affect different investments?
• What should I consider in planning for retirement?

Key Terms

inflation: general and progressive increase in price

taxes: the charge against a citizen's person or property or activity for the support of government

life stage: A distinguishable time frame in an individual's life characterized by unique and relatively stable behavioral and/or physiological characteristics that are associated with development and growth

emergency fund: money set aside against large unexpected expenses

estate planning: A strategy for leaving property to loved ones and minimizing the impact of federal and state estate taxes

compounding: A process by which investment earnings build up not only on the money originally invested but also on the earnings and gains made in previous years

Rule of 72: (1) a simple method for approximation (2) the number of years it takes an investment to double at a given compound interest rate divide the interest rate into 72

budgets: a sum of money allocated for a particular purpose

net worth: total assets minus debts and mortgages

flexible spending accounts: a plan whereby the employee can set aside (via payroll deduction) pre-tax money which can then be used to reimburse the employee for payments for uncovered medical expenses, such as deductibles, co-payments, dental or eye care expenses, or dependent care expenses

Annual Rate of Return: percentage of money earned on an investment in one year

Certificate of Deposit: also called a "CD"- a savings product that requires the investor to leave the money in the bank for a specific time period.

Individual Retirement Account (IRA): a tax-deferred retirement account that permits individuals to set aside money each year, with earnings tax-deferred until withdrawals begin at age 59 1/2 or older (or earlier, with a 10% penalty)

Mutual Fund: a savings product operated by an investment company that raises money from shareholders to invest in assets.

Rate of Return: the money made through an investment, usually presented as a percentage (income earned / amount of the investment = rate of return).

Real Estate: residential and commercial land and any structures on it if you purchase a home

Roth IRA: a type of IRA that allows taxpayers, subject to certain income limits, to save for retirement while allowing the savings to grow tax-free.

Stocks: an investor's shares of a corporation, entitling the holder to dividends and other rights of ownership.

U.S. Savings Bond: a non-transferable savings product issued by the U.S. government that matures in a set period of time.

retirement benefits package: A retirement benefits package is a combination of pension payments and health insurance offered by an employer.

Social Security: Social Security is a federal system of retirement and disability insurance for various categories of employed and dependent persons, funded through dedicated payroll taxes.

defined benefit plan: A defined benefit pension plan is a type of pension plan in which an employer/sponsor promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee\'s earnings history, tenure of service, and age, rather than depending directly on individual investment returns.

defined contribution plan: For a defined contribution plan, the amount contributed to the plan is defined by the company

profit sharing: When retirees receive a portion of a company's profits which is then invested for their retirement, it is known as profit sharing.

employee stock purchases: Employee stock purchase plans allow employees to buy shares of the employer's stock at a reduced price.

401k: A 401k is a type of retirement plan allowing employees to contribute a certain percentage of wages earned into a tax-deferred account to save and invest for retirement.

403b: A 403b is a tax-advantaged retirement savings plan available for public education organizations.

whole life insurance: Whole life insurance applies a part of the premium payments to build an investment or savings value for the policy owner.

annuities: Annuities produce income from capital investment paid in a series of regular payments.

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