Introduction to Finance

Develop a Personal Financial Plan
Developing a personal fi nancial plan is necessary to increase the 
chances of reaching your fi nancial goals. Goals in business, life, 
and fi nances rarely are met by accident. With a bewildering array 
of investment choices and confusing tax laws, more and more 
people are turning to an investment professional for help and guid-
ance. An important step in creating a personal fi nancial plan is 
to develop a policy statement. A policy statement contains basic 
information to help guide future fi nancial decisions. A policy 
statement will describe an investor’s objective. An objective will 
have two components: a return goal (capital gain, income, or both) 
and information about the investor’s risk tolerance. Investors who 
cannot handle the ups and downs of the stock market will not want 
to place as much of their savings in stocks as someone who is 
willing to take on the additional risk.
In addition to an objective, the policy statement needs to 
include information relating to the fi ve sets of constraints faced by 
every investor:
1.
Liquidity needs. Does the investor need to be able to sell assets 
and obtain cash quickly?
2.
Time horizon. Over what time horizon can funds be invested? 
Two years? Ten? Thirty years or more?
3.
Taxes. The investor’s tax situation is an important consideration 
as investing goals should focus on after-tax returns. Capital 
gains and losses, income, IRA accounts, 401(k) retirement 
plans, and taxable versus nontaxable securities all lead to 
decision-making complications.
4.
Legal and regulatory factors. Investment decisions are aff ected 
by rules and regulations. Even something as basic as investing 
money in a bank certifi cate of deposit often carries with it the 
warning, “substantial interest penalty upon early withdrawal.”
5.
Unique needs and preferences. This constraint can include 
wanting to exclude certain investments because of personal 
preference or social consciousness reasons. For example, an 
investor may not want to own stock or bonds issued by fi rms that 
produce or sell pornography, tobacco, or alcoholic beverages.