Anthony Nygren

Mr. Morgan
Finance 1050
09 December, 2015

Term Paper: Importance of Financial Planning

Link to prezi that goes with paper: http://prezi.com/-twewpzeflyc/?
utm_campaign=share&utm_medium=copy&rc=ex0share

At a glance, America may seem like it is a country of the financially illiterate. Statistics
from business insider in 2011 show that The total amount of consumer debt in the US is nearly
$2.4 trillion in 2010. Thats $7,800 debt per person. Not only that but around 33% of this debt is
revolving debt such as credit cards. The other 67% comes from loans that range from houses,
cars, student loans ext. Added, for every owner of a credit card, their average debt is about
$5,100 per cardholder. The site also claimed that this number also was expected to increase
further to $6,500 by the end of that year, being 2012. A study from 2015 showed the average
credit card debt being $15,355 per household. This number in 2011 being only $6,500 of debt.
Also, 1 in 50 households have more than $20,000 in credit card debt. Finally, there are roughly 2
to 2.5 million Americans each year will reach out to a credit counselor each year to avoid
bankruptcy.

Now this is insane! How is it possible for not only an individual but the majority of our
country being in this great of debt? This is because the majority of Americans are not fluent in
the language of financial literacy. It is a language that, for those who do know it, makes living a

healthy, happy, debt free life possible. It is important for all Americans to have a strong basis of
financial knowledge and be willing to apply their knowledge to their own life.

Now, one may ask how do you go about doing this? How do you get your finances to a place
where you dont have to worry about buying that TV or new couch and having your card get
declined. What you need is a sound financial plan. This plan is made to include many items. You
want to know where your income is coming from, the amount of income you have, and where
that income is going. You need to make a detailed plan and commit to your plan to be financial
literate.

Step 1: Start your plan by recording all your sources of income, all debt and taxes.
It would be difficult to start a plan without knowing exactly how much income you are
receiving. You need to calculate your income from all sources. This includes income from your
job and any investments you may have including stocks, bonds, housing, property, mutual funds
ext. Then, you have to account for taxes. I learned at a young age that when I got paid $7.25 an
hour working at Smiths, I wasnt really making that. After I calculated my hours vs. pay, I
realized I was only making about $5.99 an hour. When someone would ask me how much I
made, I would tell them I made $6.00 an hour, not $7.25. This is important because I realized at a
young age that a portion of my money went to taxes. If I needed a certain amount of money, I
would calculate it by taking out the taxes first. Finally, you need to create a debt to income ratio.
It helps to realize that the younger you are, the more in debt you will be in. This is okay, some
debt is needed. If you would like to buy a house, do it as soon as you financially can since in the
last 10 years, housing inflation rates have been about 2.1%. Also, have your financial plan
include debt you already have and make sure to create a plan pay it off as soon as you can. Do

not keep a high level of debt your whole life. Also, try your best to stay away from revolving
debt such as credit cards. It has taken my mom my entire life up to this paint to pay off her credit
card debt. Also, know your credit score and do the best you can to keep that score high because
investors use it on a lot of loans.

Step two: Diversification in your income

Your income should not solely come from your paycheck from work. In your financial plan, you
should include information of a collection of investments you have made. In this collection, there
should be a diversity of different sources of income. These should also range in many ways. One
way is within stocks. Stocks are bought as part of a company and when bought, you become a
shareholder of the stock. These are useful because you will get money in return for your
investment at a hopefully well rate. Also, you can always buy and sell your stocks. The one bad
side is if the company goes bankrupt, you lose your investment. Added, you should have bonds
in your portfolio. Bonds have a defined receipt of return and a maturity date so unless the bond
goes bankrupt, you know your rate of return. Also, you can have a collection of other investment
portfolios in the form of mutual funds to add diversity and security to your own portfolio.
Finally, your greatest investment is yourself. This means that you need to invest money for your
retirement. These can be in forms such as IRAs and 401Ks. Your investment will grow and
grow and by the time you retire, you will have a large amount saved up. Make sure to start
young. Remember to keep a diversity as well. You dont want to invest all your money into what
you think is the next Apple. Invest smartly and remember that risk=return but make sure to
make smart decisions to not risk it all. Every time I try to go all in in blackjack it never turns out
well.

Step three: Keep a backup

A strong addition to a financial plan that will most likely keep you out of debt is to have a
backup plan. You dont know what the future will bring. Maybe you get laid off of your job or
you break your arm in a car crash and can't work. A secure, highly liquid safety net is what is
needed to insure that you will make it through the hard times. This should include a savings
account of at least 3 months of your salary. Sadly, about 26% of adults in America have
absolutely no savings set aside for emergencies. Added, 36% of Americans have not yet began to
invest into a retirement savings account. In, 2013, the average bank account balance of America
was just around $4,436 and an estimated 38 million households in the U.S. live paycheck to
paycheck instead of creating a sound savings. According to one survey, only about 17% of
Americans actually have a 3 to 5 month emergency fund. To add to your security, you will need
to pay off outstanding debt as soon as you possibly can. If interest rates are high, paying the
minimum payment each month will never cover the price of the item. Added, pay the items with
highest interest first because if you dont they will constantly be growing.

Step 4: Commit to your plan

Planning is one thing, committing is another. If you fully complete an outstanding financial plan,
it is worthless unless you commit to your plan. Make sure to always revise your plan. Your plan
will most likely one day include advances in your income, inflation and incidents. Also, maybe
your life plans will change. One day a family, or travel might come into your plan. Remember
that this plan isnt set in stone and that you will be able to revise your plan along the way.

This class helped me learn that no matter what, I will need to have a plan to succeed. To
successfully live a financially stable life, my financial plan will be a necessity. I grew up in

pretty kart times and I was constantly in debt. It is not a life that I want to keep living. I dont
want to one day have my thanksgiving dinner at a Burger King because my family's finances
were so poor I had to move because we have gone bankrupt. Financial planning to me means that
one day I will be able to live truly wealthy. Not in a sense of having millions of dollars in my
bank account but more toward the fact that I would like to live my life without having to worry
about my debt. I want to live my life without having to stress about living paycheck to paycheck.
Finally, I want to live my life I can enjoy and not have to worry about my financial status along
the way. Money wont make me happy, but staying out of debt will.

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