Fundamentals of Financial Planning
The planning process
Financial planning is a cyclical process: establish the relationship, gather data, analyze the client's situation, develop and present recommendations, implement, and monitor. Know the sequence and the fact that monitoring feeds back into analysis. Candidates must also distinguish quantitative tools (time value of money, ratios, projections) from qualitative considerations (client goals, risk tolerance, values).
Time value of money
Master future value and present value of lump sums and annuities, and the difference between ordinary annuities (end-of-period) and annuities due (beginning-of-period). The most common trap is payment timing: set the calculator to BEGIN mode for leases, rent, and beginning-of-year contributions. Another trap is compounding frequency, which must match the periodic rate and number of periods.
Goals and assumptions
Goals should be specific, measurable, time-bound, and prioritized. Inflation assumptions matter over long horizons; a 6% nominal return with 3% inflation is roughly a 3% real return (divide, don't subtract, for precision).
Worked example
A client needs $100,000 in 10 years and can earn 6% annually. Required annual end-of-year savings = $100,000 / FVIFA(6%,10). FVIFA ≈ 13.181, so savings ≈ $7,587 per year. If deposits are made at the beginning of each year, the required amount falls to about $7,158 because each deposit compounds one extra period.
Traps
Watch for nominal versus real rates, taxes on returns, and whether the question asks for the payment or the lump sum.