Personal Financial Planning in Action

2. 1 Personal Financial Planning in Action

3. Personal Financial Planning Objectives Chapter Objectives • Identify social and economic influences on personal financial goals and decisions • Develop personal financial goals • Assess personal and financial opportunity costs associated with financial decisions • Implement a plan for these decisions

4. Objective 1: Identify social and economic influences on personal financial goals • Financial Planning: process of managing your money to achieve personal economic satisfaction. • Financial Plan: formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities.

5. Objective 1: Identify social and economic influences on personal financial goals cont’d… Advantages of Financial Planning • Increased effectiveness in obtaining, using, and protecting your financial resources. • Increased control of your financial affairs. • Improved personal relationships. • A sense of freedom from financial worries obtained by looking to the future.

6. Financial Planning in our Economy • Economy’s influence on financial planning • What is the study of economics about? • Role of the Federal Reserve in directing the economy and indirectly personal financial planning

7. Financial Planning in our Economy Global Factors • U.S economy affected by foreign investors and competition from foreign companies • Level of imports and exports affect the available supply of dollars • Level of foreign investment also affects the domestic money supply. • Money supply affects the interest rates for the consumer, thereby affecting personal finance

8. Financial Planning in our Economy Inflation is a rise in the general level of prices • Inflation reduces the buying power of the dollar • Is most harmful to people living on fixed incomes • Inflation rates vary • The CPI is a measure of inflation • Many people face hidden inflation

9. Financial Planning in our Economy (continued) Interest Rates represents the cost of money • Affected by supply and demand of money • Have a major affect on financial planning • Risk is also a factor in determining interest rates • Interest rates influence many financial decisions

10. Financial Planning Activities (continued) • Obtaining • Planning • Saving • Borrowing • Spending • Managing Risk • Investing • Retirement and Estate Planning

11. Objective 2: Develop Personal Financial Goals • There are 3 different time frames for achieving financial goals • Short-term goals • Intermediate goals • Long-term goals • There are 3 different financial needs goals • Consumable- product goals • Durable-product goals • Intangible-product goals Goal setting guidelines suggests goals should... • Be realistic, be stated in specific, measurable terms, have a time frame, and indicate the type of action to be taken.

12. Objective 3: Assess personal and financial opportunity costs of financial decisions • Opportunity cost is what you give up by making a choice. • The cost, referred to as the trade-off of a decision, cannot always be measured in dollars. Sometimes the cost is your time. • Consider lost opportunities that will result from your decisions.

13. Financial Personal Acquisitions Opportunity Costs (automobile, home, college education, investments, insurance, retirement fund) (time, effort, health) Financial Opportunity Costs (Interest, liquidity, safety ) Opportunity Costs and Financial Results Evaluated When Making Decisions

14. Time Value of Money • Increases in an amount of money as a result of interest earned. • Saving today means more money tomorrow. Spending means lost interest. • Saving and spending decisions involve considering the trade-offs. Current needs can make spending worthwhile.

15. How Simple Interest is Computed • Simple Interest.Amount in savings x annual interest rate x time period equals the interest.$100 x 5% x 1 (1 year) 100 x .05 x 1 = $5.00In one year you have $100 in principle plus $5.00 in interest for a total of $105 at the end of the year.

16. Future Value • Future value is the amount to which current savings will increase based on a certain interest rate and a certain time period. • Future value is also call compounding - earning interest on previously earned interest. • Future value can be computed for a single amount or for a series of deposits.

17. Present Value • The current value for a future amount based on a certain interest rate and a certain time period. • Present value calculations are also called discounting. • The present value of the amount you want in the future will always be less than the future value. • Present value can be computed for a single amount or for a series of deposits.

18. Objective 4: Implement a plan • Determine your current financial situation. • Develop your financial goals. • Identify alternative courses of action. • Continue the same course of action • Expand the current situation • Change the current situation • Take a new course of action • Evaluate your alternatives. • Consequences of choices • Evaluating the different types of risks • Financial Planning information sources • Create and implement your financial action plan. • Review and revise your plan.

19. Career Choice and Financial Planning • The life work one selects is a key to financial well being and personal satisfaction • Career choices have risks and opportunity costs • Career choices need to be evaluated periodically • Changing personal and social factors require continuous assessments of your work situation