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What it Takes to Become a Millionaire

What it Takes to Become a Millionaire. Americans are Obsessed with Millionaires…. Do an Amazon Search on books with “ Millionaire ” in their title: over 1,370 books… TV Shows - Survivor winner $1 million “ Who Wants to Be a Millionaire ” “ Joe Millionaire ” “ Deal or No Deal ” Lottery

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What it Takes to Become a Millionaire

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  1. What it Takes to Become a Millionaire

  2. Americans are Obsessed with Millionaires… • Do an Amazon Search on books with “Millionaire” in their title: over 1,370 books… • TV Shows - Survivor winner $1 million “Who Wants to Be a Millionaire” “Joe Millionaire” “Deal or No Deal” • Lottery • How hard is it to become a millionaire?

  3. Not Very Hard… • If a 30 year old making $50,000 a year (plus 3% raises each year), saving 10% of their income with a 10% return each year, could expect to hit millionaire status at age 59. If they work until the traditional retirement age of 65, they will have over 2 million saved up…

  4. What can you do… Start Saving Early…

  5. The Importance of Starting Early Earning 9% interest

  6. What Happens When you Wait… Earning 9% interest

  7. Top 5 Ways to Become a Millionaire… • Earn Income • Live Within Your Means • Save Money • Invest Wisely • Stick With Your Plan Source: GenXFinance.com

  8. Misconceptions… • Spending is a sign of wealth. • You don’t have to worry about money when you are young. • Those who buy very expensive things always have more wealth than people who buy less expensive things. • You can’t spend money when your bank account is empty. • There are no consequences to spending more money than you have.

  9. Millionaire Next Door • Research Found: • Most millionaires are college graduates • Only 19% of millionaires received money from a trust fund or estate. • Most millionaires drive Fords, Chryslers or Chevrolets. • Most millionaires wear inexpensive clothes. • Few millionaires lease cars • Most millionaires are homeowners • Only 17% of millionaires attended a private elementary or high school

  10. Where do you begin… Create a Financial Plan

  11. Chapter 1 Personal Finance Basics & the Time Value of Money

  12. Chapter 1 Learning Objectives • Analyze the process for making personal financial decisions • Develop personal financial goals • Assess personal and economic factors that influence personal financial planning • Determine the personal and financial opportunity costs associated with personal financial decisions • Identify strategies for achieving personal financial goals for different life situations

  13. The Financial Planning Process Objective 1: Analyze the process for making personal financial decisions Personal Financial Planning is the process of managing your money to achieve personal economic satisfaction Advantages of Personal Financial Planning are: • Increased effectiveness in obtaining, using and protecting financial resources • Increase control of one’s financial affairs • Improved personal relationships • Sense of freedom from financial worries

  14. The Financial Planning Process (continued) Six-step procedure for Financial Planning • Determine your current financial situation. • Develop your financial goals. • Identify alternative courses of action. • Evaluate your alternatives. • Create and implement your financial action plan. • Review and revise your plan.

  15. The Financial Planning Process (continued) Step 1: DETERMINE YOUR CURRENT FINANCIAL SITUATION • Determine current financial situation regarding income, savings, living expenses, and debts • Prepare a list of current asset and debt balances and amount spent for various items • Match financial goals to current income and potential earning power

  16. The Financial Planning Process (continued) Step 2: DEVELOP YOUR FINANCIAL GOALS • Identify feelings about money and the reasons for those feelings • Determine the source of your feelings about money • Determine the effects of economy on your goals and priorities • Make sure that your goals are your own and are specific to your situation

  17. The Financial Planning Process (continued) Step 3: IDENTIFY ALTERNATIVE COURSES OF ACTION • Possible courses of action can be: • Continue the same course of action • Expand the current situation • Change the current situation • Take a new course of action • Creativity in decision making is vital to effective choices • “Do nothing” can be a dangerous alternative

  18. The Financial Planning Process (continued) Step 4: EVALUATE YOUR ALTERNATIVES • CONSEQUENCES OF CHOICES • Opportunity cost - What you give up when you make a choice • The cost or trade-offof a decision cannot always be measured in dollars. Sometimes the cost is your time • EVALUATING RISK • Uncertainty is a part of every decision. • Best way to analyze and minimize risk is to gather information from financial planning sources. (Exhibit 1-3)

  19. The Financial Planning Process (continued) Step 5:CREATE AND IMPLEMENT YOUR FINANCIAL ACTION PLAN • Develop an action plan that identifies ways to achieve financial goals • Possible action plans can be increasing savings, reducing spending, or making provisions for taxes • To implement action plans you may need assistance from others

  20. The Financial Planning Process (continued) Step 6:REVIEW AND REVISE YOUR PLAN • Financial planning decisions need to be assessed regularly • Complete review should be done at least once a year • Regular reviews of decision-making process can help in making priority adjustments to achieve financial goals

  21. Developing Personal Financial Goals Objective 2: Develop personal financial goals • TYPES OF FINANCIAL GOALS can be: • Influenced by the time frame in which you want to achieve your goals • Influenced by the financial need that drives your goals • TIMING OF GOALS • Short-term, intermediate and long-term goals • Long term goals should be planned in coordination with short-term and intermediate goals • GOALS FOR DIFFERENT FINANCIAL NEEDS • Consumer product goals • Durable-produce goals • Intangible-purchase goals

  22. Developing Personal Financial Goals (continued) GOAL-SETTING GUIDELINES • Goals should be realistic • Goals should be stated in specific terms • Goals should have a time frame • Goals should indicate the action to be taken • Discuss some of your goals

  23. Smart goals are specific…. Specific goals are much more likely to be accomplished than vague ones Smart goal setting is ensured by following certain steps when creating goals for yourself. SMART is an acronym for the following characteristics that should be present in your goal. A)Realize setting goals and committing to them can benefit them both short and long term. B) Be ready and willing to risk failure in order to attempt reaching higher goals. C) Use failures and mistakes as learning opportunities; not get discouraged when faced with momentary setback Specific. This is a Goal Statement, and should be a short paragraph of one or two sentences describing the goal. Measurable. This is a description of how to measure the goal; how can you tell when the goal is accomplished? Achievable. This portion of the work sheet should go over what actions may be required to reach the goal, what obstacles may arise, and how such blocks can be handled and overcome. Relevant. Why is this the goal? How is this important to you, and what benefits will come to you by reaching this goal? ("R" can also stand for Realistic). Timely. This is the section where you lay out your time line - there should be a definite start and end date and any milestones should have clearly defined parameters.

  24. Influences on Personal Financial Planning Objective 3: Assess personal and economic factors that influence personal financial planning LIFE SITUATION AND PERSONAL VALUES • Adult life cycle stage • Marital status, household size, and employment • Major events • Graduation, marriage, career change, children, retirement, etc • Values • What values are important to you?

  25. Influences on Personal Financial Planning(continued) ECONOMIC FACTORS • Forces of Supply and Demand and prices • Study of how wealth is created and distributed • Economy includes different institutions • Federal Reserve Bank and it’s role in the economy

  26. Influences on Personal Financial Planning(continued) GLOBAL INFLUENCES • Global marketplace influences financial activities • American companies compete against foreign companies for US dollars • Balance of exports and imports • Foreign investments and their role in the US Money Supply • The level of Money Supply affects interest rates

  27. Influences on Personal Financial Planning(continued) ECONOMIC CONDITIONS ConsumerThe value of the dollarpriceschanges in inflation ConsumerThe demand for goods and spendingservices by individuals and households Interest ratesThe cost of money; cost of credit when you borrow; return on your money when you save or invest

  28. Financial Acquisitions (automobile, home, college education, investments, insurance, retirement fund) Influences on Personal Financial Planning(continued) Personal Opportunity Costs (time, effort, health) Financial Opportunity Costs (Interest, liquidity, safety )

  29. Opportunity Costs and the Time Value of Money • Every financial decision involves giving up something to obtain something else PERSONAL OPPORTUNITY COSTS • Time • Other personal opportunity costs can be related to health, leisure etc. • Personal resources like financial resources require careful management

  30. Opportunity Costs and the Time Value of Money (continued) FINANCIAL OPPORTUNITY COSTS 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.

  31. Opportunity Costs and the Time Value of Money (continued) INTEREST CALCULATIONS • Three amounts are required to calculate the time value of money • Principal • Interest rates • Time

  32. Opportunity Costs and the Time Value of Money (continued) COMPUTING SIMPLE INTEREST (Amount in savings) x (annual interest rate) x (time period) = (interest) For Example: $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

  33. Opportunity Costs and the Time Value of Money (continued) FUTURE VALUE OF A SINGLE AMOUNT • 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 OF A SERIES OF DEPOSITS • Future value can be computed for a single amount or for a series of deposits called annuities Question: If you desire to have $10,000 in savings 8 years from now, what amount would you need to deposit in an account that earns 5%? $10,000 x .677 =$6,770 (Used Exhibit 1-8C on pg 19)

  34. Opportunity Costs and the Time Value of Money (continued) PRESENT VALUE OF A SINGLE AMOUNT • Present Value is the current value of 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 (See Exhibit 1-8C) PRESENT VALUE OF A SERIES OF DEPOSITS • Present value can be computed for a single amount or for a series of deposits (See Exhibit 1-8D)

  35. Rule of 72 • The Rule of 72 provides a guideline for determining how long it takes your money to double and illustrates the power of compound interest. • Question: • You are earning 8% interest. How long will it take for you money to double? 72 / .08 = 9 years • This rule can also be used to determine the interest rate you need to earn to double your money.Question: • If you would like your money to double in 12 years, what is the rate of return you need to earn on your money? 72 / 12 = 6%

  36. Achieving Financial Goals DEVELOPING A FLEXIBLE FINANCIAL PLAN • A financial plan is a formalized report that... • Summarizes your current financial situation • Analyzes your financial needs • Recommends future financial activities • Your financial plan can be created by you, with assistance from a financial planner, or made using a money management software package

  37. Achieving Financial Goals (continued) IMPLEMENTING YOUR FINANCIAL PLAN • Develop good financial habits • Use a well conceived spending plan to help you stay within your income, while allowing you to save and invest for the future • Have appropriate insurance protection to prevent financial disasters • Become informed about tax and investment alternatives

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