Personal Financial Planning

 Establishing a plan for how you spend your money can help you make wise purchases. What factors help you decide what to buy and what not to buy?

 Arranging to spend, save, & invest $$$  Live comfortably  Financial security  Financial goals

Benefits of Planning Increased effectivenes s in managing financial resources Debt avoidance and reduced dependence on others Improved personal relationships A sense of freedom from financial worries

 Step 1: Determine Your Financial Situation  Savings  Monthly Income  Monthly Expenses  Debt

 Step 2: Develop Your Financial Goals  Spend now or save for future?  Job after hs or continue education?  Values impact decisions!!!  NEEDS AND WANTS

 Step 3: Identify Alternative Courses of Action Identify Alternative Courses of Action Continue the same course of action Change the current situation Ex- invest $$ rather than place in savings account Expand the current situation- Ex- increase $$ you save per month Take a new course of action Ex- pay off debts rather than save

 Step 4: Evaluate Your Alternatives  Consequences & risks of decisions  Consequences ▪ Opportunity costs  Evaluating Risks  Inflation- prices increase  Interest- impacts borrowing and saving  Income- possible loss of job  Personal- safety vs. $$$  Liquidity- ability to easily convert financial assets into cash without loss of value

 Step 5: Create and Use Your Financial Plan of Action  List of ways to achieve financial goals  Step 6: Review and Revise Your Plan

One year or less Short-Term Goals Intermediate Goals Two to five years Long-Term Goals More than five years

Tips for Setting Your Financial Goals Be realistic Have a clear time frame Be specific Know what type of action to take

Life Situations Personal Situations Economic Factors

Market Forces Financial Institutions Global Influences Supply & Demand Interest Rates Competition amongst nations

 Economic Conditions

Strategies Obtain financial resources Make $$$, investments Plan how you will spend your money. Spend wisely. Save on a regular basis. PYF Plan for retirement. Manage risk. (INSURANCE) Invest to increase current income and for long-term growth Borrow wisely.

 Financial Opportunity Costs  Choices on how to spend money  Time Value of Money ▪ Increase of $$$ from earned interest ▪ Spend, save, or invest $$$$ = consider opportunity costs  Rule of 72: Rule of 72: ▪ # of years to double given interest rate 72 divided by interest rate as %

 Calculating Interest  Interest- cost to borrow money  Principal ▪ Original $$ on deposit ▪ Loan- amount you borrow  Annual interest ▪ Principal X Annual Interest Rate = Interest earned for 1 year

 Compounding  Future value of original deposit  $$ earns faster over time  Principal + previously earned interest X annual interest rate ▪ Example- $1, at age 40 with 5% interest = 3,387 at age 65 ▪ $1, at age 25 with 5% interest = $7, at age 65

 P = principal amount (the initial amount you borrow or deposit)  r = annual rate of interest (as a decimal)  t = number of years the amount is deposited or borrowed for.  A = amount of money accumulated after n years, including interest.  n = number of times the interest is compounded per year Do Now: “Go Figure” page 306

Let’s assume you just inherited $15,000. What are your options and opportunity costs associated with each option?

 Often people with conflicting financial values and practices experience challenges in their business or personal relationships. How could such problems be minimized or prevented using what you have learned in this chapter?  Review Questions: page 313- # 2, 3, 4, 9