Personal Financial Planning Chapter 1 Personal Financial Planning

Chapter Objectives Define personal financial planning Name the six steps of financial planning Identify factors that affect personal financial decisions Explain opportunity costs associated with personal financial decisions Identify eight strategies for achieving financial goals at different stages of life

Personal Financial Decisions What is personal finance? Everything in your life that involves money So, what is personal financial planning? Arranging to spend, save, and invest money to live comfortably What are goals? Things that you want to accomplish, i.e. going to college and buying a car What might be some benefits of financial planning? Money and financial security, know how to use money to achieve your goals, less chance of going into debt you cannot handle, and help support your family

Financial Planning Process Step 1: Determine your current financial situation Make a list of items that relate to your finances Savings Monthly income Monthly expenses Debts

Financial Planning Process Step 2: Develop Your Financial Goals Ask yourself some questions… Is it important to spend your money now or save for the future? Would you rather get a job right after high school or continue your education? Do your personal values (beliefs and principles you consider important) affect your financial decisions? Determine the difference between your needs and your wants

Financial Planning Process Step 3: Identify your options Possible courses of action: Expand the current situation Change the current situation Start something new Continue the same course of action

Financial Planning Process Step 4: Evaluate Your Alternatives Use the many sources of Financial Information in the decision process Consider your consequences of your choices If you choose one option, you give up all the other options…opportunity cost Consider your risks Inflation Risk – prices may increase Interest Rate Risk – interest rates go up and down Income Risk – may loose your job, get into an accident, etc Personal Risk – driving versus flying Liquidity Risk – Liquidity is the ability to easily convert financial assets in to cash without loss in value

Financial Planning Process Step 5: Create and Use Your Financial Plan of Action List of ways to achieve your financial goal Step 6: Review and Revise Your Plan Financial and needs change as you get older and they need to be re-evaluated constantly

Developing Personal Financial Goals Why do so many people have money problems? They do not plan how they will use their money

Developing Personal Financial Goals Types of Financial Goals Short-term (1 yr or less) Intermediate goals (2-5yrs) Long Term (6 or more) * Start with short term goals that may lead to long-term ones

Developing Personal Financial Goals Goals for different needs – getting a hair cut is a different need than buying a new car Service - haircut Good - new car Consumable goods – items purchased often; use up quickly (Examples??) Durable goods – expensive items that are not purchased often (Examples??) Intangible items – cannot be touched but are important (relationships, health, education, etc)

Developing Personal Financial Goals Your financial goals should: Be realistic Be specific Have a clear time frame Help you decide what type of action to take

3 Influences on Personal Financial Planning Life situations – going to college, starting a new job, getting married, etc Economic Factors (study of decisions that go into making, distributing and using goods) Market forces – Supply and Demand SUPPLY: amount available for sale DEMAND: amount people are willing to buy Financial Institutions – Federal Reserve System (central bank of the U.S.) Economic conditions Consumer prices (rise over a period of time: INFLATION) Consumer spending (the more jobs, the more spending) Interest rates (the fee you pay to use someone’s money)

Financial Opportunity Costs Financial Opportunity Costs (give up something to get something else) Calculating Interest (P x APR)

Financial Calculations Future Value of Single Deposit If you deposit $100, how much would you have after 5? Future Value of a Series of Deposits (ANNUITY: a series of regular deposits to grow over time) If you deposited $100/mo, how much after 5 years? Present Value of a Single Deposit How much you need to deposit NOW to have in future Present Value of a Series of Deposits How much you need NOW to take out withdrawals later

PRESENT/FUTURE VALUE How much money will you have if you save $500 a year for 8 years at 7% interest? Starting next year, you plan to take $50 out of your savings account each year for 9 years. Your account earns 5% interest. How much will you need to deposit now to make this plan succeed?

ANSWERS $5,130 in 8 years $355.40 you will need now

INTEREST EXAMPLES You deposited $1000 in a savings account. The bank will pay you 3% annual simple interest. How much interest will you earn after 9 years of sitting in that account untouched? How much money (total) will be in your account? You deposit $500 in a savings account on your birthday, 2004. On your birthday in 2012, you plan on taking all the money out and using it to vacation in Costa Rica. If your interest rate was 6.3%, how much will you be withdrawing on your birthday 2012?

ANSWERS $270 in interest $1270 in account $752.00

Achieving Your Financial Goals Obtain Plan Spend Wisely Save Borrow Wisely Invest Manage Risk Plan for Retirement