FINANCIAL DECISIONS AND GOALS

What is Personal Finance? EVERYTHING IN YOUR LIFE THAT INVOLVES MONEY Spend Save Invest Live comfortably Financial security Achieve goals

What are Goals? Things you want to accomplish College education Buying a car Occupation

Benefits of Financial Planning More money Financial security Use moneyGoals Debt you can handle Support self and family

The Financial Planning Process (6 steps) Determine your Current Financial Situation Develop Your Financial Goals Identify Your Options Evaluate Your Alternatives Create and Use Your Financial Plan of Action Review and Revise Your Plan

Step 1: Determine Your Current Situation Savings Monthly Income Monthly Expenses Debts (money owed to others)

Step 2: Develop Your Financial Goals What is your “Attitude” about money? What are your “Values” Needs vs. Wants

Step 3: Identify Your Options Expand Current Situation Change the Current Situation Start Something New Continue the Same Course of Action

Step 4: Evaluate Your Alternatives Sources of Financial Information Consequences of Choices (Opportunity Cost/Tradeoff) Understanding Risks Inflation Interest Rate Risk Income Risk Personal Risk Liquidity Risk

Step 5: Create/Use Your Financial Plan Step 6: Review and Revise Your Plan

Types of Financial Goals Short-Term < 1 year Intermediate 2 – 5 years Long-Term > 5 years

Goals for Different Needs How you establish and reach your financial goals will depend on whether a goal involves the need for: Consumable Goods Durable Goods Intangible Item (See Question 2)

Guidelines for Setting Goals Realistic Specific Clear Time Frame Decide What Actions to Take (See Page 13, Figure 1.2: Financial Goals/Life Situations)

Influences on Personal Financial Planning Life Situations Personal Values Economic Factors Economy: study of decisions that go into making, distributing, & using goods & services Economy: Ways in which people make, distribute, & use their goods & services

Economic Conditions Affecting Global and Personal Decisions Market Forces Financial Institutions Global Influences Current Economic Conditions

Market Forces Supply Amount of goods/services available for sale Demand Amount of goods/services people are willing to buy

Financial Institutions Provide services that increase financial activity in the economy Banks Credit unions Savings & Loan Associations Insurance Companies Investment Companies Federal Reserve System (Fed) is the central banking organization of the United States

Federal Reserve System (Fed) Regulates the Money Supply Determines Interest Rates Buys/Sells Government Securities Affects Interest Rate you earn Affects Interest Rate you pay Affects to some extent…the prices of products you buy

Global Influences You and the Money You Spend are part of global marketplace Economy of Every Nation is Affected by Competition with Other Nations If more money leaves the US than enters it < money available for spending/investing Interest rates >

Economic Conditions Consumer Prices Inflation: rise in level of prices for goods/services Caused by increase in demand w/o increase in supply Rates on loans > during inflation Consumer Spending > spending = > employment < spending = < employment Interest Rates (cost of money) Price paid for the use of another’s money

Section 1.1 Assessment 1. What are the 6 steps used to create a financial plan? Pgs. 6-10 Determine current financial situation Develop your financial goals Identify alternative courses of action Evaluate your alternatives Create/Use your financial plan Revise your plan

1.1 Assessment (cont.) 2. What is the relationship between the timing of your goals and the type of good or service that you want? Pgs. 10-11 Consumable = Short term Goals: you buy often, use up quickly (gas, food), costs less Durable = Intermediate or Long term goals: usually more expensive (i.e.car, house..takes longer to save for or pay off Intangible = Long term goals: usually requires more planning, more expense (i.e. education, retirement)

1.1 Assessment (cont.) 3. What are two economic factors that affect financial decisions? How might these factors influence your financial planning? Pgs. 14-18 Market forces: supply/demand (high demand = higher cost, low demand = lower cost) Financial institutions: Affects the interest rate you earn on savings and pay on borrowed money Global influences: If other countries sell more goods to the U.S. than U.S. companies sell in those markets, less money is available for spending & investing, interest rates may rise Economic conditions: inflation (increase in demand w/o increase in supply) consumer spending helps create jobs (less spending = fewer jobs) interest rates = cost to borrow

1.1 Assessment Why is it important to distinguish between your need and your wants? Basic needs can be satisfied through different wants, some of which may cost less than others (where/how you live)

KNOW FOR QUIZ: Inflation Steps in financial planning process Interest Opportunity Cost Liquidity Consumable Goods