Personal and Financial Planning Chapter 1

Section 1.1 Objectives  Section 1.1 Define personal financial planning Name the six steps of financial planning Identify factors that affect personal financial decisions

Discussion Question  What are three reasons why people should financially plan?

Benefits of Financial Planning  Personal financial planning – arranging to spend, save, and invest money to live comfortably, have financial security, and achieve goals  Benefits More money Financial security Know how to use money to achieve goals Less chance of going into debt Can help support your family

Six Step Planning Process  Step 1: Determine Your Current Financial Situation  Step 2: Develop Your Financial Goals  Step 3: Identify Your Options  Step 4: Evaluate Your Alternatives  Step 5: Create and Use Your Financial Plan of Action  Step 6: Review and Revise Your Plan

Step 1: Determine Your Current Financial Situation  List items related to finances Savings Monthly income (job, allowance, gifts, interest) Monthly expenses (what you spend) Debts (how much do you owe)

Step 2: Develop Your Financial Goals  Know the difference between wants and needs  Develop clear goals  Ask yourself about the future Spend now or save for later? Get a job or continue school? Do your personal values affect your decisions?

Goal Setting  Complete Goal Setting Worksheet

Step 3: Identify Your Options  Expand the current situations  Change the current situation  Start something new  Continue the same course of action

Step 4: Evaluate Your Alternatives  Sources of financial information Financial specialists Technology Media Financial Institutions Education  Consequences of choices What is the opportunity costs or trade-off?

Step 4: Evaluate Your Alternatives Cont.  Understand your risks Inflation risks – price may go up if you wait to purchase Interest rate risks – can affect cost of borrowing or profits you might earn from saving/investing Income risks – lose your job, health/family problems, accident, changes in field of work Personal risks – may be dangerous, hazardous choices you make Liquidity risks – may be difficult to convert assets into cash

Step 5: Create and Use Your Financial Plan of Action  Cut back on spending to increase savings  Get part-time job or work more hours to increase income

Step 6: Review and Revise Your Plan  As you age, your finances and needs change too  Constantly revise and reevaluate your plan

Developing Personal Financial Goals  Two factors will influence planning for goals: Time frame in which you would like to achieve them Type of financial need that inspires your goals

Time Frame  Short-term goals – less than a year to achieve Example – saving for a computer  Intermediate goals – year to five years to achieve Example – saving for a down payment on house  Long-term goals – more than five years Example – Planning for retirement  Goals for different needs Consumable, durable, intangible

Guidelines for Setting Goals  Financial goals should be: Realistic Specific Have clear time frame Should help you decide what action to take  Complete Financial Goals and Activities for Various Life Situations Complete Financial Goals and Activities for Various Life Situations

Influences on Personal Financial Planning  Three most important factors are: Life situations  New career, getting married, have children, move to new city Personal Values  Independence, responsibility Economic Factors  Inflation, market forces, global influences, economic conditions  Complete Role of Economic Influences on Personal Financial Planning worksheet Complete Role of Economic Influences on Personal Financial Planning worksheet

Section 1.2 Objectives  Section 1.2 Explain opportunity costs associated with personal financial decisions Identify eight strategies for achieving financial goals at different stages of life

Opportunity Costs  Personal opportunity costs Managing financial resources takes time Must be organized, may have to give up personal to do so  Financial opportunity costs Consider time value of money – would it increase if you invested it instead of spent it

Calculating Interest  Time value of savings Need to know principal, annual interest rate, and length of time money will be in account  Principal – original amount deposited or borrowed  Interest rate – the percentage of money you earn on your principal

Annual Interest Math Problem  You deposit $1,000 in a savings account. The bank pays you 3% annual interest. How much interest will you earn to keep your money in the bank for one year?  Formula: Principal * Annual Interest Rate * Length of Time $1,000 *.03 * 1 = $30 interest

Future Value of Single Deposit  Future value – amount your original deposit will be worth earning a specific interest rate over a specific period of time  The money compounds and grows faster over time because it has longer time to sit and grow

Future Value Math Problem  You deposit $1,000 in a savings account that pays 3% annual interest. You earned $30 in interest after the first year. How much will you earn after two years?  Formula: (Principal + Previously Earned Interest) * Annual Interest Rate = Interest Earned 2 nd Year ($1,000 + $30) *.03 = $30.90  After two years, future value is $1,060.90

Future Value of a Single Deposit of $1 Annual Interest Rate Year5%6%7%8%9% To find out the value of a $1 deposited at 7% interest at the end of seven years you would to the following: $1 * = $1.61 (or $1.606)

Future Value of a Series of Equal Annual Deposits Year5%6%7%8%9% To find out the value of a $1000 deposited annually at 5% interest at the end of six years you would to the following: $1,000 * = $6,802

Present Value of a Single Deposit  Present value – how much money you would have to deposit now to have a desired amount later  For example, if you want to have $1,000 in five years for a down payment on a car, and your savings account pays 5% annual interest, how much money will you have to deposit now to accumulate $1,000?

Present Value of a Single Deposit Year5%6%7%8%9% To find out the amount at 5% you would have to deposit now to have $1,000 in five years, look in the 5 year column under 5% and do the following: $1,000 * = $784

Present Value of a Series of Deposits  You can determine how much you would need to deposit so you can take a specific amount of money out of your savings account for a certain number of years  This type of calculation is used for retirement  For example, if you want to take out $400 each year for nine years and your money is earning 8% a year, how much would you need to deposit now?

Present Value of a Series of Equal Annual Deposits Year5%6%7%8%9% To find out the amount at 8% you would have to deposit now to take out $400 for nine years, look in the 9 year column under 8% and do the following: $400 * = $2,498.80

Achieving Your Financial Goals  Obtain – money and financial resources  Plan – set your goals  Spend Wisely – spend less than you earn  Save – do this regularly  Borrow Wisely – only when needed  Invest – increase current income (dividends) and long-term growth (mutual funds, real estate)  Manage Risk – insurance coverage  Plan for Retirement – what age, what lifestyle?