Personal Financial Planning Mrs. gray

Personal financial planning Why is it important to have a plan before making a financial decision? What is a Nest egg? Nest Egg - A substantial sum of money that has been saved or invested for a specific purpose. A nest egg is generally earmarked for longer-term objectives, the most common being retirement, buying a home and education. It can also refer to money kept aside as a reserve to deal with unexpected emergencies such as a medical problem or urgent housing repairs. “Nest egg” has been used to refer to savings since the late 17th century. The term is believed to have been derived from poultry farmers’ tactic of placing eggs – both real and fake – in hens’ nests to induce them to lay more eggs, which meant more income for these farmers. Do not put all your eggs in one basket – diversify your investments. If you invest in one item or stock and it looses all of its value, you have lost your investment.

What is Personal Finance? Personal Financial Planning – Arranging to spend, save and invest money to live comfortable, have financial security and achieve goals. Goals – Things that you want to accomplish Examples: Getting a college education Buying a car Starting a Business Planning for your personal finances is important because it will help you to reach your goals, no matter what they are.

Benefits of Financial planning Increase effectiveness in obtaining, using and protecting your financial resources throughout your life Increased control of your finances by avoiding too much debt, bankruptcy and dependence on others Improved personal relationship gained from well-planned and well-communicated financial decisions A sense of freedom from financial worries gained from looking to the future, anticipating expenses and achieving personal economic goals.

Six steps to financial planning What is your current financial situation? Make a list of items that relate to your finances: Savings Monthly Income (job earnings, allowance, gifts and interest on bank accounts Monthly Expenses (Money you spend) Debts (Money you owe to others When you have determined your financial situation, you will be able to start planning. Six steps to financial planning STEP 1 DETERMINE YOUR CURRENT FINANCIAL SITUATION

Six steps to financial planning ASK YOURSELF  Is it more important to spend your money now or to save for the future? Would you rather get a job right after high school or continue your education? Will your chosen career require additional training or education in the future? Do your personal values affect your financial decisions? Six steps to financial planning STEP 2 DEVELOP YOUR FINANCIAL GOALS Values – Beliefs and principles you consider important, correct and desirable. People value different things.

Only you can decide what specific goals to pursue. Needs vs. wants NEEDS WANTS Something you must have to survive Food Shelter Clothing Something you desire or would like to have or do _________________ Only you can decide what specific goals to pursue.

Six steps to financial planning It is impossible to make a good decision unless you know your options Suppose that you are saving $500 a month. You have options: Continue the same course of action. (Do not change) Expand the current situation. (Increase savings to $600) Change the current situation. (Invest in stocks instead of money going into savings account) Take a new course of action. (Use $500 to pay off debts) Six steps to financial planning STEP 3 IDENTIFY ALTERNATIVE COURSE OF ACTION

Six steps to financial planning Use the many sources of financial information that are available: Financial Specialists Accountants Bankers Financial Planners Insurance Agents Tax Attorneys Tax Preparers Technology Computer Software Internet Six steps to financial planning STEP 4 EVALUATE YOUR ALTERNATIVE

Six steps to financial planning The Media Books Magazines Newspapers Radio Television Financial Institutions Banks Credit Unions Insurance and Investment Companies Education High School Classes College Courses Seminars Six steps to financial planning STEP 4 EVALUATE YOUR ALTERNATIVE

Six steps to financial planning Consider the consequences and risks of each decision you make. Opportunity Costs: It is what is given up when making a choice instead of another option. Choosing involves more than knowing what you might give up. It also involves knowing what you would gain. Six steps to financial planning STEP 4 EVALUATE ALTERNATIVE COURSES OF ACTION

Example – The opportunity cost of going to college could be the benefit of gaining a high paying full time job but losing out on a good job you had in high school. You will also have to pay for college. Evaluating Risks – When you make a financial decision, you also accept financial risks. OPPORTUNITY COSTS & evaluating risks

Types of financial risks Inflation Risk Interest Rate Risk Income Risk Personal Risk Liquidity Risk

Economic conditions & Financial Planning How can the ECONOMY affect your personal financial planning or money management? The House of Representatives just passed a bill to cut 5 billion dollars a year in food assistance to low income families. How does this affect the financial planning of the people that currently receive food assistance? Economy – The ways in which nations make decisions to allocate their resources… production and consumption of goods and services.

Six steps to financial planning EVALUATING RISKS Inflation Risk – If you wait to buy a car until next year, you accept the possibility that the price many increase. Interest Rate Risk – Interest rates go up or down, you may affect the cost of borrowing or the profits you earn when you save or invest. Income Risk – You may lose your job due to unexpected health problems, family problems, an accident or changes in your field of work. Liquidity Risk – Liquidity is the ability to easily convert financial assets into cash without loss in value. Some long-term investments, such as a house, can be difficult to convert quickly. Six steps to financial planning STEP 4 EVALUATE ALTERNATIVE COURSES OF ACTION

Understanding inflation Inflation risk Minimum Wage

How it Influences Financial Planning Economic Condition What it Measures How it Influences Financial Planning Consumer Prices The value of a dollar and it changes with inflation If consumer prices increase faster than wages, the value of the dollar decreases (A dollar buys less than it did before.) Consumers tend to buy fewer goods and services. Consumer Spending Demand for goods and services by individual and households Increased consumer spending usually creates more jobs and higher wages. Reduced consumer spending causes unemployment to increase. Interest Rates Cost of money, cost of credit when you borrow and the return on your money when you save or invest Higher interest rates make borrowing money more expensive and make saving more attractive. When interest rates increase, consumer prices tend to increase.

How it Influences Financial Planning Economic Condition What it Measures How it Influences Financial Planning Money Supply The dollars available for spending in our economy The Federal Reserve Systems (The FED) sometimes adjusts interest rates in order to increase or decrease the amount of money circulating in the economy. If the FED lowers interest rates, the money supply increases. If the FED raises interest rates, the money supply decreases. Unemployment The number of people without jobs who are willing and able to work Low unemployment increases consumer spending. High unemployment reduces consumer spending.

Six steps to financial planning A plan of action is a list of ways to achieve your financial goals.   If you want to increase your savings Cut back on spending Increase your income Get a part time job Work more hours at your present job Take part of your current income and invest it Create a budget Six steps to financial planning STEP 5 CREATE YOUR FINANCIAL PLAN OF ACTION

Six steps to financial planning As you get older, your finances and needs will change. Your financial plan will have to change too. Reevaluate and revise your financial plan every year. Six steps to financial planning STEP 6 REVIEW AND REVISE YOUR PLAN

TYPES OF FINANCIAL GOALS Time Frame to Achieve Goal Type of Financial Need that Inspires your Goals Short Term Goal = Less than one year Intermediate Goal = One to five years Long-Term Goals = More than five years Intangible items (something you cannot hold or touch) are often overlooked but can be very expensive. They often are items you consider when weighing the opportunity cost of something.

Personal and Financial Opportunity Costs and Strategies Whenever you make a choice, you have to give up, or trade off, some of your other options. When making your financial decisions and plans, you must weigh, or consider both the personal and financial opportunity costs carefully. Can you think of examples?

Opportunity cost What is an opportunity cost? (in your own words) Personal Opportunity Costs – Making choices about how you spend your personal resources Health Knowledge Skills Time

PERSONAL OPPORTUNITY COSTS LATELY? Do you eat a lot of junk food and avoid exercise? Do you get enough sleep for an exam the next morning? Do you study for a test or go a concert you were invited to? HAVE YOU HAD ANY PERSONAL OPPORTUNITY COSTS LATELY? You cannot do both because people have a limited amount of time.

Financial opportunity costs Making choices about how you spend your money. Do you buy new Nike Jordans at the mall for $119.00 plus tax or do you save your money? Spending money instead of putting it in your savings account can mean lost interest earnings. You cannot do both because most people have a limited amount of money. College Spending = BUDGET

Financial Strategies Financial planning involves choosing a career and then learning how to protect and manage the money you earn.

8 strategies to Avoid common money mistakes OBTAIN – Obtain financial resources by working, making investments and/or owning property. PLAN – The key to achieving your financial goals and financial security is to plan how you will spend your money. SPEND WISELY – Many people spend more than they can afford. Other people buy things they can afford but do not need. Spending less than you earn is the only way to achieve financial security. SAVE – Long-term financial security starts with a savings plan. If you save on a regular basis, you will have money to pay your bills, make major purchases and cope with emergencies.

8 strategies to Avoid common money mistakes BORROW WISELY – When you use a credit card or take out another type of a loan, you are borrowing money. Borrowing wisely, and only when necessary, will help you achieve your financial goals and avoid money problems. INVEST – Investing increases current income and helps to achieve long-term growth. MANAGE RISK – To protect your resources in care you are ever seriously injured, get sick or die, you will need insurance coverage to protect you and those who depend on you. PLAN FOR RETIREMENT – When you start to plan for retirement, consider the age at which you would like to stop working full time. You should also think about where you will want to live and how you will spend your time (part time job, doing volunteer work or enjoying hobbies or sports).

Personal Financial Planning Mrs. gray

DEVELOPING and USING A FINANCIAL PLAN A good personal financial plan includes assessing your present financial situation, making a list of your current needs and planning for future needs. Making your financial plan work takes time, effort and patience but you will develop habits that will give you a lifetime of satisfaction and security.

Money Management Current event Google NEWS Find a current event using GOOGLE NEWS Search using topics we have discussed in class “Personal Finance” “Money Management” “Economy 2014” “ Consumer Spending” “Unemployment” “Interest Rates” ADD TEENAGER – YOUNG ADULT YOUR CHOICE!!!

Personal financially planning EQ Why is it important to plan before making a financial decision? Laptop, Cell Phone, Car, House, Education, Career As a high schooler, what difference does it make how I spend my money now? Savings, habits, Investments, emergencies, risks vs benefits What are your financial goals? Which goals are needs and which are wants? People have a variety of choices when making purchases. What are the benefits of shopping at thrift shops, discount stores and stores that sell used merchandise?

Personal financial planning eq Do you think purchasing money management software is worth the investment? What is money management software? Which resources might you contact if you want information about saving for college or assistance paying for college? What strategies can you use to reach your financial goals? What are some you many have in ten years from now that you do not have today?

Personal financial planning eq How can opportunity costs be evaluated differently by different people? How can a need for one person may be a want for another? What factors might play a part in the revision of your financial plan as you get older? Interpret the phrase “spend money to make money” and explain how it relates to personal finance. Using the time value of money, write an argument in favor of shopping for a good interest rate.

Money Management Do now Make a list of five items you would like to buy Estimate the cost of each item What is the benefit of each item? How much time do you think it will take to save the money for each item? How can this activity be considered financial planning?