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2. McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved. 1 Personal Financial Planning in Action

3. 1-3 Personal Financial Planning Objectives 1.Identify social and economic influences on personal financial goals and decisions 2.Develop personal financial goals 3.Assess personal and financial opportunity costs associated with financial decisions 4.Implement a plan for these decisions Chapter Objectives

4. 1-4 Objective 1: Identify social and economic influences on personal financial goals  Financial Planning: organized process of achieving the goals  Financial Plan: formalized report that summarizes your current situation, future needs and recommended actions

5. 1-5 Financial Planning and Its Benefits  There are several advantages of personal financial planning. –Increased effectiveness in obtaining, using, and protecting your financial resources. –Increased control of your financial affairs. –Improved personal relationships. –A sense of freedom from financial worries obtained by looking to the future.

6. 1-6  You can know retire or work where you want Income Assets Expenses

7. 1-7 Influences on Personal Financial Planning Economic Factors  Economy’s influence on financial planning  What is the study of economics about? A social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants.

8. 1-8 Economics can generally be broken down into: macroeconomics, which concentrates on the behavior of the aggregate economy; and microeconomics, which focuses on individual consumers.  Role of the Federal Reserve in directing the economy and indirectly personal financial planning

9. 1-9 Changing Economic Conditions Consumer The value of the dollar prices changes in inflation. Consumer The demand for goods and services spending by individuals and households. Interest rates The cost of money; cost of credit when you borrow; return on your money when you save or invest.

10. 1-10 Changing Economic Conditions GDP: Gross Total value of goods and services Domestic Product produced in a country. Trade balance Difference between a country’s exports and imports. Market indexes The relative value of stocks as represented by the index, such as the Dow Jones Average or the S&P 500. (continued)

11. 1-11 Changing Economic Conditions Money Supply The dollars available for spending in our economy. Unemployment The number of individuals without employment who are willing and able to work. Housing starts Number of new homes being built. (continued)

12. 1-12 Influences on Personal Financial Planning Global Factors  Role of import and export on the value of the $  Competition from foreign companies  Investment of foreign companies in the US

13. 1-13 Influences on Personal Financial Planning Personal Factors  Adult life cycle stage.  Marital status, household size, and employment.  Major events. –Graduation, marriage, divorce. –Birth or adoption of child. –Career or health changes.  Values. –What are the ideas and principles you consider correct, desirable and important? Life situation and personal values

14. 1-14 Class Project  For the major economic indicators obtain current information and determine how current trends might affect financial planning activities.  Indicators: Inflation Rate, Consumer Spending, Interest Rates (Fed Fund Rate, Savings account) GDP, trade balance, Unemployment Rate - National Avg and Rochester, Housing starts

15. 1-15 Key Financial Activities  Obtaining – financial resources. Foundation of financial planning  Planning – spending thru budgeting to achieve goals and future financial security  Saving – regular savings plan for emer., unexpected, purchase of special goods  Borrowing- maintain control over credit buying. Overuse and misuse can cause problems. Misuse can lead to bankruptcy

16. 1-16  Spending- financial plan is not designed not to prevent life enjoyment but to help obtain things you want. Spending less is only way to achieve long term financial security.  Managing Risk- adequate insurance. Some are overlooked  Investing – invest for current income and long term growth. Need to diversify investments

17. 1-17  Retirement - need to plan for retirement to obtain financial security. Need to think about housing and recreational activities you plan on having after you stop working full-time.

18. 1-18 Objective 2: Developing Personal Financial Goals  Types of financial goals include those... –Influenced by the time frame in which you want to achieve your goals. –Influenced by the financial need that drives your goals.  Timing of goals. –Short-term, intermediate and long-term goals.  Goals for different financial needs.  Goal setting guidelines suggests goals should... – Be realistic, be stated in specific, measurable terms, have a time frame, and indicate the type of action to be taken.

19. 1-19 Class Project  Kim is 25 yrs old. She graduated from college last year and is currently working for Boeing.  She earns $50,000 /yr, has $10,000 in student loans, $5,000 in credit card debt, rents an apartment, has no savings or retirement plan, and is a compulsive shopper.  Come up with short term, and long term goals for her.

20. 1-20 Objective 3: Assess personal and financial opportunity costs of financial decisions  Opportunity cost is what you give up by making a choice. –The cost, referred to as the trade-off of a decision, cannot always be measured in dollars. Sometimes the cost is your time. –Consider lost opportunities that will result from your decisions.

21. 1-21 Time Value of Money  Increases in an amount of money as a result of interest earned. –Saving today means more money tomorrow. Spending means lost interest.  Saving and spending decisions involve considering the trade-offs. Current needs can make spending worthwhile.

22. 1-22 Objective 4: Implement a plan  Determine your current financial situation.  Develop your financial goals.  Identify alternative courses of action.  Evaluate your alternatives. Create and implement your financial action plan. 5. Review and revise your plan.

23. 1-23 Every Financial Decision Involves Evaluating Types of Risk  Inflation risk. –Rising prices cause lost buying power.  Interest-rate risk. –Effect costs of borrowing and rate of return.  Income risk. –The loss of a job.  Personal risk. –Health, safety, or costs.  Liquidity risk. –Higher return may mean less liquidity.

24. 1-24 Components of Financial Planning  Obtaining (chapter ?  Planning (chapters ?  Saving (chapter ?  Borrowing (chapters ?  Spending (chapters ?  Managing risk (chapters ?  Investing (chapters ?  Retirement and estate planning (chapters ?

25. 1-25 Developing a Flexible Financial Plan  A financial plan is formalized report that... –Summarizes your current financial situation. – Analyzes your financial needs. – Recommends future financial activities.  You financial plan can be created by you, done with assistance from a financial planner, or made using a money management software package.

26. 1-26 Implementing Your Financial Plan  Develop good financial habits. – Use a well conceived spending plan to help you stay within your income, while allowing you to save and invest for the future. – Have appropriate insurance protection to prevent financial disasters. – Become informed about tax and investment alternatives. – Study personal finance.

27. 1-27 Implementing Your Financial Plan  Guidelines for Sticking With Your Plan –Write your goals on index card or find pictures or your goal and post them in place you will see them daily –Tell others about your goals, and then have someone check in to see about your progress. Knowing someone is going to ask is good motivation –When going to spend money, decide how much you will need ahead of time and take only that amount so you are not tempted to spend more –Review your plan regularly so you know where you are (continued)