1. Personal Financial Planning
Chapter 1
Personal Financial Planning

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

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

10. 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

11. 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)

12. 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

13. 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)

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

15. 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

16. 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?

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

18. 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, 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?

19. ANSWERS
$270 in interest
$1270 in account
$752.00

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