1. Chapter 1 Personal Financial Planning in Action McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Personal Financial Planning Chapter Learning Objectives
LO1.1 Identify social and economic
influences on personal financial
goals and decisions
LO1.2 Develop personal financial goals
LO1.3 Calculate time value of money
situation associated with personal
financial decisions
LO1.4 Implement a plan for these decisions

3. Financial Planning
Process of managing your money to achieve personal economic satisfaction
Financial Plan:
Formalized report
Summarizes current financial situation
Analyzes financial needs
Recommends future financial activities

4. Advantages of Financial Planning
Increased effectiveness in obtaining, using, and protecting financial resources
Increased control of your financial affairs
Improved personal relationships
Sense of freedom from financial worries

5. Learning Objective LO1.1 Identify Social and Economic Influences on Personal Financial Goals and Decisions
Life situation and personal values (1.6)
Financial planning in our economy
Domestic economic influences (1.7)
Global Influences (1.8)
Inflation (1.9)
Interest rates (1.10)

6. Life Situation and Personal Values
Adult life cycle
Life Situation Factors:
Marital status, household size, employment
Exhibit 1-1 (page 5)
Major events:
Graduation, marriage, divorce
Birth or adoption of child
Career or health changes
Values:
The ideas and principles you consider correct, desirable, and important

7. Financial Planning in Our Economy Domestic Influences
Economy’s influence on financial planning
Business, labor & government
The Federal Reserve
“.. Sets the nation’s monetary policy to promote the objectives of maximum employment, stable prices and moderate long-term interest rates.”

8. Financial Planning in Our Economy Global Influences
U.S economy affected by foreign investors and competition from foreign companies
Level of imports/exports affects available supply of dollars
Level of foreign investment affects domestic money supply
Money supply affects consumer interest rates

9. Financial Planning in Our Economy Inflation
Inflation =  in the general level of prices
Reduces buying power of the dollar
Most harmful to those on fixed incomes
Inflation rates vary
“Hidden inflation”
CPI = a measure of inflation
Deflation = decline in prices

10. Financial Planning in Our Economy Interest Rates
Interest Rate = the cost of money
Affected by supply and demand
Risk premium:
Length of time funds in use
Expected inflation
Uncertainty
Major impact on financial planning

11. 8 Basic Financial Planning Activities
Obtaining Chapter 1
Planning Chapters 2,3
Saving Chapter 4
Borrowing Chapter 5
Spending Chapters 6,7
Managing Risk Chapters 8-10
Investing Chapters 11-13
Retirement/Estate Planning Chapter 14

12. Learning Objective LO1.2 Develop Personal Financial Goals
Time Frames for Achieving Financial Goals:
Short-term goals within 1 year
Intermediate goals years
Long-term goals > 5 years
Financial Needs Goals:
Consumable-product goals Food, clothing
Durable-product goals Car, appliances
Intangible-purchase goals Education, health

13. Goal-Setting Guidelines The “SMART” Approach
A “goal” that is not written down is a dream!
Effective Goals should be:
S = Specific
M = Measurable
A = Action-oriented
R = Realistic
T = Time-based

14. Learning Objective LO1.3 Assess Personal and Financial Opportunity Costs of Financial Decisions
Opportunity cost = what you give up making a choice
The trade-off of a decision
Not always measurable in dollars; may be time
Consider lost opportunities resulting from your decisions

15. Opportunity Costs and Financial Trade-Offs
Personal
Acquisitions
Opportunity Costs
(car, home, college education, investments, insurance, retirement fund)
(time, effort, health)
Financial
Opportunity Costs
(Interest, liquidity,
safety )

16. Time Value of Money
Increase in an amount of money as a result of interest earned
Saving today = more money
tomorrow
Spending today = lost interest
Saving and spending decisions involve considering the trade-offs
Current needs can make spending worthwhile
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17. Time Value of Money Interest Calculations
Calculating interest earned:
Principal = amount of savings
Annual interest rate
Length of time money on deposit (in years)
Simple interest:
Annual Interest Rate
Amt in Svgs
Time Period X = X
Interest

18. Time Value of Money Interest Calculation Example
$500 on deposit at 6% annual interest for 6 months:
Principal = $500
Interest rate = 6%
Time period = ½ (6/12 months) =
$500 X 6% X
1/2
$15

19. Time Value of Money Types of TVM Calculations
Future Value = Amount that will be available at a later date
Present Value = Current value of an amount desired in the future

20. Time Value of Money Calculation Methods
Formula calculation
Time value of money tables
Financial calculator
Spreadsheet software
Websites and apps

21. Future Value The increased value of money from interest earned
Amount to which current savings will increase
Total amount available in the future
“Compounding”

22. Original Amount in Savings
Future Value Example
Original Amount in Savings
Future Value
Interest Earned = +
$100 deposited for 1 year at 6% per year
Future Value = $100 + ($100 X .06 X 1)
Future Value = $100 + $6 = $106

23. Future Value Tables Appendix Exhibit 1-A = FV of a Single Amount
Multiply Table Factor by amount deposited
All Future Value factors > 1.0
Example:
$650 invested at 8% for 10 years
Factor = 2.159
FV = $650 X = $1,403.35

24. Time Value of Money Calculation Methods

25. Time Value of Money TVM Websites

26. Future Value Series of Deposits
Table factors = Appendix Exhibit 1-B
“Annuity” = series of equal deposits at equal intervals earning a constant rate
Example:
Deposit $50 per year at 7% for 6 years
Appendix Exhibit 1-B factor = 7.153
Period = 6; % = 7%
Future Value = $50 x = $357.65

27. Present Value
The current value of a future amount based on a certain interest rate and time period
The current value of an amount desired in the future
How much to deposit now to obtain a desired total in the future
“Discounting”

28. Present Value Tables Appendix Exhibit 1-C = PV of a single amount
Multiply Table Factor by amount deposited
All Future Value factors < 1.0
Example:
You want $1,000 five years from now
You can earn 5% on your money
Present Value = $1,000 X = $784

29. Present Value of a Series of Deposits
Appendix Exhibit 1-D
Determine how much you need to deposit now in order to withdraw a specific amount for a desired number of years
Example:
You want to withdraw $400/year for 9 years
Your money is earning 8% per year
Deposit = $400 X = $2,498.80

30. The 6-Step Financial Planning Process

31. Learning Objective LO1.4 Implement a Plan for Making Personal Financial and Career Decisions
Determine current financial situation
Develop financial goals
Identify alternative courses of action
Continue same course of action
Expand current situation
Change current situation (change vehicle)
Take a new course of action

32. Learning Objective LO1.4 Implement a Plan for Making Personal Financial and Career Decisions
Evaluate alternatives
Consequences of choices
Evaluate risks
Financial Planning information sources
Create and implement financial action plan
Review and revise plan

33. Financial Planning in Action

34. Career Choice and Financial Planning
The life work one selects = key to financial well being and personal satisfaction
Career choices have risks and opportunity costs
Career choices require periodic re-evaluation of trade-offs related to personal, social and economic factors
Changing personal and social factors require continuous assessment of your work situation

35. Chapter Summary Learning Objective LO1.1
Financial decisions are affected by:
Life situation
Personal values
Economic factors
Major elements of Financial Planning:
1. Obtaining 5. Spending
2. Planning 6. Managing Risk
3. Saving Investing
4. Borrowing 8. Retirement & Estate planning

36. Chapter Summary Learning Objective LO1.2
Financial Goals should be:
S = Specific
M = Measurable
A = Action-oriented
R = Realistic
T = Time-based

37. Chapter Summary Learning Objective LO1.3
Every decision involves a trade-off
Personal opportunity costs:
Time
Effort
Health
Financial opportunity costs
Based on the time value of money

38. Chapter Summary Learning Objective LO1.4
Personal financial planning involves:
Determine financial situation
Develop financial goals
Identify alternative courses of action
Evaluate alternatives
Create and implement a financial action plan
Review and revise the financial plan