1. Personal Financial Planning – Part I Dr. Steve Hays Personal Finance BKHS – Spring 2013

2. The New Economy Emphasis in US has shifted Manufacturing and retailing to Telecommunications, high tech, financial services New career opportunities New perspectives on financial planning

3. Money, money, money!!! People everywhere talk about money Three types Explorer – always searching uncharted areas Passenger – just along for the ride Researcher – seeking answers to questions

4. Personal Financial Planning Definition Process of managing your money to achieve personal economic satisfaction Allows you to control financial situation Every person, family, household has unique position Activities must be planned carefully to meet specific needs

5. Advantages of Personal Financial Planning Increased effectiveness in obtaining, using, and protecting financial resources Increased control of financial affairs by avoiding excessive debt, bankruptcy, and dependence on others Improved personal relationships resulting from well planned and effectively communicated financial decisions Sense of freedom from financial worries obtained by looking to the future, anticipating expenses, and achieving personal economic goals

6. Financial Planning Process 1- Determine current financial situation 2- Develop financial goals 3- Identify alternative courses of actions 4 – Evaluate alternatives 5- Create and implement financial action plan 6- Review and revise plan as needed

7. Step 1 – Determine Current Financial Situation 1- Determine Current Financial Situation Determine financial situation regarding income, living expenses, and debts Prepare a list of current assets, debt balances, and amounts spent for various items

8. Step 2 – Develop Financial Goals Periodically analyze financial values and goals How do you feel about money? Why? Factual knowledge or influence of others? SMART Goals 2- Develop Financial Goals

9. What are SMART Goals?

10. Step 3 – Identify Alternative Courses of Action 3- Identify Alternative Courses of Action Categories Continue same course of action Expand current situation Change current situation Take new course of action Creativity in decision making is vital to effective choices Consider all possible alternatives Doing nothing is a dangerous alternative!!

11. Step 4 – Evaluate Alternatives Evaluate courses of action Consider Life situation Personal values Current economic conditions Opportunity cost 4- Evaluate Alternatives

12. What is Opportunity Cost? What you give up by making a choice Trade-off The resources you give up (money or time) have a value you can never regain

13. Evaluating Risk Uncertainty is part of every decision High degree Low degree In many financial decisions, identifying and evaluating risk is difficult Gather information based on your experience and experience of others Use financial planning information sources

14. Types of Risk Inflation Risk Interest Rate Risk Income Risk Personal Risk Liquidity Risk

15. Inflation Risk Rising prices cause lost buying power Decide whether to buy something now or later If you buy, you may have to pay more

16. Comparing Prices 1963 Coca-Cola: $0.05/bottle Bread: $0.21/loaf Milk: $1.04/gal US Eggs: $0.96/doz Car: $2,300 Gas: $0.30/gal House: $19,300 Stamp: $0.05/ea Ave. Income: $6,998/yr Min Wage: $1.25/hr DOW Ave: 763 2012 Coca-Cola:$1.19/bottle Bread: $1.88/loaf Milk: $2.79/gal US Eggs: $1.54/doz Car: $ 30,748 Gas: $3.72/gal House: $263,200 Stamp: $0.46/ea Ave. Income: $47,000/yr Min Wage: $7.25/hr DOW Ave: 13,553

17. Interest Rate Risk Changing interest rates affect your costs when you borrow and your benefits when you save or invest Borrowing at low rates saves you money Investing when rates are dropping costs you money

18. Income Risk Loss of job could result in change in consumer spending Individuals who face risk of unemployment need to save while employed Acquire skills they can use to obtain different type of work

19. Personal Risk Tangible and intangible factors can create less than desirable situations Purchasing certain brands pr from certain stores may entail risk (i.e repairs) Health risks Safety risks

20. Liquidity Risk Some investments have potential for higher earnings Mat be more difficult to convert to cash or sell without significant loss in value Art Jewelry Sports Collectibles Precious Metals

21. Financial Planning Information Sources Financial Specialists Financial planners Bankers, CPAs Lawyers WWW, Computer Software School Courses Financial Institutions Printed Materials

22. Step 5 – Create and Implement Plan 5- Create and Implement Plan Develop an action plan identifying ways to achieve goals Prioritize goals Seek assistance from others

23. Step 6 – Review and Revise Plan Dynamic process that always changes Regularly assess financial decisions Changing personal, social, and economic factors require more frequent assessment 6- Review and Revise Plan

24. Reviewing the Financial Planning Process 1- Determine current financial situation 2- Develop financial goals 3- Identify alternative courses of actions 4 – Evaluate alternatives 5- Create and implement financial action plan 6- Review and revise plan as needed

25. Developing Personal Financial Goals Two factors influence financial aspirations Time frame Financial needs

26. Timing of Goals Short-term Less than one year Intermediate Two to fives years Long-term Greater than five years

27. Financial Needs Consumable Products Goals Periodic basis Food, clothing, entertainment Can have negative impact on financial situation if made unwisely Durable Product Goals Infrequently purchased Expensive items Intangible Purchase Goals Personal relationships, health, education, leisure

28. Homework – Due Friday, February 1, 2013 Using Excel, develop two charts 1.Compare the prices of goods for the year you were born with 2012 (see PPT slide for items to compare) What is the percentage of increase from the year you were born to 2012? 2.Develop SMART financial goals for both you and your family – short term, intermediate, and long-term.