1.  2004 McGraw-Hill Ryerson Ltd. Kapoor Dlabay Hughes Ahmad Prepared by Cyndi Hornby, Fanshawe College Chapter 1 Personal Financial Planning: An Introduction 1-2

2.  2004 McGraw-Hill Ryerson Ltd. Learning Objectives – Chapter 1 1.Analyze the process for making personal financial decisions. 2.Develop personal financial goals. 3.Assess personal & economic factors that influence personal financial planning. 4.Determine personal and financial opportunity costs associated with personal financial decisions. 5.Identify strategies for achieving personal financial goals for different life situations 1-3

3.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 1 Analyze the process for making personal financial decisions. 1-4

4.  2004 McGraw-Hill Ryerson Ltd. Financial Planning and Its Benefits Personal financial planning is the process of managing your money to achieve personal economic satisfaction. 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. 1-5

5.  2004 McGraw-Hill Ryerson Ltd. The Financial Planning Process Determine your current financial situation. Develop financial goals. Identify alternative courses of action. Evaluate alternatives. Create and implement a financial action plan. Reevaluate and revise your plan. 1-6

6.  2004 McGraw-Hill Ryerson Ltd. Every Decision Has An Opportunity Cost (Trade-off) 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. 1-7

7.  2004 McGraw-Hill Ryerson Ltd. 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. 1-8

8.  2004 McGraw-Hill Ryerson Ltd. Financial Planning Information Sources Printed materials. Financial institutions. School courses and educational seminars. Computer software, World Wide Web, and on-line information sources. Financial specialists. 1-9

9.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 2 Develop personal financial goals. 1-10

10.  2004 McGraw-Hill Ryerson Ltd. Developing Personal Financial Goals Financial goals are influenced by; Time frame in which you want to achieve your goals. Type of financial need that drives your goals. Timing of goals. Short-term, intermediate and long-term goals. Goals for different financial needs. Financial goals should... Be realistic, be stated in specific, measurable terms, have a time frame, and indicate the type of action to be taken. 1-11

11.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 3 Assess personal and economic factors that influence personal financial planning. 1-12

12.  2004 McGraw-Hill Ryerson Ltd. Influences on Personal Financial Planning Age & Health Income & Employment Situation Marital Status Values Number & Age of Household Members Personal Beliefs Employment Situation Important events/changes in your life Personal factors influence your spending and saving habits. 1-13

13.  2004 McGraw-Hill Ryerson Ltd. Influences on Personal Financial Planning Market Forces. Supply and demand. Production costs and competition. Financial institutions. Influence of the Bank of Canada Global Influences. Level of exports, foreign investors, competition. Economic conditions.... Economic factors: 1-14

14.  2004 McGraw-Hill Ryerson Ltd. Changing Economic Conditions Consumer Prices Inflation is a rise in the general level of prices Mainly caused by increase in demand without increase in supply Harmful to people on fixed incomes Can adversely affect people who lend money Rate of inflation varies 1-15

15.  2004 McGraw-Hill Ryerson Ltd. Changing Economic Conditions Consumer Spending Demand for goods and services influences employment opportunities Reduced spending causes unemployment Interest Rates Represent the cost of money Saving and investing increase the supply of money and interest rates decrease Borrowing increases demand and interest rates rise 1-16

16.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 4 Determine personal and financial opportunity costs associated with personal financial decisions. 1-17

17.  2004 McGraw-Hill Ryerson Ltd. Opportunity Costs and Financial Results Evaluated When Making Decisions Personal Opportunity Costs (time, effort, health) Financial Opportunity Costs (Interest, liquidity, safety ) Financial Acquisitions (automobile, home, college education, investments, insurance, retirement fund) 1-18

18.  2004 McGraw-Hill Ryerson Ltd. Financial Opportunity Costs (discounting) Present Amount Now Future Value (compounding) Value Amount Later 1-19 Time Value of Money Increases in an amount of money as a result of interest earned Every time you spend, save, invest or borrow money you should consider the time value of money as an opportunity cost

19.  2004 McGraw-Hill Ryerson Ltd. How Simple Interest is Computed Simple Interest: interest compounded on the principal, excluding previously earned interest $100 x 6% x 1 (1 year) 100 x.06 x 1 = $6.00 In one year you have $106. 1-20 (P) (r) (T) (I) Amount x Annual x Time = Interest in Savings Interest Rate Period

20.  2004 McGraw-Hill Ryerson Ltd. How Compound Interest is Computed Compound Interest: Interest that is earned on previously earned interest Each time interest is added to the principal, the next interest is computed on the new balance 1-21 1 st year: $100 x 6% x 1(year) = $106.00 2 nd year: ($100 + $6) x 6% x 1(year) = $112.36 3 rd year: ($106 + $6.36) x 6% x 1(year) =$119.10

21.  2004 McGraw-Hill Ryerson Ltd. Future Value of Money Is the amount to which current savings will increase based on certain interest rate and certain time period Calculations involve compounding since interest is earned on previously earned interest Can be computed for a single amount or a series of deposits Start investing now to take advantage of the future value of money. 1-22

22.  2004 McGraw-Hill Ryerson Ltd. Present Value The current value of a future amount based on a certain interest rate and a certain time period. Present value calculations are also called discounting. Allows you to determine how much to deposit now to obtain desired future amount Can be computed for a single amount or a series of deposits 1-23

23.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 5 Identify strategies for achieving personal financial goals for different life situations. 1-24

24.  2004 McGraw-Hill Ryerson Ltd. Components of Financial Planning Obtaining (chapter 1) Planning (chapters 2,3) Saving (chapter 4) Borrowing (chapters 5,6) Spending (chapter 7) Managing risk (chapters 8,9) Investing (chapters 10-13) Retirement and estate planning (chapters 14,15) 1-25

25.  2004 McGraw-Hill Ryerson Ltd. 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. 1-26

26.  2004 McGraw-Hill Ryerson Ltd. Implementing Your Financial Plan Develop good financial habits. Use a spending plan to stay within your income, allowing you to save and invest for the future. Have appropriate insurance protection to prevent financial disasters. Become informed about tax and investment alternatives. Achieving your financial objectives requires.. A willingness to learn. Appropriate information sources. 1-27

27.  2004 McGraw-Hill Ryerson Ltd. Chapter 1 - Appendix Financial Planners and Other Financial Planning Information Sources Current Periodicals Financial Institutions Courses & Seminars Personal Finance Software Spreadsheets Money Management & Financial Planning Programs Tax Software Investment Analysis Programs The Internet 1-28

28.  2004 McGraw-Hill Ryerson Ltd. Chapter 1 - Appendix Financial Planning Specialists Accountants Bankers Credit counselors Certified Financial Planners Insurance agents/brokers Investment Brokers Lawyers Real Estate Agents Tax Preparers 1-29

29.  2004 McGraw-Hill Ryerson Ltd. Chapter 1 - Appendix Financial planners are categorized based on the method of compensation 1. Fee-only planners 2. Fee-and-commission planners 3. Commission-only planners Do you need a financial planner? Your income Your willingness to make independent decisions 1-30