1. Chapter 1 Personal Financial Planning in Action Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. 1-2 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 situations associated with personal financial decisions LO1.4 Implement a plan for making personal financial and career decisions. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3. 1-3 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

4. 1-4 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5. 1-5 Life situation and personal values Financial planning in our economy ◦ Domestic economic influences ◦ Global Influences ◦ Inflation ◦ Interest rates Learning Objective LO1.1 Identify Social and Economic Influences on Personal Financial Goals and Decisions Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

6. 1-6 Life Situation and Personal Values Adult life cycle Life Situation Factors: ◦ Marital status, household size, employment  Exhibit 1-1 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

7. 1-7 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.”  http://www.federalreserve.gov/ http://www.federalreserve.gov/ Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

8. 1-8 Financial Planning in Our Economy Domestic Influences Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

9. 1-9 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10. 1-10 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11. 1-11 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

12. 1-12 8 Basic Financial Planning Activities ObtainingChapter 1 Planning Chapters 2,3 SavingChapter 4 BorrowingChapter 5 SpendingChapters 6,7 Managing RiskChapters 8- 10 InvestingChapters 11-13 Retirement/Estate PlanningChapter 14 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

13. 1-13 Time Frames for Achieving Financial Goals : ◦ Short-term goals........... within 1 year ◦ Intermediate goals.........1-5 years ◦ Long-term goals...........> 5 years Financial Needs Goals: ◦ Consumable-product goals... Food, clothing ◦ Durable-product goals...... Car, appliances ◦ Intangible-purchase goals...Education, health Learning Objective LO1.2 Develop Personal Financial Goals Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

14. 1-14 Goal-Setting Guidelines The “SMART” Approach Effective Goals should be: S = Specific M = Measurable A = Action-oriented R = Realistic T = Time-based Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

15. 1-15 Learning Objective LO1.3 Using Time Value of Money to Evaluate Personal 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

16. 1-16 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

17. 1-17 Calculating interest earned: ◦ Principal = amount of savings ◦ Annual interest rate ◦ Length of time money on deposit (in years) Simple interest: Time Value of Money Interest Calculations Amt in Svgs X Annual Interest Rate Time Period Interest X = Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

18. 1-18 $500 on deposit at 6% annual interest for 6 months: Principal = $500 Interest rate = 6% Time period = ½ (6/12 months) Time Value of Money Interest Calculation Example $500 X 6%1/2$15 X = Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

19. 1-19 Future Value = Amount that will be available at a later date Present Value = Current value of an amount desired in the future Time Value of Money Types of TVM Calculations Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

20. 1-20 1. Formula calculation 2. Time value of money tables 3. Financial calculator 4. Spreadsheet software 5. Websites and apps Time Value of Money Calculation Methods Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

21. 1-21 Future Value The increased value of money from interest earned Amount to which current savings will increase Total amount available in the future “Compounding” is earning interest on your interest. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

22. 1-22 Future Value Formula Method Future Value Original Amount in Savings Interest Earned = + $100 deposited for 1 year at 6% per year Future Value = $100 + ($100 X.06 X 1) Future Value = $100 + $6 = $106 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

23. 1-23 Future Value Formula method This could be repeated for several time periods, but there’s an easier way: FV = PV(1+i) n In the previous example: FV = 100(1.06) 1 =$106 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

24. 1-24 Future Value Formula method If you left the money in for two years: FV = 100(1.06) 2 =$112.36 Notice that $6 interest for two years would give you $12. The extra $0.36 is the result of compounding. Another example: ◦ $650 invested at 8% for 10 years FV = $650(1.08) 10 =$1,403.30 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

25. 1-25 Future Value Table Method 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 × 2.159 = $1,403.35 ◦ Because of rounding, the answer is slightly off. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

26. 1-26 Future Value Financial Calculator Method Every financial calculator has five buttons of interest for time value of money:  Means the number of time periods  Means the interest rate per period  Means present value  Means payment amount per period  Means future value I/YR PV PMT FV NN Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

27. 1-27 Future Value Financial Calculator Method In the example above, $650 at 8% for 10 years:  10  8 (not 0.08!)  -650  0  1,403.30 I/YR PV PMT FV NN Enter all the values you know first (these are in red here), then press the key matching the value you want to know. In the TI BAII Plus, you must press “CPT” before solving. Notice you must enter -650. Otherwise, the answer will be negative. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

28. 1-28 Future Value Spreadsheet Method In a spreadsheet such as Microsoft Excel, there are financial functions. For FV, the function is: =FV(rate,periods,payment,pv,type) In the above example, it would be: =FV(0.08,10,0,-650,0) When you press enter, the answer will be in the cell. ($1,403.30) We will introduce “type” later. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

29. 1-29 Time Value of Money TVM Websites www.moneychimp.com/calculator www.dinkytown.net Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

30. 1-30 Time Value of Money Calculation Methods Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

31. 1-31 Future Value Series of Deposits “Annuity” = series of equal deposits at equal intervals earning a constant rate Examples are retirement savings, or any other savings goal in which you deposit an equal amount at equal intervals. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

32. 1-32 Future Value of a Series of Deposits Formula method Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

33. 1-33 Future Value of a Series of Deposits Table Method Appendix Exhibit 1- B = Future Value of an Annuity ◦ Multiply Table Factor by Annuity amount ◦ All future value of an annuity factors > 0. Example: ◦ Deposit $50 per year at 7% for 6 years ◦ Factor = 7.153 ◦ FV = $50 × 7.153 = $357.65 ◦ Because of rounding, the answer is slightly off. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

34. 1-34 Future Value of a Series of Deposits Financial Calculator Method In the example above, $50 at 7% for 6 years:  6  7 (not 0.07!)  0  -$50  357.66 I/YR PV PMT FV NN Enter all the values you know first (these are in red here), then press the key matching the value you want to know. In the TI BAII Plus, you must press “CPT” before solving. Notice you must enter -50. Otherwise, the answer will be negative. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

35. 1-35 Future Value of a Series of Deposits Spreadsheet Method For FV, the spreadsheet function is: =FV(rate,periods,payment,pv,type) In the above example, it would be: =FV(0.07,6,-50, 0,0) When you press enter, the answer will be in the cell. ($357.66) For annuities, you can change the type from 0 to 1 if the payments occur at the beginning of the year instead of the end. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

36. 1-36 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” Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

37. 1-37 Present Value Formula method Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

38. 1-38 Present Value Table Method Appendix Exhibit 1-C = PV of a single amount ◦ Multiply Table Factor by amount deposited ◦ All present value of factors < 0. Example: ◦ You want $1,000 five years from now ◦ You can earn 5% on your money ◦ Present Value = $1,000 × 0.784 = $784 ◦ Because of rounding, the answer is slightly off. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

39. 1-39 Present Value Financial Calculator Method In the example above, $1,000 at 5% in 5 years:  5  5 (not 0.05!)  783.53  0  -1000 I/YR PV PMT FV NN Enter all the values you know first (these are in red here), then press the key matching the value you want to know. In the TI BAII Plus, you must press “CPT” before solving. Notice you must enter -1000. Otherwise, the answer will be negative. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

40. 1-40 Present Value Spreadsheet Method For PV, the function is: =PV(rate,periods,payment,fv,type) In the above example, it would be: =PV(0.05,5,0,-1000,0) When you press enter, the answer will be in the cell. ($783.53) Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

41. 1-41 Present Value of a Series of Deposits Formula method Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

42. 1-42 Present Value of a Series of Deposits Table Method Appendix Exhibit 1-D PV of an annuity ◦ Multiply Table Factor by amount deposited ◦ All present value of factors < 0. Example: ◦ You want to withdraw $400/year for 9 years ◦ Your money is earning 8% per year ◦ Deposit = $400 × 6.247 = $2,498.80 ◦ Because of rounding, the answer is slightly off. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

43. 1-43 Present Value of a Series of Deposits Financial Calculator Method In the example above, $400 at 8% for 9 years:  9  8 (not 0.08!)  $2,498.76  -400  0 I/YR PV PMT FV NN Enter all the values you know first (these are in red here), then press the key matching the value you want to know. In the TI BAII Plus, you must press “CPT” before solving. Notice you must enter -400. Otherwise, the answer will be negative. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

44. 1-44 Present Value of a Series of Deposits Spreadsheet Method For PV, the function is: =PV(rate,periods,payment,fv,type) In the above example, it would be: =PV(0.08,9,-400,0,0) When you press enter, the answer will be in the cell. ($2,498.76) Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

45. 1-45 The 6-Step Financial Planning Process Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

46. 1-46 1. Determine current financial situation 2. Develop financial goals 3. Identify alternative courses of action Continue same course of action Expand current situation Change current situation Take a new course of action Learning Objective LO1.4 Implement a Plan for Making Personal Financial and Career Decisions Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

47. 1-47 4. Evaluate alternatives Consequences of choices Evaluate risks Financial Planning information sources 5. Create and implement financial action plan 6. Review and revise plan Learning Objective LO1.4 Implement a Plan for Making Personal Financial and Career Decisions Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

48. 1-48 Financial Planning in Action Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

49. 1-49 Career Choice and Financial Planning 1. The life work one selects = key to financial well being and personal satisfaction 2. Career choices have risks and opportunity costs 3. Career choices require periodic re- evaluation of trade-offs related to personal, social and economic factors 4. Changing personal and social factors require continuous assessment of your work situation Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

50. 1-50 Chapter Summary Learning Objective LO1.1 Financial decisions are affected by: ◦ Life situation ◦ Personal values ◦ Economic factors Major elements of Financial Planning: 1. Obtaining5. Spending 2. Planning6. Managing Risk 3. Saving7. Investing 4. Borrowing8. Retirement & Estate planning Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

51. 1-51 Chapter Summary Learning Objective LO1.2 Financial Goals should be: S = Specific M = Measurable A = Action-oriented R = Realistic T = Time-based Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

52. 1-52 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

53. 1-53 Chapter Summary Learning Objective LO1.4 Personal financial planning involves: 1. Determine financial situation 2. Develop financial goals 3. Identify alternative courses of action 4. Evaluate alternatives 5. Create and implement a financial action plan 6. Review and revise the financial plan Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.