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Chapter 1 - Objectives (1.1)

When you have completed this section, you will be able to:

Define personal financial planning

Name the six steps of financial planning

Identify factors that affect personal financial decisions

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Personal Financial Planning

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Personal Financial Planning

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Arranging to spend, save, and invest money to live comfortably, have financial security, and achieve goals.

Everyone has different financial goals.Goals – things you want to accomplish

Planning your personal finances is important because it will help you reach your goals

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Step 1: Determining Your Current Financial SituationFirst…make a list of items that relate to your

finances:SavingsMonthly income (job earnings, allowance, gifts, &

interest on bank accounts)Monthly expenses (money you spend)Debts (money you owe to others)

Keep a careful record of everything you buy for one month to help you determine your financial situation.

List three of your financial goals.

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Step 2: Develop Your Financial GoalsThink about your attitude toward money and ask

yourself some questions:

1. Is it more important to spend your money now or to save for the future?

2. Would you rather get a job right after high school or continue your education?

3. Do your personal values affect your financial decisions?

Values- beliefs principles you consider important, correct, and desirable. Different people value different things.

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Step 3: Identify Your OptionsIt’s impossible to make a good decision

unless you know all your options.

Generally, you have several possible courses of action.

Be aware in each case that the costs of your decision may outweigh the benefits.

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Step 4: Evaluate Your AlternativesLook at your present financial situation and your

personal values

Consider the consequences & risks of each decision you make

Consequences of choices: when you choose one option, you eliminate other possibilities. You cannot choose all options.

Opportunity cost- what is given up when making one choice instead of another.

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Understanding risks Types of financial risks:

1. Inflation risk Prices may increase if you wait to buy something

2. Interest rate risk When rates go up or down, it affects the cost of borrowing

3. Income risk Job loss, health problems, family problems, an accident, or

changes in your field of work4. Personal risk

Ex. Driving in hazardous conditions vs. more expensive cost of flying

5. Liquidity risk Ability to easily convert financial assets into cash w/o loss in

value…some assets are difficult to convert quickly.

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Step 5: Create & Use Your Financial Plan of Action List of ways to achieve your financial goals.

Examples:

Cut spending

Get a part-time job or work more hours at your present job

Use extra money to pay off debts, save money, purchase stocks, or make other investments

Step 6: Review & Revise Your Plan – as you get older, your finances & needs will change…as a result, your financial plan will change too. Evaluate & revise as needed.

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Develop Personal Financial GoalsTypes of financial goals

Short-term (one-year or less)

Intermediate (2-5 years) ex. Saving for a down payment on a house

Long-term (more than 5 years) ex. Planning for retirement

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Goals for Different NeedsConsumable goods

Durable goods

Intangible goods (health, education)…often overlooked but can be expensive

Guidelines for setting goalsRealistic, specific, clear time frame

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Influences on Personal Financial PlanningMany factors will influence your day-to-day

decisions about finances. The three most important factors are:Life situationsPersonal valuesEconomic factors

EconomyMarket forces

Supply & demandFinancial institutions

Federal Reserve SystemGlobal influencesEconomic conditions

Consumer prices (inflation) Consumer spending Interest rates (price we pay for the use of another’s

money)

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Objectives (1.2)

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When you have completed this section, you will be able to:

Explain opportunity costs associated with personal financial decisions.

Identify eight strategies for achieving financial goals at different stages of life.

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Financial opportunity costsTime value of money

Increase of an amount of money due to interest or dividends

Calculating interest: need principal, annual interest rate, and length of time your money will be in an account

Principal – original amount of money on deposit (amount you borrow)

Future value of a single depositFuture value – amount your original deposit

will be worth in the future based on earning a specific interest rate over a specific period of time.

When computing future value, your balance compounds (your money increases faster over time).

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Present value of a single depositPresent value – amount of money you would need

to deposit now in order to have a desired amount in the future.

Achieving your financial goalsObtain money by working, investing, or owning

propertyPlanSpend wiselySaveBorrow wisely – only when necessaryInvestManage risk – purchase insurancePlan for retirement