Influences on Personal Financial PlanningDr. Steve Hays

Personal FinanceBishop Kearney High School

Spring 2013

Types of Influences

• Many factors influence daily financial decisions– Age– Household size– Interest rates– Inflation

• Three primary elements– Life situation– Personal Values– Economic factors

Life Situation and Personal Values• People in their 20s spend

money differently than people in their 50s

• Life situation and/or lifestyle created by a combination of factors

• As society changes, financial needs evolve– People marry later in life– Two income households– Two million women care for

dependent children and their own parents

– 80% of Americans will live past age 65

The Adult Life Cycle

Age

18-24

45-5425-34

55-6435-44

65+

Employment Situation

Full time student

Full time employment

or volunteer work

Not employed

Part-time employment or

volunteer work

Marital Status

Single

Separated/Divorced

Married

Widowed

Number and Age of Household Members

No other household members

College students

Preschool children

Dependant adults

Elementary/secondary age

Non-dependant

adults

The stages in the family situation and financial needs of an

adult

Defined by Values

• What are values?– Ideas and principles you

consider correct, desirable, important

• Have direct influence on:– Spending decisions– College/career choices– Lifestyle choices

Economic Factors

• What is economics?– The study of how wealth is created and

distributed

• Includes various institutions– Business – Labor– Government• Working together to satisfy our needs and wants

Economic Conditions

• Personal financial decisions influenced by:– Consumer prices– Consumer spending– Interest rates

Consumer Prices

• Inflation– Rise in general level of prices– Buying power of dollar decreases– Increase in demand without comparable increase in

supply• Most harmful to those living on fixed incomes• Also adversely affects money lenders– Interest rates rise during high inflation

• 50s-60s: 1-3%• 70s-early 80s: 10-12%

– At 12% inflation prices double in about 6 years

Consumer Spending

• Total demand for goods and services influences – employment

opportunities – potential for income

• Increased spending creates more jobs, higher wages

• Also increases interest rates and prices

Interest Rates

• Represents the cost of money• When consumer savings and investing

increase the supply of money, interest rates decrease

• As demand for money increases, interest rates rise

• Interest rates affect financial planning– Earnings reflect current interest rates

Opportunity Cost and Time Value of Money

Opportunity Costs

Financial Acquisition

s

• You always give up something when you make choices

• Constantly making choices among financial decisions

• Must consider the time value of money– The increase in an

amount of money as a result of interest earned

Opportunity Cost In Financial Decisions

• Setting aside funds in a savings plan with little or no risk has the opportunity cost of potentially higher returns from a higher risk investment

• Having extra money withheld from your paycheck in order to receive a tax refund has the opportunity cost of the lost interest the money could earn in a savings account

• Making adequate deposits in a retirement account an help you avoid the opportunity cost of having inadequate funds later in life.

Interest Calculations

Amount in

Savings

Annua

l Interest Rate

Time

Period

Interest

Example

• $500 on deposit• 6% interest• 6 months• What is the interest earned?

$500 x .06 x 6/12 = ?

Future Value of a Single Amount

• What is Future Value (FV)?– The amount to which current savings will increase

based on a certain interest rate and a certain time period

– FV = Original Amount in Savings + Amount of Interest Earned (Original Amount x Interest Rate x Time Period)

– Example: $650 @ 8% for 1 year = FV ??

Present Value of a Single Amount

• Determine the current value of a desired amount for the future

• Based on certain interest rate and certain time period

• Present value computations are also known as discounting– Allows you to determine how much to deposit

now to obtain a desired total in the future

Achieving Financial Goals

• Components of Personal Financial Planning– Obtaining– Saving– Borrowing– Spending– Managing Risks– Investing– Retirement and Estate Planing

Developing a Financial Plan

• Flexibility is important!• What is a financial plan?– A formalized report that summarizes your current

financial situation, analyzes your needs, and recommends future financial activities

Homework – Part 1

• Computing the Time Value of Money• Using the time value of money tables, calculate

the following:1. The FV of $450 6 years from now at 7%2. The FV of $800 saved each year for 10 years at 8%3. The amount a person would have to deposit today

(PV) at 6% interest rate to have $1000 seven years from now

4. The amount a person would have to deposit today to have $2500 ten years from now while earning 8% interest

Homework – Part 2

• Watch the Super Bowl and evaluate/rate all of the commercials on scale of 1-5 with 5 being the best, 1 being the worst

• Be prepared to discuss how each of the commercials influences buying decisions and whether or not the commercial would influence your future purchasing decisions

• Research to see how much money was spent on all the Super Bowl commercials this year. Was it money well spent? Why or why not?