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Chapter 1

Chapter 1






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    Chapter 1 Chapter 1 Presentation Transcript

    • 33 Kapoor Dlabay Hughes 7e
      • The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
      P ERSONAL F INANCE Irwin/McGraw-Hill
    • C HAPTER 1 1-1 Personal Finance Personal Financial Planning: An Introduction Kapoor Dlabay Hughes 7e Irwin/McGraw-Hill
    • Financial Planning and Its Benefits
      • Personal financial planning is the process of managing your money to achieve personal economic satisfaction. There are several 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 obtained by looking to the future.
    • The Financial Planning Process
      • Determine your current financial situation.
      • Develop your financial goals.
      • Identify alternative courses of action.
      • Evaluate your alternatives.
      • Create and implement your financial action plan.
      • Review and revise your plan.
    • Consequences of Choices: Opportunity Cost
      • 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.
    • 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.
    • 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.
        • Financial planners, bankers, accountants, insurance agents, lawyers and tax preparers.
    • Developing Personal Financial Goals
      • Types of financial goals include those...
        • Influenced by the time frame in which you want to achieve your goals.
        • Influenced by the financial need that drives your goals.
      • Timing of goals.
        • Short-term, intermediate and long-term goals.
      • Goals for different financial needs.
      • Goal setting guidelines suggests goals should...
        • Be realistic, be stated in specific, measurable terms, have a time frame, and indicate the type of action to be taken.
    • Influences on Personal Financial Planning
      • Adult life cycle stage.
      • Marital status, household size, and employment.
      • Major events.
        • Graduation, marriage, divorce.
        • Birth or adoption of child.
        • Career or health changes.
      • Values.
        • What are the ideas and principles you consider correct, desirable and important?
      Life situation and personal values 1-8
    • Influences on Personal Financial Planning
      • Global influences.
        • The global marketplace influences financial activities.
          • Foreign investors.
          • Competition from foreign companies.
      • Economic conditions....
      Economic factors: 1-9 (continued)
    • Changing Economic Conditions
      • Consumer The value of the dollar prices changes in inflation.
      • Consumer The demand for goods and services spending by individuals and households.
      • Interest rates The cost of money; cost of credit when you borrow; return on your money when you save or invest.
    • Changing Economic Conditions (continued)
      • Money Supply The dollars available for spending in our economy.
      • Unemployment The number of individuals without employment who are willing and able to work.
      • Housing starts Number of new homes being built.
    • Changing Economic Conditions (continued)
      • GDP: Gross Total value of goods and services Domestic Product produced in a country.
      • Trade balance Difference between a country’s exports and imports.
      • Market indexes The relative value of stocks as represented by the index, such as the Dow Jones Average or the S&P 500.
    • Opportunity Costs and Financial Results Evaluated When Making Decisions Personal Opportunity Costs (time, effort, health) Financial Opportunity Costs (Interest, liquidity, safety ) 1-13 Financial Acquisitions (automobile, home, college education, investments, insurance, retirement fund)
    • Time Value of Money
      • Increases in an amount of money as a result of interest earned.
        • Saving today means more money tomorrow. Spending means lost interest.
      • Saving and spending decisions involve considering the trade-offs. Current needs can make spending worthwhile.
    • How Simple Interest is Computed
      • Simple Interest. Amount in savings x annual interest rate x time period equals the interest. $100 x 5% x 1 (1 year) 100 x .05 x 1 = $5.00 In one year you have $100 in principle plus $5.00 in interest for a total of $105 at the end of the year.
    • Future Value
      • Future value is the amount to which current savings will increase based on a certain interest rate and a certain time period.
      • Future value is also call compounding - earning interest on previously earned interest.
      • Future value can be computed for a single amount or for a series of deposits.
    • Present Value
      • The current value for a future amount based on a certain interest rate and a certain time period.
      • Present value calculations are also called discounting.
      • The present value of the amount you want in the future will always be less than the future value. (See Exhibit 1-8C)
      • Present value can be computed for a single amount or for a series of deposits.
    • Components of Financial Planning
      • Obtaining (chapter 2)
      • Planning (chapters 3, 4)
      • Saving (chapter 5)
      • Borrowing (chapters 6, 7)
      • Spending (chapters 8, 9)
      • Managing risk (chapters 10-12)
      • Investing (chapters 13-17)
      • Retirement and estate planning (chapters 18, 19)
    • 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.
    • Implementing Your Financial Plan
      • Develop good financial habits.
        • Use a well conceived spending plan to help you stay within your income, while allowing you to save and invest for the future.
        • Have appropriate insurance protection to prevent financial disasters.
        • Become informed about tax and investment alternatives.
        • Study personal finance.
    • Implementing Your Financial Plan
      • Achieving your financial objectives requires two things.
        • A willingness to learn.
        • Appropriate information sources (see Appendix A).
          • Current periodicals.
          • Financial institutions.
          • Courses and seminars.
          • Personal financial software.
          • The World Wide Web.
          • Financial specialists.
      (continued) 1-22