Kapoor Dlabay Hughes 6e
P ERSONAL F INANCE Irwin/McGraw-Hill
- The McGraw-Hill Companies, Inc.,2001. All Rights Reserved.
C HAPTER 1 1-1 Personal Finance Personal Financial Planning: An Introduction Kapoor Dlabay Hughes 6e 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.
- Identify alternative courses of action.
- Create and implement a financial action plan.
- Reevaluate and revise your plan.
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.
Every Financial Decision Involves Evaluating Types of Risk
- Rising prices cause lost buying power.
- Effect costs of borrowing and rate of return.
- Health, safety, or costs.
- Higher return may mean less liquidity.
Financial Planning Information Sources
- School courses and educational seminars.
- Computer software, World Wide Web, and on-line information sources.
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.
- 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.
Influences on Personal Financial Planning
- Marital status, household size, and employment.
- Birth or adoption of child.
Life situation and personal values 1-8
- What are the ideas and principles you consider correct, desirable and important?
Influences on Personal Financial Planning (continued)
- Production costs and competition.
Economic factors: 1-9
- Influence of the Federal Reserve.
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 (discounting) 1-14 Increases in an amount of money as a result of interest earned Present Amount Now Future Value (compounding) Value Amount Later
How Simple Interest is Computed
- Simple Interest. Amount in savings x annual interest rate x time period equals the interest. $100 x 6% x 1 (1 year) 100 x .06 x 1 = $6.00 In one year you have $106.
Future Value of Money
- Future value is also call compounding.
- The amount to which a sum you invest now will increase based on a specified interest rate and time period.
- Future value can be computed for a single amount.
- Future value can also be determined for a series of deposits.
- Start investing now to take advantage of the future value of money.
- 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.
- Present value of a single amount.
- Present value of a series of deposits.
Components of Financial Planning
- Borrowing (chapters 6, 7)
- 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.
- Achieving your financial objectives requires..
- Appropriate information sources.