Chapter One


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Chapter One

  1. 1. Kapoor Dlabay Hughes 6e <ul><li>The McGraw-Hill Companies, Inc.,2001. All Rights Reserved. </li></ul>P ERSONAL F INANCE Irwin/McGraw-Hill
  2. 2. C HAPTER 1 1-1 Personal Finance Personal Financial Planning: An Introduction Kapoor Dlabay Hughes 6e Irwin/McGraw-Hill
  3. 3. Financial Planning and Its Benefits <ul><li>Personal financial planning is the process of managing your money to achieve personal economic satisfaction. There are several advantages of personal financial planning. </li></ul><ul><ul><li>Increased effectiveness in obtaining, using, and protecting your financial resources. </li></ul></ul><ul><ul><li>Increased control of your financial affairs. </li></ul></ul><ul><ul><li>Improved personal relationships. </li></ul></ul><ul><ul><li>A sense of freedom from financial worries obtained by looking to the future. </li></ul></ul>1-2
  4. 4. The Financial Planning Process <ul><li>Determine your current financial situation. </li></ul><ul><li>Develop financial goals. </li></ul><ul><li>Identify alternative courses of action. </li></ul><ul><li>Evaluate alternatives. </li></ul><ul><li>Create and implement a financial action plan. </li></ul><ul><li>Reevaluate and revise your plan. </li></ul>1-3
  5. 5. Every Decision Has An Opportunity Cost (trade-off) <ul><li>Opportunity cost is what you give up by making a choice. </li></ul><ul><ul><li>The cost, referred to as the trade-off of a decision, cannot always be measured in dollars. Sometimes the cost is your time. </li></ul></ul><ul><ul><li>Consider lost opportunities that will result from your decisions. </li></ul></ul>1-4
  6. 6. Every Financial Decision Involves Evaluating Types of Risk <ul><li>Inflation risk. </li></ul><ul><ul><li>Rising prices cause lost buying power. </li></ul></ul><ul><li>Interest-rate risk. </li></ul><ul><ul><li>Effect costs of borrowing and rate of return. </li></ul></ul><ul><li>Income risk. </li></ul><ul><ul><li>The loss of a job. </li></ul></ul><ul><li>Personal risk. </li></ul><ul><ul><li>Health, safety, or costs. </li></ul></ul><ul><li>Liquidity risk. </li></ul><ul><ul><li>Higher return may mean less liquidity. </li></ul></ul>1-5
  7. 7. Financial Planning Information Sources <ul><li>Printed materials. </li></ul><ul><li>Financial institutions. </li></ul><ul><li>School courses and educational seminars. </li></ul><ul><li>Computer software, World Wide Web, and on-line information sources. </li></ul><ul><li>Financial specialists. </li></ul>1-6
  8. 8. Developing Personal Financial Goals <ul><li>Types of financial goals include those... </li></ul><ul><ul><li>Influenced by the time frame in which you want to achieve your goals. </li></ul></ul><ul><ul><li>Influenced by the financial need that drives your goals. </li></ul></ul><ul><li>Timing of goals. </li></ul><ul><ul><li>Short-term, intermediate and long-term goals. </li></ul></ul><ul><li>Goals for different financial needs. </li></ul><ul><li>Financial goals should... </li></ul><ul><ul><li>Be realistic, be stated in specific, measurable terms, have a time frame, and indicate the type of action to be taken. </li></ul></ul>1-7
  9. 9. Influences on Personal Financial Planning <ul><li>Adult life cycle stage. </li></ul><ul><li>Marital status, household size, and employment. </li></ul><ul><li>Major events. </li></ul><ul><ul><li>Marriage. </li></ul></ul><ul><ul><li>Birth or adoption of child. </li></ul></ul><ul><ul><li>Divorce. </li></ul></ul><ul><li>Values. </li></ul><ul><ul><li>What are the ideas and principles you consider correct, desirable and important? </li></ul></ul>Life situation and personal values 1-8
  10. 10. Influences on Personal Financial Planning (continued) <ul><li>Market Forces. </li></ul><ul><ul><li>Supply and demand. </li></ul></ul><ul><ul><li>Production costs and competition. </li></ul></ul><ul><li>Financial institutions. </li></ul><ul><ul><li>Influence of the Federal Reserve. </li></ul></ul><ul><li>Global influences. </li></ul><ul><ul><li>Level of exports. </li></ul></ul><ul><li>Economic conditions.... </li></ul>Economic factors: 1-9
  11. 11. Changing Economic Conditions <ul><li>Consumer The value of the dollar prices changes in inflation. </li></ul><ul><li>Consumer The demand for goods and services spending by individuals and households. </li></ul><ul><li>Interest rates The cost of money; cost of credit when you borrow; return on your money when you save or invest. </li></ul>1-10
  12. 12. Changing Economic Conditions (continued) <ul><li>Money Supply The dollars available for spending in our economy. </li></ul><ul><li>Unemployment The number of individuals without employment who are willing and able to work. </li></ul><ul><li>Housing starts Number of new homes being built. </li></ul>1-11
  13. 13. Changing Economic Conditions (continued) <ul><li>GDP: Gross Total value of goods and services Domestic Product produced in a country. </li></ul><ul><li>Trade balance Difference between a country’s exports and imports. </li></ul><ul><li>Market indexes The relative value of stocks as represented by the index, such as the Dow Jones Average or the S&P 500. </li></ul>1-12
  14. 14. 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)
  15. 15. 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
  16. 16. How Simple Interest is Computed <ul><li>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. </li></ul>1-15
  17. 17. Future Value of Money <ul><li>Future value is also call compounding. </li></ul><ul><ul><li>The amount to which a sum you invest now will increase based on a specified interest rate and time period. </li></ul></ul><ul><li>Future value can be computed for a single amount. </li></ul><ul><li>Future value can also be determined for a series of deposits. </li></ul><ul><li>Start investing now to take advantage of the future value of money. </li></ul>1-16
  18. 18. Present Value <ul><li>The current value for a future amount based on a certain interest rate and a certain time period. </li></ul><ul><li>Present value calculations are also called discounting. </li></ul><ul><li>Present value of a single amount. </li></ul><ul><li>Present value of a series of deposits. </li></ul>1-17
  19. 19. Components of Financial Planning <ul><li>Obtaining (chapter 2) </li></ul><ul><li>Planning (chapters 3, 4) </li></ul><ul><li>Saving (chapter 5) </li></ul><ul><li>Borrowing (chapters 6, 7) </li></ul><ul><li>Spending (chapters 8, 9) </li></ul><ul><li>Managing risk (chapters 10-12) </li></ul><ul><li>Investing (chapters 13-17) </li></ul><ul><li>Retirement and estate planning (chapters 18, 19) </li></ul>1-18
  20. 20. Developing a Flexible Financial Plan <ul><li>A financial plan is formalized report that... </li></ul><ul><ul><li>Summarizes your current financial situation. </li></ul></ul><ul><ul><li>Analyzes your financial needs. </li></ul></ul><ul><ul><li>Recommends future financial activities. </li></ul></ul><ul><li>You financial plan can be created by you, done with assistance from a financial planner, or made using a money management software package. </li></ul>1-19
  21. 21. Implementing Your Financial Plan <ul><li>Develop good financial habits. </li></ul><ul><ul><li>Use a well conceived spending plan to help you stay within your income, while allowing you to save and invest for the future. </li></ul></ul><ul><ul><li>Have appropriate insurance protection to prevent financial disasters. </li></ul></ul><ul><ul><li>Become informed about tax and investment alternatives. </li></ul></ul><ul><li>Achieving your financial objectives requires.. </li></ul><ul><ul><li>A willingness to learn. </li></ul></ul><ul><ul><li>Appropriate information sources. </li></ul></ul>1-20