Chapter One
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  • 1. Kapoor Dlabay Hughes 6e
    • The McGraw-Hill Companies, Inc.,2001. All Rights Reserved.
    P ERSONAL F INANCE Irwin/McGraw-Hill
  • 2. C HAPTER 1 1-1 Personal Finance Personal Financial Planning: An Introduction Kapoor Dlabay Hughes 6e Irwin/McGraw-Hill
  • 3. 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.
    1-2
  • 4. The Financial Planning Process
    • Determine your current financial situation.
    • Develop financial goals.
    • Identify alternative courses of action.
    • Evaluate alternatives.
    • Create and implement a financial action plan.
    • Reevaluate and revise your plan.
    1-3
  • 5. 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.
    1-4
  • 6. 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.
    1-5
  • 7. 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.
    1-6
  • 8. 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.
    • Financial goals should...
      • Be realistic, be stated in specific, measurable terms, have a time frame, and indicate the type of action to be taken.
    1-7
  • 9. Influences on Personal Financial Planning
    • Adult life cycle stage.
    • Marital status, household size, and employment.
    • Major events.
      • Marriage.
      • Birth or adoption of child.
      • Divorce.
    • Values.
      • What are the ideas and principles you consider correct, desirable and important?
    Life situation and personal values 1-8
  • 10. Influences on Personal Financial Planning (continued)
    • Market Forces.
      • Supply and demand.
      • Production costs and competition.
    • Financial institutions.
      • Influence of the Federal Reserve.
    • Global influences.
      • Level of exports.
    • Economic conditions....
    Economic factors: 1-9
  • 11. 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.
    1-10
  • 12. 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.
    1-11
  • 13. 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.
    1-12
  • 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. 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. 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.
    1-15
  • 17. 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.
    1-16
  • 18. 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.
    • Present value of a single amount.
    • Present value of a series of deposits.
    1-17
  • 19. 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)
    1-18
  • 20. 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.
    1-19
  • 21. 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..
      • A willingness to learn.
      • Appropriate information sources.
    1-20