1. Chapter 1 Personal Financial Planning in Action Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. Personal Financial Planning Objectives 1.Identify social and economic influences on personal financial goals and decisions 2.Develop personal financial goals 3.Assess personal and financial opportunity costs associated with financial decisions 4.Implement a plan for these decisions 1-2

3. Financial Planning Process of managing your money to achieve personal economic satisfaction Financial Plan: –Formalized report –Summarizes current financial situation –Analyzes financial needs –Recommends future financial activities 1-3

4. Advantages of Financial Planning Increased effectiveness in obtaining, using, and protecting financial resources Increased control of your financial affairs Improved personal relationships Sense of freedom from financial worries 1-4

5. Life situation and personal values Financial planning in our economy –Domestic economic influences –Global Influences –Inflation –Interest rates Objective 1 Identify Social and Economic Influences on Personal Financial Goals and Decisions 1-5

6. Life Situation and Personal Values Adult life cycle Life Situation Factors: –Marital status, household size, employment –Exhibit 1-1 (page 5) Major events: –Graduation, marriage, divorce –Birth or adoption of child –Career or health changes Values: –The ideas and principles you consider correct, desirable, and important 1-6

7. Financial Planning in Our Economy Domestic Influences Economy’s influence on financial planning –Business, labor & government The Federal Reserve –“.. Sets the nation’s monetary policy to promote the objectives of maximum employment, stable prices and moderate long-term interest rates.” –http://www.federalreserve.gov/http://www.federalreserve.gov/ 1-7

8. F inancial Planning in Our Economy Global Factors U.S economy affected by foreign investors and competition from foreign companies Level of imports/exports affects available supply of dollars Level of foreign investment affects domestic money supply Money supply affects consumer interest rates 1-8

9. Financial Planning in Our Economy Inflation Inflation =  in the general level of prices Reduces buying power of the dollar Most harmful to those on fixed incomes Inflation rates vary “Hidden inflation” CPI = a measure of inflation 1-9

10. Financial Planning in Our Economy Interest Rates Interest Rate = the cost of money –Affected by supply and demand –Risk premium: Length of time funds in use Expected inflation Uncertainty –Major impact on financial planning 1-10

11. 8 Basic Financial Planning Activities ObtainingChapter 1 Planning Chapters 2, 3 SavingChapter 4 BorrowingChapter 5 SpendingChapter 6, 7 Managing RiskChapter 8- 10 InvestingChapter 11-13 Retirement/Estate PlanningChapter 14 1-11

12. Time Frames for Achieving Financial Goals : –Short-term goals........... w/in 1 year –Intermediate goals.........2-5 years –Long-term goals...........> 5 years Financial Needs Goals: –Consumable-product goals... Food, clothing –Durable-product goals...... Car, appliances –Intangible-purchase goals...Education, health Objective 2 Develop Personal Financial Goals 1-12

13. Goal-Setting Guidelines Effective Goals should be: – Realistic – Stated in specific, measurable terms – Based on a time frame – Action-oriented 1-13

14. Objective 3 Assess Personal and Financial Opportunity Costs of Financial Decisions Opportunity cost = what you give up making a choice –The trade-off of a decision –Not always measurable in dollars; may be time –Consider lost opportunities resulting from your decisions 1-14

15. Opportunity Costs and Financial Trade-Offs Personal Opportunity Costs (time, effort, health) Financial Opportunity Costs (Interest, liquidity, safety ) Financial Acquisitions (car, home, college education, investments, insurance, retirement fund) 1-15

16. Time Value of Money Increase in an amount of money as a result of interest earned –Saving today = more money tomorrow –Spending today = lost interest Saving and spending decisions involve considering the trade-offs –Current needs can make spending worthwhile 1-16

17. Calculating interest earned: –Principal = amount of savings –Annual interest rate –Length of time money on deposit (in years) Simple interest: Time Value of Money Interest Calculations Amt in Svgs X Annual Interest Rate Time Period Interest X = 1-17

18. $500 on deposit at 6% annual interest for 6 months: Principal = $500 Interest rate = 6% Time period = ½ (6/12 months) Time Value of Money Interest Calculation Example $500 X 6%1/2$15 X = 1-18

19. Future Value The increased value of money from interest earned Amount to which current savings will increase Total amount available in the future “Compounding” 1-19

20. Future Value Example Future Value Original Amount in Savings Interest Earned = + $100 deposited for 1 year at 6% per year Future Value = $100 + ($100 X.06 X 1) Future Value = $100 + $6 = $106 1-20

21. Future Value Tables Exhibit 1-3A = FV of a Single Amount –Multiply Table Factor by amount deposited –All Future Value factors > 1.0 Example: –$650 invested at 8% for 10 years –Factor = 2.159 –FV = $650 X 2.159 = $1,403.35 1-21

22. Future Value Series of Deposits Exhibit 1-3B “Annuity” = series of equal deposits at equal intervals earning a constant rate Example: –Deposit $50 per year at 7% for 6 years –Exhibit 1-3B factor = 7.153 –Future Value = $50 x 7.153 = $357.65 1-22

23. Present Value The current value of a future amount based on a certain interest rate and time period The current value of an amount desired in the future How much to deposit now to obtain a desired total in the future “Discounting” 1-23

24. Present Value Tables Exhibit 1-3C = PV of a single amount –Multiply Table Factor by amount deposited –All Future Value factors < 1.0 Example: –You want $1,000 five years from now –You can earn 5% on your money –Present Value = $1,000 X 0.784 = $784 1-24

25. Present Value of a Series of Deposits Exhibit 1-3D Determine how much you need to deposit now in order to withdraw a specific amount for a desired number of years Example: –You want to withdraw $400/year for 9 years –Your money is earning 8% per year –Deposit = $400 X 6.247 = $2,498.80 1-25

26. The 6-Step Financial Planning Process 1-26

27. 1.Determine current financial situation 2.Develop financial goals 3.Identify alternative courses of action Continue same course of action Expand current situation Change current situation Take a new course of action Objective 4 Implement a Plan for Making Personal Financial and Career Decisions 1-27

28. 4.Evaluate alternatives Consequences of choices Evaluate risks Financial Planning information sources 5.Create and implement financial action plan 6.Review and revise plan Objective 4 Implement a Plan for Making Personal Financial and Career Decisions 1-28

29. Financial Planning in Action 1-29

30. Career Choice and Financial Planning 1. The life work one selects = key to financial well being and personal satisfaction 2. Career choices have risks and opportunity costs 3. Career choices require periodic re- evaluation of trade-offs related to personal, social and economic factors 4. Changing personal and social factors require continuous assessment of your work situation 1-30