1. Chapter 1 Personal Financial Planning: An Introduction McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Financial Planning and Its Benefits Personal financial planning - Process of managing money to achieve personal economic satisfaction. Advantages of personal financial planning: 1) Increased effectiveness in obtaining, using, and protecting your financial resources. 2) Increased control of your financial affairs. 3) Improved personal relationships. 4) A sense of freedom from financial worries obtained by looking to the future. 1-2

3. 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. 1-3

4. Consequences of Choices: Opportunity Cost Opportunity cost - What you give up when you make a choice The cost, or trade-off of a decision, cannot always be measured in dollars. Sometimes the cost is your time.  What opportunity costs do you have from being a college student? 1-4

5. 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

6. Financial Planning Information Sources Printed materials. Financial institutions. School courses and educational seminars. The internet, online sources, computer software. Financial specialists.  Financial planners, bankers, accountants, insurance agents, lawyers and tax preparers. 1-6

7. 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  Consumer product goals, etc. 1-7

8. Goal-Setting Guidelines Goals should be realistic Goals should be stated in specific terms Goals should have a time frame Goals should indicate the action to be taken Discuss some of your goals 1-8

9. Influences on Personal Financial Planning Adult life cycle stage. Marital status, household size, and employment. Major events.  Graduation, marriage, children, retirement, etc. Values.  What values are important to you? Global influences Economic conditions Life situation and personal values 1-9

10. Changing Economic Conditions Consumer The value of the dollar prices changes in inflation. Consumer The demand for goods and spending services 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

11. Changing Economic Conditions (continued) Money Supply The dollars available for spending in our economy. UnemploymentThe number of individuals without employment who are willing and able to work. Housing startsNumber of new homes being built. 1-11

12. Changing Economic Conditions (continued) GDP: Gross Total value of goods and Domestic Product services 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

13. Opportunity Costs and Financial Results Evaluated When Making Decisions Personal Opportunity Costs (time, effort, health) Financial Opportunity Costs (Interest, liquidity, safety ) Financial Acquisitions (automobile, home, college education, investments, insurance, retirement fund) 1-13

14. 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. 1-14

15. 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. 1-15

16. 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. 1-16

17. 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. 1-17

18. 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

19. Developing a Flexible Financial Plan A financial plan is a formalized report that...  Summarizes your current financial situation.  Analyzes your financial needs.  Recommends future financial activities. Your financial plan can be created by you, with assistance from a financial planner, or made using a money management software package. 1-19

20. 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. 1-20

21. Implementing Your Financial Plan (continued) 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. 1-21

22. Lucky You Suppose you just won a $100 million lottery and you are given the choice of taking a lump sum or payments over 20 years. Which would you do? Why? 1-22