Chapter 3 Personal Financial Planning

Intro If I gave you $ what would you do with it? If I gave you $ what would you do with it? What would you consider to be a financial goal that you have right now? What would you consider to be a financial goal that you have right now?

Making Personal Financial Decisions Personal Financial Planning: Spending, saving, and investing your money so you can have the kind of life you want as well as financial security Personal Financial Planning: Spending, saving, and investing your money so you can have the kind of life you want as well as financial security Everyone has different financial goals Everyone has different financial goals Goals: Things you want to accomplish Goals: Things you want to accomplish

Continued… What financial decisions are you making now, and how might they change in 5-10 years? What financial decisions are you making now, and how might they change in 5-10 years? Benefits to financial planning: Benefits to financial planning: –You have more money; know how to use money to achieve your goals and are financially secure –Your have less chance of going into debt you can’t handle –You can help your partner and support children

Financial Planning Process 6 Step Process 6 Step Process 1) Determine your current financial situation 1) Determine your current financial situation 2)Develop your financial goals 2)Develop your financial goals 3) Identify alternative courses of action 3) Identify alternative courses of action 4) Evaluate your alternatives 4) Evaluate your alternatives 5)Create and use your financial plan of action 5)Create and use your financial plan of action 6) Review and revise your plan 6) Review and revise your plan

Step 1) Determine your current financial situation Make list of your savings, monthly income, monthly expenses, and debts Make list of your savings, monthly income, monthly expenses, and debts Estimate: Make an approximate calculation of your expenses. Estimate: Make an approximate calculation of your expenses. Good way to track: Keep record of everything you spend your money on for a month (Journal or Calendar) Good way to track: Keep record of everything you spend your money on for a month (Journal or Calendar) What do you feel your number one expenditure would be? What do you feel your number one expenditure would be?

Step 2) Develop your financial goals To develop a clear financial goal, need to think of your attitude toward money. To develop a clear financial goal, need to think of your attitude toward money. Spend now or save for future? Spend now or save for future? Go to college or get a job? Go to college or get a job? Values: The beliefs and principles you consider important, correct, and desirable Values: The beliefs and principles you consider important, correct, and desirable What personal values affect your personal financial planning? What personal values affect your personal financial planning?

Cont… Also must distinguish between needs and wants Also must distinguish between needs and wants Need: Something you must have to survive Need: Something you must have to survive Want: Something you desire or would like to have or do Want: Something you desire or would like to have or do Make your goals as specific as possible Make your goals as specific as possible Ex: $50 per check or 15% per check Ex: $50 per check or 15% per check Pg. 64 Careers that Count Pg. 64 Careers that Count

Step 3) Identify alternative courses of action Impossible to make good decision unless you know all your options Impossible to make good decision unless you know all your options Ex: Now saving $50 a month; you could: Ex: Now saving $50 a month; you could: –Expand the current situation –Change the current situation (stocks instead) –Start something new (pay off debts with the $50) –Keep things the same Costs of decision may outweigh the benefits Costs of decision may outweigh the benefits

Step 4) Evaluate your alternatives Ask yourself: Ask yourself: –Where are you in your life? –What is your present financial situation? –What are your personal values? Sources of financial information: Internet, financial institutions (banks/investment companies), Media sources (newspapers, magazines, TV, Radio), Financial specialist (financial planner, lawyers and tax preparers) Sources of financial information: Internet, financial institutions (banks/investment companies), Media sources (newspapers, magazines, TV, Radio), Financial specialist (financial planner, lawyers and tax preparers) See Common Cents pg. 65 See Common Cents pg. 65

Consequences of Choices When you choose one option, it eliminates other possibilities (college vs. work) When you choose one option, it eliminates other possibilities (college vs. work) Opportunity Cost (trade off): What you give up when you make one choice instead of another Opportunity Cost (trade off): What you give up when you make one choice instead of another

Understanding Risks Risk Types: Risk Types: –Inflation Risk: Price may increase if you wait (vacation) –Interest rate risk: Interest rates change daily –Income Risk: Could lose your job at anytime –Personal Risk: Ex: Driving over flying –Liquidity Risk: Liquidity- The ability to easily convert your financial resources into cash without a loss in value

Step 5) Create and use your financial plan of action List of ways to achieve your financial goals List of ways to achieve your financial goals

Step 6) Review and Revise your plan May need to change as you get older May need to change as you get older Pg. 68 Pg. 68

Developing Personal Financial Goals Why do you feel so many people have money problems? Why do you feel so many people have money problems? Avoid by planning with clear financial goals in mind Avoid by planning with clear financial goals in mind

Types of Financial Goals Two factors influence your planning Two factors influence your planning 1)Time frame in which you want to achieve your goal 2)The type of financial need that inspires your goals

Timing of Goals Can be defined by the time it takes to achieve them: Can be defined by the time it takes to achieve them: –Short-term: Accomplish in 1 yr or less –Intermediate: 2-5 to reach –Long-Term: Take more then 5 years to reach

Goals for different financial needs Service: Task that a person or a machine performs for you Service: Task that a person or a machine performs for you Good: Physical object that is produced and can be weighed or measured Good: Physical object that is produced and can be weighed or measured Goals can consist of: Goals can consist of: –Consumable goods: Purchased often and used quickly –Durable goods: Expensive items that you don’t purchase often –Intangible Items: Can’t be touched and are often important to your well-being and happiness

Guidelines for Setting Goals Must know what goals are to make good financial decision Must know what goals are to make good financial decision Will change with age Will change with age See pg. 70 See pg. 70 When choosing your goals follow these guidelines: When choosing your goals follow these guidelines: –Be realistic, specific, clear time frame, help decide what type of action to take

Influences on Personal Financial Planning Main Influences: Life Situations, Personal Values, Economic Factors.

Economic Factors Economics: The study of the decisions that go into making, distributing, and using goods and services Economics: The study of the decisions that go into making, distributing, and using goods and services Economy: Ways in which people make, distribute, and use their goods and services Economy: Ways in which people make, distribute, and use their goods and services Must be aware of market forces, financial institutions, global influences, and economic conditions Must be aware of market forces, financial institutions, global influences, and economic conditions

Market Forces Decided by supply and demand Decided by supply and demand Supply: Amount of goods and services available for sale Supply: Amount of goods and services available for sale Demand: Amount of goods and services people are willing to buy Demand: Amount of goods and services people are willing to buy High demand=Higher Prices High demand=Higher Prices

Financial Institutions Banks, Credit Unions, Savings and loans associations, Insurance companies, etc. Banks, Credit Unions, Savings and loans associations, Insurance companies, etc. Provide financial services that increase the financial activities in the economy Provide financial services that increase the financial activities in the economy Federal Reserve System (feds): Central banking organization of the United States. Primary role is the regulation of the money supply. Federal Reserve System (feds): Central banking organization of the United States. Primary role is the regulation of the money supply. Feds determine interest rates on savings and those you pay on loans Feds determine interest rates on savings and those you pay on loans

Global Influences Many products we use are made in other countries Many products we use are made in other countries If foreign countries sell more goods to the US than the US does to foreign markets, less money is available for spending and investing If foreign countries sell more goods to the US than the US does to foreign markets, less money is available for spending and investing May cause a rise to interest rate May cause a rise to interest rate

Economic Conditions Current conditions affect your financial decisions Current conditions affect your financial decisions Fig. 3 pg. 74 Shows how economic conditions can influence financial planning Fig. 3 pg. 74 Shows how economic conditions can influence financial planning Most important conditions: Consumer prices, Consumer Spending, Interest Rates Most important conditions: Consumer prices, Consumer Spending, Interest Rates

Consumer Prices Overtime, prices of just about everything will go up Overtime, prices of just about everything will go up Inflation: Takes more of your money to buy the same amount of goods and services Inflation: Takes more of your money to buy the same amount of goods and services Inflation especially hard on retired Inflation especially hard on retired

Consumer Spending Consumer: A person who purchases and uses goods and services Consumer: A person who purchases and uses goods and services Helps create and maintain jobs Helps create and maintain jobs What do you spend money on? What jobs does your money help create? What do you spend money on? What jobs does your money help create?

Interest Rates Interest: The price that is paid for the use of anothers money Interest: The price that is paid for the use of anothers money Bank example Bank example

Section 1.2 Opportunity Costs and Financial Strategies

Opportunity Costs and the Time Value of Money Remember, when you make a financial decision you must give something up to get something in return Remember, when you make a financial decision you must give something up to get something in return

Personal Opportunity Costs Must manage personal resources in same manner as financial resources Must manage personal resources in same manner as financial resources Personal Resources: Health, knowledge, skills, and time Personal Resources: Health, knowledge, skills, and time Financial decisions you make now, will affect your financial future Financial decisions you make now, will affect your financial future

Financial Opportunity Costs Time Value of Money: Increase of an amount of money as a result of interest of dividends earned Time Value of Money: Increase of an amount of money as a result of interest of dividends earned Consider, Invest your money or buy something (ex: sneakers) Consider, Invest your money or buy something (ex: sneakers) Every time you spend, save or invest money think about the time value of the money and the opportunity cost Every time you spend, save or invest money think about the time value of the money and the opportunity cost

Calculating Interest Can calculate time value of your savings by figuring out how much interest you will earn Can calculate time value of your savings by figuring out how much interest you will earn To figure need: Principal, Annual Interest Rate, and the Length of time your money will be in the account To figure need: Principal, Annual Interest Rate, and the Length of time your money will be in the account Principal: For savings account principal is the amount of money you deposit on which interest is paid. For loan, principal is the amount you borrow Principal: For savings account principal is the amount of money you deposit on which interest is paid. For loan, principal is the amount you borrow Bank informs you of interest rate when you form an account (annual percentage) Bank informs you of interest rate when you form an account (annual percentage) To figure interest amount: See pg.77 To figure interest amount: See pg.77

Future Value of a Single Deposit Future value is the amount your original deposit will be worth in the future based on earning a specific interest rate over a specific period of time Future value is the amount your original deposit will be worth in the future based on earning a specific interest rate over a specific period of time To figure: Principal * Annual Interest Rate, New interest rate + Principal To figure: Principal * Annual Interest Rate, New interest rate + Principal See pg. 78 See pg. 78 Future value computations also called compounding Future value computations also called compounding

Cont. With compounding, money increases faster because paid interest on your original deposit and on previously earned interest With compounding, money increases faster because paid interest on your original deposit and on previously earned interest Future Value Tables Simplify (pg. 79) Future Value Tables Simplify (pg. 79) Better to deposit at a younger age, gives more time to compound Better to deposit at a younger age, gives more time to compound

Future Value of a Series of Deposits Making regular deposits into your savings Making regular deposits into your savings Annuity: A series of equal regular deposits Annuity: A series of equal regular deposits See Figure 4 pg. 79 See Figure 4 pg. 79

Present Value of a Single Deposit Present Value: Amount of money you would need to deposit now in order to attain a desired amount in the future Present Value: Amount of money you would need to deposit now in order to attain a desired amount in the future Ex: If you want $1000 in five years, your saving account pays 5% annual interest, how much money do you need to deposit now in order to accumulate $1000? Ex: If you want $1000 in five years, your saving account pays 5% annual interest, how much money do you need to deposit now in order to accumulate $1000? See Figure 4 See Figure 4

Present Value of a Series of Deposits Determines how much you need to deposit so you can take a specific amount of money out of your savings account for a certain number of years. Determines how much you need to deposit so you can take a specific amount of money out of your savings account for a certain number of years. Ex: Want to take $400 out of account each year for 9 yr. and your money is earning 8% interest how much money will you need to deposit now? Ex: Want to take $400 out of account each year for 9 yr. and your money is earning 8% interest how much money will you need to deposit now?

Achieving your Financial Goals First choose a career, learn to protect and manage the money you earn First choose a career, learn to protect and manage the money you earn The following 8 strategies will help you avoid common mistakes: The following 8 strategies will help you avoid common mistakes:

1) OBTAIN Work, make investments, own property Work, make investments, own property Obtaining money is the foundation of financial planning because you’ll use that money for all financial activities Obtaining money is the foundation of financial planning because you’ll use that money for all financial activities

2) PLAN How will you spend your money? How will you spend your money?

3) SPEND WISELY Spend less then you earn, to obtain financial security Spend less then you earn, to obtain financial security

4) SAVE Long-term security requires a savings plan Long-term security requires a savings plan Necessary for bills, major purchases, and emergency situations Necessary for bills, major purchases, and emergency situations

5) BORROW WISELY Borrow wisely, only when necessary Borrow wisely, only when necessary

6) INVEST 2 main reasons to invest: 1) Increase their current income 2) Long Term Growth 2 main reasons to invest: 1) Increase their current income 2) Long Term Growth To increase income: Select investments that pay dividends or interest To increase income: Select investments that pay dividends or interest For long-term growth: Stocks, mutual funds, real estate anything that has potential to increase in value in the future For long-term growth: Stocks, mutual funds, real estate anything that has potential to increase in value in the future

7) Manage Risk Insurance coverage, protect yourself and resources in case you are ever injured, sick, or die Insurance coverage, protect yourself and resources in case you are ever injured, sick, or die Protects you and those that depend on you Protects you and those that depend on you

8) Plan for Retirement Consider age you want to retire at Consider age you want to retire at Where will you live? Where will you live? What will you do? What will you do?

Developing and Using Your Financial Plan Access present situation Access present situation Make list of current needs Make list of current needs How to plan for future needs How to plan for future needs Can design own plan, hire planner, buy a program Can design own plan, hire planner, buy a program