1. Making Financial Decisions
Chapter 1

2. Your Life Situation and Financial Planning
Personal Financial Planning
Process of managing your money to achieve personal economic satisfaction
Allows you to control your financial situation
Can assure the quality of your life and increase your satisfaction by reducing uncertainty about future needs and resources

3. Your Life Situation and Financial Planning
Formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activity
Can be created on your own or by a financial planner

4. Your Life Situation and Financial Planning
Advantages of financial planning:
Increased effectiveness in obtaining, using, and protecting your financial resources
Increased control of your financial affairs by avoiding excessive debt, bankruptcy, and dependence on others
Improved personal relationships resulting from well-planned and effectively communicated financial decisions
A sense of freedom from financial worries obtained by looking to the future, anticipating expenses, and achieving personal economic goals

5. Your Life Situation and Financial Planning
Factors that influence daily financial decisions
Age
Income
Household size
Personal beliefs
Financial situation
Family situation
Events
Values

6. Your Life Situation and Financial Planning
Values
What is important to your family, others in your culture?
Peers
People you know
Pressure for positive or negative behaviors
Habits
You are accustomed to doing it this way
Feelings (love, anger, frustration, ambivalence, rejection)
If you do make a certain decision
If you don’t make a certain decision
E. Family
Your family’s preference
Decisions other family members have made
F. Risks and consequences
What (or how much) you stand to win
What (or how much) you stand to lose
G. Age
Minor
Adult

7. Financial Planning in Our Economy
Economics
Study of how wealth is created and distributed
Includes various institutions:
Individual consumers and investors
Using cash or credit to purchase goods and services
Saving money in a bank account
Investing money in stocks, mutual funds, bonds, etc.
Businesses
Sell products or services
Use money to pay for operating expenses and profits for investors
Borrow money to make improvements, hire new employees
Government
Collects taxes to provide public services
Borrow money to finance various projects

8. Common Decision Making Strategies
spontaneity
Choosing the first option that comes to mind; giving little or no consideration to the consequences of the choice.
compliance
Going along with family, school, work, or peer expectations.
procrastination
Postponing thought and action until options are limited.
agonizing
Accumulating so much information that analyzing the options becomes overwhelming.
intention
Choosing an option that will be both intellectually and emotionally satisfying.
desire
Choosing the option that might achieve the best result, regardless of the risk involved.
avoidance
Choosing the option that is most likely to avoid the worst possible result.
security
Choosing the option that will bring some success, offend the fewest people, and pose the least risk.
synthesis
Choosing the option that has a good chance to succeed and which you like the best.

9. Economic Factors Affecting Financial Activities
consumer prices
changes in the buying power of the dollar, inflation
consumer spending
demand for goods and services
gross domestic product (GDP)
total value of goods and services produced within the country
housing starts
the number of new homes being built
interest rates
the cost of borrowing money
money supply
funds available for spending in the economy
stock market index
(such as the Dow Jones averages, Standard & Poor’s 500) indicate general trends in the value of U.S. stocks
unemployment
the number of people without employment who are willing to work

10. Financial Planning Activities
Obtaining
Obtaining financial resources through employment, investments, or ownership of business
Foundation of financial planning
Planning
Spending through budgeting is the key to achieving goals and future financial security
Saving
Regular savings plan for emergencies, unexpected bills, replacement of a major item, and purchase of special goods and services (college education, boat, vacation home)

11. Financial Planning Activities
Borrowing
Maintaining control over credit-buying habits
Spending
Spending less than you earn is the only way to achieve long-term financial security
Managing Risk
Adequate insurance coverage

12. Financial Planning Activities
Investing
Current income—select investments that pay regular dividends or interest
Long-term growth—choose stocks, mutual funds, real estate, and other investments with potential for increased value in the future
Retirement and Estate Planning
Planning for financial security upon completion of full-time work
Thinking about housing situation, recreational activities, and possible part-time or volunteer work

13. Developing and Achieving Financial Goals
Types of Financial Goals
Short-term--Goals to be achieved in the next year or two
Intermediate--Time frame of two to five years
Long-term--Financial plans more than five years off
Should be in line with short-term and intermediate goals

14. Types of Purchases Consumable-product
Occur on a periodic basis and involve items that are used up relatively quickly (food, clothing, entertainment)
Durable-product
Usually involve infrequently purchased, expensive items (appliances, cars, sporting equipment)
Intangible-purchase
Relate to personal relationships, health, education, and leisure

15. Goal Setting Guidelines
Effective financial goals should be:
Realistic
Stated in specific, measurable terms
Based on a time frame
Action oriented
SMART Goals
Specific
Measurable
Attainable
Time bound

16. Opportunity Costs and the Time Value of Money
What you give up to get something else
Commonly referred to as a trade-off
Cannot always be measured in dollars
Personal Opportunity Cost
Involves time or health
Financial Opportunity Cost
Time value of money—increase in amount of money as a result of interest earned
Every time you save, spend, invest, or borrow money, you should consider the time value of that money as opportunity cost

17. Risks Associated with Decision Making
personal risks
factors that may create a less than desirable situation. Personal risk may be in the form of inconvenience, embarrassment, safety, or
health concerns.
inflation risk
rising prices cause lower buying power. Buying an item later may mean a higher price.
interest-rate risk
changing interest rates affect your costs (when borrowing) and your benefits (when saving or investing).
income risk
changing jobs or reduced spending by consumers can result in a lower income or loss of one’s employment. Career changes or job loss can result in a lower income and reduced buying power.
liquidity risk
certain types of savings (certificates of deposit) and investments (real estate) may be difficult to convert to cash quickly.

18. Financial Opportunity Costs
Interest Calculations
Amount of savings
Annual interest rate
Length of time of deposit
Future Value of a Single Amount
Amount to which current savings will increase based on a certain interest rate and a certain time period
Also referred to as compounding interest
Future Value of a Series of Deposits
Annuity—series of equal deposits or payments

19. Financial Opportunity Costs
Present Value of a Single Amount
Current value for a future amount based on a certain interest rate and a certain time period
Also called discounting
Allow you to determine how much to deposit now to obtain a desired total in the future
Present Value of a Series of Deposits
Determine how much to deposit so you can take out a certain amount for a desired number of years

20. A Plan for Personal Financial Planning
Determine current financial situation
Develop financial goals
Identify alternative courses of action
Continue on same course
Expand current situation
Change current situation
Take new course of action

21. A Plan for Personal Financial Planning
Evaluate your alternatives
Consequences of choices
Evaluating risk
Financial planning information resources
Create and implement your financial action plan
Review and revise your plan