1. Chapter 1 Personal Finance Basics and the Time Value of Money 09/01/09

2. Why Important Nobody can avoid dealing with personal finance
People do claim bankruptcy

3. Chapter 1 Learning Objectives
Analyze the process for making personal financial decisions
Develop personal financial goals
Assess personal and economic factors that influence personal financial planning
Determine the personal and financial opportunity costs associated with personal financial decisions
Identify strategies for achieving personal financial goals for different life situations

4. The Financial Planning Process
Objective 1: Analyze the process for making personal financial decisions
Personal Financial Planning is the process of managing your money to achieve personal economic satisfaction
Advantages of Personal Financial Planning are:
Increased effectiveness in obtaining, using and protecting financial resources
Increase control of one’s financial affairs
Sense of freedom from financial worries

5. The Financial Planning Process (continued)
Six-step procedure for Financial Planning
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.

6. The Financial Planning Process (continued)
Step 1: DETERMINE YOUR CURRENT FINANCIAL SITUATION
Determine current financial situation regarding income, savings, living expenses, and debts
Prepare a list of current asset and debt balances and amount spent for various items
Match financial goals to current income and potential earning power

7. The Financial Planning Process (continued)
Step 2: DEVELOP YOUR FINANCIAL GOALS
Identify feelings about money and the reasons for those feelings
Determine the source of your feelings about money
Determine the effects of economy on your goals and priorities
Make sure that your goals are your own and are specific to your situation

8. The Financial Planning Process (continued)
Step 3: IDENTIFY ALTERNATIVE COURSES OF ACTION
Possible courses of action can be:
Continue the same course of action
Expand the current situation
Change the current situation
Take a new course of action
Creativity in decision making is vital to effective choices

9. The Financial Planning Process (continued)
Step 4: EVALUATE YOUR ALTERNATIVES
CONSEQUENCES OF CHOICES
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
EVALUATING RISK
Uncertainty is a part of every decision.
Best way to analyze and minimize risk is to gather information from financial planning sources. (Exhibit 1-3)

10. The Financial Planning Process (continued)
Step 5: CREATE AND IMPLEMENT YOUR FINANCIAL ACTION PLAN
Develop an action plan that identifies ways to achieve financial goals
Possible action plans can be increasing savings, reducing spending, or making provisions for taxes
To implement action plans you may need assistance from others

11. The Financial Planning Process (continued)
Step 6: REVIEW AND REVISE YOUR PLAN
Financial planning decisions need to be assessed regularly
Complete review should be done at least once a year
Regular reviews of decision-making process can help in making priority adjustments to achieve financial goals

12. Developing Personal Financial Goals
Objective 2: Develop personal financial goals
TYPES OF FINANCIAL GOALS can be:
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
Long term goals should be planned in coordination with short-term and intermediate goals
GOALS FOR DIFFERENT FINANCIAL NEEDS
Consumer product goals
Durable-produce goals
Intangible-purchase goals

13. Developing Personal Financial Goals (continued)
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

14. Developing Personal Financial Goals (continued)

15. Influences on Personal Financial Planning
Objective 3: Assess personal and economic factors that influence personal financial planning
LIFE SITUATION AND PERSONAL VALUES
Adult life cycle stage
Marital status, household size, and employment
Major events
Graduation, marriage, career change, children, retirement, etc
Values
What values are important to you?

16. Influences on Personal Financial Planning (continued)
ECONOMIC FACTORS
Forces of Supply and Demand and prices
Federal Reserve Bank and it’s role in the economy

17. Influences on Personal Financial Planning (continued)
GLOBAL INFLUENCES
Global marketplace influences financial activities
Balance of exports and imports
Foreign investments and their role in the US Money Supply

18. Influences on Personal Financial Planning (continued)
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

19. Opportunity Costs and the Time Value of Money
Object 4: Every financial decision involves giving up something to obtain something else
PERSONAL OPPORTUNITY COSTS
Time
Other personal opportunity costs can be related to health, leisure etc.
Personal resources like financial resources require careful management

20. Opportunity Costs and the Time Value of Money (continued)
FINANCIAL OPPORTUNITY COSTS
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.

21. Opportunity Costs and the Time Value of Money (continued)
INTEREST CALCULATIONS
Three amounts are required to calculate the time value of money
Principal
Interest rates
Time

22. Opportunity Costs and the Time Value of Money (continued)
COMPUTING SIMPLE INTEREST
(Amount in savings) x (annual interest rate) x (time period) = (interest)
For Example:
$100 x 5% x 1 (1 year) 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

23. Opportunity Costs and the Time Value of Money (continued)
FUTURE VALUE OF A SINGLE AMOUNT
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 OF A SERIES OF DEPOSITS
Future value can be computed for a single amount or for a series of deposits called annuities

24. Opportunity Costs and the Time Value of Money (continued)

25. Opportunity Costs and the Time Value of Money (continued)
PRESENT VALUE OF A SINGLE AMOUNT
Present Value is the current value of 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 OF A SERIES OF DEPOSITS
Present value can be computed for a single amount or for a series of deposits (See Exhibit 1-8D)

26. Achieving Financial Goals
Objective 5: Identify strategies for achieving personal financial goals different life situations
COMPONENTS OF PERSONAL 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)

27. Achieving Financial Goals (continued)
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

28. Achieving Financial Goals (continued)
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