Chapter 3Chapter 3

Personal Financial PlanningPersonal Financial Planning

IntroIntro

• If I gave you $200.00 what would you If I gave you $200.00 what would you do with it?do with it?

• What would you consider to be a What would you consider to be a financial goal that you have right financial goal that you have right now?now?

Making Personal Financial Making Personal Financial DecisionsDecisions

• Personal Financial Planning: Personal Financial Planning: Spending, saving, and investing your Spending, saving, and investing your money so you can have the kind of money so you can have the kind of life you want as well as financial life you want as well as financial securitysecurity

• Everyone has different financial goalsEveryone has different financial goals

• Goals: Things you want to Goals: Things you want to accomplishaccomplish

Continued…Continued…• What financial decisions are you making now, What financial decisions are you making now,

and how might they change in 5-10 years?and how might they change in 5-10 years?• Benefits to financial planning: Benefits to financial planning:

– You have more money; know how to You have more money; know how to use money to achieve your goals and use money to achieve your goals and are financially secureare financially secure

– Your have less chance of going into Your have less chance of going into debt you can’t handledebt you can’t handle

– You can help your partner and support You can help your partner and support childrenchildren

Financial Planning ProcessFinancial Planning Process• 6 Step Process6 Step Process

• 1) Determine your current financial situation1) Determine your current financial situation

• 2)Develop your financial goals2)Develop your financial goals

• 3) Identify alternative courses of action3) Identify alternative courses of action

• 4) Evaluate your alternatives4) Evaluate your alternatives

• 5)Create and use your financial plan of 5)Create and use your financial plan of actionaction

• 6) Review and revise your plan6) Review and revise your plan

Step 1) Determine your current Step 1) Determine your current financial situationfinancial situation

• Make list of your savings, monthly income, Make list of your savings, monthly income, monthly expenses, and debtsmonthly expenses, and debts

• Estimate: Make an approximate Estimate: Make an approximate calculation of your expenses.calculation of your expenses.

• Good way to track: Keep record of Good way to track: Keep record of everything you spend your money on for a everything you spend your money on for a month (Journal or Calendar)month (Journal or Calendar)

• What do you feel your number one What do you feel your number one expenditure would be?expenditure would be?

Step 2) Develop your financial Step 2) Develop your financial goalsgoals

• To develop a clear financial goal, need To develop a clear financial goal, need to think of your attitude toward money.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 Values: The beliefs and principles you

consider important, correct, and consider important, correct, and desirabledesirable

• What personal values affect your What personal values affect your personal financial planning?personal financial planning?

Cont…Cont…• Also must distinguish between needs Also must distinguish between needs

and wantsand wants• Need: Something you must have to Need: Something you must have to

survivesurvive• Want: Something you desire or would Want: Something you desire or would

like to have or dolike to have or do• Make your goals as specific as possibleMake your goals as specific as possible• Ex: $50 per check or 15% per checkEx: $50 per check or 15% per check• Pg. 64 Careers that CountPg. 64 Careers that Count

Step 3) Identify alternative Step 3) Identify alternative courses courses of actionof action• Impossible to make good decision unless you Impossible to make good decision unless you

know all your optionsknow all your options

• Ex: Now saving $50 a month; you could:Ex: Now saving $50 a month; you could:– Expand the current situationExpand the current situation– Change the current situation (stocks instead)Change the current situation (stocks instead)– Start something new (pay off debts with the Start something new (pay off debts with the

$50)$50)– Keep things the sameKeep things the same

• Costs of decision may outweigh the benefitsCosts of decision may outweigh the benefits

Step 4) Evaluate your Step 4) Evaluate your alternativesalternatives• Ask yourself:Ask yourself:

– Where are you in your life?Where are you in your life?– What is your present financial situation?What is your present financial situation?– What are your personal values?What are your personal values?

• Sources of financial information: Internet, Sources of financial information: Internet, financial institutions (banks/investment financial institutions (banks/investment companies), Media sources (newspapers, companies), Media sources (newspapers, magazines, TV, Radio), Financial specialist magazines, TV, Radio), Financial specialist (financial planner, lawyers and tax (financial planner, lawyers and tax preparers)preparers)

• See Common Cents pg. 65See Common Cents pg. 65

Consequences of ChoicesConsequences of Choices

• When you choose one option, it When you choose one option, it eliminates other possibilities (college eliminates other possibilities (college vs. work)vs. work)

• Opportunity Cost (trade off): What Opportunity Cost (trade off): What you give up when you make one you give up when you make one choice instead of anotherchoice instead of another

Understanding RisksUnderstanding Risks• Risk Types:Risk Types:

– Inflation Risk: Price may increase if you Inflation Risk: Price may increase if you wait (vacation)wait (vacation)

– Interest rate risk: Interest rates change Interest rate risk: Interest rates change dailydaily

– Income Risk: Could lose your job at Income Risk: Could lose your job at anytimeanytime

– Personal Risk: Ex: Driving over flyingPersonal Risk: Ex: Driving over flying– Liquidity Risk: Liquidity- The ability to Liquidity Risk: Liquidity- The ability to

easily convert your financial resources easily convert your financial resources into cash without a loss in valueinto cash without a loss in value

Step 5) Create and use your Step 5) Create and use your financial plan of financial plan of

actionaction• List of ways to achieve your financial List of ways to achieve your financial

goalsgoals

Step 6) Review and Revise Step 6) Review and Revise your your planplan

• May need to change as you get olderMay need to change as you get older

• Pg. 68Pg. 68

Developing Personal Financial Developing Personal Financial GoalsGoals

• Why do you feel so many people Why do you feel so many people have money problems?have money problems?

• Avoid by planning with clear financial Avoid by planning with clear financial goals in mindgoals in mind

Types of Financial GoalsTypes of Financial Goals

• Two factors influence your planningTwo factors influence your planning1)1) Time frame in which you want to Time frame in which you want to

achieve your goalachieve your goal

2)2) The type of financial need that inspires The type of financial need that inspires your goalsyour goals

Timing of GoalsTiming of Goals

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

reachreach

Goals for different financial Goals for different financial needsneeds

• Service: Task that a person or a Service: Task that a person or a machine performs for youmachine performs for you

• Good: Physical object that is produced Good: Physical object that is produced and can be weighed or measuredand can be weighed or measured

• Goals can consist of:Goals can consist of:– Consumable goods: Purchased often and used Consumable goods: Purchased often and used

quicklyquickly– Durable goods: Expensive items that you don’t Durable goods: Expensive items that you don’t

purchase oftenpurchase often– Intangible Items: Can’t be touched and are often Intangible Items: Can’t be touched and are often

important to your well-being and happinessimportant to your well-being and happiness

Guidelines for Setting GoalsGuidelines for Setting Goals

• Must know what goals are to make Must know what goals are to make good financial decisiongood financial decision

• Will change with ageWill change with age• See pg. 70See pg. 70• When choosing your goals follow When choosing your goals follow

these guidelines:these guidelines:– Be realistic, specific, clear time frame, Be realistic, specific, clear time frame,

help decide what type of action to takehelp decide what type of action to take

Influences on Personal Financial Influences on Personal Financial PlanningPlanning

Main Influences: Life Situations, Main Influences: Life Situations, Personal Values, Economic Factors. Personal Values, Economic Factors.

Economic FactorsEconomic Factors

• Economics: The study of the decisions Economics: The study of the decisions that go into making, distributing, and that go into making, distributing, and using goods and servicesusing goods and services

• Economy: Ways in which people make, Economy: Ways in which people make, distribute, and use their goods and distribute, and use their goods and servicesservices

• Must be aware of market forces, financial Must be aware of market forces, financial institutions, global influences, and institutions, global influences, and economic conditionseconomic conditions

Market ForcesMarket Forces

• Decided by supply and demandDecided by supply and demand

• Supply: Amount of goods and Supply: Amount of goods and services available for saleservices available for sale

• Demand: Amount of goods and Demand: Amount of goods and services people are willing to buyservices people are willing to buy

• High demand=Higher PricesHigh demand=Higher Prices

Financial InstitutionsFinancial Institutions• Banks, Credit Unions, Savings and loans Banks, Credit Unions, Savings and loans

associations, Insurance companies, etc.associations, Insurance companies, etc.• Provide financial services that increase the Provide financial services that increase the

financial activities in the economyfinancial activities in the economy• Federal Reserve System (feds): Central Federal Reserve System (feds): Central

banking organization of the United States. banking organization of the United States. Primary role is the regulation of the money Primary role is the regulation of the money supply.supply.

• Feds determine interest rates on savings Feds determine interest rates on savings and those you pay on loansand those you pay on loans

Global InfluencesGlobal Influences

• Many products we use are made in Many products we use are made in other countriesother countries

• If foreign countries sell more goods If foreign countries sell more goods to the US than the US does to foreign to the US than the US does to foreign markets, less money is available for markets, less money is available for spending and investingspending and investing

• May cause a rise to interest rateMay cause a rise to interest rate

Economic ConditionsEconomic Conditions

• Current conditions affect your Current conditions affect your financial decisionsfinancial decisions

• Fig. 3 pg. 74 Shows how economic Fig. 3 pg. 74 Shows how economic conditions can influence financial conditions can influence financial planningplanning

• Most important conditions: Consumer Most important conditions: Consumer prices, Consumer Spending, Interest prices, Consumer Spending, Interest RatesRates

Consumer PricesConsumer Prices

• Overtime, prices of just about Overtime, prices of just about everything will go upeverything will go up

• Inflation: Takes more of your money Inflation: Takes more of your money to buy the same amount of goods to buy the same amount of goods and servicesand services

• Inflation especially hard on retiredInflation especially hard on retired

Consumer SpendingConsumer Spending

• Consumer: A person who purchases Consumer: A person who purchases and uses goods and servicesand uses goods and services

• Helps create and maintain jobsHelps create and maintain jobs

• What do you spend money on? What What do you spend money on? What jobs does your money help create?jobs does your money help create?

Interest RatesInterest Rates

• Interest: The price that is paid for the Interest: The price that is paid for the use of anothers moneyuse of anothers money

• Bank exampleBank example

Section 1.2Section 1.2

Opportunity Costs and Opportunity Costs and Financial StrategiesFinancial Strategies

Opportunity Costs and the Time Opportunity Costs and the Time Value of MoneyValue of Money

• Remember, when you make a Remember, when you make a financial decision you must give financial decision you must give something up to get something in something up to get something in returnreturn

Personal Opportunity CostsPersonal Opportunity Costs

• Must manage personal resources in Must manage personal resources in same manner as financial resourcessame manner as financial resources

• Personal Resources: Health, Personal Resources: Health, knowledge, skills, and timeknowledge, skills, and time

• Financial decisions you make now, Financial decisions you make now, will affect your financial futurewill affect your financial future

Financial Opportunity CostsFinancial Opportunity Costs

• Time Value of Money: Increase of an Time Value of Money: Increase of an amount of money as a result of amount of money as a result of interest of dividends earnedinterest of dividends earned

• Consider, Invest your money or buy Consider, Invest your money or buy something (ex: sneakers)something (ex: sneakers)

• Every time you spend, save or invest Every time you spend, save or invest money think about the time value of money think about the time value of the money and the opportunity costthe money and the opportunity cost

Calculating InterestCalculating Interest• Can calculate time value of your savings by Can calculate time value of your savings by

figuring out how much interest you will earnfiguring out how much interest you will earn• To figure need: Principal, Annual Interest Rate, To figure need: Principal, Annual Interest Rate,

and the Length of time your money will be in the and the Length of time your money will be in the accountaccount

• Principal: For savings account principal is the Principal: For savings account principal is the amount of money you deposit on which interest is amount of money you deposit on which interest is paid. For loan, principal is the amount you borrowpaid. For loan, principal is the amount you borrow

• Bank informs you of interest rate when you form Bank informs you of interest rate when you form an account (annual percentage)an account (annual percentage)

• To figure interest amount: See pg.77To figure interest amount: See pg.77

Future Value of a Single Future Value of a Single DepositDeposit• Future value is the amount your original Future value is the amount your original

deposit will be worth in the future deposit will be worth in the future based on earning a specific interest based on earning a specific interest rate over a specific period of timerate over a specific period of time

• To figure: Principal * Annual Interest To figure: Principal * Annual Interest Rate, New interest rate + PrincipalRate, New interest rate + Principal

• See pg. 78See pg. 78• Future value computations also called Future value computations also called

compoundingcompounding

Cont.Cont.

• With compounding, money increases With compounding, money increases faster because paid interest on your faster because paid interest on your original deposit and on previously original deposit and on previously earned interestearned interest

• Future Value Tables Simplify (pg. 79)Future Value Tables Simplify (pg. 79)

• Better to deposit at a younger age, Better to deposit at a younger age, gives more time to compoundgives more time to compound

Future Value of a Series of Future Value of a Series of DepositsDeposits

• Making regular deposits into your Making regular deposits into your savingssavings

• Annuity: A series of equal regular Annuity: A series of equal regular depositsdeposits

• See Figure 4 pg. 79See Figure 4 pg. 79

Present Value of a Single Present Value of a Single DepositDeposit

• Present Value: Amount of money you Present Value: Amount of money you would need to deposit now in order to would need to deposit now in order to attain a desired amount in the futureattain a desired amount in the future

• Ex: If you want $1000 in five years, Ex: If you want $1000 in five years, your saving account pays 5% annual your saving account pays 5% annual interest, how much money do you interest, how much money do you need to deposit now in order to need to deposit now in order to accumulate $1000?accumulate $1000?

• See Figure 4See Figure 4

Present Value of a Series of Present Value of a Series of DepositsDeposits

• Determines how much you need to Determines how much you need to deposit so you can take a specific deposit so you can take a specific amount of money out of your savings amount of money out of your savings account for a certain number of years.account for a certain number of years.

• Ex: Want to take $400 out of account Ex: Want to take $400 out of account each year for 9 yr. and your money is each year for 9 yr. and your money is earning 8% interest how much money earning 8% interest how much money will you need to deposit now?will you need to deposit now?

Achieving your Financial Achieving your Financial GoalsGoals

• First choose a career, learn to First choose a career, learn to protect and manage the money you protect and manage the money you earnearn

• The following 8 strategies will help The following 8 strategies will help you avoid common mistakes:you avoid common mistakes:

1) OBTAIN1) OBTAIN

• Work, make investments, own Work, make investments, own propertyproperty

• Obtaining money is the foundation of Obtaining money is the foundation of financial planning because you’ll use financial planning because you’ll use that money for all financial activitiesthat money for all financial activities

2) PLAN2) PLAN

• How will you spend your money?How will you spend your money?

3) SPEND WISELY3) SPEND WISELY

• Spend less then you earn, to obtain Spend less then you earn, to obtain financial securityfinancial security

4) SAVE4) SAVE

• Long-term security requires a Long-term security requires a savings plansavings plan

• Necessary for bills, major purchases, Necessary for bills, major purchases, and emergency situationsand emergency situations

5) BORROW WISELY5) BORROW WISELY

• Borrow wisely, only when necessaryBorrow wisely, only when necessary

6) INVEST6) INVEST

• 2 main reasons to invest: 1) Increase their 2 main reasons to invest: 1) Increase their current income 2) Long Term Growthcurrent income 2) Long Term Growth

• To increase income: Select investments To increase income: Select investments that pay dividends or interestthat pay dividends or interest

• For long-term growth: Stocks, mutual For long-term growth: Stocks, mutual funds, real estate anything that has funds, real estate anything that has potential to increase in value in the futurepotential to increase in value in the future

7) Manage Risk7) Manage Risk

• Insurance coverage, protect yourself Insurance coverage, protect yourself and resources in case you are ever and resources in case you are ever injured, sick, or dieinjured, sick, or die

• Protects you and those that depend Protects you and those that depend on youon you

8) Plan for Retirement8) Plan for Retirement

• Consider age you want to retire atConsider 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 Developing and Using Your Financial PlanFinancial Plan

• Access present situationAccess present situation

• Make list of current needsMake list of current needs

• How to plan for future needsHow to plan for future needs

• Can design own plan, hire planner, Can design own plan, hire planner, buy a programbuy a program