1-12
Goal-Setting Guidelines Effective Goals should be:
– Realistic – Stated
in specific, measurable
terms – Based on a time frame – Action-oriented
1-13
Assess Personal and Financial Opportunity Costs of Financial Decisions
• Opportunity cost = what you give up making a choice
Objective 3
– The trade-off of a decision
– Not always measurable in dollars; may be time – Consider lost opportunities resulting from your decisions
– /
1-7
Financial Planning in Our Economy Global Factors
• U.S economy affected by foreign investors and competition from foreign companies • Level of imports/exports affects available supply of dollars • Level of foreign investment affects domestic money supply • Money supply affects consumer interest rates
• “Compounding”
1-19
Future Value
Example
Future Value Original Amount in Savings
=
+
Interest Earned
$100 deposited for 1 year at 6% per year Future Value = $100 + ($100 X .06 X 1) Future Value = $100 + $6 = $106
1-11
Develop Personal Financial Goals
• Time Frames for Achieving Financial Goals:
– Short-term goals . . . . . . . . . . . – Intermediate goals . . . . . . . . . – Long-term goals . . . . . . . . . . . w/in 1 year 2-5 years > 5 years
– Marital status, household size, employment – Exhibit 1-1 (page 5)
• Major events:
– Graduation, marriage, divorce – Birth or adoption of child – Career or health changes
$500
X
6%
X
1/2
=
$15
1-18
Future Value
• The increased value of money from interest earned • Amount to which current savings will increase
• Total amount available in the future
1-9
Financial Planning in Our Economy Interest Rates Interest Rate = the cost of money – Affected by supply and demand – Risk premium:
• Length of time funds in use • Expected inflation • Uncertainty
• Values:
– The ideas and principles you consider correct, desirable, and important
1-6
Financial Planning in Our Economy
Domestic Influences
• Economy’s influence on financial planning
– Principal = amount of savings – Annual interest rate – Length of time money on deposit (in years)
ห้องสมุดไป่ตู้
• Simple interest:
Amt in Svgs
X
Annual Interest Rate
X
1-14
Opportunity Costs and Financial Trade-Offs
Personal
Opportunity Costs (time, effort, health)
Financial Acquisitions
(car, home, college education, investments, insurance, retirement fund)
Chapter 1
Personal Financial Planning in Action
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Personal Financial Planning Objectives 1. Identify social and economic influences on personal financial goals and decisions 2. Develop personal financial goals 3. Assess personal and financial opportunity costs associated with financial decisions 4. Implement a plan for these decisions
1-2
Financial Planning
• Process of managing your money to achieve personal economic satisfaction • Financial Plan:
– Formalized report – Summarizes current financial situation – Analyzes financial needs – Recommends future financial activities
– Domestic economic influences – Global Influences – Inflation – Interest rates
Objective 1
1-5
Life Situation and Personal Values
• Adult life cycle • Life Situation Factors:
• Saving and spending decisions involve considering the trade-offs
– Current needs can make spending worthwhile
1-16
Time Value of Money
Interest Calculations • Calculating interest earned:
Time Period
=
Interest
1-17
Time Value of Money
Interest Calculation Example
$500 on deposit at 6% annual interest for 6 months: Principal = $500 Interest rate = 6% Time period = ½ (6/12 months)
1-8
Financial Planning in Our Economy Inflation
Inflation = in the general level of prices
•Reduces buying power of the dollar •Most harmful to those on fixed incomes •Inflation rates vary •“Hidden inflation” •CPI = a measure of inflation
– Business, labor & government
• The Federal Reserve
– “.. Sets the nation’s monetary policy to promote the objectives of maximum employment, stable prices and moderate long-term interest rates.”
1-3
Advantages of Financial Planning
• Increased effectiveness in obtaining, using, and protecting financial resources • Increased control of your financial affairs • Improved personal relationships • Sense of freedom from financial worries