Chapter1PersonalFinancialPlanninginActionCopyright

?2010byTheMcGraw-HillCompanies,Inc.Allrightsreserved.McGraw-Hill/IrwinPersonalFinancialPlanningObjectivesIdentifysocialandeconomicinfluencesonpersonalfinancialgoalsanddecisionsDeveloppersonalfinancialgoalsAssesspersonalandfinancialopportunitycostsassociatedwithfinancialdecisionsImplementaplanforthesedecisions1-2FinancialPlanningProcessofmanagingyourmoneytoachievepersonaleconomicsatisfactionFinancialPlan:

FormalizedreportSummarizescurrentfinancialsituationAnalyzesfinancialneedsRecommendsfuturefinancialactivities1-3AdvantagesofFinancialPlanningIncreasedeffectivenessinobtaining,using,andprotectingfinancialresourcesIncreasedcontrolofyourfinancialaffairsImprovedpersonalrelationshipsSenseoffreedomfromfinancialworries1-4LifesituationandpersonalvaluesFinancialplanninginoureconomyDomesticeconomicinfluencesGlobalInfluencesInflationInterestratesObjective1

IdentifySocialandEconomicInfluencesonPersonalFinancialGoalsandDecisions1-5LifeSituationandPersonalValuesAdultlifecycleLifeSituationFactors:Maritalstatus,household

size,employmentExhibit1-1(page5)Majorevents:Graduation,marriage,divorceBirthoradoptionofchildCareerorhealthchangesValues:Theideasandprinciplesyouconsidercorrect,desirable,andimportant1-6FinancialPlanninginOurEconomy

DomesticInfluencesEconomy’sinfluenceonfinancialplanningBusiness,labor&governmentTheFederalReserve“..Setsthenation’smonetarypolicytopromotetheobjectivesofmaximumemployment,stablepricesandmoderatelong-terminterestrates.”/1-7FinancialPlanninginOurEconomy

GlobalFactorsU.SeconomyaffectedbyforeigninvestorsandcompetitionfromforeigncompaniesLevelofimports/exportsaffectsavailablesupplyofdollarsLevelofforeigninvestmentaffectsdomesticmoneysupplyMoneysupplyaffectsconsumerinterestrates1-8FinancialPlanninginOur

EconomyInflationInflation=inthegenerallevelofpricesReducesbuyingpowerofthedollarMostharmfultothoseonfixedincomesInflationratesvary“Hiddeninflation”CPI=ameasureofinflation1-9FinancialPlanninginOurEconomy

InterestRatesInterestRate=thecostofmoneyAffectedbysupplyanddemandRiskpremium:LengthoftimefundsinuseExpectedinflationUncertaintyMajorimpactonfinancialplanning1-108BasicFinancialPlanningActivitiesObtaining Chapter1Planning Chapters2,3Saving Chapter4Borrowing Chapter5Spending Chapter6,7ManagingRisk Chapter8-10Investing Chapter11-13Retirement/EstatePlanning Chapter141-11TimeFramesforAchievingFinancialGoals:Short-termgoals........... w/in1yearIntermediategoals......... 2-5yearsLong-termgoals........... >5yearsFinancialNeedsGoals:Consumable-productgoals... Food,clothingDurable-productgoals...... Car,appliancesIntangible-purchasegoals... Education,healthObjective2

DevelopPersonalFinancialGoals1-12Goal-SettingGuidelinesEffectiveGoalsshouldbe:RealisticStatedinspecific,measurabletermsBasedonatimeframeAction-oriented1-13Objective3

AssessPersonalandFinancialOpportunityCostsofFinancialDecisionsOpportunitycost=whatyougiveupmakingachoiceThetrade-off

ofadecisionNotalwaysmeasurableindollars;maybetimeConsiderlostopportunitiesresultingfromyourdecisions1-14OpportunityCostsand

FinancialTrade-OffsPersonalOpportunityCosts(time,effort,health)FinancialOpportunityCosts(Interest,liquidity,

safety)FinancialAcquisitions(car,home,collegeeducation,investments,insurance,retirementfund)1-15TimeValueofMoneyIncreaseinanamountofmoney

asaresultofinterestearnedSavingtoday=moremoneytomorrowSpendingtoday=lostinterestSavingandspendingdecisionsinvolveconsideringthetrade-offsCurrentneedscanmakespendingworthwhile1-16Calculatinginterestearned:Principal=amountofsavingsAnnualinterestrateLengthoftimemoneyondeposit(inyears)Simpleinterest:TimeValueofMoney

InterestCalculationsAmtinSvgsXAnnualInterestRateTimePeriodInterestX=1-17$500ondepositat6%annualinterestfor6months:Principal=$500Interestrate=6%Timeperiod=?(6/12months)TimeValueofMoney

InterestCalculationExample$500X6%1/2$15X=1-18FutureValueTheincreasedvalueofmoneyfrom interestearnedAmounttowhichcurrentsavingswill increaseTotalamountavailableinthefuture“Compounding”1-19FutureValue

Example

FutureValueOriginalAmountinSavingsInterestEarned=+$100depositedfor1yearat6%peryearFutureValue=$100+($100X.06X1)FutureValue=$100+$6=$106 1-20FutureValueTablesExhibit1-3A=FVofaSingleAmountMultiplyTableFactorbyamountdepositedAllFutureValuefactors>1.0Example:$650investedat8%for10yearsFactor=2.159FV=$650X2.159=$1,403.351-21FutureValue

SeriesofDepositsExhibit1-3B“Annuity”=seriesofequaldepositsatequalintervalsearningaconstantrateExample:Deposit$50peryearat7%for6yearsExhibit1-3Bfactor=7.153FutureValue=$50x7.153=$357.651-22PresentValueThecurrentvalueofafutureamountbasedona

certaininterestrateandtimeperiodThecurrentvalueofanamountdesiredinthefutureHowmuchtodepositnowtoobtainadesiredtotalinthefuture“Discounting”1-23PresentValueTablesExhibit1-3C=PVofasingleamountMultiplyTableFactorbyamountdepositedAllFutureValuefactors<1.0Example:Youwant$1,000fiveyearsfromnowYoucanearn5%onyourmoneyPresentValue=$1,000X0.784=$7841-24PresentValue

ofaSeriesofDepositsExhibit1-3DDeterminehowmuchyouneedtodepositnowinordertowithdrawaspecificamountforadesirednumberofyearsExample:Youwanttowithdraw$400/yearfor9yearsYourmoneyisearning8%peryearDeposit=$400X6.247=$2,498.801-25The6-StepFinancialPlanningProcess1-26DeterminecurrentfinancialsituationDevelopfinancialgoalsIdentifyalternativecoursesofactionContinuesamecourseofactionExpandcurrentsituationChangecurrentsituationTakeanewcourseofactionObjective4

ImplementaPlan

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