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Planning personal finances

Planning personal finances. Income and Career. Personal Financial Decisions. What is personal finance? Personal Financial Planning (PFP): arranging to spend, save and invest money to live comfortably, have financial security and achieve goals Provide examples of financial goals

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Planning personal finances

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  1. Planning personal finances Income and Career

  2. Personal Financial Decisions • What is personal finance? • Personal Financial Planning (PFP): arranging to spend, save and invest money to live comfortably, have financial security and achieve goals • Provide examples of financial goals • What are some consequences and opportunity costs to our financial decisions? • Scenario: buying a car • 6-step decision making process

  3. Decision Making process • Determine your current financial situation • Develop your financial goals • Identify Alternative Courses of Action • Evaluate Your Alternatives • Create and Use Your Financial Plan of Action • Review and Revise Your Plan

  4. Determine current financial situation • Make a list of items that relate to your finances: • Savings • Monthly income • Monthly expenses • Debts • Estimate: make approx. calculation • Estimate expenses by keeping a monthly record • Online apps, credit card online account features, pen/paper, bank statements

  5. Develop financial goals • What is your attitude towards money? • What do you value? • What are your needs? • What are your wants?

  6. Identify alternative courses of action • What are all of your options? • Scenario: you are saving $50/month • Is what you have been doing working? • Can you expand on what you are doing? • Should you change your means of what you are doing? • Should you do something totally different?

  7. Evaluate your alternatives • What is the good and bad of all your alternatives? • Does one get you closer towards your goal over the other? • Does one get you closer towards your goal more effectively that the other? • How will others be affected? • What are consequences of each? • Check with sources of financial info

  8. Evaluating risk • Risk: Chance of financial loss • Buying a car example: • Inflation risk: If you wait to buy a car, prices may change • Interest rate risk: Cost of borrowing money can change • Income risk: You may lose your job and lack income • Personal risk: Wrong choices • Liquidity risk: How easy is it to sell the car?

  9. Create and use your financial plan of action • Plan of action ins a list of ways to achieve your financial goal • Implement decision

  10. Review/revise plan • Did you meet your goal? • Are you satisfied with the outcome? • Review to ensure plan still works for current financial situation • Revise plan as financial situation changes

  11. Developing Personal Financial Goals • Types of financial goals • Time frame • Short-term: takes 1-year or less to achieve. Example? • Intermediate: takes 2-5 years to achieve. Example? • Long-term: takes more than 5-years to achieve. Example? • Different needs • Service: a task a person or machine performs for you • Good: tangible item that can be weighed/measured • Commercial business: place to buy goods/services for personal use • Setting goals • Realistic, specific, clear time frame, clear action • Why?

  12. Influences on Financial Planning • Day to day influences include life situation, personal values, economic factors and economic conditions • Life situations include… • Personal values include… • What variables affect each?

  13. Influences On Financial Plannng • Economic factors – national and global • Market forces: supply, demand and price • Financial institutions: places that handle accounts, provide loans, sell insurance and make investments for people • The Fed: central banking org. of the U.S. Main role is to regulate the money supply and interest rates • Their decisions affect the money available to you • Global influences: global competition – how does it affect you as a consumer?

  14. Economic Conditions • Inflation: the general rise in prices over time • Consumer prices: rapid inflation makes prices significantly rise for the same product • Main causes: over-productivity. Rise in demand without a rise in supply. • Consumers have more money to spend, exceeding the resources for businesses to keep up with demand • What are scenarios that would allow increased purchasing power? • Inflation increases national CPI

  15. Economic Conditions cont’d • Consumer: a person who purchases and uses goods/services • High consumer spending  increased purchasing power  increased labor force  stronger economy • Interest: cost to borrow money • When the gov. wants to increase spending, they lower rates on loans and saving accounts – vice versa • The money you invest in savings is used to give loans • You borrow money from bank and vice versa

  16. Personal/Financial Opportunity Costs • Health, skills, time, knowledge • There is always a personal trade off when you make a decision • Suppose you want to spend $125 on… • Time value of money: the increase of an amount of money due to earned interest and dividends • Think of it as an opportunity cost • How could it be “better” used

  17. Calculating Interest • Interest earned calculates time value of money • Principal: the original amount of money on deposit or to borrow • Comparing interest rates tells you how much more you will earn or how much a loan costs • Interest is valued at a percent

  18. Future Value of a Single Deposit • FVSD: How much your principal will be worth in the future based on earning interest at a specific rate for a specific period of time • Each year value can increase by principal + interest earned from previous year or just one lump sum of interest • Compounding interest: Earning interest on top of previous interest earned + principal • Simple interest: Earning interest only on principal

  19. FV Single Deposit cont’d • $1 deposit now at 7% interest • After year: • 1  $1.07 • 2  $1.14 • 3  $1.23 • 4  $1.31 • 5  $1.40 • 6  $1.50 • 7  $1.61 • 8  $1.72

  20. FV of Series of Deposits • Annuity: regular deposits into savings • Earns compound interest • Same as previous example, just add deposit to compound interest + principal year to year • Formula = P [(1+r)n-1 / r] • P=principal • N=number of payments • R=rate of interest • $1000 @ 5% after 6 years = $6802

  21. Present Value of a Single Deposit • Present value: the amount of money you need to deposit now in order to have the desired amount in the future • Accumulate: how much money collects over time • How much will one lump deposit now turn into in the future? • PV = FV/(1+i)n • PV=present value • FV=future value • i= interest • N=number of periods

  22. Present Value • PV of single deposits are used to calculate a down payment • PV of series of deposits are used to calculate retirement • If you want to save $1,000,000 by the time you retire, how much do you need to deposit now until your retirement age? • Use a chart or online calculator!!

  23. Present Value of a Series of Equal Annual Deposit Table

  24. Achieving Your Financial Goals • Obtain money • Plan • Spend wisely • Save • Borrow wisely • Invest • Manage rise • Plan for retirement

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