CHAPTER 1 - Personal Finance Basics & Time Value of Money
Future Value of a Single Amount & Deposits
(See Starbucks cup future value tables)
Present Value of a Single Amount & Deposits
(See Tables on Slides 40)
Rule of 72
72/x% = Y years for $ to double in value, where x% rate of return is a whole number. Example : at 10% rate of return, money will double in approximately 7 years. 72/10 = ~7.
Life Situation and Personal Values Influence
Adult life cycle stage-remember each stage will have different goals Marital status, household size, and employment Major events Graduation, marriage, career change, children, college, weddings, retirement, etc Personal values influence spending and saving decisions
Planning Principles
Best time of your life to learn about Personal Financial Planning Achieving a Financial Plan means Financial Independence Most people fail to plan, not plan to fail Take advantage of the power of compounding or the Time Value of Money
Time Element
Can calculate FUTURE value of money (x years from now) Can calculate PRESENT value of money (what is it worth today) For both PRESENT and FUTURE, you can figure out based on: 1) SINGLE AMOUNT 2) SERIES OF DEPOSITS
Time Value of Money
Can't be overemphasized. Money increases and grows as a result of interest earned. The continual effect of this is compounding. Compound interest means Interest on Interest! $100 earning 10% compounded over 7 years = $100*(1+10%)^7 or $100*(1.1)^7 or $200 Saving today means exponentially more money tomorrow. Spending means lost interest and lost interest on interest. Huge lost opportunity Saving and spending decisions involve considering the trade-offs between now and later and much later.
Six-Step Procedure
Determine your current financial situation Develop your financial goals Identify alternative courses of action Evaluate alternatives Create and Implement financial action plan Review and revise financial plan as needed
Timing of Goals vs. Stages of Life
Each stage of life will have different short-term, intermediate and long-term goals and different financial focus 20's Post Graduation - single 30's Early Career - single/married 40's Mid Career - single/married/family 50's/60's Late Career - pre-retirement/college expenses/empty nest 60's/70's + Retirement - living off of investments/part time work
Consequences of Choices
Examples of trade-offs and potential consequences of decisions Buying vs renting a home Paying off debt Buying a nice car vs a functional car
SMART Goals
Goals should be smart: Specific: know what your goals are to create a plan Measurable: with a specific amount Action-oriented: identify the personal financial activities Realistic: utilizing your income and life situation Time-based: identify the time frame to achieve the goal
ECONOMIC FACTORS
Market Forces- Supply and Demand and impact on prices and markets. Key Global Players- The economic environment is global and includes many different institutions (corporations, governments, financial system). Key US Player- Federal Reserve Bank and it's role in the economy and regulating interest rates in the US. Interest rates have an impact on large financial decisions. Who is Janet Yellen?
TIMING of Goals
Short-term, intermediate and long-term goals One can have concurrent financial goals Long term goals should be planned in coordination with short-term and intermediate goals Short Term : 0-1 years Shorter Intermediate : 1-5 years Longer Intermediate : 5-10 years Long Term : 10+ years
Interest Calculations
Three amounts are required to calculate the time value of money Principal of Amount invested Interest rate Time
