Chapter 1 - Personal Financial Planning in Action
Risk premium
based on factors as the length of time funds will be used by others, expected inflation and the extent of uncertainty about getting money back.
Reduced money supply can
cause higher interest rates
Step 4 in the Financial Planning Process - Evaluate alternatives of A
Access risk, time value of money or opportunity cost
Benefits of an emergency fund?
Avoid or minimize financial crisis due to job loss, unexpected expenses or unforeseen situation.
Step 4 in the Financial Planning Process - Evaluate alternatives of C
Consider life situation, personal values and economic factors
Step 5 in the Financial Planning Process - C
Create and implement your financial action plan
Step 2 in the Financial Planing Process - D
Develop your financial goals
Rule of 72
Divide 72 by the annual inflation or interest rate
Spreadsheet software
Excel and other spreadsheet programs have built-in formulas for financial computations, including future value and present value.
Personal money management or personal financial planning
Financial and personal satisfaction
Interest rates represent the
cost of money
Present value
current value of an amount desired in the future
Investing in a bond is a
debt security involving borrowing by a company or government.
Deflation
decline in prices which damages the economy
Values
Ideas and principles a person considers correct desirable and important
Step 3 in the Financial Planning Process - I
Identify alternative courses of action
Risk is also a
factor in the interest rate you pay as a borrower.
Financial regulators represent the
federal reserve system, federal deposit insurance corporation, national credit union administration, office of the comptroller of the currency, consumer financial protection bureau, securities and exchange commission, state banking agencies and state insurance agencies.
Financial intermediaries represent other
financial institutions
Inflation is harmful to people with
fixed incomes
Financial plan
formalized report that summarizes your current financial situation analyzes your financial needs and recommends future financial activities.
Advantages of effective personal financial planning include a sense of...
freedom from financial worries obtained by anticipating expenses and achieving personal economic goals.
People with poor credit ratings pay
higher interest rates than people with good credit ratings.
Borrowing by consumers, business, and government
increases interest rates are likely to rise
Providers represent
individuals businesses governments and foreign entities
Users are
individuals, businesses, governments and foreign entities
Evaluating Risk - Common risks include
inflation, interest rate, income, personal and liquidity risk
Financial intermediaries represent insurance and
investment companies
Long-term goals
involve financial plans more than five years off, retirement, money for children's college education or purchase vacation home
Personal opportunity costs
involves time when used for one activity cannot be used for other activities. Time used for studying, working or shopping will not be available for other uses.
Step 6 in the Financial Planning Process - R
Review and revise the financial plan
Formula calculation
math notations used for computing future value and present value
Possible courses of action for step 3 .. Take a
new course of action
A financial plan enhances quality of life and increases satisfaction by
reducing uncertainty about future needs and resources.
Government agencies
regulate financial activities
Global influences: when the level of exports of US made goods is lower than the level of imported goods more
US dollars leave the country than the dollar value of foreign currency coming into the US
Financial calculator
Variety of calculators programmed with financial functions. Uses future value and present value calculations.
The financial system: Providers are
savers and investors of funds
S
specific
Deflation cuts
spending
Adult life cycle
stages in the family situation and financial needs of an adult
Financial markets represent which markets
stock bond money and commodity markets
When consumer saving and investing increase the
supply of money, interest rates tend to decrease
Future value
the amount to which current savings will grow based on certain interest rate and certain time period.
Personal financial planning
the process of managing your money to achieve personal economic satisfaction.
Possible courses of action for step 3 .. continue
the same course of action
Economics
the study of wealth is created and distributed
Time-based
time frame for achieving goals, such as three years. Allowing you to measure your progress toward financial goals.
T
time-based
Opportunity cost
what you give up by making a choice.
Trade-off
a decision that cannot always be measured in dollars. Viewed in terms of personal and financial resources.
Inflation
a rise in the general level of prices
Annuity
a series of equal deposits or payments
Short term goals
achieved within the next year such as saving for a vacation
Compounding
also referred to as future value computations
Measurable
and specific
3 Steps to Financial Literacy
1. determine the desired amount of your emergency fund based on financial needs and income volatility. 2. monitor daily spending to locate possible areas for reduced spending and increased savings. 3. Decide where to keep your emergency fund: bank, credit union or other financial institutions.
Interest Calculations - three amounts used to calculate Time Value of Money:
Amount in saving x annual interest rate x time period = interest
Step 1 in the Financial Planning Process - D
Determine current financial situation
Financial Planning Process: DDICACR
Determine, develop, Identify, Consider, Asses, Create and Review
Five methods for calculating time value of money
Formula calculation, time value of money tables financial calculator, spreadsheet software and websites or apps
How do you prepare for Step 2 - Develop Your Financial Goals
Periodically analyze your financial values and goals in order to differentiate your needs from your wants.
How do you prepare for Step 1 - determine your current financial situation regarding income, savings, living expenses and debts?
Prepare a list of current asset and debt balances and amounts spent for various items
Websites and apps
Time value of money calculators available online through mobile devices. Programs may be sued to calculate future value of savings as well as loan payment amounts.
A
action oriented
Consequences of choices: Trade-offs cannot
always be measured in dollars
Federal Reserve or The Fed
attempts to maintain adequate money supply to encourage consumer spending business growth and job creation.
Financial intermediaries represent
banks credit unions
Action oriented
basis for personal financial activities you undertake, like reducing your credit card debt
Users represent
borrowers and spenders of funds
Consumer price index (CPI) - computed and published by the
bureau of labor statistics a measure of the average change in prices urban consumers pay for a fixed basket of goods and services.
In times of inflation when more money is needed to
buy the same amount of goods and services.
Financial market activities include
buying and selling mutual funds certificates of deposit and commodity futures.
Compounding allows for the future value of a
deposit to grow faster than if only interest were paid on the original deposit.
Future value of a single amount
deposited money earns interest that will increase over time
Advantages of effective personal financial planning include increased...
effectiveness obtaining using and protecting financial resources through life.
Investing in stock is called an
equity security, represents ownership in a corporation.
Increased value of money from interest earned involves two types of time value of money calculations
future value and present value
Time value of money tables
future value and present value tables providing easier computations
Realistic
goals based on your income and life situation.
Federal Reserve System and the central bank of the US
has significant economic responsibility.
Intermediate goals
have a time frame of two to five years
Time value of money
increases in an amount of money as a result of interest earned
Durable-product goals
infrequently purchased, expensive items such as appliances, cars, and sporting equipment consisting of tangible items
Specific
knowing what your goals are creating a plan to achieve them in a
Inflation also affects
lenders of money
M
measurable
Advantages of effective personal financial planning include increased control
of financial affairs by avoiding excessive debt bankruptcy and dependence on others.
Consumable-product goals occur
on a periodic basis and involve items such as food, clothing and entertainment
How do you prepare for Step 4 - Evaluate Your Alternatives : Consequences of choices
opportunity cost is what you give up by making a choice.
Advantages of effective personal financial planning include improved...
personal relationships from well-planned and effectively communicated financial decisions.
In times of inflation the
power of the dollar decreases
Discounting also called
present value computations
R
realistic
Intangible purchase goals
relate to personal relationships, health, education, community service and leisure.
hidden inflation
the cost of necessities (food, gas, healer) may rise at a higher rate than nonessential items which could be dropping in price.
Possible courses of action for step 3 .. change
the current situation
Possible courses of action for step 3 .. expand
the current situation
US dollars leaving the country than the level of imported goods reduces
the funds available for domestic spending and investment.