Personal Finance Ch 1
10 principles of personal finance
1) best protection is knowledge 2) nothing happens without a plan 3) time value of money 4) taxes affect personal finance decisions 5) importance of liquidity 6) waste not, want not 7) protect yourself against major catastrophes 8) risk and return go hand in hand 9) financial personality and your money 10) just do it
financial plan process
1) evaluate your financial health 2) define your financial goals 3) develop a plan of action 4) implement your plan 5) review your progress, reevaluate, and revise your plan
banks ensure your money up to what?
250,000$
importance of budgeting
If you don't budget, you never know when to stop spending. You don't have a plan in your head and therefore cannot make reasonable decision when it comes to expenses. You need to evaluate your financial health, determine where to spend your money, and learn restraint.
job security
Never have 100% job security. Take steps to be successful in your career and keep your job secure. For example, always learn new skills, keep up to date on technology, gain visibility, take on new assignments, etc.
do older people today have adequate financial stability?
No, they cannot afford to retire and have to work longer
do you use current income to set future goals?
Yes, you use your current salary to determine how much to save now
short term goals
achievable within 1 year; finance a vacation, purchase a major item, etc
intermediate term goals
achievable within 1-10 years; save for older child's college, pay off major debt, etc
long term goals
achievable within 10+ years; purchase retirement home, take care of elderly family, etc
infaltion
an economic condition in which rising prices reduce the purchasing power of money
cover letter
an introduction of yourself to your potential employer explaining how you heard about the job, your talents, and a way to contact you. This impresses employers because it's uncommon and extremely professional.
stage 2 financial life cycle
approaching retirement (55-64); reassess financial goals--retirement, insurance protection, and estate planning
How does Step 5 of the financial planning process contribute to the idea that "financial planning is an ongoing process"?
as your life and financial situation changes, you must change your plan as well. Set different goals, invest in different items, and more. Different things become necessary and important in different stages of life
principle 9
behavioral biases lead to financial mistakes and mental accounting impacts financial decisions
principle 6
differentiate want from need, research and make purchase at best price
stage 1 financial life cycle
early years (through age 54); cost of raising children
principle 7
have right kind of insurance before tragedy and know the policy coverage
liquidity
immediate use of cash by quickly and easily converting an asset
common factors found in a financial plan
income, goals, expenses, what you own,etc
principle 8
investors demand higher return for added risk and diversify your investments
principle 4
know effects of taxes on rate of return of investments and understand tax laws
resume
list your education, talents, work experience, and other important areas. You should have one of these by senior year of high school for potential jobs, internships, scholarships, etc.
importance of financial planning
manage the unplanned, accumulate wealth for special expenses, save for retirement, get insurance, invest intelligibly, minimize taxes
education vs earnings
more education = more money you'll make
explain why it is important to review past economic downturns when studying personal finance
not understanding the past could lead to a repeat of events. Learn to recognize the signs and prepare for disaster
Rockefeller Foundation Report
people are most worried about RETIREMENT
principle 5
plan for unexpected events and have liquid funds covering 3-6 months of expenses
estate planning
planning for your eventual death and the passage of your wealth to your heirs
career planning
process of identifying a job that you feel is important and that will lead to the lifestyle you want
stage 3 financial life cycle
retirement years (65+); live off savings, use less risky investment strategy, etc
principle 2
saving must be planned and putting this your plan makes your goals harder to achieve
what is a financial plan?
set of goals that you plan to achieve by saving money, picking smart investments, have liquidity, etc
diversification
should use diversification by spreading money in several different investments to reduce risk. Risk and return go hand in hand, but you don't want all your money and risk in one investment.
effect of the recent economic downturn?
still recovering, but we are learning from the past and trying to predict the next downfall and be prepared
principle 10
take first hard step and others become easier, save early
what 3 financial concerns are addressed across all three stages?
tax and estate planning, saving for goals (pay yourself first), and insurance planning
women and personal finance
typically earn less, live longer than men, qualify for less social security, etc
principle 3
understand how savings and investsments grow over time
principle 1
understand the basics, take responsibility for your lifetime financial plan, and seek help
what three characteristics are required to define financial goals?
write/formalize goals, attach cost to each one, determine when you will need the money
should financial goals change?
yes, as your life and financial situation changes, you must change your plan, goals, investments, etc
how is career planning like financial planning?
you must evaluate yourself, define your interests/goals for this career, develop a plan, and if your plan doesn't work out then revise it. You must always be planning ahead and playing smart