personal finances chapter 1

inflation

a rise in the general level of prices

bankruptcy

a set of federal laws that allow you to either restructure your debts or remove certain debts

consumable product goals

periodic basis involving items that are used quickly, food, clothing entertainment

personal risk

purchasing risk : may need repairs. health risk, safety risk, and additional costs associated various financial decisions

what to do in times of financial difficulty

reduce use of debt. reduce spending. review the safety of you savings. evaluate insurance coverage. avoid financial scams. communicate with family members

6. review and revise your plan

regularly asses. at least once a year or when changing personal, social, and economic factors require

intangible purchase goals

related to personal relationships, health education, leisure

inflation risk

rising or falling prices cause changes in buying power. decide to buy it now or later

financial goals

short term intermediate long term

liquidity risk

some savings and investments have potential for higher earnings however they may be more difficult to convert to cash or to sell without significant loss in value

S. M. A. R. T goals

specific : know exactly what goals are measurable: specific amount action oriented: providing the basis for the personal activities you will undertake. realistic: based on your income and life situations time based: time frame for achieving the goal

4. evaluate your alternatives

taking into consideration live situation, personal values, current economic conditions.

liquidity

the ability to readily convert financial resources into cash without a loss in value

interest calculations

the amount of the savings ... the principle the annual interest rate the length of time the money is on deposit principle x annual interest rate x time period = interest

future value

the amount to which current savings will increase based on a certain interest rate and a certain time period; also referred to as compounding

consumer prices

the buying power o fa dollar changes in inflation: if consumer prices increase faster than your income you are unable to purchase the same amount of goods and services;will also cause higher interest rates

interest rates

the cost of money; credit when you borrow; the return on you money when you save or invest: higher interest rates = saving and investing more attractive and discourage borrowing

present value

the current value for a future amount based on a certain interest rate and a certain time period; also referred to as discounting

planning process

1. determine current financial situation 2. develop you financial goals 3. identify alternative courses of action 4. evaluate alternatives 5. create and implement your financial action plan 6. review and revise the financial plan

three main decision areas of financial activities

1. spend 2. save 3. share

interest rate risk

changing interest rates affect your costs, when you borrow, and your benefits , when you save or invest.

3. identify alternative courses of action

continue. expand. change. new.

5. create and implement your financial plan

developing action plan that identifies ways to achieve your goals

rule of 72

divide 72 by the annual inflation -or interest rate

values

ideas and principles that a person considers correct, desirable and important

2. develop your financial goals

identifying how you feel about money and why you feel that way. differentiate your needs from your wants.

1. determine your current financial situation

income, savings, living expenses, debts, current assets,

advantages of personal financial planning

increased effectiveness in obtaining using and protecting resources. control by avoiding debt, bankruptcy and dependence on others for security. improved relationships resulting from well planned and communicated financial decisions. freedom from financial worries:

time value of money

increases in amount of money as a result of interest earned

durable product goals

infrequently purchased expensive items. cars, appliances, sporting equiptment

consumer spending

the demand for goods and services by individuals and households; increase consumer spending creates more jobs and higher wages- can also push up prices and interest rates

Trade balance

the difference between a country's exports and its imports : if a country exports more than it imports, the balance of payments deficit can result in price changes for foreign goods

money supply

the dollars available for spending in our economy: interest rates decline as more people save and invest, higher saving may also reduce job opportunities

income risk

the loss of a job may result from changes in consumer spending or expanded use of technology. save while employed or acquire a new skill

housing starts

the number of new homes being built: increase home building results in more job opportunities, higher wages, overall economic expansion.

unemployment

the number of people without jobs who are willing and able to work: high unemployment reduces consumer spending and job opportunities

Personal financial planning

the process of managing your money to achieve personal economic satisfaction

Dow jones average, S&P 500, other stock market indexes

the relative value of stocks represented by the index.: the indexes provide an indication of the general movement of stock prices

adult life cyle

the stages in the family situation and financial needs of an adult

economics

the study of how wealth is created and distributed

gross domestic product

the total value of goods and services produced in a country's borders: provides an indication of nations economic viability, resulting in employment and opportunities for increased personal wealth

opportunity cost

what a person gives up by making a choice