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.