Business 101: Chapter 1, Personal Financial Planning in Action

Bankruptcy

Bankruptcy is a set of federal laws allowing you to either restructure your debts or remove certain debts.

Consequences of Choices

Every decision closes off alternatives. For example, a decision to invest in stock may mean you cannot take a vacation. A decision to go to school full-time may mean you cannot work full-time. Opportunity cost is what you give up by making a choice. These trade-offs cannot always be measured in dollars. However, the resources you give up (money or time) have a value that is lost.

What kind of plan can interest rates affect ?

Financial Plan

Step 6: Review and Revise Your Plan

Financial planning is an ongoing process that does not end when you take action. You need to regularly assess your financial decisions. You should do a review of your finances at least once a year. Changing personal, social, and economic factors may require a more frequent review.

Spending

Financial planning is not designed to prevent enjoyment of life but to help you obtain what you want. Too often purchases are made without considering the financial consequences. Some people shop compulsively, creating financial difficulties. Use a spending plan to control your living expenses and other financial obligations. Spending less than you earn is the only way to achieve long-term financial security.

Five methods for calculating time value of money

formula calculation, time value of money tables, financial calculator, spreadsheet softwear

Intermediate Goals

have a time frame of two to five years.

Values

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

Time value of money tables

In the past, before calculators and computers, future value and present value tables were used for easier computing

Saving

Long-term financial security starts with a regular savings plan for emergencies, unexpected bills, replacement of major items, and the purchase of expensive goods and services, such as a college education, a boat, or a vacation home. Once you have established a basic savings plan, use additional money for investments that offer greater financial growth

Websites and Apps

Many time value of money calculators are available online and through mobile devices. These programs calculate the future value of savings as well as loan payment amounts

Long-term goals

involve financial plans that are more than five years off, such as retirement, money for children's college education, or the purchase of a vacation home

Retirement and Estate Planning

Most people desire financial security upon completion of full-time employment; however, retirement planning also involves thinking about your housing situation, your recreational activities, and possible part-time work or volunteering. Transfers of money or property to others should be timed, if possible, to minimize the taxes and maximize the benefits for those receiving the financial resources. Knowledge of property transfer methods can help you select the best course of action for funding current and future living costs, educational expenses, and retirement needs of dependents

Planning

Planned spending with a budget is vital for achieving goals and future financial security. Efforts to anticipate expenses along with making certain financial decisions can reduce taxes, increase savings, and result in less financial stress

Present Value

Present value is the current value for a future amount based on a particular interest rate for a certain period of time. Present value computations, also called discounting, allow you to determine how much to deposit now to obtain a desired total in the future.

Time Value of Money (TVM)

The time value of money involves increases in an amount of money as a result of interest earned. Saving or investing a dollar instead of spending it today results in a future amount greater than a dollar

Intangible purchase goals

These goals relate to personal relationships, health, education, community service, and leisure. Examples include learning a new skill to expand your career, participating in community service activities, and creating art through writing, photography, drawing, or sculpture.

Evaluating Risk

Uncertainty is also a part of every decision. Selecting a college major and choosing a career field involve risk. What if you don't like working in a field or cannot obtain employment? Other decisions involve a very low degree of risk, such as putting money in an insured savings account or purchasing items that cost only a few dollars. Your chance of losing something of great value is not present in these situations.

Financial calculator

Various calculators are programmed with financial functions. Both future value and present value calculations are performed using appropriate keystrokes

Formula Calculation

With this method, math notations are used to compute future value and present value

Personal Financial Planning

the process of managing your money to achieve personal economic satisfaction. This planning process allows you to control your financial situation. Every person, family, or household has a unique situation; therefore, financial decisions must be planned to meet specific needs and goals.

T

time-based, indicating a time frame for achieving the goal, such as three years. This allows you to measure your progress toward your financial goals

Durable-product goals

usually involve infrequently purchased, expensive items such as appliances, cars, and sporting equipment; these consist of tangible items.

Consumable-product goals

usually occur on a periodic basis and involve items that are used up relatively quickly, such as food, clothing, and entertainment.

Obtaining

You obtain financial resources from employment, investments, or ownership of a business. Obtaining financial resources is the foundation of financial planning.

Step 2: Develop your Financial Goals

You should periodically analyze your financial values and goals. The purpose of this action is to clarify your needs and wants. Specific financial goals are vital to financial planning

Annuity

a series of equal deposits or payments

Short-term goals

achieved within the next year or so, such as saving for a vacation or paying off small debts

M

measurable, by a specific amount. For example, "Accumulate $5,000 in an investment fund within three years" is more measurable than "Put money into an investment fund."

R

realistic, involving goals based on your income and life situation. For example, it is probably not realistic to expect to buy a new car each year if you are a full-time student

S

specific, so you know exactly what your goals are and can create a plan designed to achieve those objectives.

Future Value

the amount to which current savings will grow based on a certain interest rate and a certain time period.

Deflation

A decline in the general level of prices

Financial Plan

A formalized report that summarizes your current financial situation, analyzes your financial needs and recommends future financial activities.

Consumer Price Index (CPI)

A measure of the average change in prices over time in a fixed "market basket" of goods and services

Managing Risk

Adequate insurance coverage is another area for financial planning decisions. Some types of insurance are commonly overlooked. For example, the number of people who suffer disabling injuries or diseases at age 50 is greater than the number who die at that age, so people may need disability insurance more than they need life insurance. Yet research reveals that most people have adequate life insurance but few have disability insurance

Investing

Although many types of investments are available, people invest for two primary reasons. Those interested in current income select investments that pay regular dividends or interest. In contrast, investors who desire long-term growth choose stocks, mutual funds, real estate, and other investments with the potential for increased future value. You can achieve investment diversification by creating a portfolio with varied assets, such as stocks, bond mutual funds, real estate, and collectibles such as rare coins.

Financial Planning Information Resources

Appropriate information is required at each stage of the financial planning process. In addition to this book, useful sources available to help you include (1) online sources and apps; (2) financial institutions, such as banks, credit unions, and investment companies; (3) media sources, such as newspapers, magazines, television, radio, podcasts, and online videos; and (4) financial specialists, such as financial planners, insurance agents, investment advisors, credit counselors, lawyers, and tax preparers.

Spreadsheet Software

Excel and other spreadsheet programs have built-in formulas for financial calculations, including future value and present value.

Step 3: Identify Alternative Courses of Action

Identifying alternatives is crucial when making decisions. Although many factors can influence available alternatives, possible courses of action usually fall into these categories: Continue the same course of action. For example, you may determine that the amount you have saved each month is still appropriate. Expand the current situation. You may choose to save a larger amount each month. Change the current situation. You may decide to use a money market account instead of a regular savings account. Take a new course of action. You may decide to use your monthly saving budget to pay off credit card debts.

Step 1: Determine your current financial situation

In the first step, determine your current financial situation regarding income, savings, living expenses, and debts. Prepare a list of assets and debts, along with amounts spent for various items is the foundation for financial planning activities

Advantages of Personal Financial Planning

Increased effectiveness when obtaining, using, and protecting your financial resources throughout your life. Expanded control of your financial affairs by avoiding excessive debt and dependence on others. Improved personal relationships resulting from well-planned and effectively communicated financial decisions. A sense of freedom from financial worries is obtained by looking to the future, anticipating expenses, and achieving personal economic goals.

Step 4: Evaluate Your Alternatives

Next, evaluate possible courses of action, taking into consideration your life situation, personal values, and current economic conditions. How will the ages of dependents affect your saving goals? How do you like to spend leisure time? How will changes in interest rates affect your financial situation?

Financial Planning Activities

Obtaining, planning, saving, borrowing, spending, managing risk, investing, retirement and estate planning

Equity Security

Represents stock ownership in another company that sometimes pays dividends

SMART goals stands for

Specific, Measurable, Attainable, Realistic, Timely

Borrowing

Wise use of credit can contribute to your financial goals. In contrast, the overuse and misuse of credit will likely result in a person's debts exceeding the resources available to pay those debts. Bankruptcy is a set of federal laws allowing you to either restructure your debts or remove certain debts. The people who declare bankruptcy may have avoided this trauma with wise spending and careful borrowing decisions

Step 5: Create and Implement your Financial Action Plan

You are now ready to develop an action plan to achieve your goals. For example, you can increase your savings by reducing your spending or by increasing your income. If you are concerned about year-end tax payments, you may increase the amount withheld from each paycheck, file quarterly tax payments, or shelter current income in a tax-deferred retirement program. To implement your financial action plan, you may need assistance from others. For example, you may contact an insurance agent to purchase property insurance or use an investment broker to purchase stocks, bonds, or mutual funds.

A

action-oriented, providing the basis for the personal financial activities you will undertake. For example, "Reduce credit card debt" will usually mean actions to pay off amounts owed

Opportunity cost

what you give up when making a choice. This cost, often referred to as a trade-off, cannot always be measured in dollars. Opportunity costs should be viewed in terms of both personal and financial resources.