Chapter 1: Personal Financial Planning in Action

Marie will be receiving $300/yr for 6 years out of an investment acct. The interest is 5%, compounded annually. What is the present value of this annuity?

$1,523 (300*5.076, found in table 1-D)

Paula needs to have $400 in three years. The interest earned on the account is 6%, compounded annually. How much does she need to invest today?

$336 (400*.840, found in table 1-C)

if you deposit $500 per year in an account for nine years at 6%, how much will you have in the account?

$5,746

personal financial planning steps

1) determine current financial situation 2) develop financial goals 3) ID alternative courses of action (categories: continue, expand, change, new) 4) evaluate alternatives 5) create/implement financial action plan 6) review/revise plan

Alex has an interest rate of 3.6% on his savings account. Using the rule of 72, his money will double in

20 years

Fred has good credit and can borrow at 5%. Bob has poor credit and can borrow at 11%. What is the amount of the risk premium that Bob will pay?

6% (Bob's rate - Fred's rate)

financial plan

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

What does SMART stand for?

Specific, Measurable, Action-oriented, Realistic, Time-based

Rule of 72

The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest.

Deflation

a decrease in the general level of prices, can cause consumers to cut their spending

annuity

a series of equal regular deposits/payments

what factors influence spending and saving patterns?

age, income, household size, personal beliefs

Simple Interest Formula

amt savings * annual interest rate * time = interest

risk premium

an expected return in excess of that on risk-free securities; based on length of time your funds will be used by others, expected inflation, and uncertainty about getting the money back

hidden inflation

decreases in quality or quantity of necessities, not considered in inflation calculations

what sets the price for securities, goods and services?

forces of supply and demand

the US economy is affected by

foreign investors and competition from foreign companies

what are the five main methods of calculating TVM?

formula, TVM tables, financial calculators, spreadsheets, websites/apps

values

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

Durable-product goals (tangibles)

involve infrequently purchased, expensive items such as appliances, cars, etc (tangible items)

Consumable-product goals

occur on a periodic basis and involve items that are used up relatively quickly (food, clothing, entertainment)

valuing your time more than making money is an example of

personal opportunity cost

what are the two main factors of Americans' money problems?

poor planning/weak money management and extensive advertising/selling efforts/product availability that encourages overbuying

determining your current situation involves

preparing personal financial statements and identifying current income, savings, living expenses and debts

intangible-purchase goals

relate to personal relationships, health, education, and leisure

inflation

rise in the general level of prices

types of financial goals

short term: achieved within ~1 year intermediate: achieved within 2-5 years long-term: achieved in >5 years

financial goals are the basis for measuring the progress of

spending, saving, investment activities

Future Value (compounding)

the amount of money in the future that an amount of money today will yield, given prevailing interest rates

Federal Reserve System

the central bank of the United States; attempts to maintain an adequate money supply to encourage consumer spending, business growth, and job creation

interest rates

the cost of borrowing money

Present Value (discounting)

the current value for a future amount based on a certain interest rate and a certain time period; allow you to determine how much to deposit now to obtain a desired total in the future

time value of money

the increase of an amount of money due to earned interest or dividends

adult life cycle

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

economics

the study of how wealth is created and distributed

opportunity cost

whatever must be given up to obtain some item

what causes interest rates to increase

when borrowing increases

what causes interest rates to decrease

when consumer saving and investing increase the supply of money