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