Financial Planning

Decisions & Goals in Personal Finance

What does personal financial planning mean?

O It means spending, saving, and investing your money so you can have the kind of life you want as well as financial security.

O Everyone has different financial goals (things you want to accomplish).

Why Plan?

Some of the benefits:O You have more money, know how to

use money to achieve your goals, and are financially secure;

O You have less chance of going into debt you can’t handle;

O You can help your partner and support your children.

Why It’s Important

Learning the steps in the financial planning process

will give you a solid foundation for making all

your financial decisions, big and small, now and in the

future.

Personal Financial Planning

in 6 Steps

Step 1: Determine your current

financial situation

Make a list of monthly income, expenses, and debts.

Keep a record!!!

Step 2:Develop your financial goals

What is your attitude toward money?

Need vs. Want

Think Critically….Why is it important to distinguish

between your needs and your wants?

Step 3:Identify alternative courses

of action

What are your options?O Expand current situationO Change the current situationO Start something newO Continue the same course of action

Step 4: Evaluate your alternatives

O Sources of financial informationO social and economic conditions

O Consequences of choicesO opportunity costs

O Understanding risksO Inflation, interest rate, income,

personal, and liquidity

Step 5:Create and use your

financial plan of action

O A list of way to achieve your financial goals

Step 6:Review & Revise your plan

O Should be looked at at minimum every year

Developing Personal Financial Goals

WRITE IT DOWN!!!!

Studies show that people who write down their goals are 3 times more likely to achieve

them.

Types of Goals

Can be defined by the time it takes to achieve them:O Short-term goals are those that you’ll

reach in one year or less (save for computer)

O Intermediate goals take two to five years to reach (house down payment)

O Long-term goals take more than five years to reach (retirement)

Can also be defined depending on the need..

Service vs Good

Consumable (soda)Durable (car….expensive, not purchased often)Intangible (education)

Guidelines for setting goals

Your financial goals should:

O Be realisticO Be specificO Have a clear time frameO Help you decide what type of action

to take

SMART goalsSpecific “I want to go to Panama City for Spring Break” vs. “I want to go somewhere fun over Spring Break”Measurable“I’ll need $150 for my share of the hotel room for the week” vs. “ I want to save a bunch of money for the trip”

Attainable“I’ll split the driving with my friends and take $200 more for gas, food, and other spending” vs. “I want $500 to fly there and $700 for spending money”

Realistic“I’ll save $60 a month from my paycheck for the next six months” vs. “I’ll buy lottery tickets every week”

Time bound“I want to save all the money by March 1st vs. “I want to save all the money by spring”

Influences on Personal Financial Planning

Life situationsPersonal values

Economic factors

Financial Goals and Activities for Various Life SituationLife Situation Financial Goals & Activities

Young single adult Become financially independent

Obtain career training

Develop a savings plan

Carefully manage your use of credit

Young couple with no children Create an effective financial record-keeping system

Implement a budget

Carefully manage your use of credit

Develop a savings and investment program

Couple with young children Purchase a home

Obtain adequate health and life insurance

Start a college fund

Make a will and name a guardian for your children

Single parent with young children Obtain adequate health, life, and disability insurance

Make a will and name a guardian for your children

Establish an emergency fund

Middle-aged, single adult Contribute to a tax-deferred retirement plan

Evaluate and select appropriate investments

Accumulate an adequate emergency fund

Review will and estate plans

Older couple with no children at home Plan retirement houseing, living expenses, and activities

Obtain health insurance for retirement

Review will and estate plans

Economic Factors

Market ForcesSupply/Demand

Financial InstitutionsFederal Reserve System

Global InfluencesWhere were they made?

Economic ConditionsInflation, Consumer, Interest

Economic Conditions and Financial PlanningEconomic Condition What It Measures

Consumer prices The value of a dollar; changes in inflation

Consumer spending Demand for goods and services by individuals and households

Interest rates Cost of money, cost of credit when you borrow, and the return on your money when you save or invest

Money supply The dollars available for spending in our economy

Unemployment The number of people without jobs who are willing and able to work

Gross domestic product (GDP) Total dollar value of all the goods and services produced in a country in one year

Opportunity Costs & Financial Strategies

O Personal Opportunity CostsO Time, health, skills, etc

O Financial Opportunity CostsO Time value of money---future value?

Calculating Interest

Need the following 3 numbers:PrincipalAnnual Interest RateLength of time investing

Principal x Annual Interest Rate = Interest Earned for 1 Year

P x R = I$1,000 x 5% = $50

Future ValueA. Future Value of a Single Deposit

A. $1000 deposit, 5% interest rate=$50 1st yrA. ($1000+$50) x 5%= $52.50 2nd yr = $1102.50

B. Future Value of a Series of DepositsA. $1000 a yr @ %5 6 yrs. = $1000 x 6.802=$6802

C. Present Value of a Single DepositA. Amt to deposit now to have a desired amt.

Want $1000…1000 x .784=$784 nowPresent Value Series of Deposits-how much you need to take so much out later onEx. Want $400 each year for 9 yrs, how much need in acct right now?

Achieving Your Financial Goals

1. Obtain – making money2. Plan – how to spend3. Spend – less than earn!4. Save – bills, emergencies, long-term5. Borrow – when necessary6. Invest – income & long-term growth7. Manage Risk – protect if sick,

injured, die8. Retire – enjoy life