Personal Finance Basics and the Time Value of Money
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Transcript of Personal Finance Basics and the Time Value of Money
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Chapter 1Chapter 1
Personal Finance BasicsPersonal Finance Basicsand the Time Value of Moneyand the Time Value of Money
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Personal Financial PlanningPersonal Financial Planning The process of managing your money The process of managing your money
to achieve personal economic to achieve personal economic satisfactionsatisfaction
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Advantages of Advantages of Personal Financial PlanningPersonal Financial Planning Increased effectiveness with your Increased effectiveness with your
financial resourcesfinancial resources Increased control of your finances Increased control of your finances
to avoid financial pitfallsto avoid financial pitfalls Improved personal relationshipsImproved personal relationships A sense of freedom from financialA sense of freedom from financial
worriesworries
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Financial Planning ProcessFinancial Planning ProcessStep 1Step 1
Determine your current financial Determine your current financial situationsituation IncomeIncome SavingsSavings Living expensesLiving expenses DebtsDebts
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Financial Planning ProcessFinancial Planning ProcessStep 2Step 2
Develop your financialDevelop your financial goalsgoals
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Financial Planning ProcessFinancial Planning ProcessStep 3Step 3
Identify alternative courses of actionIdentify alternative courses of action Continue the same course of action Continue the same course of action Expand the current situationExpand the current situation Change the current situationChange the current situation Take a new course of actionTake a new course of action
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Financial Planning ProcessFinancial Planning ProcessStep 4Step 4
Evaluate your alternativesEvaluate your alternatives Opportunity cost--what you give up Opportunity cost--what you give up
by making a choiceby making a choice
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Evaluating RisksEvaluating Risks
Inflation-rising pricesInflation-rising prices Interest rateInterest rate IncomeIncome PersonalPersonal Liquidity-ability to easily convert your Liquidity-ability to easily convert your
financial resources into cash without a financial resources into cash without a loss in valueloss in value
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Financial Planning Financial Planning Information SourcesInformation Sources Printed materialsPrinted materials Media sourcesMedia sources Financial specialistsFinancial specialists School courses and community School courses and community
seminarsseminars Financial institutionsFinancial institutions Online sourcesOnline sources
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Financial Planning ProcessFinancial Planning ProcessStep 5Step 5
Create and implement your financial Create and implement your financial action planaction plan
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Financial Planning ProcessFinancial Planning ProcessStep 6Step 6
Review and revise your planReview and revise your plan
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GoalsGoals
Short-term (one year or less)Short-term (one year or less) Intermediate (2-5 years)Intermediate (2-5 years) Long-term (5+ years)Long-term (5+ years)
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Types of GoalsTypes of Goals
Consumable-products involve items Consumable-products involve items that are used up relatively quicklythat are used up relatively quickly
Durable-products involve Durable-products involve infrequently purchased, expensive infrequently purchased, expensive itemsitems
Intangible-purchases involve items Intangible-purchases involve items relating to personal relationshipsrelating to personal relationships
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Creating S.M.A.R.T GoalsCreating S.M.A.R.T Goals SSpecific – Ask Who, What, pecific – Ask Who, What,
Where, When, Which, WhyWhere, When, Which, Why MMeasurable – Ask how much? easurable – Ask how much?
How many?How many? AAttainable – This can be self-ttainable – This can be self-
fulfilling: people who name fulfilling: people who name their goals grow and achievetheir goals grow and achieve
RRealistic – Are you willing and ealistic – Are you willing and able to work towards this able to work towards this goal?goal?
TTime frame – How will I know ime frame – How will I know when it is accomplished?when it is accomplished?
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SMART PracticeSMART Practice ““Get in shape”Get in shape”
““Get a degree”Get a degree”
““Make more money”Make more money”
““Save money for a car”Save money for a car”
““Get better grades”Get better grades”
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Influences on Influences on Personal Financial PlanningPersonal Financial Planning
Life situationLife situation Adult life cycle—the stages in the family and Adult life cycle—the stages in the family and
financial needs of an adultfinancial needs of an adult Personal values--the ideas and principles that Personal values--the ideas and principles that
you consider correct, desirable and importantyou consider correct, desirable and important Economic factorsEconomic factors
Consumer pricesConsumer prices Rule of 72 and CPIRule of 72 and CPI
Consumer spendingConsumer spending Interest ratesInterest rates
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Time Value of MoneyTime Value of Money
The increases in an amount of The increases in an amount of money as a result of interest earnedmoney as a result of interest earned
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Interest CalculationsInterest Calculations
I=P x R x TI=P x R x T Principal-amount of money you Principal-amount of money you
deposit or borrowdeposit or borrow Rate-interest rate financial interest Rate-interest rate financial interest
pays or chargespays or charges Time-amount of time principal is Time-amount of time principal is
deposited or borrowed (based on one deposited or borrowed (based on one year)year)
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Future ValueFuture Value
The amount to which current savings The amount to which current savings will increase based on a certain will increase based on a certain interest rate and a certain time interest rate and a certain time period--see chart on p. 18period--see chart on p. 18
Compounding-interest earned on Compounding-interest earned on interestinterest
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Present ValuePresent Value
The current value for a future The current value for a future amount based on a certain interest amount based on a certain interest rate and a certain time period--see rate and a certain time period--see chart on p. 18chart on p. 18
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Components of Components of Personal Financial PlanningPersonal Financial Planning Obtaining (Ch. 2)Obtaining (Ch. 2) Planning (Ch. 3-4)Planning (Ch. 3-4) Saving (Ch. 5)Saving (Ch. 5) Borrowing (Ch. 6-7)Borrowing (Ch. 6-7) Spending (Ch. 8-9)Spending (Ch. 8-9) Managing risk (Ch. 10-12)Managing risk (Ch. 10-12) Investing (Ch. 13-17)Investing (Ch. 13-17) Retirement and estate planning (Ch. 18-19)Retirement and estate planning (Ch. 18-19)
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Financial PlanFinancial Plan
A formalized report that summarizes A formalized report that summarizes your current financial situation, your current financial situation, analyzes your financial needs, and analyzes your financial needs, and recommends future financial recommends future financial activitiesactivities
Example on p. 23Example on p. 23