What it Takes to Become a Millionaire 1. Americans are Obsessed with Millionaires… Do an Amazon...

What it Takes to Become a Millionaire

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Americans are Obsessed with Millionaires…

Do an Amazon Search on books with “Millionaire” in their title: over 1,370 books…

TV Shows - Survivor winner $1 million“Who Wants to Be a Millionaire”“Joe Millionaire”“Deal or No Deal”

Lottery

How hard is it to become a millionaire?

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Not Very Hard…

If a 30 year old making $50,000 a year (plus 3% raises each year), saving 10% of their income with a 10% return each year, could expect to hit millionaire status at age 59. If they work until the traditional retirement age of 65, they will have over 2 million saved up…

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What can you do…

Start Saving Early…

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The Importance of Starting Early

Earning 9% interest5

What Happens When you Wait…

Earning 9% interest6

Top 5 Ways to Become a Millionaire…

1. Earn Income2. Live Within Your Means3. Save Money4. Invest Wisely5. Stick With Your Plan

Source: GenXFinance.com

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Misconceptions… Spending is a sign of wealth. You don’t have to worry about money when you

are young. Those who buy very expensive things always

have more wealth than people who buy less expensive things.

You can’t spend money when your bank account is empty.

There are no consequences to spending more money than you have.

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Millionaire Next Door Research Found:

Most millionaires are college graduates Only 19% of millionaires received money from a trust fund

or estate. Most millionaires drive Fords, Chryslers or Chevrolets. Most millionaires wear inexpensive clothes. Few millionaires lease cars Most millionaires are homeowners Only 17% of millionaires attended a private elementary or

high school

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Where do you begin…

Create a Financial Plan

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Chapter 1

Personal Finance Basics & the Time Value of Money

Chapter 1

Personal Finance Basics & the Time Value of Money

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1. Analyze the process for making personal financial decisions

2. Develop personal financial goals

3. Assess personal and economic factors that influence personal financial planning

4. Determine the personal and financial opportunity costs associated with personal financial decisions

5. Identify strategies for achieving personal financial goals for different life situations

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Chapter 1 Learning Objectives

Objective 1: Analyze the process for making personal financial decisions

Personal Financial Planning is the process of managing your money to achieve personal economic satisfaction

Advantages of Personal Financial Planning are:

1. Increased effectiveness in obtaining, using and protecting financial resources

2. Increase control of one’s financial affairs

3. Improved personal relationships

4. Sense of freedom from financial worries

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The Financial Planning Process

Six-step procedure for Financial Planning

Determine your current financial situation. Develop your financial goals. Identify alternative courses of action. Evaluate your alternatives. Create and implement your financial

action plan. Review and revise your plan.

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The Financial Planning Process (continued)

Step 1: DETERMINE YOUR CURRENT FINANCIAL SITUATION

Determine current financial situation regarding income, savings, living expenses, and debts

Prepare a list of current asset and debt balances and amount spent for various items

Match financial goals to current income and potential earning power

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Step 2: DEVELOP YOUR FINANCIAL GOALS

Identify feelings about money and the reasons for those feelings

Determine the source of your feelings about money

Determine the effects of economy on your goals and priorities

Make sure that your goals are your own and are specific to your situation

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Step 3: IDENTIFY ALTERNATIVE COURSES OF ACTION

Possible courses of action can be: Continue the same course of action Expand the current situation Change the current situation Take a new course of action

Creativity in decision making is vital to effective choices

“Do nothing” can be a dangerous alternative17


Step 4: EVALUATE YOUR ALTERNATIVES

CONSEQUENCES OF CHOICES Opportunity cost - What you give up when you make a choice The cost or trade-off of a decision cannot always

be measured in dollars. Sometimes the cost is your time

EVALUATING RISK Uncertainty is a part of every decision. Best way to analyze and minimize risk is to gather

information from financial planning sources. (Exhibit 1-3)

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Step 5: CREATE AND IMPLEMENT YOUR FINANCIAL ACTION PLAN

Develop an action plan that identifies ways to achieve financial goals

Possible action plans can be increasing savings, reducing spending, or making provisions for taxes

To implement action plans you may need assistance from others

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Step 6: REVIEW AND REVISE YOUR PLAN

Financial planning decisions need to be assessed regularly

Complete review should be done at least once a year

Regular reviews of decision-making process can help in making priority adjustments to achieve financial goals

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Objective 2: Develop personal financial goals TYPES OF FINANCIAL GOALS can be:

Influenced by the time frame in which you want to achieve your goals

Influenced by the financial need that drives your goals

TIMING OF GOALS Short-term, intermediate and long-term goals

Long term goals should be planned in coordination with short-term and intermediate goals

GOALS FOR DIFFERENT FINANCIAL NEEDS Consumer product goals Durable-produce goals Intangible-purchase goals

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Developing Personal Financial Goals

GOAL-SETTING GUIDELINES

Goals should be realistic

Goals should be stated in specific terms

Goals should have a time frame

Goals should indicate the action to be taken

Discuss some of your goals

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Developing Personal Financial Goals (continued)

Specific. This is a Goal Statement, and should be a short paragraph of one or two sentences describing the goal.

Measurable. This is a description of how to measure the goal; how can you tell when the goal is accomplished?

Achievable. This portion of the work sheet should go over what actions may be required to reach the goal, what obstacles may arise, and how such blocks can be handled and overcome.

Relevant. Why is this the goal? How is this important to you, and what benefits will come to you by reaching this goal? ("R" can also stand for Realistic).

Timely. This is the section where you lay out your time line - there should be a definite start and end date and any milestones should have clearly defined parameters.

A)Realize setting goals and committing to them can benefit them both short and long term.

B) Be ready and willing to risk failure in order to attempt reaching higher goals.

C) Use failures and mistakes as learning opportunities; not get discouraged when faced with momentary setback

Smart goal setting is ensured by following certain steps when creating goals for yourself. SMART is an acronym for the following characteristics that should be present in your goal.

Smart goals are specific….

Specific goals are much more likely to be accomplished than vague ones

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Objective 3: Assess personal and economic factors that influence personal financial planning

LIFE SITUATION AND PERSONAL VALUES Adult life cycle stage Marital status, household size, and employment Major events

Graduation, marriage, career change, children, retirement, etc

Values What values are important to you?

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Influences on Personal Financial Planning

ECONOMIC FACTORS

Forces of Supply and Demand and prices

Study of how wealth is created and distributed

Economy includes different institutions

Federal Reserve Bank and it’s role in the economy

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Influences on Personal Financial Planning (continued)

GLOBAL INFLUENCES

Global marketplace influences financial activities

American companies compete against foreign companies for US dollars

Balance of exports and imports

Foreign investments and their role in the US Money Supply

The level of Money Supply affects interest rates

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ECONOMIC CONDITIONS

Consumer The value of the dollarprices changes in inflation

Consumer The demand for goods and spending services by individuals and households

Interest rates The cost of money; cost ofcredit when you borrow; returnon your money when you saveor invest 27


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PersonalOpportunity Costs

(time, effort, health)

FinancialOpportunity Costs(Interest, liquidity,

safety )

Financial

Acquisitions

(automobile, home, college education, investments, insurance, retirement fund)

Every financial decision involves giving up something to obtain something else

PERSONAL OPPORTUNITY COSTS

Time

Other personal opportunity costs can be related to health, leisure etc.

Personal resources like financial resources require careful management

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Opportunity Costs and the Time Value of Money

FINANCIAL OPPORTUNITY COSTS

Time Value of Money Increases in an amount of money

as a result of interest earned. Saving today means more money

tomorrow. Spending means lost interest. Saving and spending decisions involve

considering the trade-offs. Current needs can make spending worthwhile.

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Opportunity Costs and the Time Value of Money (continued)

INTEREST CALCULATIONS

Three amounts are required to calculate the time value of money Principal Interest rates Time

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COMPUTING SIMPLE INTEREST(Amount in savings) x (annual interest rate) x (time period) = (interest)

For Example:$100 x 5% x 1 (1 year) 100 x .05 x 1 = $5.00

In one year you have $100 in principle plus $5.00 in interest for a total of $105 at the end of the year

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FUTURE VALUE OF A SINGLE AMOUNT Future value is the amount to which current savings will

increase based on a certain interest rate and a certain time period

Future value is also call compounding - earning interest on previously earned interest

FUTURE VALUE OF A SERIES OF DEPOSITS Future value can be computed for a single amount or for a

series of deposits called annuitiesQuestion:

If you desire to have $10,000 in savings 8 years from now, what amount would you need to deposit in an account that earns 5%? $10,000 x .677 =$6,770 (Used Exhibit 1-8C on pg 19)

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PRESENT VALUE OF A SINGLE AMOUNT Present Value is the current value of a future amount

based on a certain interest rate and a certain time period Present value calculations are also called discounting The present value of the amount you want in the future

will always be less than the future value (See Exhibit 1-8C)

PRESENT VALUE OF A SERIES OF DEPOSITS Present value can be computed for a single amount or for

a series of deposits (See Exhibit 1-8D)

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Rule of 72

The Rule of 72 provides a guideline for determining how long it takes your money to double and illustrates the power of compound interest.

Question:You are earning 8% interest. How long will it take for you money to double? 72 / 8 = 9 years

This rule can also be used to determine the interest rate you need to earn to double your money.

Question:If you would like your money to double in 12 years, what is the rate of return you need to earn on your money?

72 / 12 = 6% 35

DEVELOPING A FLEXIBLE FINANCIAL PLAN

A financial plan is a formalized report that...

Summarizes your current financial situation

Analyzes your financial needs

Recommends future financial activities

Your financial plan can be created by you, with assistance from a financial planner, or made using a money management software package

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Achieving Financial Goals

IMPLEMENTING YOUR FINANCIAL PLAN

Develop good financial habits

Use a well conceived spending plan to help you stay within your income, while allowing you to save and invest for the future

Have appropriate insurance protection to prevent financial disasters

Become informed about tax and investment alternatives

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Achieving Financial Goals (continued)

What it Takes to Become a Millionaire 1. Americans are Obsessed with Millionaires… Do an Amazon...

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