Slide 1Financial Planning and Its BenefitsThe Financial Planning ProcessConsequences of Choices: Opportunity CostEvery Financial Decision Involves Evaluating Types of RiskFinancial Planning Information SourcesDeveloping Personal Financial GoalsGoal-Setting GuidelinesInfluences on Personal Financial PlanningChanging Economic ConditionsChanging Economic Conditions (continued)Slide 12Opportunity Costs and Financial Results Evaluated When Making DecisionsTime Value of MoneyHow Simple Interest is ComputedFuture ValuePresent ValueComponents of Financial PlanningDeveloping a Flexible Financial PlanImplementing Your Financial PlanImplementing Your Financial Plan (continued)Lucky YouChapter 1Personal Financial Planning: An IntroductionPersonal Financial Planning: An IntroductionMcGraw-Hill/IrwinCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.Financial Planning and Its Benefits•Personal financial planning - Process of managing money to achieve personal economic satisfaction. •Advantages of personal financial planning:1) Increased effectiveness in obtaining, using, and protecting your financial resources.2) Increased control of your financial affairs.3) Improved personal relationships.4) A sense of freedom from financial worries obtained by looking to the future.1-2The Financial Planning Process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.1-3Consequences of Choices:Opportunity Cost•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.What opportunity costs do you have from being a college student?1-4Every Financial DecisionInvolves Evaluating Types of Risk•Inflation risk.Rising prices cause lost buying power.•Interest-rate risk.Effect costs of borrowing and rate of return.•Income risk.The loss of a job.•Personal risk.Health, safety, or costs.•Liquidity risk.Higher return may mean less liquidity.1-5Financial Planning Information Sources• Printed materials.• Financial institutions.• School courses and educational seminars.• The internet, online sources, computer software.• Financial specialists.Financial planners, bankers, accountants, insurance agents, lawyers and tax preparers.1-6Developing Personal Financial Goals•Types of financial goals include those...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.•Goals for different financial needsConsumer product goals, etc.1-7Goal-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 goals1-8Influences on Personal Financial Planning•Adult life cycle stage.•Marital status, household size, and employment.•Major events.Graduation, marriage, children, retirement, etc.•Values.What values are important to you?•Global influences•Economic conditionsLife situation and personal values1-9Changing Economic ConditionsConsumer 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.1-10Changing Economic Conditions (continued)Money Supply The dollars available for spending in our economy.Unemployment The number of individualswithout employment who arewilling and able to work.Housing starts Number of new homes beingbuilt.1-11Changing Economic Conditions (continued)GDP: Gross Total value of goods andDomestic Product services produced in acountry.Trade balance Difference between acountry’s exports andimports.Market indexes The relative value of stocks as represented bythe index, such as theDow Jones Average or theS&P 500.1-12Opportunity Costs and Financial Results Evaluated When Making DecisionsPersonalOpportunity Costs(time, effort, health)FinancialOpportunity Costs(Interest, liquidity, safety)FinancialAcquisitions(automobile, home, college education, investments, insurance, retirement fund)1-13Time 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.1-14How Simple Interest is Computed•Simple Interest.Amount in savings x annual interest rate x time period equals the interest.$100 x 5% x 1 (1 year) 100 x .05 x 1 = $5.00In one year you have $100 in principle plus $5.00 in interest for a total of $105 at the end of the year.1-15Future Value•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 can be computed for a single amount or for a series of deposits.1-16Present Value•The current value for 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 can be computed for a single amount or for a series of deposits.1-17Components of Financial Planning•Obtaining (chapter 2)•Planning (chapters 3, 4)•Saving (chapter 5)•Borrowing (chapters 6, 7)•Spending (chapters 8, 9)•Managing risk (chapters 10-12)•Investing (chapters 13-17)•Retirement and estate planning (chapters 18, 19)1-18Developing 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.1-19Implementing Your Financial Plan•Develop good financial habits.Use a well conceived spending plan to help you stay within your income, while allowing you