Quiz 1 Notes 04 29 2014 Chapter 1 The Financial Planning Process Personal finance a specialized area of study that focuses on individual and household financial decisions budgeting saving spending insurance Personal financial planning developing and implementing an integrated comprehensive plan designed to meet financial goals to improve financial well being and plan for financial emergencies Purpose buying a first home bigger home consumer purchase Why do People Avoid Financial Planning They don t believe their math finance skills are adequate fear failure expect someone else to take care of it FIVE Steps in the Financial Planning Process Step 1 Analyze your current position o College and organize all financial info create financial statements o Determine a baseline to measure progress Step 2 Develop short term and long term goals o Prioritize your goals why you have the goals you do Step 3 Identify and Evaluate alternative strategies for achieving your goals o Evaluate the costs benefits of each strategy be creative o May need to reduce spending increase earnings Step 4 Implement a plan for achieving your goals o Your plan should meet your basic needs build wealth Step 5 Regularly reevaluate and revise your plan o Revise your plan when your life changes or when economic conditions change RETURN TO STEP 1 Life Situation General Economic Conditions than inflation rate Your age marital status number of kids will impact financial situation college degree earn 26 000 more than only hs degree Inflation changes in price over time want income to increase faster Consumer Price Index measure of the price of a representative basket of household goods and services in the US market Calculating Percentage Change Percentage Change New Value Old Value Old value Annual Percentage Change 1 Percentage Change 1 N 1 o N of years Interest Rates When you borrow money it is what you must pay another person to Interest rate the cost of money be able to use their money for a certain period of time When you loan money it is the amount you charge the borrower for the use of your money for a certain period of time Interest rates are impacted by the supply of money and the demand for money Basic Supply and Demand Principles Prices of goods services are affected by supply demand High demand lower sellers price tends to rise High supply low demand price tends to fall Federal Reserve Bank Controls monetary policy for the US When Fed wants to stimulate economy so it decreases interest rates When Fed wants to slow economy it increase interest rates Fed doesn t have direct control over interest rates o When it wants to make interest rates go down it increases supply of money buys treasury bills o More money in economy competition forces lenders to reduce rates individuals can get lower mortgage rates companies make more investments Lot of money in the economy interest rates fall Less money interest rates rise price of money Recession businesses are not spending money or hiring employees Expansion businesses are spending money and hiring employees Chapter 2 Financial Planning Tools Keep tax records for seven years Keep documents in a safe deposit box private storage area or lockbox if it can be replaced keep readily accessible Financial Records Receipts billing statements tax records insurance policies investment info bank account statements legal docs Short Term ATM receipts household bills Intermediate Term evidence in support of tax deductions bank statements Long Term birth marriage and death certificates wills deeds SS records info on assets Assets things you own things you can turn into money Debts amount you owe Net work Total assets total debts Negative net worth if you sold everything you own and emptied all your savings accounts you would not be able to pay off your debts Positive net worth if you sold everything you own and emptied all your savings accounts you could pay off your debts and have extra Cash Flow Statement tracks where your money came from and went over a Income not limited to what is earned from salaries and wages its also gifts specific period of time interest scholarships Expenses Fixed Expenses usually paid in the same amount during each time period often contractual rent mortgage payment Variable Expenses expenditures you can control items amounts differ from month to month spending on clothing and food Occasional Expenses pay infrequently Net Cash flow cash inflows cash outflows Negative cash flow you aren t making enough to cover your expenses need to increase income decrease spending Positive cash flow you make more than what you spend each month Liquidity the speed and ease with which an asset can be converted to cash Liquidity Ratio how many months you could pay your monthly expenses form your liquid assets liquid assets monthly expenses Debt Payment Ration total monthly debt payments after tax monthly Mortgage student loans car loans 20 or more is high for debts Mortgage Debt service principal interest tax insurance gross monthly income income Market value the price that something can be sold for today Cash Surrender value the amount the insurer will pay to the policy owner if a cash value insurance policy is canceled Insolvency the inability to pay your debts as they come due Gross Income income before taxes and expenses Debt Payment Ratio estimates the percentage of your after tax income that Total monthly debt payments after tax monthly income Savings Ratio percentage of your after tax income that is being allocated to goes to paying debts savings Monthly savings After tax monthly income Time Value of Money money received today is more valuable than money received in the future because of the power of compounding Compounding interest is paid on both the original investment and interest already earned Compound interest earning interest on interest FV PV 1 i n FV future value PV present value PMT serious of equal payments I interest rate for one period N number of periods PV FV 1 1 i n How much would u have to invest Discounting calculating the present value of a lump sum or a series of payments to be received in the future Future Value of an Annuity Annuity series of equal payments made at regular intervals for a period of time o Ordinary annuity payment occurs at the end of the period o Annuity due payment occurs at the beginning of the period FVA PMT 1 i n 1 i Present Value of an Annuity the lump sum amount that must be deposited today to provide for equal periodic
View Full Document