Chapter 1

Personal Finance Basics and the Time Value of Money

McGraw-Hill/Irwin

Copyright 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.
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The 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.

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Every Financial Decision Involves 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.
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Developing 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.
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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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Influences on Personal Financial Planning

Life situation and personal values
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 conditions
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Changing Economic Conditions

Consumer prices Consumer spending
The value of the dollar changes in inflation.

The demand for goods and services by individuals and households. The cost of money; cost of credit when you borrow; return on your money when you save or invest.
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Interest rates

Changing Economic Conditions

(continued)

Money Supply

The dollars available for

spending in our economy.

Unemployment The number of individuals without employment who are willing and able to work. Housing starts Number of new homes being built.
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Changing Economic Conditions

(continued)

GDP: Gross Total value of goods and Domestic Product services produced in a

country.
Trade balance

Difference between a countrys exports and imports. The relative value of stocks as represented by the index, such as the Dow Jones Average or the S&P 500.

Market indexes

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Opportunity Costs and Financial Results Evaluated When Making Decisions

Personal Opportunity Costs (time, effort, health) Financial Opportunity Costs (Interest, liquidity, safety )

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

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Components 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)
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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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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. Study personal finance.
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