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McGraw-Hill/Irwin
Financial Planning
Process of managing your money to achieve personal economic satisfaction Financial Plan:
Formalized report Summarizes current financial situation Analyzes financial needs Recommends future financial activities
1-3
Identify Social and Economic Influences on Personal Financial Goals and Decisions Life situation and personal values Financial planning in our economy
Domestic economic influences Global Influences Inflation Interest rates
Objective 1
1-5
Major events:
Graduation, marriage, divorce Birth or adoption of child Career or health changes
Values:
The ideas and principles you consider correct, desirable, and important
1-6
1-7
1-8
1-9
Financial Planning in Our Economy Interest Rates Interest Rate = the cost of money Affected by supply and demand Risk premium:
Length of time funds in use Expected inflation Uncertainty
1-10
Objective 2
1-12
Goal-Setting Guidelines
Effective Goals should be:
Realistic
Stated
in specific, measurable
1-13
Objective 3
1-14
Personal
Opportunity Costs (time, effort, health)
Financial Acquisitions
(car, home, college education, investments, insurance, retirement fund)
Financial
Opportunity Costs (Interest, liquidity, safety )
1-15
Simple interest:
Amt in Svgs
Time Period
Interest
1-17
$500
6%
1/2
$15
1-18
Future Value
The increased value of money from interest earned Amount to which current savings will increase Total amount available in the future Compounding
1-19
Future Value
Example
Future Value
Original Amount in Savings
Interest Earned
$100 deposited for 1 year at 6% per year Future Value = $100 + ($100 X .06 X 1) Future Value = $100 + $6 = $106
1-20
Present Value
The current value of a future amount based on a certain interest rate and time period The current value of an amount desired in the future How much to deposit now to obtain a desired total in the future Discounting
1-21
1-22
Objective 4
1. Determine current financial situation 2. Develop financial goals 3. Identify alternative courses of action Continue same course of action Expand current situation Change current situation Take a new course of action
1-23
Implement a Plan for Making Personal Financial and Career Decisions 4. Evaluate alternatives Consequences of choices Evaluate risks Financial Planning information sources 5. Create and implement financial action plan 6. Review and revise plan
1-24
Objective 4
1-25
2.
3.
4.
The life work one selects = key to financial well being and personal satisfaction Career choices have risks and opportunity costs Career choices require periodic reevaluation of trade-offs related to personal, social and economic factors Changing personal and social factors require continuous assessment of your work situation
1-26