Post on 30-Nov-2014
description
33 Kapoor
Dlabay
Hughes
7e
©The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
PE
RS
ON
AL
FIN
AN
CE
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
1-1
CHAPTER 1
Personal Finance
Personal Financial Planning: An Introduction
Kapoor Dlabay Hughes
7e
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
Financial Planning and Its Benefits
Personal financial planning is the process of managing your money to achieve personal economic satisfaction. There are several advantages of personal financial planning.
Increased effectiveness in obtaining, using, and protecting your financial resources.
Increased control of your financial affairs. Improved personal relationships. A sense of freedom from financial worries
obtained by looking to the future. 1-2
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
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.
1-3
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
Consequences of Choices:Opportunity CostOpportunity cost is what you give up by making a choice.
The cost, referred to as the trade-off of a decision, cannot always be measured in dollars. Sometimes the cost is your time.
Consider lost opportunities that will result from your decisions.
1-4
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
Every 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.1-5
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
Financial Planning Information Sources
Printed materials. Financial institutions. School courses and educational seminars. Computer software, World Wide Web, and on-line information sources. Financial specialists.
Financial planners, bankers, accountants, insurance agents, lawyers and tax preparers.
1-6
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
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. Goal setting guidelines suggests goals should...
Be realistic, be stated in specific, measurable terms, have a time frame, and indicate the type of action to be taken.
1-7
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
Influences on Personal Financial Planning
Adult life cycle stage. Marital status, household
size, and employment. Major events.
Graduation, marriage, divorce. Birth or adoption of child. Career or health changes.
Values. What are the ideas and principles you consider
correct, desirable and important?
Life situation and personal values
1-8
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
Influences on Personal Financial Planning
Global influences. The global marketplace influences
financial activities.Foreign investors.Competition from foreign companies.
Economic conditions....
Economic factors:
1-9
(continued)
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
Changing Economic Conditions
Consumer The value of the dollarprices changes in inflation.
Consumer The demand for goods and services spending by individuals and households.
Interest rates The cost of money; cost of credit when you borrow; return on your money when you save or invest.
1-10
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
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.
1-11
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
Changing Economic Conditions (continued)
GDP: Gross Total value of goods and services Domestic Product produced in a country.
Trade balance Difference between a country’s exports and imports.
Market indexes The relative value of stocks as represented by the index, such as the Dow Jones Average or theS&P 500.
1-12
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
Opportunity Costs and Financial Results Evaluated When Making Decisions
PersonalOpportunity Costs
(time, effort, health)
FinancialOpportunity Costs(Interest, liquidity,
safety )
Financial
Acquisitions
(automobile, home, college education, investments, insurance, retirement fund)
1-13
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
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.
1-14
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
How 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 = $5.00
In one year you have $100 in principle plus $5.00 in interest for a total of $105 at the end of the year.
1-15
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
Future 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.
1-16
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
Present 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.
1-17
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
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) 1-18
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
Developing a Flexible Financial Plan
A financial plan is formalized report that... Summarizes your current financial situation. Analyzes your financial needs. Recommends future financial activities.
You financial plan can be created by you, done with assistance from a financial planner, or made using a money management software package.
1-19
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
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.
1-20
© The McGraw-Hill Companies, Inc., 2004. All Rights Reserved.
Irwin/McGraw-Hill
Implementing Your Financial Plan
Achieving your financial objectives requires two things.A willingness to learn.Appropriate information sources (see Appendix A).
Current periodicals.Financial institutions.Courses and seminars.Personal financial software.The World Wide Web.Financial specialists.
(continued)
1-22