Types of Influences Many factors influence daily financial decisions – Age – Household size –...
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Transcript of Types of Influences Many factors influence daily financial decisions – Age – Household size –...
Influences on Personal Financial PlanningDr. Steve Hays
Personal FinanceBishop Kearney High School
Spring 2013
Types of Influences
• Many factors influence daily financial decisions– Age– Household size– Interest rates– Inflation
• Three primary elements– Life situation– Personal Values– Economic factors
Life Situation and Personal Values• People in their 20s spend
money differently than people in their 50s
• Life situation and/or lifestyle created by a combination of factors
• As society changes, financial needs evolve– People marry later in life– Two income households– Two million women care for
dependent children and their own parents
– 80% of Americans will live past age 65
The Adult Life Cycle
Age
18-24
45-5425-34
55-6435-44
65+
Employment Situation
Full time student
Full time employment
or volunteer work
Not employed
Part-time employment or
volunteer work
Marital Status
Single
Separated/Divorced
Married
Widowed
Number and Age of Household Members
No other household members
College students
Preschool children
Dependant adults
Elementary/secondary age
Non-dependant
adults
The stages in the family situation and financial needs of an
adult
Defined by Values
• What are values?– Ideas and principles you
consider correct, desirable, important
• Have direct influence on:– Spending decisions– College/career choices– Lifestyle choices
Economic Factors
• What is economics?– The study of how wealth is created and
distributed
• Includes various institutions– Business – Labor– Government• Working together to satisfy our needs and wants
Economic Conditions
• Personal financial decisions influenced by:– Consumer prices– Consumer spending– Interest rates
Consumer Prices
• Inflation– Rise in general level of prices– Buying power of dollar decreases– Increase in demand without comparable increase in
supply• Most harmful to those living on fixed incomes• Also adversely affects money lenders– Interest rates rise during high inflation
• 50s-60s: 1-3%• 70s-early 80s: 10-12%
– At 12% inflation prices double in about 6 years
Consumer Spending
• Total demand for goods and services influences – employment
opportunities – potential for income
• Increased spending creates more jobs, higher wages
• Also increases interest rates and prices
Interest Rates
• Represents the cost of money• When consumer savings and investing
increase the supply of money, interest rates decrease
• As demand for money increases, interest rates rise
• Interest rates affect financial planning– Earnings reflect current interest rates
Opportunity Cost and Time Value of Money
Opportunity Costs
Financial Acquisition
s
• You always give up something when you make choices
• Constantly making choices among financial decisions
• Must consider the time value of money– The increase in an
amount of money as a result of interest earned
Opportunity Cost In Financial Decisions
• Setting aside funds in a savings plan with little or no risk has the opportunity cost of potentially higher returns from a higher risk investment
• Having extra money withheld from your paycheck in order to receive a tax refund has the opportunity cost of the lost interest the money could earn in a savings account
• Making adequate deposits in a retirement account an help you avoid the opportunity cost of having inadequate funds later in life.
Interest Calculations
Amount in
Savings
Annua
l Interest Rate
Time
Period
Interest
Example
• $500 on deposit• 6% interest• 6 months• What is the interest earned?
$500 x .06 x 6/12 = ?
Future Value of a Single Amount
• What is Future Value (FV)?– The amount to which current savings will increase
based on a certain interest rate and a certain time period
– FV = Original Amount in Savings + Amount of Interest Earned (Original Amount x Interest Rate x Time Period)
– Example: $650 @ 8% for 1 year = FV ??
Present Value of a Single Amount
• Determine the current value of a desired amount for the future
• Based on certain interest rate and certain time period
• Present value computations are also known as discounting– Allows you to determine how much to deposit
now to obtain a desired total in the future
Achieving Financial Goals
• Components of Personal Financial Planning– Obtaining– Saving– Borrowing– Spending– Managing Risks– Investing– Retirement and Estate Planing
Developing a Financial Plan
• Flexibility is important!• What is a financial plan?– A formalized report that summarizes your current
financial situation, analyzes your needs, and recommends future financial activities
Homework – Part 1
• Computing the Time Value of Money• Using the time value of money tables, calculate
the following:1. The FV of $450 6 years from now at 7%2. The FV of $800 saved each year for 10 years at 8%3. The amount a person would have to deposit today
(PV) at 6% interest rate to have $1000 seven years from now
4. The amount a person would have to deposit today to have $2500 ten years from now while earning 8% interest
Homework – Part 2
• Watch the Super Bowl and evaluate/rate all of the commercials on scale of 1-5 with 5 being the best, 1 being the worst
• Be prepared to discuss how each of the commercials influences buying decisions and whether or not the commercial would influence your future purchasing decisions
• Research to see how much money was spent on all the Super Bowl commercials this year. Was it money well spent? Why or why not?