What it Takes to Become a Millionaire
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Transcript of What it Takes to Become a Millionaire
What it Takes to Become a Millionaire
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Americans are Obsessed with Millionaires…
Do an Amazon Search on books with “Millionaire” in their title: over 1,370 books…
TV Shows - Survivor winner $1 million“Who Wants to Be a Millionaire”“Joe Millionaire”“Deal or No Deal”
Lottery
How hard is it to become a millionaire?
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Not Very Hard…
If a 30 year old making $50,000 a year (plus 3% raises each year), saving 10% of their income with a 10% return each year, could expect to hit millionaire status at age 59. If they work until the traditional retirement age of 65, they will have over 2 million saved up…
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What can you do…
Start Saving Early…
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The Importance of Starting Early
Earning 9% interest5
What Happens When you Wait…
Earning 9% interest6
Top 5 Ways to Become a Millionaire…
1. Earn Income2. Live Within Your Means3. Save Money4. Invest Wisely5. Stick With Your Plan
Source: GenXFinance.com
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Misconceptions… Spending is a sign of wealth. You don’t have to worry about money when you
are young. Those who buy very expensive things always
have more wealth than people who buy less expensive things.
You can’t spend money when your bank account is empty.
There are no consequences to spending more money than you have.
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Millionaire Next Door Research Found:
Most millionaires are college graduates Only 19% of millionaires received money from a trust fund
or estate. Most millionaires drive Fords, Chryslers or Chevrolets. Most millionaires wear inexpensive clothes. Few millionaires lease cars Most millionaires are homeowners Only 17% of millionaires attended a private elementary or
high school
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Where do you begin…
Create a Financial Plan
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Chapter 1
Personal Finance Basics & the Time Value of Money
Chapter 1
Personal Finance Basics & the Time Value of Money
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1. Analyze the process for making personal financial decisions
2. Develop personal financial goals
3. Assess personal and economic factors that influence personal financial planning
4. Determine the personal and financial opportunity costs associated with personal financial decisions
5. Identify strategies for achieving personal financial goals for different life situations
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Chapter 1 Learning Objectives
Objective 1: Analyze the process for making personal financial decisions
Personal Financial Planning is the process of managing your money to achieve personal economic satisfaction
Advantages of Personal Financial Planning are:
1. Increased effectiveness in obtaining, using and protecting financial resources
2. Increase control of one’s financial affairs
3. Improved personal relationships
4. Sense of freedom from financial worries
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The Financial Planning Process
Six-step procedure for Financial Planning
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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The Financial Planning Process (continued)
Step 1: DETERMINE YOUR CURRENT FINANCIAL SITUATION
Determine current financial situation regarding income, savings, living expenses, and debts
Prepare a list of current asset and debt balances and amount spent for various items
Match financial goals to current income and potential earning power
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The Financial Planning Process (continued)
Step 2: DEVELOP YOUR FINANCIAL GOALS
Identify feelings about money and the reasons for those feelings
Determine the source of your feelings about money
Determine the effects of economy on your goals and priorities
Make sure that your goals are your own and are specific to your situation
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The Financial Planning Process (continued)
Step 3: IDENTIFY ALTERNATIVE COURSES OF ACTION
Possible courses of action can be: Continue the same course of action Expand the current situation Change the current situation Take a new course of action
Creativity in decision making is vital to effective choices
“Do nothing” can be a dangerous alternative17
The Financial Planning Process (continued)
Step 4: EVALUATE YOUR ALTERNATIVES
CONSEQUENCES OF CHOICES Opportunity cost - What you give up when you make a choice The cost or trade-off of a decision cannot always
be measured in dollars. Sometimes the cost is your time
EVALUATING RISK Uncertainty is a part of every decision. Best way to analyze and minimize risk is to gather
information from financial planning sources. (Exhibit 1-3)
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The Financial Planning Process (continued)
Step 5: CREATE AND IMPLEMENT YOUR FINANCIAL ACTION PLAN
Develop an action plan that identifies ways to achieve financial goals
Possible action plans can be increasing savings, reducing spending, or making provisions for taxes
To implement action plans you may need assistance from others
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The Financial Planning Process (continued)
Step 6: REVIEW AND REVISE YOUR PLAN
Financial planning decisions need to be assessed regularly
Complete review should be done at least once a year
Regular reviews of decision-making process can help in making priority adjustments to achieve financial goals
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The Financial Planning Process (continued)
Objective 2: Develop personal financial goals TYPES OF FINANCIAL GOALS can be:
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
Long term goals should be planned in coordination with short-term and intermediate goals
GOALS FOR DIFFERENT FINANCIAL NEEDS Consumer product goals Durable-produce goals Intangible-purchase goals
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Developing Personal Financial Goals
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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Developing Personal Financial Goals (continued)
Specific. This is a Goal Statement, and should be a short paragraph of one or two sentences describing the goal.
Measurable. This is a description of how to measure the goal; how can you tell when the goal is accomplished?
Achievable. This portion of the work sheet should go over what actions may be required to reach the goal, what obstacles may arise, and how such blocks can be handled and overcome.
Relevant. Why is this the goal? How is this important to you, and what benefits will come to you by reaching this goal? ("R" can also stand for Realistic).
Timely. This is the section where you lay out your time line - there should be a definite start and end date and any milestones should have clearly defined parameters.
A)Realize setting goals and committing to them can benefit them both short and long term.
B) Be ready and willing to risk failure in order to attempt reaching higher goals.
C) Use failures and mistakes as learning opportunities; not get discouraged when faced with momentary setback
Smart goal setting is ensured by following certain steps when creating goals for yourself. SMART is an acronym for the following characteristics that should be present in your goal.
Smart goals are specific….
Specific goals are much more likely to be accomplished than vague ones
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Objective 3: Assess personal and economic factors that influence personal financial planning
LIFE SITUATION AND PERSONAL VALUES Adult life cycle stage Marital status, household size, and employment Major events
Graduation, marriage, career change, children, retirement, etc
Values What values are important to you?
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Influences on Personal Financial Planning
ECONOMIC FACTORS
Forces of Supply and Demand and prices
Study of how wealth is created and distributed
Economy includes different institutions
Federal Reserve Bank and it’s role in the economy
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Influences on Personal Financial Planning (continued)
GLOBAL INFLUENCES
Global marketplace influences financial activities
American companies compete against foreign companies for US dollars
Balance of exports and imports
Foreign investments and their role in the US Money Supply
The level of Money Supply affects interest rates
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Influences on Personal Financial Planning (continued)
ECONOMIC CONDITIONS
Consumer The value of the dollarprices changes in inflation
Consumer The demand for goods and spending services by individuals and households
Interest rates The cost of money; cost ofcredit when you borrow; returnon your money when you saveor invest 27
Influences on Personal Financial Planning (continued)
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Influences on Personal Financial Planning (continued)
PersonalOpportunity Costs
(time, effort, health)
FinancialOpportunity Costs(Interest, liquidity,
safety )
Financial
Acquisitions
(automobile, home, college education, investments, insurance, retirement fund)
Every financial decision involves giving up something to obtain something else
PERSONAL OPPORTUNITY COSTS
Time
Other personal opportunity costs can be related to health, leisure etc.
Personal resources like financial resources require careful management
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Opportunity Costs and the Time Value of Money
FINANCIAL OPPORTUNITY COSTS
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.
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Opportunity Costs and the Time Value of Money (continued)
INTEREST CALCULATIONS
Three amounts are required to calculate the time value of money Principal Interest rates Time
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Opportunity Costs and the Time Value of Money (continued)
COMPUTING SIMPLE INTEREST(Amount in savings) x (annual interest rate) x (time period) = (interest)
For Example:$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
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Opportunity Costs and the Time Value of Money (continued)
FUTURE VALUE OF A SINGLE AMOUNT 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 OF A SERIES OF DEPOSITS Future value can be computed for a single amount or for a
series of deposits called annuitiesQuestion:
If you desire to have $10,000 in savings 8 years from now, what amount would you need to deposit in an account that earns 5%? $10,000 x .677 =$6,770 (Used Exhibit 1-8C on pg 19)
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Opportunity Costs and the Time Value of Money (continued)
PRESENT VALUE OF A SINGLE AMOUNT Present Value is the current value of 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 OF A SERIES OF DEPOSITS Present value can be computed for a single amount or for
a series of deposits (See Exhibit 1-8D)
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Opportunity Costs and the Time Value of Money (continued)
Rule of 72
The Rule of 72 provides a guideline for determining how long it takes your money to double and illustrates the power of compound interest.
Question:You are earning 8% interest. How long will it take for you money to double? 72 / .08 = 9 years
This rule can also be used to determine the interest rate you need to earn to double your money.
Question:If you would like your money to double in 12 years, what is the rate of return you need to earn on your money?
72 / 12 = 6% 35
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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Achieving Financial Goals
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
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Achieving Financial Goals (continued)