Personal Finance

What is personal financial planning?

Managing your money and financial resources to achieve personal economic satisfaction by being proactive

Main goal of personal financial planning

Achieving financial independence through planning and informed decisions

Key advantage of personal financial planning

Greater control over finances and reduced financial stress

What does “most people fail to plan

not plan to fail” mean?

Step 1 of the financial planning process

Determine your current financial situation including income

Assets

Things you own that have value

Liabilities

What you owe or your debts

Net worth

Assets minus liabilities

Step 2 of the financial planning process

Develop financial goals based on priorities and resources

SMART financial goals

Specific Measurable Action-oriented Realistic Time-based

Step 3 of the financial planning process

Identify alternative courses of action to achieve goals

Why is doing nothing risky in financial planning?

It wastes valuable time which reduces financial growth

Step 4 of the financial planning process

Evaluate alternatives and consequences including opportunity cost and risk

Opportunity cost

What you give up when you choose one option over another

Step 5 of the financial planning process

Create and implement a financial action plan

Common financial action strategies

Increase income increase savings reduce spending minimize taxes

Step 6 of the financial planning process

Review and revise your financial plan regularly

Why financial goals are important

They are the foundation of a financial plan and guide decisions

Short-term financial goals

Goals to be achieved within 0 to 1 year

Short-intermediate financial goals

Goals to be achieved in 1 to 5 years

Long-intermediate financial goals

Goals to be achieved in 6 to 10 years

Long-term financial goals

Goals to be achieved in more than 10 years

Personal factors influencing financial planning

Life stage personal situation major life events and values

Examples of major life events affecting finances

Graduation marriage children career changes retirement

Economic factors influencing financial planning

Interest rates inflation employment taxes and markets

Role of the Federal Reserve

Regulates interest rates affecting borrowing saving and investing

What is a financial plan?

A formal report summarizing current finances and recommending actions

Four things financial planning involves

Obtaining protecting growing and using financial resources

Obtaining financial resources

Bringing in income from work investments or business ownership

Why income is foundational to financial planning

All financial activities depend on income

Planning as a financial component

Budgeting and tax planning to manage money efficiently

Spending as a financial component

Tracking expenses and spending less than you earn

Key rule of spending

Spending less than you earn is necessary for long-term financial security

Saving as a financial component

Setting aside money for short-term and long-term needs

Emergency fund recommendation

Save 3 to 6 months of expenses

Big 5 savings areas

Emergency car house education retirement

Liquidity

The ability to convert assets to cash quickly without loss of value

Borrowing as a financial component

Using credit responsibly to avoid excessive debt

Danger of overusing credit

Debt can exceed ability to repay and lead to bankruptcy

Managing risk or insurance

Protecting against financial loss from unexpected events

Common insurance mistake

Having overlapping or excessive coverage

Investing as a financial component

Using money to generate growth or income

Growth investments

Stocks mutual funds ETFs and real estate

Income investments

Bonds dividend-paying stocks and real estate

Diversification

Spreading investments to reduce risk

Retirement and estate planning

Planning for retirement income healthcare and wealth transfer

Time value of money

Money today is worth more than the same amount in the future

Compounding

Earning interest on both principal and previously earned interest

Why starting early matters

Money grows exponentially over time

Rule of 72

72 divided by interest rate equals years for money to double

Example of Rule of 72

At 10 percent money doubles in about 7 years

Future value

FV is what money today will be worth in the future

Present value

PV is what a future amount is worth today

Three components of time value of money

Amount interest rate and time

Future value of a single amount

Value of one investment after earning interest over time

Future value of a series of deposits

Value of regular savings over time also called an annuity

Present value of a single future amount

How much you need to invest today to reach a future amount

Present value of a series of deposits

Amount needed today to fund regular future payments

Core personal finance rule

Live below your means and invest the difference

Biggest lesson of Chapter 1

Financial success comes from planning discipline and starting early

What is the Rule of 72?

A simple way to estimate how long it takes money to double

Rule of 72 formula

72 divided by the interest rate equals years to double

Rule of 72 at 8 percent

Money doubles in about 9 years

Rule of 72 at 9 percent

Money doubles in about 8 years

Why the Rule of 72 matters

It shows the power of compounding over time

Rule of 72 and starting early

Starting earlier allows money to double more times

Rule of 72 and debt

High interest rates cause debt to double quickly

Key takeaway of the Rule of 72

Small changes in interest rates have big long-term effects