Personal Finance ch 1

The process of managing your money to achieve personal economic satisfaction

Personal financial planning

Advantage of personal economic satisfaction

Its advantages: more effective obtaining, using and protecting of resources; more control (avoiding excessive debt, bankruptcy and dependence on others); better personal relationships; and freedom from financial worries.

The six step financial planning process-

1. Determine your current financial situation

2. Develop financial goals

3. Identify alternative courses of action

4. Evaluate your alternatives

5. Create nad implement a financial action plan

6. Review and review the plan

What happens in step 1- determine your current financial situation?

Evaluate income, savings, living expenses and debts; keep spending records; list asset and debt balances

What happens in step two - develop financial goals?

Examine your feeling about money, separate needs form wants and decide on specific goals

What happens in step 3- identify alternatives courses of action

Continue the same course, expand it, change it, or take. Anew course, choosing to “do nothing” can be dangerous

What happens in step five- create and implement a financial action plan?

Increase savings, reduce spending, work extra hours, plan for taxes; get help from others (insurance agent, investment app)

What happens in step 6- review and revise the plan?

A complete review at least once a year, more often when personal social or economic conditions change

What is opportunity cost?

What you give up by making a choice, not always measured in dollars, can be time, effort, or health

What is risk?

Is the uncertainties that is part of every decision

What are five types of risk?

Inflation risk, interest rate risk, income risk, personal risk, liquidity risk

Inflation risk

Rising or falling prices change buying power; buying later may cost even more

Interest rate risk

Changing rates affect what you pay when you borrow and what you earn when you save

Income risk

Losing a job due to changes in consumer spending or technology

Personal risk

Health, safety or inconvenience costs tied to a decision

Liquidity risk

Some higher-earning investments are hard to convert to cash without losing value

Adult life cycle

 stages of family and financial needs (marriage, children, career change, retirement) that shape financial decisions.

Values

Ideas principles you consider correct, desirable and important

Economics

Study of how wealth is created and distributed

What sets prices for securities, goods, and services and they also influence interest rates

Supply and demand

Federal reserve

Maintains an adequate money supply and influences borrowing, interest rates and the buying and selling of government securities

Inflation

Rise in general level of prices

When does inflation happen

When consumer demand increases without an increase in supply

Consumer Price Index (CPI)

measures the average change in prices for a basket of goods and services. Deflation (falling prices) can also be damaging.

Rule of 72

•   divide 72 by the annual rate to find how many years it takes prices (or savings) to double. Flip it to find the rate: 72 ÷ years = rate needed.

Interest rates represent the

Cost of money

Consumer spending is

Total demand for goods and services and drives employment

Financial goals

By timing

Shot term- within a year

Intermediate- one to five years

Long-term- more than five years (retirement, college fund)

Financial goals

By type of need

Consumable product- items used of quickly (food, clothing)

Durable product- long lasting item (car appliance)

Intangible purchase: relationships, education, health, leisure

Good financial goals are S-M-A-R-T meaning

Specific, Measurable (a dollar amount), Action-oriented, Realistic and Time-based. A goal like "increase our savings" is vague; a goal that names a monthly amount, a total and a purpose is easy to implement and measure.

Personal opportunity costs

Involve personal resources: time, effort, health, relationships (working long hours a the expense of family time)

Financial opportunity costs

Involve money: interest lost, liquidity and safety

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.

Simple interest

principal × annual rate × time (in years).

Future value

Is what current savings grow to

Compounding

Growth by earning interest on interest

Annuity

Series of EQUAL deposits

Today’s value of a future amount

Present value

Discounting

Today’s value of a future amount

Present value always BLANK thank future value

Less than

Financial plan and what does it depend on

is a formalized report that summarizes your current situation, analyzes your needs and recommends future activities. The success of any plan depends on your financial habits.