FIN2100 Chapter 1: Personal Finance Basics and the Time Value of Money

what is personal financial planning?

the process of managing your money for economic growth and satisfaction

what are some advantages of personal financial planning?

increased effectiveness for financial resources, more control of finances, and more freedom from financial worries and issues

what are the steps of the financial planning process

determine current financial status, develop financial goals, identify alternate courses of action, evaluate alternatives, create financial action plan, review and revise

what is step 1 in the financial planning process?

determine your current financial situation

what does step 1 of the financial planning process entail?

evaluating income and expenses, maintaining daily records, and matching goals with your future

what is step 2 of the financial planning process?

develop financial goals

what does step 2 of the financial planning process entail?

identify feelings towards money, determine basis of financial priorities, and separate needs vs wants

what is step 3 of the financial planning process?

identify alternate courses of action

what does step 3 of the financial planning process entail?

continue the same course of action, expanding the current situation, or picking a new course of action

what is step 4 of the financial planning process?

evaluate your alternatives

what does step 4 of the financial planning process entail?

thinking of the consequences of your choices, determining opportunity costs and trade-offs, and evaluating risks

what is an opportunity cost?

what you give up for a financial opportunity

what are the types of financial risks?

inflation, interest rate, income, personal, liquidity

what is step 5 of the financial planning process?

create and implement your financial action plan

what does step 5 of the financial planning process entail?

making an action plan for goals, and implementing it with the help of others

what is step 6 of the financial planning process?

review and revise your plan

what does step 6 of the financial planning process entail?

assessing plan periodically, reviewing frequently, and involving other decisions

what are some influences on personal financial planning?

life situation, personal values, and the adult life cycle

what is the financial system (diagram)

money flows from providers to financial intermediaries and markets to users, all through with funds

what is economics?

the study of how wealth is created and distributed

what are some global influences?

global economy fluctuation, competition between american companies and foreigners, and balance of exports and imports

what is a trade deficit?

an affect to the value of the nation’s economy and the costs of items for consumers

what are some economic indicators and personal financial decisions?

trade balance, GDP, consumer prices, spending, housing prices, stock market, unemployment, interest rates, and money supply

what are some economic conditions?

consumer prices, inflation, consumer price index, deflation, consumer spending, and interest rates

what is the rule of 72?

72 divided by the interest rate

what is the consumer price index?

a measure of average prices consumers pay for goods and services

what are the types of timing for financial goals?

short term (less than a year), intermediate (1-5 years), and long term (5+ years)

what are some types of goals for different financial needs?

consumable-product goals, durable-product goals, and intangible-purchase goals

what is the SMART guideline for goal-setting?

specific, measurable, action-oriented, realistic, time-based

what is the balance of opportunity costs?

personal and financial opportunity costs vs financial acquisitions

what is the formula for computing simple interest?

I = PRT, interest = principal amount in savings x rate of interest x time periodw

what is future value?

the amount of savings one will have in the future based on interest and time

what is compounding?

earning interest on previously earned interest

what is present value?

the current value of a future amount with interest and time

what does a financial plan entail?

a summary of the financial situation, an analysis of financial needs, and other financial activities

how can you implement your financial plan?

track spending, have good insurance, and be informed of your taxes and investments