Personal Finance

Personal Finance Planning

The process of meeting your life goals through the management of your finances.

Personal Financial Planning Process

1. Establish Foundation: Acquire knowledge, tools and objectives

2. Secure Basic Needs: Secure cash flow, housing, emergency funds

3. Build Wealth: Saving and investing

4. Protect Finances: Insurance and real estate planning

Marginal Reasoning

Evaluating if doing a little bit more is worth it by only considering what changes as a direct result of your choice.

Sunk Cost

A past, irreversible loss that should not influence current marginal reasoning ("Don't cry over spilt milk").

Sensitivity Analysis

Anticipating the financial impact on your plan if your assumptions turn out to be wrong.

Financial Position (Personal Balance Sheet)

Calculated as Assets (what you own) minus Liabilities (what you owe).

Financial Performance (Personal Cash Flow Statement)

Shows what is happening with your money over a specific period (monthly/yearly).

Human Capital

Your ability to earn and save money; considered your biggest and most powerful asset.

Discounting

The opposite of compounding; bringing a future value back to its Present Value (e.g., $100 received in 4 years discounted at 5% = $100 / (1.05)^4).

Compounding

Growing money forward into the future (e.g., $100 invested at 5% for 4 years = $100 x (1.05)^4).

Time Value Money

The concept that a dollar today is worth more than a dollar tomorrow due to opportunity cost, risk, inflation and human impatience.

Three factors:

Size (how big the amount of money is), Timing (how long before you receive it), and Risk (the discount/compounding rate used).

Inflation

The economic factor that causes money to lose purchasing power over time (e.g., $100 from 1966 only has about $6.16 in buying power today).