Personal Financial Planning

Making Financial Decisions

• Personal finance refers to all the things in your life that involve money.

• Personal financial planning means spending, saving, and investing your money so you can enjoy the kind of life you want, along with financial security.

• Everyone has different financial goals.

  • Goals are the things you want to accomplish.

• The financial planning process has six steps.

  • Determine your financial situation: Once you have determined your financial situation, you will be able to start planning.

    • First, make a list of your savings, monthly income (money you receive, such as job earnings, an allowance, tips, gifts, and interest on bank accounts), monthly expenses (money you spend), and debts (money you owe to others).

  • Develop your financial goals: To develop clear financial goals, you will need to think about your attitude toward money.

  • Identify possible courses of action: It is important to consider your options before making a decision.

  • Evaluate your alternatives: When you evaluate your alternatives, use the sources of financial information that are available.

  • Implement a financial plan of action: A plan of action is a list of ways to achieve your financial goals.

  • Review and revise your plan: You should reevaluate and revise it every year.

Sources of Financial Information

• When making financial decisions, the Internet is a good place to get information on social and economic conditions.

• Most corporations put facts about their company and financial situation on their Web site

Understanding Risk

• Some risks include:

  • Inflation Risk: Inflation is a general increase in the cost of goods and services.

  • Interest Rate Risk: Interest rates rise and fall, which may affect the cost of borrowing or the profits you earn when you save or invest.

  • Income Risk: Your income may rise or fall.

  • Personal Risk: Some choices increase risk.

  • Liquidity Risk: You may have to withdraw your savings or investments.

• An important part of financial planning is understanding which risks you can afford to take and which ones you cannot.

Consequences of Choices

• An opportunity cost, sometimes called a tradeoff, is what you give up when you make one choice instead of another.

• However, choosing between the alternatives involves more than just knowing what you forgo.

• It also involves knowing what you gain.

Money Management

The Importance of Budgeting

• Money management is necessary for consumers, businesses, and governments.

  • Money management is a method of planning to get the most from one’s money.

• A budget is a plan for using your income in a way that best meets your wants and needs.

  • It includes a record of your expected income, your planned expenses, and your planned savings over a certain period of time.

Preparing a Budget

• Planning a budget is a seven-step process:

  • Set your goals

  • estimate your income

  • budget for unexpected expenses and savings

  • budget for fixed expenses; budget for variable expenses

  • record what you spend

  • and review spending and saving patterns.

• Your income is the actual amount of money you earn or receive during a given period.

  • Your gross pay is the total amount of money you earned for a specific time.

  • Your gross pay is reduced by various deductions, or amounts that are taken out of your pay before you receive your paycheck.

  • Your take-home pay, or net pay, is your gross pay minus deductions.

• An expense is an amount of money used to buy or do something.

  • Fixed expenses are expenses that occur regularly and are regularly paid.

  • Variable expenses are expenses that change and can be controlled more easily than fixed expenses.

• The difference between the budgeted amount and the actual amount that you spend is the budget variance.

• This figure can be either a surplus or a deficit.

  • A surplus is extra money that can be spent or saved, depending on a person’s goals and values.

  • A deficit occurs when more money is spent than is earned or received.