Transcript What it Takes to Become a Millionaire

What it Takes to Become a Millionaire
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Americans are Obsessed with
Millionaires…
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Do an Amazon Search on books with
“Millionaire” in their title: over 1,370 books…
TV Shows - Survivor winner $1 million
“Who Wants to Be a Millionaire”
“Joe Millionaire”
“Deal or No Deal”
Lottery
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How hard is it to become a millionaire?
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Not Very Hard…
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If a 30 year old making $50,000 a year
(plus 3% raises each year), saving 10% of
their income with a 10% return each year,
could expect to hit millionaire status at
age 59. If they work until the traditional
retirement age of 65, they will have over 2
million saved up…
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What can you do…
Start Saving Early…
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The Importance of Starting Early
Earning 9% interest
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What Happens When you Wait…
Earning 9% interest
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Top 5 Ways to Become a
Millionaire…
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Earn Income
Live Within Your Means
Save Money
Invest Wisely
Stick With Your Plan
Source: GenXFinance.com
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Misconceptions…
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Spending is a sign of wealth.
You don’t have to worry about money when
you are young.
Those who buy very expensive things always
have more wealth than people who buy less
expensive things.
You can’t spend money when your bank
account is empty.
There are no consequences to spending more
money than you have.
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Millionaire Next Door
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Research Found:
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Most millionaires are college graduates
Only 19% of millionaires received money from a trust fund
or estate.
Most millionaires drive Fords, Chryslers or Chevrolets.
Most millionaires wear inexpensive clothes.
Few millionaires lease cars
Most millionaires are homeowners
Only 17% of millionaires attended a private elementary or
high school
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Where do you begin…
Create a Financial Plan
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Chapter 1
Personal Finance Basics &
the Time Value of Money
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Chapter 1
Learning Objectives
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Analyze the process for making personal financial
decisions
2.
Develop personal financial goals
3.
Assess personal and economic factors that
influence personal financial planning
4.
Determine the personal and financial opportunity
costs associated with personal financial decisions
5.
Identify strategies for achieving personal financial
goals for different life situations
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The Financial Planning Process
Objective 1: Analyze the process for making
personal financial decisions
Personal Financial Planning is the process of
managing your money to achieve personal
economic satisfaction
Advantages of Personal Financial Planning are:
1.
Increased effectiveness in obtaining, using and
protecting financial resources
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Increase control of one’s financial affairs
Improved personal relationships
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Sense of freedom from financial worries
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The Financial Planning Process
(continued)
Six-step procedure for Financial Planning
 Determine your current financial situation.
 Develop your financial goals.
 Identify alternative courses of action.
 Evaluate your alternatives.
 Create and implement your financial action
plan.
 Review and revise your plan.
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The Financial Planning Process
(continued)
Step 1: DETERMINE YOUR CURRENT
FINANCIAL SITUATION
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Determine current financial situation regarding
income, savings, living expenses, and debts
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Prepare a list of current asset and debt balances
and amount spent for various items
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Match financial goals to current income and
potential earning power
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The Financial Planning Process
(continued)
Step 2: DEVELOP YOUR FINANCIAL GOALS
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Identify feelings about money and the reasons
for those feelings
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Determine the source of your feelings about
money
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Determine the effects of economy on your
goals and priorities
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Make sure that your goals are your own and
are specific to your situation
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The Financial Planning Process
(continued)
Step 3: IDENTIFY ALTERNATIVE COURSES OF ACTION
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Possible courses of action can be:
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Continue the same course of action
Expand the current situation
Change the current situation
Take a new course of action
Creativity in decision making is vital to effective choices
“Do nothing” can be a dangerous alternative
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The Financial Planning Process
(continued)
Step 4: EVALUATE YOUR ALTERNATIVES
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CONSEQUENCES OF CHOICES
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Opportunity cost - What you give up
when you make a choice
The cost or trade-off of a decision cannot
always be measured in dollars. Sometimes the
cost is your time
EVALUATING RISK
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Uncertainty is a part of every decision.
Best way to analyze and minimize risk is to
gather information from financial planning
sources. (Exhibit 1-3)
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The Financial Planning Process
(continued)
Step 5: CREATE AND IMPLEMENT YOUR
FINANCIAL ACTION PLAN
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Develop an action plan that identifies ways
to achieve financial goals
Possible action plans can be increasing
savings, reducing spending, or making
provisions for taxes
To implement action plans you may need
assistance from others
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The Financial Planning Process
(continued)
Step 6: REVIEW AND REVISE YOUR PLAN
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Financial planning decisions need to be
assessed regularly
Complete review should be done at least once
a year
Regular reviews of decision-making process
can help in making priority adjustments to
achieve financial goals
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Developing Personal Financial Goals
Objective 2: Develop personal financial goals
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TYPES OF FINANCIAL GOALS can be:
 Influenced by the time frame in which you want to
achieve your goals
 Influenced by the financial need that drives your
goals
TIMING OF GOALS
 Short-term, intermediate and long-term goals
Long term goals should be planned in
coordination with short-term and intermediate
goals
GOALS FOR DIFFERENT FINANCIAL NEEDS
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Consumer product goals
Durable-produce goals
Intangible-purchase goals
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Developing Personal Financial Goals
(continued)
GOAL-SETTING GUIDELINES
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Goals should be realistic
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Goals should be stated in specific terms
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Goals should have a time frame
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Goals should indicate the action to be taken
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Discuss some of your goals
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Smart goals are specific….
Specific goals are much more likely to be accomplished than vague ones
Smart goal setting is ensured by following certain steps when creating goals for yourself.
SMART is an acronym for the following characteristics that should be present in your goal.
A)Realize setting goals and committing to them can benefit them both short and long term.
B) Be ready and willing to risk failure in order to attempt reaching higher goals.
C) Use failures and mistakes as learning opportunities; not get discouraged when faced with
momentary setback
Specific. This is a Goal Statement, and should be a short paragraph of one or two sentences
describing the goal.
Measurable. This is a description of how to measure the goal; how can you tell when the goal
is accomplished?
Achievable. This portion of the work sheet should go over what actions may be required to
reach the goal, what obstacles may arise, and how such blocks can be handled and overcome.
Relevant. Why is this the goal? How is this important to you, and what benefits will come to
you by reaching this goal? ("R" can also stand for Realistic).
Timely. This is the section where you lay out your time line - there should be a definite start
and end date and any milestones should have clearly defined parameters.
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Influences on Personal Financial Planning
Objective 3: Assess personal and economic
factors that influence personal financial
planning
LIFE SITUATION AND PERSONAL VALUES
 Adult life cycle stage
 Marital status, household size, and employment
 Major events
 Graduation, marriage, career change, children,
retirement, etc
 Values
 What values are important to you?
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Influences on Personal Financial Planning
(continued)
ECONOMIC FACTORS
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Forces of Supply and Demand and prices
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Study of how wealth is created and
distributed
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Economy includes different institutions
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Federal Reserve Bank and it’s role in the
economy
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Influences on Personal Financial Planning
(continued)
GLOBAL INFLUENCES
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Global marketplace influences financial
activities
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American companies compete against foreign
companies for US dollars
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Balance of exports and imports
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Foreign investments and their role in the US
Money Supply
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The level of Money Supply affects interest
rates
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Influences on Personal Financial Planning
(continued)
ECONOMIC CONDITIONS
Consumer
prices
The value of the dollar
changes in inflation
Consumer
spending
The demand for goods and
services by individuals and
households
Interest rates The cost of money; cost of
credit when you borrow; return
on your money when you save
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or invest
Influences on Personal Financial Planning
(continued)
Personal
Opportunity Costs
(time, effort, health)
Financial
Opportunity Costs
(Interest, liquidity,
safety )
Financial
Acquisitions
(automobile,
home, college
education,
investments,
insurance,
retirement fund)
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Opportunity Costs and the Time
Value of Money
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Every financial decision involves giving up
something to obtain something else
PERSONAL OPPORTUNITY COSTS
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Time
Other personal opportunity costs can be related
to health, leisure etc.
Personal resources like financial resources
require careful management
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Opportunity Costs and the Time
Value of Money (continued)
FINANCIAL OPPORTUNITY COSTS
Time Value of Money
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Increases in an amount of money
as a result of interest earned.
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Saving today means more money tomorrow.
Spending means lost interest.
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Saving and spending decisions involve
considering the trade-offs. Current needs
can make spending worthwhile.
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Opportunity Costs and the Time
Value of Money (continued)
INTEREST CALCULATIONS
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Three amounts are required to calculate the
time value of money
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Principal
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Interest rates
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Time
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Opportunity Costs and the Time
Value of Money (continued)
COMPUTING SIMPLE INTEREST
(Amount in savings) x (annual interest rate) x (time period) = (interest)
For Example:
$100 x 5% x 1 (1 year)
100 x .05 x 1 = $5.00
In one year you have $100 in principle plus
$5.00 in interest for a total of $105 at the
end of the year
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Opportunity Costs and the Time Value of Money
(continued)
FUTURE VALUE OF A SINGLE AMOUNT
 Future value is the amount to which current savings will
increase based on a certain interest rate and a certain time
period
 Future value is also call compounding - earning interest on
previously earned interest
FUTURE VALUE OF A SERIES OF DEPOSITS
 Future value can be computed for a single amount or for a
series of deposits called annuities
Question:
If you desire to have $10,000 in savings 8 years from
now, what amount would you need to deposit in an account
that earns 5%? $10,000 x .677 =$6,770 (Used Exhibit 1-8C on pg 19)
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Opportunity Costs and the Time
Value of Money (continued)
PRESENT VALUE OF A SINGLE AMOUNT
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Present Value is the current value of a future amount
based on a certain interest rate and a certain time period
Present value calculations are also called discounting
The present value of the amount you want in the future
will always be less than the future value (See Exhibit 18C)
PRESENT VALUE OF A SERIES OF DEPOSITS
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Present value can be computed for a single amount or for
a series of deposits (See Exhibit 1-8D)
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Rule of 72
The Rule of 72 provides a guideline for determining
how long it takes your money to double and illustrates the power
of compound interest.
Question:
You are earning 8% interest. How long will it take for you money
to double? 72 / 8 = 9 years
This rule can also be used to determine the interest rate you need
to earn to double your money.
Question:
If you would like your money to double in 12 years, what is the
rate of return you need to earn on your money?
72 / 12 = 6%
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Achieving Financial Goals
DEVELOPING A FLEXIBLE FINANCIAL PLAN
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A financial plan is a formalized report that...
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Summarizes your current financial situation
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Analyzes your financial needs
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Recommends future financial activities
Your financial plan can be created by you, with
assistance from a financial planner, or made
using a money management software package
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Achieving Financial Goals (continued)
IMPLEMENTING YOUR FINANCIAL PLAN
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Develop good financial habits
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Use a well conceived spending plan to help
you stay within your income, while allowing
you to save and invest for the future
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Have appropriate insurance protection to
prevent financial disasters
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Become informed about tax and investment
alternatives
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