Planning Your Financial Future
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Transcript Planning Your Financial Future
An Overview of
Personal Finance
Chapter 1
Planning Your Financial Future, 4e
by: Boone, Kurtz & Hearth
The Meaning and Importance
of Personal Finance
Can improve your standard of living
Today’s environment has impacted personal
finance over the years
Sluggish growth in personal income
After adjusting for inflation and taxes, personal income growth
has only been about 2% a year for the last two decades
Changes in the labor market
Most people starting jobs today will work at
numerous companies during their career(s)
More options
Many more options available today in investments, retirement
planning, banking, etc.
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Personal Financial Planning—A
Lifelong Activity
No matter how old you are, you’ll have
financial goals
What works when you’re 20, won’t
necessarily work when you’re 40
In your 20s, your goals may be paying off
student loans or buying your first house
In your 70s, your goal may be making sure your
retirement funds last your lifetime
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Personal Financial Toolbox
Once you graduate from college (and now
have a ‘real’ job)
Figure out your current financial standing
How much do you owe?
What assets do you have?
Prepare an income statement and balance sheet
Put yourself on a budget
Insure yourself against financial ruin
Life, health, property
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Personal Financial Toolbox
Get your debts under control (if
already)
they’re not
Pay off high-rate loans (or roll over into lower-rate
loans)
Start saving for retirement
Set up a regular savings program (pay yourself)
Have money automatically transferred from checking to
savings
Treat this like a fixed expense
5
Getting Professional Help
Many colleges & universities offer credit
counseling
May use services of a CPA or professional
investment advisor
Dozens of financial self-help books
Online financial information is available
If you use a financial planner, make sure
they are qualified
6
Web Links
http://www.moneycentral.com
http://www.quicken.com
http://www.motleyfool.com
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A Personal Financial
Management Model
A financial plan is a guide to help you reach
your targeted future goals
Step 1: Develop short and long-term goals
Influenced by your personal values & current
financial situation
Step 2: Establish financial strategies
Step 3: Put plan in action & monitor
performance
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General Themes Common to
All Financial Plans
Maximizing income and wealth
The amount of money you earn is a vital part of any
plan
Using money more effectively
Spend (and save) your money wisely
Little things add up
Monitoring expenditures
Use a budget to help control expenditures
The more you know about loans, investments, etc., the
more likely you are to make a good decision
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Pitfalls of Poor Financial
Planning
Missed or late payments will be noticed
Creditors may:
Repossess your property
Garnish your wages
Force you to file for personal bankruptcy
A bad credit record can last for years
10
Setting Personal Goals
Your values will influence your financial goals
What things in life are important to you?
Your financial goals are influenced by your current
financial situation
Prepare current financial statements
Review them to determine what you own, what you owe, &
where you’re spending your money
Prepare a budget
Prepare a list of short- and long-term goals
Make sure they are realistic and obtainable
Write down your goals and periodically review them
11
Your Personal Financial
Decisions
Career choice
Most of your income comes from salaries/wages – determines your
lifestyle
Basic money management
Prepare a budget
Select the right bank
Establish a regular savings plan
Credit management
Don’t bite off more than you can chew
Find a good credit card
Learn how to compute interest charges/monthly payments
Find out your credit history (report)
Learn what to do if you get into trouble
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Your Personal Financial
Decisions
Tax planning
How can you reduce your taxes?
Effective buying
Real estate, cars, etc.
Renting vs. owning
Insurance
How much insurance should you have (if any)?
Life
Health
Property
Disability
Liability
13
Your Personal Financial
Decisions
Investment management
Invest to increase your future wealth
Difficult to substantially increase future wealth without
investing
Investments are risky, choices include:
Mutual funds
Stocks
Bonds
Options and futures
Real estate
Art
Coins
Metals (gold, silver, etc.)
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Financial Planning for Tomorrow
Planning for your children’s college education
Becoming more and more expensive
Retirement planning
How do you want to live your retirement?
How much (if any) do you want to pass along to your
heirs?
How long remains until you retire?
Will Social Security be enough?
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External Factors
Government policy
Changes to federal student loan programs
Will costs of student loans increase due to loan
consolidation limits?
Social Security reform
Will it be privatized?
Will benefits be reduced?
16
External Factors
Economic conditions
The business cycle
Shorter-term sequences of expansions and contractions
(recession)
Typical business cycle has four stages: prosperity, decline,
recession, and recovery
Gross domestic product
Represents the total value of goods and services produced by a
nation’s economy
Important determinant of personal income
Disposable personal income – what remains after income
taxes
Discretionary personal income – what remains after all
necessary living expenses have been paid
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External Factors
Unemployment rate
The percentage of the workforce currently looking for a job
Inversely related to economic activity
Inflation
Inflation decreases the purchasing power of the dollar
Inflation has been about 3% in recent years
Income sources with cost-of-living increases are tied to inflation
Interest rates
If you think interest rates are going to rise sharply, buy that house/car
now instead of waiting
Interest rates are tied to inflation
Nominal interest rates are those that you pay or receive, whereas real
interest rates are nominal rates less the rate of inflation
For instance, if a six-month CD pays a 5% nominal rate, but inflation is
2%, then you are earning a real rate of 3%
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External Factors
Government policy and economic activity
Government influences economy
If taxes increase and government spending remains
unchanged, economic growth will slow
Federal Reserve Board can increase or decrease the supply
of money
Impacts interest rates, inflation, and economic growth
Recession/Expansion
If you think a recession is in the near future, save
more now (in case you get laid off)
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Figure 1.5: Change in Real GDP
Source: Based on data from the Federal Reserve Board and the Statistical Abstract of the United States.
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Figure 1.6: Breakdown of
Personal Income
Source: Based on data from the Federal Reserve Board and the Statistical Abstract of the United States.
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The Time Value of Money
Why money has time value
Risk of not getting your money back
Risk of inflation
Opportunity cost
You have to give up something when you invest (you
can’t use the money for something else)
Because money has time value you should
expect to earn interest on an investment
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Future Value
Value at some point in the future of
a current sum
of money
If you invest $1,000 in an account and it earns 6%, after
one year you will have $1,060
$1,000 × 0.06 = $60 interest + $1,000 beginning amount
After two years, the $1,000 investment would be worth
$1,060 × 0.06 = $63.60 interest + $1,060 = $1,123.60
Or, $1,000 × 1.062 = $1,123.60
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Future Value
Compound interest
Payment of interest on interest
Simple interest
Interest on the original deposit only
Multiple cash flows
An annuity is a series of cash payments or
receipts
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Present Value
The value today of
a future sum of money
A dollar received tomorrow is worth less than a
dollar today
Finding present value is called discounting
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