FIN 2081 Chapter Notes - Chapter 1: Federal Reserve System, Money Supply, Risk Premium
Chapter 1 - Personal Financial Planning in Action
Your Life Situation and Financial Planning
Financial Planning - is a formalized report that summarizes your current financial situation, analyzes your financial needs,
and recommends future financial activities.
Personal Factors such as age, income, household size, and personal beliefs influence your spending and saving patterns.
Adult Life Cycle - the stages in the family situation and financial needs of an adult - is an important influence on your
financial activities and decisions.
Values - ideas and principles that a person considers correct, desirable, and important.
Values, have a direct influence on our spending decisions.
Financial Planning in Our Economy
In most societies, the forces of supply and demand set prices for securities, goods and services.
Economics is the study of how wealth is created and distributed.
The economic environmnet includes business, labour, and government working together to satisfy needs and wants.
The federal reserve system, the central bank of the United States, has significant economic responsibility.
The Fed, attempts to maintain an adequate money supply to encourage consumer spending, business growth, and job
creation.
The global economy can influence financial activities.
The US economy is affected by both foreign investors and competition from foreign companies.
Inflation - a rise in the general price level.
In times of high inflation, the buying power of the dollar decreases.
More money is needed to buy the same amount of goods and services.
Rule of 72: divide 72 by the annual inflation (interest) rate
Find out when prices/savings will double.
The Consumer Price Index (CPI) published by the Bureau of Labour Statistics, is a measure of the average change in the
prices consumers pay for a fixes "basket" of goods and services.
Inflation rates can be deceptive since the index is based on items calculated in a predetermined manner.
Hidden Inflation is the cost of neccessities on which consumers spend the most may rise at a higher rate than other
non-essential goods.
The result, reported inflation is much lower than an actual cost-of-living.
Deflation - a decline in prices.
Interest Rates - represent cost of money.
The forces of supply and demand influence interest rates.
When consumers saving/investing increase the supply of money, Interest Rates tend to decrease.
Borrowing by consumers, businesses and government increases, IR are likely to increase.
The earnings you receive as a saver or an investor reflect current interest rates as well as a risk premium based on such
factors as:
Length of time your funds will be used by others, expected inflation, and the extent of uncertainty.
Types of Financial Goals
Short-term goals - achieved withing a next year or so.
Intermediate - time frame of 2-5 years.
Long-term - more than 5 years.
Consumable-product goals usually occur on a periodic basis and involve items that are used up relatively quickly (food,
clothes, entertainment)
Durable-product goals usually involve infrequently purchased, expensive items (appliances, cars, sporting equipment).
Tangible items.
Intangible-purchase goals relate to personal relationships, health, education, community service and leisure.
Goal-Setting Guidelines
Your financial goals are the basis for planning, implementing and measuring the progress of your spending, saving, and
investing activities.
SMART
1.
2.
3.
4.
a.
1.
2.
a.
b.
c.
3.
a.
4.
a.
b.
c.
i.
d.
i.
ii.
1.
5.
6.
a.
b.
c.
d.
i.
1.
2.
3.
4.
5.
6.
1.
2.
Document Summary
Chapter 1 - personal financial planning in action. Financial planning - is a formalized report that summarizes your current nancial situation, analyzes your nancial needs, and recommends future nancial activities. Personal factors such as age, income, household size, and personal beliefs in uence your spending and saving patterns. Adult life cycle - the stages in the family situation and nancial needs of an adult - is an important in uence on your. Values - ideas and principles that a person considers correct, desirable, and important. a. Values, have a direct in uence on our spending decisions. In most societies, the forces of supply and demand set prices for securities, goods and services. Economics is the study of how wealth is created and distributed. a. b. c. The economic environmnet includes business, labour, and government working together to satisfy needs and wants. The federal reserve system, the central bank of the united states, has signi cant economic responsibility.
