FIN 221 Lecture 1: PF ch 1

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7 Feb 2017
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Chapter 1: Personal Finance Basics and the Time Value of Money
The Financial Planning Process
o What does money mean to you? Possessions/independence/giving to what matters?
o Personal Financial Planning is the process of managing your money to achieve personal
economic satisfaction. This planning process allows you to CONTROL your financial situation.
Financial trouble comes from not planning
Spend only on things that are of value to you, not to compare yourself to others.
Pay yourself first for future investments
Associate dollar amounts with goals
20% teaching, 80% doing
o Advantages of personal financial planning include:
1. Increased effectiveness in obtaining, using, and protecting your financial resources
throughout your life.
2. Increased control of your financial affairs by avoiding excessive debt, bankruptcy,
and dependence on others for economic security.
3. Improved personal relationships resulting from well-planned and effectively
communicated financial decisions.
4. A sense of freedom from financial worries obtained by looking to the future,
anticipating expenses, and achieving your personal economic goals.
o 3 main decision areas of personal financial planning:
1. Spend: for daily living expenses, major expenditures, and recreational activities.
2. Save: for long-term financial security.
3. Share: for local and global assistance to those in need.
o Six Steps of the Financial Planning Process:
1. Determine your current financial situation
2. Develop your financial goals
3. Identify alternative courses of action
4. Evaluate your alternatives
a. Opportunity Cost/Trade-off: what you give up by making a choice
b. Types of Risk:
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i. Inflation Risk: rising or falling (deflation) prices cause changes in
buying power. Decide whether to buy something now or later. If you
buy later, you may have to pay more.
ii. Interest Rate Risk: changing interest rates
iii. Income Risk:
iv. Personal Risk:
v. Liquidity Risk:
5. Create and implement your financial adaption plan
6. Review and revise your plan
Influences on Personal Financial Planning
o 3 main influences on Personal Financial Planning:
1. Lifestyle/life choices: Adult life cycle = education, engagement/marriage,
birth/adoption of a child, career change/move, health, divorce, retirement, death of
spouse/family member
2. Personal values: ideas/principles you consider correct, desirable and important
3. The Financial System and Economic factors: (risk)
Financial System: Providers/savers financial intermediaries/markets
users/spenders
Economic conditions:
1. Consumer Prices: the buying power of a dollar
Consumer Price Index (CPI): average change in price for a
asket of goods and servies.
Inflation: is a rise in the general level of prices.
Deflation: is a fall in the general level of prices.
Rule of 72: years for something to double
72 ÷ % = years
Exhibit 1-5: understand these terms and concepts
Consumer prices
Consumer spending
Interest rates
Money supply
Unemployment
Housing starts
Gross domestic product (GDP)
Trade balance
Dow Jones Average, S&P 500, other stock market indexes
2. Consumer Spending: total demand for goods and services in the
economy
3. Interest Rates: the cost of money.
The forces of supply and demand influence interest rates.
Developing Personal Financial Goals
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