CDAE 158 Study Guide - Comprehensive Final Exam Guide - Credit Card, United States Dollar, Inflation

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CDAE 158
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Personal Finance Basics and the Time Value of Money
- Analyze the process for making personal finance decisions
- Personal Financial Planning the process of managing your money to achieve
personal economic satisfaction
- Advantages of personal financial planning:
1. Increased effectiveness in obtaining, using, and protecting financial
resources
2. Increased control of one's financial affairs by avoiding excessive debt,
bankruptcy, and dependence on others
3. Improved personal relationships
4. Sense of freedom from financial worries
The financial planning process:
1. Determine current financial situation
Evaluate income, savings, living expense, and debts. Prepare a list of current asset and
debt balances and amounts spent for various items. Match financial goals to current
income and potential earning power
2. Develop your financial goals
Identify feelings about money and the reasons for those feelings. Determine your
source of your feelings about money (facts or influence of others). Determine the basis
of your financial priorities (social pressures, household needs, or desires). Determine
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the effects of the economy on your goals and priorities. Decide on specific financial
goals to pursue for your situation.
3. Identify alternative courses of action
Possible courses of action could be: continue the same course of action, expand or
change the current situation, or take a new course of action. Creativity in decision
making is vital for effective choices. Electing to “do nothing” can be a dangerous
alternative.
4. Evaluate alternatives (consider life situation, personal values, economic
factors. Assess risk, time value of money).
Consequence of choices (opportunity cost = what you give up by making a choice. The
cost, or trade-off of a decision, may refer to the value of money or time that you give
up). Uncertainty is a part of every decision. Consider inflation risk, interest rate risk,
income risk, personal risk, and liquidity risk. To minimize risk, gather relevant
information from print and media sources, digital sources, financial experts, and
financial institutions.
5. Create and implement your financial action plan
Develop an action plan that identifies ways to achieve financial goals. Possible action
plans can be increasing savings, reducing spending, increasing income by working
extra hours, or making provisions for taxes. To implement action plans you may need
assistance from others.
6. Review and revise the financial plan
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