Personal financial planning- the process of managing your $ to achieve personal
The Financial Planning Process Exhibit 1-1
1.) Determine current financial situation- income, savings, living expenses and
debts. Current assets and debts
2.) Develop financial goals- analyzing values involves identifying what beliefs
you hold with respect to money and how these beliefs lead you to act in
3.) Identify alternative courses of action-
Continue course of action; keep saving same amount, expand save more,
change- use money market versus savings account, take new course of
action- using savings to pay off debt.
4.) Evaluate alternatives (Consider- life situation, economic factors and Asses-
risk, time value of $)
5.) Create and implement a financial action plan
6.) Re-evaluate and revise the financial plan
Opportunity Cost- what a person gives up by making a choice
Time Value of Money- increases in an amount of money as a result of interest
earned. Saving or investing a dollar today instead of spending it results in a future
amount greater than a dollar.
Short Term Goals- achieved within a year.
Intermediate goals- 2-5 yrs
Long Term Goals- 5+ yrs paying down a mortgage
Consumable Product Goals - occur on a periodic and involve items that are used up
relatively quickly, eg food.
Durable Product Goals - usually involve infrequent purchases, expensive items such
as cars and appliances.
Intangible Purchase Goals- may relate to personal relationships, health, education,
Adult life cycle - the stages in the family situation and financial needs of an adult
Life Cycle Approach- the idea that the average person goes through 4 basic stages in
personal financial management. Early years (mid 30s) creating emergency fund,
down payment for house, think about retirement, (mid 30s-50s) building wealth
paying down mortgage, 50+ building up retirement fund, and retirement adequate
management of funds. Financial Goals
1. Realistic- based on income and life situation.
2. Stated in specific, and measurable terms eg; accumulating a $5000
investment fund in 3 yrs.
3. Time frame- above 3 yrs
4. Indicate the type of action that needs to be taken.
Economics- the study of how wealth is created and distributed.
Inflation- is a rise in the general level of prices.
Interest Rates- represents cost of money.
Simple Interest- interest compounded on the principle, excluding previously earned
interest. I= P x R x T
Compounding- A process that calculates interest based on previously earned
interest. (P) x 1+R^T
Future Value- the amount to which current savings will increase based on certain
interest rate and a certain time period; typically involves compounding.
Annuity- a series of equal deposits or payments
Present Value- the current value for a future amount based on a certain interest rate
and a certain time period…aka discounting
Financial plan- is a formalized report that summarizes your current financial
situation, analyzes your financial needs, and recommends future financial activities.
Money Management- Day-today financial activities necessary to manage current
personal economic resources while working toward long-term financial security.
Three major money management activities:
1) Storing and maintaining personal financial records and documents
2) Creating personal financial statements (balance sheets and cash flow statements
of income and outflows)
3) Creating and implementing a plan for spending and saving (budgeting)
Personal balance she