MCS*2100 Chapter Summaries 1-4 Inclusive

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Marketing and Consumer Studies
MCS 2100
Rosemary Vanderhoeven

Chapter 1 – An Introduction  Why financial planning is important? o Is the process of managing your money to achieve personal economic satisfaction o Advantages: increased effectiveness in obtaining, using and protecting resources o Increased control of financial affairs, improved personal relationships, sense of freedom  Understand how life cycle can affect planning o Early years (up to mid 30’s)  Focus on creating emergency fund, saving for down payments, purchasing life insurance, retirement o Middle years (mid 30’s to 50’s)  Focus on building wealth by paying down mortgage and increasing savings and investments o Middle years (50’s +)  Focus is on providing an adequate retirement plan o Retirement years  Focus is on the efficient management of previously acquired wealth o Common goals and activities:  Obtain career training, create effective record system, regular savings and investment program, accumulate emergency fund, purchase appropriate insurance, implement flexible budget, evaluate and select investments, establish retirement goals, create a will and estate plan  6 Steps in the Financial Planning Process o Step 1 – Determine your current financial situation:  Prepare a list of current asset and debt balances and amounts spent for various items o Step 2 – Develop financial goals  Analyze your financial values and attitudes towards money  What is your financial decision making process? o Step 3 – identify alternative courses of action  Continue as you are, expand or change the current situation, or take a new course of action o Step 4 – Evaluate Alternatives  Take into consideration your life situation, personal values and current economic situation  Opportunity cost is what you give up by making a choice  The cost, referred to as the trade-off of a decision, can be measured in money or time  Consider lost opportunities that will result from decisions  Evaluate the risks faced  Interest Rate – changing rates affecting borrowing and benefits  Inflation risk – rising prices cause lost buying power  Liquidity risk – difficulty of converting to cash or sell without significant loss  Product risk – products flawed or don’t meet expectations, retailers not honouring obligations  Risk of death – premature death causing financial hardship  Risk of Income Lost – job loss or injury  Health Risk – increased medical costs, reduce working capacity or life expectancy  Asset and Liability Risk – assets stolen or damaged, suing for negligence or for damages caused by yourself o Step 5 – Create and implement a financial action plan  Choose ways to achieve your goals, assistance from others o Step 6 – Re-evaluate and revise your plan  Plan should be reviewed regularly based on life circumstances  How to set financial goals o Influenced by:  Timing – short-term, intermediate and long-term  Needs – consumable products (food, clothing), durable products (appliances, cars, equipment)  Life Situation – age, income, status, household, personal beliefs, employment  Also influenced by graduation, engagement and marriage, birth/adoption, career change or move, dependent children, health, divorce, retirement, death  Social – married at later age, more households/multiple incomes, single parents, living longer o Goals should be realistic, stated in specific/measurable items, time frame, indicate type of action to be taken  How economy affects decisions o Economics – study of how wealth is created and distributed o Market forces – supply and demand, production costs and competition o Financial institutions – influence of the Bank of Canada o Global influences – level of exports, foreign investors, competition o Economic conditions:  Consumer prices – value of dollar, changes in inflation (caused by increase in demand without increase in supply)  Consumer spending – influences employment opportunities  Interest Rates – represents costs of money, costs of credit when you borrow (increased demand in IR rises), return on your money when you save or invest (increase the supply of money and IR decrease)  Money supply – dollars available for spending  Unemployment rate - # of people without employment who are willing/able to work  Housing starts - # of new homes built  GDP – value of goods and services produced within a country’s borders including items produced with foreign resources  Trade balance – difference between imports and exports  S&P/TSX – composite index and other stock market indexes, value of stocks  Opportunity cost – cost related to the next-best choice available to someone  Calculating interest: o time value of money – increase in an amount of money as a result of interest earned, should be considered an opportunity cost o simple interest – compounded on the principal, excluding previous interest earned  P x r x T = I P r T I Amount in Savings Annual Interest Time Period Interest Rate  Ex. $100 x 6% (0.06) x 1 (year) = $6 or in 1 year you have $106.  Compound interest – interest that is earned on previously earned interest o Each time interest is added to the principal, the next interest is computed on the new balance  Ex. Year 1: $100 x 6% x 1 (year) = $$6  Ex. Year 2: ($100 + $6) x 6% x 1 (year) = $6.36  Ex. Year 3: ($106 + $6.36) x 6% x 1 (year) = $6.74  Year 1 = $106  Year 2 = $ 112.36  Year 3 = $119.10  Future Value of Money o Is the amount to which current savings will increase based on certain interest rate and certain time period o Calculations involve compounding since interest is earned on previously earned interest o Can be computed for a single or series of amounts  Annuity – series of equal deposits or payments  Present Value of Money o Current value of a future amount based on IR and time period o Also called discounting  FV = PV(1 + i) or FV = ((1+i) -1)/ i  PV = FV/ (1 + i) FV PV i n Future Value Present Value interest rate Number Compounding Periods Chapter 2 – Money Management Strategy: Statements and Budgeting  Objective 1 o Spending money reduces the amount you can save and invest o Saving and investing reduces money you can spend now o Buying on credit ties up future income o Using savings for purchases results in lost interest savings can’t be used for other purposes o Comparison shopping can save you money but uses up valuable time o Major Money Management Activities:  Store and maintain personal records and documents  Create personal financial statements  Create and implement a plan for spending and saving  Personal Balance Sheet o What an individual or family owns or owes; also called a net worth statement o Items of value (what you own) – Net Worth (your wealth) = Amounts owed (what you owe) o Components:  Assets  Liquid assets – cash and items easily converted to cash  Real estate – home, condo, property owned  Personal possessions – automobiles or other possessions  Investment assets – funds for long term needs  Liabilities  Current liabilities – debts to be paid within short time  Long-term liabilities – do not have to pay until more than a year  Net Worth  Assets – liabilities o High net worth may still have financial difficulties  No liquid cash available to pay current expenses  Insolvency – inability to pay debts when they are due because liabilities far exceed the value of assets o Increase net worth by:  Increasing savings, reduce spending, increase value of investments, reducing amounts owed o net worth is not money available for use but an indication of your financial position  Cash Flow Statement o A statement that summarizes cash receipts and payments for a given period of time o Total Cash received during period + cash outflows during the time period = cash surplus or deficit o Components  Shows inflow and outflow during a given time period  Step 1 – Record income  From employment; wages, salaries and commission or self-employment  Savings and investment, gifts, grants, scholarships, and educational loans  Government payments (CPP, welfare, EI)  Amounts received from pensions and retirement  Alimony and child support payments  Step 2 – Record cash outflows  Fixed expenses do not vary from month to month o Rent, mortgage, loan payments, insurance  Variable expenses are flexible payments o Food, clothing, utilities  Step 3 – Determine net cash flow  Net cash flow can be surplus or a deficit  Used as a basis for creating a spending, saving and investment plan  Creating a Budget o Budget: A specific plan for spending income  Step 1 – setting financial goals  Step 2 – Estimating Income  Step 3 – Budgeting Emergency funds and savings (3-6 months of living expenses)  Step 4 – Budgeting fixed expenses  Step 5 – Budgeting Variable Expenses  Step 6 – Recording Spending amounts  Variance – difference between amount budgeted & actual amount received or spent  Deficit – actual spending exceeds planned spending  Surplus – actual spending less than planned spending  Step 7 – Reviewing spending and saving patterns  Dual-Income Households o Pooled income – incomes combined and bills paid from pool o Sharing the bills – each responsible for predetermined bills o 50/50 – each contribute equally to pool o Proportionate contribution – each contribute percentage of his/her income Chapter 3 – Taxes and Tax Strategy 4 Types of Tax: 1. On purchases: GST, PST (now HST) as well as excise taxes on cigarettes, gasoline etc 2. On property: a major source of revenue for local governments, determined based on assessed value of land. The ongoing increase to this tax is a concern for those on fixed incomes (seniors) 3. On wealth: aka the Capital Gains tax – 50% of any net gains from the sale of assets is taxable within the year the gains are incurred. 4. On earnings: income taxes. Quote from p. 75 of text: “Throughout the year, your employer will withhold income tax amounts from your paycheque, and you may be required to make income tax instalments if you earn income from other sources, such as a business. Both types of payments are only estimates of your income taxes payable. You may need to pay an additional amount when you file your income tax return, or you may get a refund.” Filing Federal and Provincial Income Tax Return Who must file? All residents of Canada, for any year in which they have a balance of taxes owing (and even if you don’t it’s wise to file anyway). Income Tax Fundamentals: 1. Composition of Total Income: i. Employment income – salaries, wages, commission, tips, bonuses, taxable benefits. ii. Net business income – income from proprietorships/partnerships/corporations minus expenses. iii. Investment income – interest, dividends, or rental income minus expenses  Note: dividends are grossed-up by 44% to calculate taxable divs. iv. Taxable capital gains – income from the sale of stocks, bonds, & real estate.  Note: subtract losses, and this net value is taxable @ 50% v. Other income: retirement income (private pensions and RRSPs), gov’t CPP/EI/OAS payments, spousal and (some) child support, research grants  Non-taxable income: lottery winnings, gifts, inheritances, some child support, GST/HST rebate, Canada Child Tax Benefit, scholarships/fellowships/bursaries  NOTE: your home is your best tax-shelter, as you pay no capital gains tax upon the sale of your primary residence. 2. Calculating Net Income: Basically, “total income” – the following deductions = net income i. Contributions to deferred income plans – RRSPs etc. (income taxed upon withdrawl) ii. Union & professional dues – usually withheld @ sourc
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