Chapter 1 Personal Finance Planning in Action - Student

7/28/2021
Chapter 1
PERSONAL FINANCIAL PLANNING IN ACTION
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Personal Financial Planning - KEY CONTENTS
➢ Determinants impact on personal finance target and decision

➢ Personal financial goals
➢ Personal financial planning process
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Financial Planning
Process of managing your money to achieve personal

economic satisfaction
Financial Plan:
◦ Formalized report
◦ Summarizes current financial situation
◦ Analyzes financial needs
◦ Recommends future financial activities
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Definition of Financial Planning
Financial planning is a holistic process whereby a

person’s total position, both financial and non-
financial, is examined and a set of actions or a plan
is put in place which, once implemented, will assist
in meeting the person’s ultimate goals and
objectives.
Advantages of Financial Planning
➢ Increased effectiveness in obtaining, using, and

protecting financial resources
➢ Increased control of your financial affairs
➢ Improved personal relationships
➢ Sense of freedom from financial worries
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Learning Objective LO1.1
Identify Social and Economic Influences on

Personal Financial Goals and Decisions
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Life Situation and Personal Values

Adult life cycle
Life Situation Factors:
◦ Marital status, household
size, employment
Major events:
◦ Graduation, marriage, divorce
◦ Birth or adoption of child
◦ Career or health changes
Values:
◦ The ideas and principles you consider correct, desirable, and important
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Financial Planning in Our Economy

Domestic Influences
Economy’s influence on financial planning

◦ Business, labor & government
The Federal Reserve

◦“.. Sets the nation’s monetary policy to promote the objectives of
maximum employment, stable prices and moderate long-term
interest rates.”
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Economic Environment
•Adviser must be aware of the impact of the economic
environment, both micro and macro, including interest
rates, inflation, unemployment, global tensions, terrorism,
overseas economies.
• The economic environment is cyclic in nature.
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The business cycle moves from recession to recovery

to boom to contraction then back to recession.
• Recession — high unemployment, low economic

growth
• Recovery — unemployment begins to fall and
economic growth begins to rise
• Boom — expansion, high employment and
economic growth, increase in inflationary conditions
• Contraction — economic growth starts to slow, level
of unemployment begins to rise, falling retail sales
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Many factors impact on
• Interest rates
• Inflation
• Unemployment
• Savings record of Australians
• Issues re-self-funding of retirement
• Availability of credit
• Ageing population
• Government initiatives for investment
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Global Influences
U.S economy affected by foreign investors and competition from foreign companies
Level of imports/exports affects available supply of dollars
Level of foreign investment affects domestic money supply
Money supply affects consumer interest rates
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Inflation
Inflation =  in the general level of prices
Reduces buying power of the dollar

Most harmful to those on fixed incomes
Inflation rates vary
“Hidden inflation”
CPI = a measure of inflation
Deflation = decline in prices
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Interest Rates
Interest Rate = the cost of money

Affected by supply and demand
Risk premium :
◦ Length of time funds in use
◦ Expected inflation
◦ Uncertainty
Major impact on financial planning
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8 Basic Financial Planning Activities

Obtaining Chapter ?
Planning Chapters ?
Saving Chapter ?
Borrowing Chapter ?
Spending Chapters ?
Managing Risk Chapters ?
Investing Chapters ?
Retirement/Estate
Planning Chapter ?
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LO1.2 Develop Personal Financial Goals

Time Frames for Achieving Financial Goals:
◦ Short-term goals . . . . . . . . . . . within 1 year
◦ Intermediate goals . . . . . . . . . 1-5 years
◦ Long-term goals . . . . . . . . . . . > 5 years
Financial Needs Goals:

◦ Consumable-product goals. . . Food, clothing
◦ Durable-product goals . . . . . . Car, appliances
◦ Intangible-purchase goals . . . Education, health
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Goal-Setting Guidelines
The “SMART” Approach
Effective Goals should be:

• S = Specific
• M = Measurable
• A = Action-oriented
• R = Realistic
• T = Time-based
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Using Time Value of Money to Evaluate

Personal Financial Decisions
Opportunity cost = what you give up making a choice

The trade-off of a decision
Not always measurable in dollars; may be time
Consider lost opportunities resulting from your decisions
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Time Value of Money
Increase in an amount of money

as a result of interest earned
◦ Saving today = more money tomorrow
◦ Spending today = lost interest
Saving and spending decisions involve considering the trade-offs
◦ Current needs can make spending worthwhile
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Time Value of Money

Interest Calculations
Calculating interest earned:

◦ Principal = amount of savings
◦ Annual interest rate
◦ Length of time money on deposit (in years)
Simple interest:
Amt in Annual Time

Svgs X Interest X Period = Interest
Rate
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Time Value of Money

Interest Calculation Example
$500 on deposit at 6% annual interest for 6 months:

Principal = $500
Interest rate = 6%
Time period = ½ (6/12 months)
$500 X 6% X 1/2 = $15
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Time Value of Money

Types of TVM Calculations
➢ Future Value = Amount that will be available at a later date

➢ Present Value = Current value of an amount desired in the future
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Time Value of Money

Calculation Methods
1. Formula calculation
2. Time value of money tables
3. Financial calculator
4. Spreadsheet software
5. Websites and apps
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Future Value
➢ The increased value of money from interest earned

➢ Amount to which current savings will increase
➢ Total amount available in the future
➢ “Compounding” is earning interest on your interest.
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Future Value
Formula Method
Future = Original + Interest

Amount in Earned
Value
Savings
$100 deposited for 1 year at 6% per year

Future Value = $100 + ($100 X .06 X 1)
Future Value = $100 + $6 = $106
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Future Value
Formula method
This could be repeated for several time periods, but there’s

an easier way:
FV = PV(1+i)n
In the previous example:
FV = 100(1.06)1=$106
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Future Value
Formula method
If you left the money in for two years:

FV = 100(1.06)2=$112.36
Notice that $6 interest for two years would give you $12. The extra
$0.36 is the result of compounding.
Another example:
◦ $650 invested at 8% for 10 years
FV = $650(1.08)10=$1,403.30
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Time Value of Money

Calculation Methods
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Future Value
Series of Deposits
“Annuity” = series of equal deposits at equal intervals earning a constant rate

Examples are retirement savings, or any other savings goal in which you deposit an
equal amount at equal intervals.
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Future Value of a Series of Deposits

Formula method
The formula is:

(1+i)n −1
FV = Annuity
i
For example, if you deposit $50 per year at 7 percent for six years, you’ll have:
(1.07)6 −1
FV = $50 = $357.66
0.07
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Present Value
The current value of a future amount based on a certain interest rate and time period
The current value of an amount desired in the future
How much to deposit now to obtain a desired total in the future
“Discounting”
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Present Value
Formula method
The formula is:

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PV = FV
(1+i)n
For example, if you want $1,000 five years from now and can
earn 5% on your deposit:
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PV = $1,000 = $783.53
(1.05)5
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Present Value of a Series of Deposits

Formula method
The formula is:
1− 1 n
(1+i)
PV = Annuity
i
For example, if you want to withdraw $400 per year for nine years and your
money is earning 8%, how much should you deposit today?
1− 1
(1.08)9
PV = $400 =$2,498.76
0.08
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Rule of 72, 114, 144
Time for investment to double = 72 / % average Rate of Return
Time for investment to triple = 114/ % average Rate of Return
Time for investment to quadruple = 144 / % average Rate of Return
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The 6-Step Financial Planning Process
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Implement a Plan for Making Personal

Financial and Career Decisions
1. Determine current financial situation
2. Develop financial goals
3. Identify alternative courses of action
• Continue same course of action
• Expand current situation
• Change current situation
• Take a new course of action
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Implement a Plan for Making Personal

Financial and Career Decisions
4. Evaluate alternatives
• Consequences of choices
• Evaluate risks
• Financial Planning information
sources
5. Create and implement financial action plan
6. Review and revise plan
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Financial Planning in Action
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-41
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Career Choice and Financial Planning

1. The life work one selects = key to financial well being and
personal satisfaction
2. Career choices have risks and opportunity costs
3. Career choices require periodic re-evaluation of trade-offs
related to personal, social and economic factors
4. Changing personal and social factors require continuous
assessment of your work situation
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Financial Planning
Financial Goals should be:

• S = Specific
• M = Measurable
• A = Action-oriented
• R = Realistic
• T = Time-based
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Financial Planning
Every decision involves a trade-off
Personal opportunity costs:
◦ Time
◦ Effort
◦ Health
Financial opportunity costs
◦ Based on the time value of money
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Financial Planning Process
• A financial plan documents

— where a person is now
— where they want to go
— how they will get there
• A financial plan considers
— relevant timeframes relating to goals
— an analysis of client tolerance for risk
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• Planning must be collaborative
— Must determine whether and how an individual can
meet stated life goals
— The person position, the recommendations and
implementation must be discussed, negotiated and
agreed
— The person is ultimately responsible for the success of
the plan; proper management of financial resources is
needed
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• Recommendations must have a reasonable basis
— For holistic advice, the total person position must be evaluated
— Account must be taken of the socio-economic environment,
legal issues, client personality and financial status as well as any
immediate concerns
— Both financial and non-financial issues that will impact on
overall outcomes should be considered if person goals and
objectives are to be fulfilled
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Financial Planning
Personal financial planning involves:
1. Determine financial situation
2. Develop financial goals
3. Identify alternative courses of action
4. Evaluate alternatives
5. Create and implement a financial action plan
6. Review and revise the financial plan
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Individual Work – End of chapter
Create your own financial planning that

includes short-term, medium-term, long-
term with some scenario (your choices)
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7/28/2021

Personal Financial Planning - KEY CONTENTS

➢ Determinants impact on personal finance target and decision

Process of managing your money to achieve personal

Definition of Financial Planning

Financial planning is a holistic process whereby a

Advantages of Financial Planning

➢ Increased effectiveness in obtaining, using, and

Learning Objective LO1.1

Identify Social and Economic Influences on

Life Situation and Personal Values

Financial Planning in Our Economy

Economy’s influence on financial planning

The Federal Reserve

The business cycle moves from recession to recovery

• Recession — high unemployment, low economic

Financial Planning in Our Economy

Financial Planning in Our Economy

Inflation =  in the general level of prices

Reduces buying power of the dollar

Financial Planning in Our Economy

Interest Rate = the cost of money

Major impact on financial planning

8 Basic Financial Planning Activities

LO1.2 Develop Personal Financial Goals

Financial Needs Goals:

Effective Goals should be:

Using Time Value of Money to Evaluate

Opportunity cost = what you give up making a choice

Time Value of Money

Increase in an amount of money

Time Value of Money

Calculating interest earned:

Amt in Annual Time

Time Value of Money

$500 on deposit at 6% annual interest for 6 months:

$500 X 6% X 1/2 = $15

Time Value of Money

➢ Future Value = Amount that will be available at a later date

Time Value of Money

➢ The increased value of money from interest earned

Future = Original + Interest

$100 deposited for 1 year at 6% per year

This could be repeated for several time periods, but there’s

If you left the money in for two years:

Time Value of Money

“Annuity” = series of equal deposits at equal intervals earning a constant rate

Future Value of a Series of Deposits

The formula is:

The formula is:

Present Value of a Series of Deposits

Rule of 72, 114, 144

Time for investment to double = 72 / % average Rate of Return

Time for investment to triple = 114/ % average Rate of Return

Time for investment to quadruple = 144 / % average Rate of Return

The 6-Step Financial Planning Process

Implement a Plan for Making Personal

Implement a Plan for Making Personal