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Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Personal Financial Planning 3 Why is it important to learn now how to plan for your financial future? Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. It is important to begin planning now! Financial security can only be assured if you plan for it The earlier you plan, the more likely you are to reach your goals Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Personal Financial Planning 3 personal financial planning goals values liquidity service good Glencoe Personal Finance consumer interest time value of money principle future value annuity present value Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Personal Financial Planning 3 Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 1 Financial Decisions and Goals Define personal financial planning. List the six steps of financial planning. Identify factors that affect personal financial decisions. Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 1 Financial Decisions and Goals Personal Financial Decisions Personal Financial Planning Your Goals personal financial planning arranging to spend, save, and invest money to live comfortably, have financial security, and achieve goals goals the things one wants to accomplish Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 1 Financial Decisions and Goals Personal Financial Decisions Benefits of Planning Increased effectiveness in managing financial resources Glencoe Personal Finance Debt avoidance and reduced dependence on others Improved personal relationships A sense of freedom from financial worries Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 1 Financial Decisions and Goals Personal Financial Decisions: Step 1 Determine Your Current Financial Situation Glencoe Personal Finance Savings Monthly Income Monthly Expenses Debts Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 1 Financial Decisions and Goals Personal Financial Decisions: Step 2 Develop Your Financial Goals Think about your financial goals Do your personal values affect your financial decisions? What are your needs? What are your wants? values the beliefs and principles you consider important, correct, and desirable Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 1 Financial Decisions and Goals Personal Financial Decisions: Step 3 Identify Alternative Courses of Action Glencoe Personal Finance Continue the same course of action Expand the current situation Change the current situation Take a new course of action Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 1 Financial Decisions and Goals Personal Financial Decisions: Step 4 Evaluate Your Alternatives Sources of Financial Information The Internet Financial Institutions Media Sources Financial Specialists Consequences of Choice (opportunity cost) Evaluating Risks Inflation Risk SEE PAGE 66 Interest Rate Risk Income Risk Personal Risk Liquidity Risk liquidity the ability to easily convert financial assets into cash without loss in value Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Personal Financial Decisions: Step 5 and Step 6 STEP 5 – Create and Use Your Financial Plan STEP 6 – Review and Revise Your Plan Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 1 Financial Decisions and Goals Developing Personal Financial Goals Short-Term Goals Intermediate Goals Long-Term Goals One year or less Two to five years More than five years Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 1 Financial Decisions and Goals Developing Personal Financial Goals Service Good service a task that a person or machine performs for you good physical item that is produced and can be weighed or measured Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 1 Financial Decisions and Goals Developing Personal Financial Goals Tips for Setting Your Financial Goals Glencoe Personal Finance Be realistic Be specific Have a clear time frame Know what type of action to take Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 1 Financial Decisions and Goals Influences on Personal Financial Planning Life Situations See Pg. 70 Glencoe Personal Finance Personal Situations Values Economic Factors See next slide Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 1 Financial Decisions and Goals Influences on Personal Financial Planning Economic Factors: See Page 72 Market Forces Supply & Demand Glencoe Personal Finance Financial Institutions Banks, Credit Unions, Savings & Loan, Insurance Companies, Investment Companies Federal Reserve Global Influences Global Marketplace, Competition between nations affects the economy Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 1 Financial Decisions and Goals Influences on Personal Financial Planning Economic Conditions: Page 73 Consumer Prices Consumer Spending Interest Rates consumer a person who purchases and uses goods or services interest the price that is paid for the use of another’s money, represents the Cost of money…increased savings/investments = > money supply, More money borrowed = demand for money is > and interest rates go up Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 1 Financial Decisions and Goals Often people with conflicting financial values and practices experience challenges in their business or personal relationships. How could such problems be minimized or prevented using what you have learned in this chapter? Answers will vary. Sample answer: Spouses who disagree about how much to spend on certain goods or activities may have frequent arguments. To reduce arguments, they need to communicate with each other before making decisions. Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 2 Opportunity Costs and Strategies Explain the opportunity costs associated with personal financial decisions. Understand the time value of money. Identify eight strategies for achieving financial goals at different stages of life. Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. What is an Opportunity Cost? Pg. 76 What is given up when making one choice instead of another Two types of Opportunity Costs – Personal – Financial Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 2 Opportunity Costs and Strategies Personal Opportunity Cost: pg. 76 Personal Resources Require Management Glencoe Personal Finance Health Knowledge Skills Time Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 2 Opportunity Costs and Strategies Financial Opportunity Cost pg. 76 To help make choices, consider the time value of money. time value of money the increase of an amount of money due to earned interest or dividends (money could be worth more later by earning interest or dividends…your current needs determine if trading off interest earnings is worthwhile) Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 2 Opportunity Costs and Strategies Financial Opportunity Cost pg. 77 Calculating Interest Principal x Annual Interest Rate = Interest principal the original amount of money on deposit SEE “GO FIGURE”, page 77 Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 2 Opportunity Costs and Strategies Financial Opportunity Cost pg. 77 Calculating Future Value Multiply the principal by the annual interest rate and then add that interest amount to the principal. future value the amount an original deposit will be worth in the future based on earning a specific interest rate over a specific period of time SEE “GO FIGURE” pg. 78. Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 2 Opportunity Costs and Strategies Financial Opportunity Cost What is an annuity? annuity series of equal regular deposits SEE “FUTURE AND PRESENT VALUE TABLE”, pg. 79 Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 2 Opportunity Costs and Strategies Financial Opportunity Cost What is present value? present value the amount of money one would need to deposit now in order to have a desired amount in the future SEE “FUTURE AND PRESENT VALUE TABLE, pg. 79 Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 2 Opportunity Costs and Strategies Achieving Your Financial Goals Strategies 1 5 Obtain financial records. 2 Plan how you will spend your money. 3 Borrow wisely. 6 Invest to increase current income and for long-term growth 7 Spend wisely. 4 Manage risk. 8 Save on a regular basis. Glencoe Personal Finance Plan for retirement. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 2 Opportunity Costs and Strategies HOMEWORK Question #2, pg. 85: DEBATE New and improved versions of electronic devices become available often. Detail arguments for and against upgrading each time a new device becomes available. For: It is fun to have the latest gadgets; the most current technology can be beneficial for organization and efficiency, and necessary for education/career goals. Against: Upgrade is not necessary if it is a want and not a need. If the device works, it is wasteful to replace it. Replaced devices may end up in a landfill. Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Personal Financial Planning Section 2 Opportunity Costs and Strategies HOMEWORK Question #4, pg. 85: PREDICT What factors might play a part in the revision of your financial plan as you get older? Health Relationships– marriage, additional family members, widow/widower—can create financial changes Education—many people choose to continue their education later in life Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Personal Financial Planning 3 Opportunity Cost An opportunity cost is what you give up to get something else. Source: www.collegeboard.com Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Personal Financial Planning 3 Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Personal Financial Planning 3 Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. End of Glencoe Personal Finance Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.