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PERSONAL FINANCE
7e
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Kapoor
Dlabay
Hughes
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CHAPTER 1
Personal Financial Planning:
An Introduction
Personal Finance 7e
Kapoor
Dlabay
Hughes
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Financial Planning and Its Benefits

Personal financial planning is the process of
managing your money to achieve personal
economic satisfaction. There are several
advantages of personal financial planning.
 Increased effectiveness in obtaining, using,
and protecting your financial resources.
 Increased control of your financial affairs.
 Improved personal relationships.
 A sense of freedom from financial worries
obtained by looking to the future.
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The Financial Planning Process
 Determine
your current financial situation.
 Develop your financial goals.
 Identify alternative courses of action.
 Evaluate your alternatives.
 Create and implement your financial action
plan.
 Review and revise your plan.
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Consequences of Choices:
Opportunity Cost
Opportunity
cost is what you give up by
making a choice.
 The cost, referred to as the trade-off of a
decision, cannot always be measured in
dollars. Sometimes the cost is your time.
 Consider lost opportunities that will result
from your decisions.
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Every Financial Decision
Involves Evaluating Types of Risk
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Inflation risk.
 Rising prices cause lost buying power.
Interest-rate risk.
 Effect costs of borrowing and rate of return.
Income risk.
 The loss of a job.
Personal risk.
 Health, safety, or costs.
Liquidity risk.
 Higher return may mean less liquidity.
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Financial Planning Information Sources

Printed materials.
 Financial institutions.
 School courses and educational
seminars.
 Computer software, World Wide Web,
and on-line information sources.
 Financial specialists.
 Financial planners, bankers,
accountants, insurance agents,
lawyers and tax preparers.
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Developing Personal Financial Goals
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Types of financial goals include those...
 Influenced by the time frame in which you want
to achieve your goals.
 Influenced by the financial need that drives
your goals.
Timing of goals.
 Short-term, intermediate and long-term goals.
Goals for different financial needs.
Goal setting guidelines suggests goals should...
 Be realistic, be stated in specific, measurable
terms, have a time frame, and indicate the type
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of action to be taken.
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Influences on Personal Financial Planning
Life situation and personal values
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Adult life cycle stage.
Marital status, household
size, and employment.
Major events.
 Graduation, marriage, divorce.
 Birth or adoption of child.
 Career or health changes.
Values.
 What are the ideas and principles you consider
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correct, desirable and important?
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Influences on Personal Financial Planning
(continued)
Economic factors:

Global influences.
 The global marketplace influences
financial activities.
 Foreign investors.
 Competition from foreign companies.

Economic conditions....
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Changing Economic Conditions
Consumer The value of the dollar
prices
changes in inflation.
Consumer The demand for goods and services
spending by individuals and households.
Interest rate The cost of money; cost of credit
when you borrow; return on your money when you
save or invest.
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Changing Economic Conditions
(continued)
Money Supply
The dollars available for
spending in our economy.
Unemployment
The number of individuals without
employment who are willing and
able to work.
Housing starts
Number of new homes being built.
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Changing Economic Conditions
(continued)
GDP: Gross
Total value of goods and services
Domestic Product produced in a country.
Trade balance
Difference between a country’s
exports and imports.
Market indexes
The relative value of stocks as
represented by the index, such as
the Dow Jones Average or the
S&P 500.
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Opportunity Costs and Financial Results
Evaluated When Making Decisions
Personal
Opportunity Costs
(time, effort, health)
Financial
Opportunity Costs
(Interest, liquidity,
safety )
Financial
Acquisitions
(automobile,
home, college
education,
investments,
insurance,
retirement fund)
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Time Value of Money
Increases in an amount of money
as a result of interest earned.
 Saving today means more money
tomorrow. Spending means lost
interest.
 Saving and spending decisions involve
considering the trade-offs. Current
needs can make spending worthwhile.

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How Simple Interest is Computed

Simple Interest.
Amount in savings x annual interest rate x
time period equals the interest.
I = PRT (Interest = Principal x Rate x Time)I
$100 x 5% x 1 (1 year)
100 x .05 x 1 = $5.00
In one year you have $100 in principle plus
$5.00 in interest for a total of $105 at the
end of the year.
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Future Value
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Future value is the amount to which current
savings will increase based on a certain
interest rate and a certain time period.
Future value is also call compounding earning interest on previously earned interest.
Future value can be computed for a single
amount or for a series of deposits.
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Present Value

The current value for a future amount based on
a certain interest rate and a certain time period.
 Present value calculations are also called
discounting.
 The present value of the amount you want in
the future will always be less than the future
value. (See Exhibit 1-8C)
 Present value can be computed for a single
amount or for a series of deposits.
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Components of Financial Planning
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Obtaining (chapter 2)
Planning (chapters 3, 4)
Saving (chapter 5)
Borrowing (chapters 6, 7)
Spending (chapters 8, 9)
Managing risk (chapters 10-12)
Investing (chapters 13-17)
Retirement and estate planning
(chapters 18, 19)
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Developing a Flexible Financial Plan

A financial plan is a formalized report that...
 Summarizes your current financial situation.
 Analyzes your financial needs.
 Recommends future financial activities.
 Your financial plan can be created by you, done
with assistance from a financial planner, or made
using a money management software package.
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Implementing Your Financial Plan

Develop good financial habits.
 Use a well conceived spending plan to help
you stay within your income, while allowing
you to save and invest for the future.
 Have appropriate insurance protection to
prevent financial disasters.
 Become informed about tax and investment
alternatives.
 Study personal finance.
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Implementing Your Financial Plan
(continued)

Achieving your financial objectives requires
two things.
A willingness to learn.
Appropriate information sources
(see Appendix A).
Current periodicals.
Financial institutions.
Courses and seminars.
Personal financial software.
The World Wide Web.
Financial specialists.
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THE END
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