Personal Finance Unit 1 Chapter 1 2007 GlencoeMc

Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 0

Chapter 1 Personal Financial Planning What You’ll Learn § Section 1. 1 § Define personal financial planning. § Name the six steps of financial planning. § Identify factors that affect personal financial decisions. § Section 1. 2 § Explain opportunity costs associated with personal financial decisions. § Identify eight strategies for achieving financial goals at different stages of life. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 1

The Money Plan • Q: I am a high school student. I do not have money for investments or buying property. So what difference does it make how I spend my money now? • A: You will not always be a student. Learning to save and use money wisely now will help you know how to achieve financial security in the future. While you are in high school, financial planning can help you decide how to spend, save, and invest your money for special purchases or activities that matter to you. You may even be able to buy stock! Go to finance 07. glencoe. com to complete the Standard & Poor’s Financial Focus activity. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 2

Section 1. 1 Financial Decisions and Goals Main Idea List three of your financial goals. The steps in the financial planning process can help you reach your financial goals. Video Clip: Why Have a Financial Plan? Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 3 3

Section 1. 1 Financial Decisions and Goals personal financial planning arranging to spend, save, and invest money to live comfortably, have financial security, and achieve goals Personal Financial Decisions Personal finance is everything in your life that involves money. Some of the benefits of personal financial planning are: § You have more money and financial security. § You know how to use money to achieve your goals. § You have less chance of going into debt you cannot handle. § You can help your partner and support your children, if you have a family. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 4

Section 1. 1 Financial Decisions and Goals goals the things you want to accomplish The financial planning process has six steps to help you reach your goals. Step 1: Determine Your Current Financial Situation To figure out your current financial situation, make a list of items that relate to your finances, such as: § Savings § Monthly income (job earnings, allowance, gifts, and interest on bank accounts) § Monthly expenses (money you spend) § Debts (money you owe to others) When you have determined your financial situation, you will be able to start planning. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 5

Section 1. 1 Financial Decisions and Goals values the beliefs and principles you consider important, correct, and desirable need something you must have to survive, such as food, shelter, and clothing Step 2: Develop Your Financial Goals To develop clear financial goals, think about your attitude toward money and ask yourself some questions: § Is it more important to spend your money now or to save for the future? § Would you rather get a job right after high school or continue your education? § Do your personal values affect your financial decisions? § Do you know the difference between your needs and your wants? want something you desire or would like to have or do Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 6

Section 1. 1 Financial Decisions and Goals Step 3: Identify Your Options It is impossible to make a good decision unless you know all your options. If you are saving $50 a month, for example, you might have these options: § Expand the current situation by increasing the amount of money you save every month to $60. § Change the current situation by investing in stocks instead of putting your money into a savings account. § Start something new by using the $50 to pay off your debts. § Continue the same course of action. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 7

Section 1. 1 Financial Decisions and Goals opportunity cost what is given up when making one choice instead of another Step 4: Evaluate Your Alternatives You must consider the consequences and risks of each decision you make during the financial planning process. You can do this by: § Using the many available sources of financial information to keep you up-todate with social and economic conditions that can affect your financial situation. § Understanding the opportunity cost of your decisions. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 8

Section 1. 1 Financial Decisions and Goals liquidity the ability to easily convert financial assets into cash without loss in value Understanding Risks When you make a financial decision, you also accept certain financial risks. Some types of financial risks include: § Inflation Risk § Interest Rate Risk § Income Risk § Personal Risk § Liquidity Risk Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 9

Section 1. 1 Financial Decisions and Goals Step 5: Create and Use Your Financial Plan of Action A plan of action is a list of ways to achieve your financial goals. Some examples of plans of action include: § Cutting back on spending to increase your savings. § Getting a part-time job or working more hours at your present job to increase your income. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 10

Section 1. 1 Financial Decisions and Goals Step 6: Review and Revise Your Plan As you get older, your finances and needs will change. That means that your financial plan will have to change too. You should reevaluate and revise it every year. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 11

Section 1. 1 Financial Decisions and Goals Developing Personal Financial Goals Why do so many people have money problems? The main reason is that they do not plan how they will use their money. You can avoid money problems by planning with some clear financial goals in mind. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 12

Pay Yourself First When you receive your first paycheck, pay yourself first. This means that before you pay bills or buy anything, you should put something into your savings account—even a small amount. Think of it as paying yourself. Try saving a percentage of your take-home pay or allowance— 1 percent the first month, 2 percent the second month, and so forth. Then sit back and watch you money grow. If your take-home pay is $860 a month and you save the percentages listed above for 12 months, how much would you have? Personal Finance Unit 11 Chapter 11© © 2007 Glencoe/Mc. Graw-Hill 13 13

Section 1. 1 Financial Decisions and Goals Types of Financial Goals Two factors will influence your planning for financial goals. These factors are: § The time frame in which you would like to achieve your goals. § The type of financial need that inspires your goals. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 14

Section 1. 1 Financial Decisions and Goals Time Frame of Goals can be defined by the time it takes to achieve them: § Short-term goals take one year or less to achieve (such as saving to buy a computer). § Intermediate goals take two to five years to achieve (such as saving for a down payment on a house). § Long-term goals take more than five years to achieve (such as planning for retirement). Start with short-term goals that may lead to long -term ones. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 15

Section 1. 1 Financial Decisions and Goals service a task that a person or a machine performs for you good a physical item that is produced and can be weighed or measured Goals for Different Needs Services and goods are two different categories of financial needs. A haircut is an example of a service, while a new car is a good. How you establish and reach your financial goals will depend on whether a goal involves the need for: § Consumable goods (such as a soda) § Durable goods (such as a car) § Intangible items (such as an education) Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 16

Section 1. 1 Financial Decisions and Goals Guidelines for Setting Goals When setting your financial goals, follow these guidelines: § Your financial goals should be realistic. § Your financial goals should be specific. § Your financial goals should have a clear time frame. § Your financial goals should help you decide what type of action to take. Your financial goals will change as you go through life. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 17

Section 1. 1 Financial Decisions and Goals Influences on Personal Financial Planning Many factors will influence your day-to-day decisions about finances. The three most important factors are: § Life situations § Personal values § Economic factors Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 18

Section 1. 1 Financial Decisions and Goals Life Situations and Personal Values Your financial planning will be affected by changes in your life situation, such as: § Going to college § Starting a new career § Getting married § Having children § Moving to a new city Your personal values also influence your financial decisions. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 19

My “Life Situation” Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 20

Section 1. 1 Financial Decisions and Goals economics the study of the decisions that go into making, distributing, and using goods and services economy the ways in which people make, distribute, and use their goods and services Economic Factors Economic factors across the country and around the world play a role in day-to-day financial planning and decision making for most people. To understand economics and the economy, you need to be aware of: § Market forces § Financial institutions § Global influences § Economic conditions Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 21

Section 1. 1 Financial Decisions and Goals supply the amount of goods and services available for sale demand the amount of goods and services people are willing to buy Market Forces The forces of supply and demand determine the prices of products, or goods and services, you purchase. When there is a high demand for an item, or when a company cannot manufacture enough of a certain product to keep up with the demand, the price of the product rises. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 22

Section 1. 1 Financial Decisions and Goals Financial Institutions Most people do business with financial institutions, which include: § Banks § Credit unions § Savings and loan associations § Insurance companies § Investment companies Financial institutions provide services that increase financial activity in the economy. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 23

Section 1. 1 Financial Decisions and Goals Federal Reserve System the central banking organization of the United States, also known as the Fed The Federal Reserve System’s primary role in the U. S. economy is the regulation of the money supply. The Fed controls the money supply by: § Determining interest rates § Buying or selling government securities Its decisions affect: § The interest rate you earn on your savings § The interest rate you pay when you borrow money § The prices of the products you buy Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 24

Section 1. 1 Financial Decisions and Goals Global Influences You and the money you spend are part of the global marketplace, which is another economic factor that can affect financial planning. The economy of every nation is affected by competition with other nations. When more money is leaving the U. S. than entering it, for example: § Less money is available for spending and investing. § Interest rates may rise. These global influences also affect personal financial decisions. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 25

Section 1. 1 Financial Decisions and Goals Economic Conditions Current economic conditions also affect your personal financial decisions. The three important economic conditions are: § Consumer prices § Consumer spending § Interest rates Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 26

Section 1. 1 Financial Decisions and Goals inflation a rise in the level of prices for goods and services Consumer Prices Over time the prices of most products inflate. The main cause of inflation is an increase in demand without an increase in supply. For example, prices will rise if: § People have more money to spend because of pay increases or borrowing. § The same amounts of goods and services are available. The inflation rate affects consumer prices and varies from year to year. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 27

Section 1. 1 Financial Decisions and Goals consumer a person who purchases and uses goods or services Consumer Spending Consumer spending affects the economy by helping to create and maintain jobs. When people buy more goods or services: § Companies have to hire extra employees to meet the demand. § The employment rate rises, making more jobs available. § More people work, and they have more money to spend. When consumers buy fewer goods and services, companies have to produce less, and unemployment rises. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 28

Section 1. 1 Financial Decisions and Goals interest the price that is paid for the use of another’s money Interest Rates Interest rates represent the cost of money and are also influenced by supply and demand. Interest rates will affect your financial planning as you: § Save § Invest § Obtain loans Interest rates are just one facet of the economic factors that influence your personal financial planning. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 29

Section 1. 2 Opportunity Costs and Strategies Main Idea Why do you think you may have to make trade-offs to meet your financial goals? By recognizing the trade-offs of financial decisions and learning to use your money wisely now, you will be able to live according to your values and meet your financial needs and goals throughout your life. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 30 29

Section 1. 2 Opportunity Costs and Strategies Personal and Financial Opportunity Costs Whenever you make a choice, you have to give up, or trade off, some of your other options. When making your financial decisions and plans, you will need to carefully consider: § Personal opportunity costs § Financial opportunity costs Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 31

Section 1. 2 Opportunity Costs and Strategies Personal Opportunity Costs Like financial resources, your personal resources require management. These resources include: § Health § Knowledge § Skills § Time You have to decide how to use your time to meet your needs, to achieve your goals, and to satisfy your values. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 32

Section 1. 2 Opportunity Costs and Strategies time value of money the increase of an amount of money due to earned interest or dividends Financial Opportunity Costs You also must make choices about how you spend money. To help make choices, consider the time value of money every time you: § Spend § Save § Invest Think about the time value of this money as an opportunity cost. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 33

Section 1. 2 Opportunity Costs and Strategies principal the original amount of money on deposit Calculating Interest You can calculate the time value of your savings by figuring out how much interest you will earn. To do this, you will need to know: § The principal § The annual interest rate § The length of time your money will be in an account By comparing interest rates at several financial institutions, you can figure out which one will make your money grow the fastest. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 34

Section 1. 2 Opportunity Costs and Strategies future value the amount your original deposit will be worth in the future based on earning a specific interest rate over a specific period of time Future Value of a Single Deposit You can determine the future value of your savings by: § Multiplying the principal by the annual interest rate. § Adding that interest amount to the principal. Each year, interest is earned on your principal and on previously earned interest. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 35

Section 1. 2 Opportunity Costs and Strategies Compounding To calculate the interest earned for the second year: § Add interest earned in the first year to the principal. § Take that amount and multiply it by the annual interest rate. Future value computations are also called compounding. With compounding, your money increases faster over time. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 36

Section 1. 2 Opportunity Costs and Strategies annuity a series of equal regular deposits present value the amount of money you would need to deposit now in order to have a desired amount in the future Deposit Values Some savers and investors like to make regular deposits into their savings. A series of equal regular deposits is sometimes called an annuity. You can also: § Calculate the present value of a single deposit. § Use present value calculations to determine how much you would need to deposit so you can take a specific amount of money out of your savings account for a certain number of years. You can use these calculations to determine your retirement age. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 37

Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 38

Section 1. 2 Opportunity Costs and Strategies Achieving Your Financial Goals Throughout your life you will have many different financial needs and goals. By learning to use your money wisely now, you will be able to achieve many of those goals. Financial planning involves: § Choosing a career § Learning how to protect and manage the money you earn Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 39

Section 1. 2 Opportunity Costs and Strategies to Achieve Your Financial Goals By using the following eight strategies, you can avoid many common money mistakes: § Obtain § Plan § Spend Wisely § Save § Borrow Wisely § Invest § Manage Risk § Plan for Retirement Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 40

Section 1. 2 Opportunity Costs and Strategies Developing and Using a Financial Plan A good personal financial plan includes: § Assessing your present financial situation § Making a list of your current needs § Deciding how to plan for future needs You can design a plan on your own, hire a financial planner, or use a good moneymanagement software program. Making your financial plan work takes time, effort, and patience, but you will develop habits that will give you a lifetime of satisfaction and security. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 41

Section 1. 2 Opportunity Costs and Strategies Financial Planning When developing and using a financial plan, you can: § Design a plan on your own. § Hire a financial planner. § Use a good money-management software program. Making your financial plan work takes time, effort, and patience, but you will develop habits that will give you a lifetime of satisfaction and security. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 42

Chapter 1 Personal Financial Planning Key Term Review § § § personal financial planning goals values opportunity cost liquidity service good economics economy supply demand § § § § § Federal Reserve System inflation consumer interest time value of money principal future value annuity present value Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 43

Chapter 1 Personal Financial Planning Reviewing Key Concepts 1. Explain personal financial planning and its importance. Personal financial planning is arranging to spend, save, and invest money to live comfortably, have financial security, and achieve goals. Planning your personal finances is important because it will help you to reach your goals, no matter what they are. Some of the benefits of planning are: § § You have more money and financial security. You know how to use money to achieve your goals. You have less chance of going into debt you cannot handle. You can help your partner and support your children, if you have a family. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 44

Chapter 1 Personal Financial Planning Reviewing Key Concepts 2. Describe the six strategies of financial planning. The six steps of financial planning are § Determine your current financial situation § Develop your financial goals § Identify your options § Evaluate your alternatives § Create and use your financial plan of action § Review and revise your plan Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 45

Chapter 1 Personal Financial Planning Reviewing Key Concepts 3. Describe the factors that affect personal financial decisions. The three most important factors that influence your day-to-day decisions about finances are: § § § Life situations Personal values Economic factors Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 46

Chapter 1 Personal Financial Planning Reviewing Key Concepts 4. Explain opportunity costs and how they might affect your personal financial decisions. An opportunity cost is what is given up when making one choice instead of another. Whenever you make a choice, you have to give up, or trade off, some of your other options. You should consider both personal and financial opportunity costs before making your financial decisions and plans. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 47

Chapter 1 Personal Financial Planning Reviewing Key Concepts 5. List eight strategies for achieving financial goals. The following are eight strategies for achieving financial goals: § Obtain § Plan § Spend Wisely § Save § Borrow Wisely § Invest § Manage Risk § Plan for Retirement Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 48

Newsclip: Internet Planning If your knowledge about personal finance is limited, being Web and tech savvy will help you learn more. Finance is a frequent topic on the news and is easy to research. Log On Go to finance 07. glencoe. com and open Chapter 1. Learn more about financial decisions and strategies. Write ways you can learn more about finance. Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/Mc. Graw-Hill 49