personal finances chapter 1
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the process of managing your money to achieve personal economic satisfaction
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Personal financial planning
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increased effectiveness in obtaining using and protecting resources. control by avoiding debt, bankruptcy and dependence on others for security. improved relationships resulting from well planned and communicated financial decisions. freedom from financial worries:
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advantages of personal financial planning
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1. spend 2. save 3. share
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three main decision areas of financial activities
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1. determine current financial situation 2. develop you financial goals 3. identify alternative courses of action 4. evaluate alternatives 5. create and implement your financial action plan 6. review and revise the financial plan
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planning process
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income, savings, living expenses, debts, current assets,
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1. determine your current financial situation
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identifying how you feel about money and why you feel that way. differentiate your needs from your wants.
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2. develop your financial goals
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continue. expand. change. new.
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3. identify alternative courses of action
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taking into consideration live situation, personal values, current economic conditions.
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4. evaluate your alternatives
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what a person gives up by making a choice
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opportunity cost
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rising or falling prices cause changes in buying power. decide to buy it now or later
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inflation risk
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changing interest rates affect your costs, when you borrow, and your benefits , when you save or invest.
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interest rate risk
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the loss of a job may result from changes in consumer spending or expanded use of technology. save while employed or acquire a new skill
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income risk
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purchasing risk : may need repairs. health risk, safety risk, and additional costs associated various financial decisions
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personal risk
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some savings and investments have potential for higher earnings however they may be more difficult to convert to cash or to sell without significant loss in value
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liquidity risk
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developing action plan that identifies ways to achieve your goals
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5. create and implement your financial plan
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regularly asses. at least once a year or when changing personal, social, and economic factors require
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6. review and revise your plan
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short term intermediate long term
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financial goals
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periodic basis involving items that are used quickly, food, clothing entertainment
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consumable product goals
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infrequently purchased expensive items. cars, appliances, sporting equiptment
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durable product goals
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related to personal relationships, health education, leisure
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intangible purchase goals
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specific : know exactly what goals are measurable: specific amount action oriented: providing the basis for the personal activities you will undertake. realistic: based on your income and life situations time based: time frame for achieving the goal
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S. M. A. R. T goals
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the stages in the family situation and financial needs of an adult
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adult life cyle
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ideas and principles that a person considers correct, desirable and important
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values
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the study of how wealth is created and distributed
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economics
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a rise in the general level of prices
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inflation
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divide 72 by the annual inflation -or interest rate
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rule of 72
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reduce use of debt. reduce spending. review the safety of you savings. evaluate insurance coverage. avoid financial scams. communicate with family members
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what to do in times of financial difficulty
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the buying power o fa dollar changes in inflation: if consumer prices increase faster than your income you are unable to purchase the same amount of goods and services;will also cause higher interest rates
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consumer prices
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the demand for goods and services by individuals and households; increase consumer spending creates more jobs and higher wages- can also push up prices and interest rates
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consumer spending
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the cost of money; credit when you borrow; the return on you money when you save or invest: higher interest rates = saving and investing more attractive and discourage borrowing
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interest rates
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the dollars available for spending in our economy: interest rates decline as more people save and invest, higher saving may also reduce job opportunities
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money supply
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the number of people without jobs who are willing and able to work: high unemployment reduces consumer spending and job opportunities
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unemployment
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the number of new homes being built: increase home building results in more job opportunities, higher wages, overall economic expansion.
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housing starts
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the total value of goods and services produced in a country's borders: provides an indication of nations economic viability, resulting in employment and opportunities for increased personal wealth
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gross domestic product
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the difference between a country's exports and its imports : if a country exports more than it imports, the balance of payments deficit can result in price changes for foreign goods
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Trade balance
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the relative value of stocks represented by the index.: the indexes provide an indication of the general movement of stock prices
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Dow jones average, S&P 500, other stock market indexes
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increases in amount of money as a result of interest earned
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time value of money
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the amount of the savings ... the principle the annual interest rate the length of time the money is on deposit principle x annual interest rate x time period = interest
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interest calculations
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the amount to which current savings will increase based on a certain interest rate and a certain time period; also referred to as compounding
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future value
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the current value for a future amount based on a certain interest rate and a certain time period; also referred to as discounting
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present value
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the ability to readily convert financial resources into cash without a loss in value
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liquidity
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a set of federal laws that allow you to either restructure your debts or remove certain debts
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bankruptcy
