FINANCIAL DECISIONS AND GOALS

What is Personal Finance?

EVERYTHING IN YOUR LIFE THAT INVOLVES MONEY

SpendSaveInvestLive comfortablyFinancial securityAchieve goals

What are Goals?Things you want to accomplishCollege educationBuying a carOccupation

Benefits of Financial PlanningMore moneyFinancial securityUse moneyGoalsDebt you can handleSupport self and family

The Financial Planning Process(6 steps)Determine your Current Financial

SituationDevelop Your Financial GoalsIdentify Your OptionsEvaluate Your AlternativesCreate and Use Your Financial Plan of

ActionReview and Revise Your Plan

Step 1:Determine Your Current SituationSavingsMonthly IncomeMonthly ExpensesDebts (money owed to others)

Step 2:Develop Your Financial GoalsWhat is your “Attitude” about money?

What are your “Values”Needs vs. Wants

Step 3:Identify Your OptionsExpand Current SituationChange the Current SituationStart Something NewContinue the Same Course of Action

Step 4:Evaluate Your AlternativesSources of Financial InformationConsequences of Choices

(Opportunity Cost/Tradeoff)Understanding Risks

InflationInterest Rate RiskIncome RiskPersonal RiskLiquidity Risk

Step 5:Create/Use Your Financial Plan

Step 6:Review and Revise Your Plan

Types of Financial GoalsShort-Term

< 1 yearIntermediate

2 – 5 yearsLong-Term

> 5 years

Goals for Different NeedsHow you establish and reach your

financial goals will depend on whether a goal involves the need for:

Consumable Goods

Durable Goods

Intangible Item (See Question

2)

Guidelines for Setting GoalsRealisticSpecificClear Time FrameDecide What Actions to Take

(See Page 13, Figure 1.2: Financial Goals/Life Situations)

Influences on Personal Financial PlanningLife SituationsPersonal ValuesEconomic Factors

Economy: study of decisions that go into making, distributing, & using goods & services

Economy: Ways in which people make, distribute, & use their goods & services

Economic Conditions Affecting Global and Personal Decisions

Market ForcesFinancial InstitutionsGlobal InfluencesCurrent Economic Conditions

Market ForcesSupply

Amount of goods/services available for sale

DemandAmount of goods/services people are willing to buy

Financial InstitutionsProvide services that increase financial

activity in the economyBanksCredit unionsSavings & Loan AssociationsInsurance CompaniesInvestment CompaniesFederal Reserve System (Fed) is the

central banking organization of the United States

Federal Reserve System (Fed)Regulates the Money Supply

Determines Interest RatesBuys/Sells Government SecuritiesAffects Interest Rate you earnAffects Interest Rate you payAffects to some extent…the prices of products you buy

Global InfluencesYou and the Money You Spend are

part of global marketplaceEconomy of Every Nation is Affected

by Competition with Other NationsIf more money leaves the US than enters it< money available for spending/investing

Interest rates >

Economic ConditionsConsumer Prices

Inflation: rise in level of prices for goods/servicesCaused by increase in demand w/o

increase in supplyRates on loans > during inflation

Consumer Spending> spending = > employment< spending = < employment

Interest Rates (cost of money)Price paid for the use of another’s money

Section 1.1 Assessment1. What are the 6 steps used to create

a financial plan? Pgs. 6-10Determine current financial situationDevelop your financial goalsIdentify alternative courses of actionEvaluate your alternativesCreate/Use your financial planRevise your plan

1.1 Assessment (cont.)2. What is the relationship between the

timing of your goals and the type of good or service that you want? Pgs. 10-11

Consumable = Short term Goals: you buy often, use up quickly (gas, food), costs less

Durable = Intermediate or Long term goals: usually more expensive (i.e.car, house..takes longer to save for or pay off

Intangible = Long term goals: usually requires more planning, more expense (i.e. education, retirement)

1.1 Assessment (cont.)3. What are two economic factors that affect financial

decisions? How might these factors influence your financial planning? Pgs. 14-18

Market forces: supply/demand (high demand = higher cost, low demand = lower cost)

Financial institutions: Affects the interest rate you earn on savings and pay on borrowed money

Global influences: If other countries sell more goods to the U.S. than U.S. companies sell in those markets, less money is available for spending & investing, interest rates may rise

Economic conditions: inflation (increase in demand w/o increase in supply) consumer spending helps create jobs (less spending = fewer jobs) interest rates = cost to borrow

1.1 AssessmentWhy is it important to distinguish

between your need and your wants?

Basic needs can be satisfied through different wants, some of which may cost less than others

(where/how you live)

KNOW FOR QUIZ:InflationSteps in financial planning

processInterestOpportunity CostLiquidityConsumable Goods