Personal Finance chapter 1

personal financial planning spending, saving, and investing you money so you can have the kind of life you want as well as financial security.
financial plan formalized report that summarizes your current financial situation, analyzes your financial needs and recommends future financial activities.
Advantages of personal financial planning 1.)increased effectivness in obtaining, using and protecting financial resources throughout your life2.)Increased control of your financial affairs by avoiding excessive debt, bankruptcy and dependence on others3.)Improved personal relationships resulting from well-planned and effectively communicated financial decisions.4.) A sense of freedom from financial worries obtained from looking to the future, anticipating expenses and achieving personal financial goals.
Adult life cycle stages in the family and financial needs of an adult
values ideas and principles a person considers correct, desirable and important
economics the study of how wealth is created and distributed
The Fed The Federal Reserve – government agnecy that regulates money in circulation, control interest rates, control amount of money loaned
Inflation a rise in the general level of prices
Rule of 72 The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest.
CPI (consumer price index) a measure of the overall cost of the goods and services bought by a typical consumer
Interest rates These represent the cost of borrowing money
Risk premium the excess return required from an investment in a risky asset over that required from a risk-free investment
Financial Planning Activities (10) Obtaining, Planning, Saving, Borrowing, Spending, Managing Risk, Investing, Retirement and Estate Planning
Investing-current income comes from investments that pay dividents or interest
Investing-long term growth comes from stocks, mutual funds, real estate or investments whose value will increase in the future
long term financial security is achieved by spending less than you earn
factors that encourage over-buying extensive advertising, selling efforts, product availablity
Types of financial goals Short Term – within one yearIntermediate Term – 2 to 5yearsLong Term – more than 5 years
consumable-product goals occur on a periodic basis and involve items that are used up relatively quickly (food, clothing, entertainment)
durable-product goals involve infrequently purchased, expensive items such as appliances, cars, etc (tangible items)
intangible-purchase goals relate to personal relationships, health, education, and leisure
Effective financial goals should be (4) 1.) Realistic2.)Stated in specific, measurable terms3.)Based on a time-frame4.) Action oriented
Opportunity cost whatever must be given up to obtain some item”trade-off”i.e. starbucks for a month for a dress.
time value of money increase of an amount of money as a result of interest or dividends earned
Simple interest I=prt
Future Value (compounding interest) the amount your original deposit will be worth in the future based on earning a specific interest rate over a specific period of timeFV=P(1+i)^n
annuity income from capital investment paid in a series of regular payments
Present value (discounting) the amount of money you would need to deposit now in order to attain a desired amount in the future
Financial Planning process (6 steps) determine your financial situation, develop financial goals, identify alternative courses of action, evaluate alternatives, create and use plan of action, review and revise plan
Fives types of risk InflationInterestIncomePersonal (relationships, health, safety)Liquidity (things that are difficult to convert into cash without losing value
Sources of financial planning information InternetFinancial InstitutionsMedia SourcesFinancial Specalists

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