Chapter 1: personal finance

Personal financial planning The process of managing your money to achieve personal economic satisfaction
Financial plan A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities
Adult life cycle The stages in the family situation and financial needs of an adult
Values Ideas and principles that a person considers correct, desirable, and important
Economics The study of how wealth is created and distributed
Inflation A rise in the general level of prices
Bankruptcy A set of federal laws allowing you to either restructure your debts or remove certain debts
Opportunity cost What a person gives up by making a choice
Time value of money Increase in an amount of money as a result of interest earned
Future value The amount to which current savings will increase based on a certain interest rate and a certain time period; also referred to as compounding
Present value The current value for a future amount based on a certain interest rate and a certain time period; also referred to as discounting
What personal and economic factors commonly affect personal financial decisions? Age; Martial Status; Number and Age of Household members; Employment situation
What are the eight main components of personal finance planning? Obtaining; Planning; Saving; Borrowing; Spending; Managing Risk; Investing; Retirement and Estate Planning
Types of financial goals Short-term goals: within next yearIntermediate goals: two to five yearsLong-term goals: more than five years
What are the main characteristics of useful financial goals? S- specific M- measurable (ex: Accumulate $5,000 in an investment fund within 3 years)A- action-oriented (ex: Reduce credit card debt)R- realistic (goals based on income and life situation)T- time-based (ex: 3 years)
Examples of personal opportunity cost time; energy; health, abilities; knowledge
Financial Planning process 1. Determine current financial situation2. Develop financial goals3. Identify alternative courses of action4. Evaluate alternatives5. Create and Implement financial action plan6. Review and revise plan
1. Determine current financial situation Regarding income, savings, living expenses, and debtsPrepare a list of current assets and debt balances and amounts spent for various items
2. Develop financial goals Differentiate needs from wants
3. Identify alternative courses of action continue the same course of action (ex: amount saved each month is still appropriate)expand current situation (ex: save larger amount each month) change the current situation (ex: use money market account instead of savings account)take a new course of action (ex: use monthly saving budge to pay off bills)
4. Evaluate alternatives Assess: risk and time value of money (opportunity cost)Consider: life situation, personal values, and economic factors
Common risks Inflation risk- rise or fall of pricesInterest rate risk- changes in cost of moneyIncome risk- loss of job or illnessPersonal risk- tangible and intangible factors Liquidity risk- savings and investments have potential for higher earnings difficult to convert or sell

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