BUSN380 Week 1 TCO 1 Quiz -Time Value of Money Relationships & Applications; Opportunity Costs;
BUSN380 Week 1 TCO 1 Quiz -Time Value of Money Relationships & Applications; Opportunity Costs;
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Date Created: 11/06/15
BUSN38O Week 1 Notes CHAPTER 1 PERSONAL FINANCE BASICS amp THE TIME VALUE OF MONEY Key Concepts 0 Analyze a personal financial statement 0 Identify opportunity cost 0 Measure the time value of money 0 Compute the present value of a lump sum and an annuity 0 Compute the future value of a lump sum and an annuity 0 Explain compounding and discounting Personal Financial Planning is the process of managing your money to achieve personal economic satisfaction The planning process allows you to control your financial situation A comprehensive financial plan can enhance the quality of your life and increase your satisfaction by reducing uncertainty about future needs and resources ADVANTAGES 0 Increased effectiveness in obtaining using and protecting your financial resources throughout your lifetime 0 Increased control of your financial affairs by avoiding excessive debt bankruptcy and dependence on others for economic security 0 Improved personal relationships resulting from well planned and effectively communicated financial decisions 0 A sense of freedom from financial worries obtained by looking to the future anticipating eXpenses and achieving your personal economic goals BUSN38O Week 1 Notes The financial Planning Process is a logical siX step procedure that can be adapted to any life situation PERSONAL FINANCE BASICS amp TIME VALUE OF MONEY Step 1 Determine current financial situation Income savings living eXpenses and debts Prepare list of current asset amp debt balances and eXpenditure Step 2 Develop your financial goals spend save or invest Analyze values amp goals several times a year to separate wants from needs how you feel about money amp why are the feelings based on facts or other people39s in uence are financial priorities based on social pressures household needs or desires for luxury items Effect of economic conditions on goals and priorities Step 3 Identify alternative courses of action possible courses of action fall into the following categories Continue same course e g save same amount Expand current situation e g save more Change current situation e g use a money market acct instead of regular savings 0000 Take new course of action e g use monthly savings budget to pay off credit card debts Step 4 Evaluate alternatives Consider Economic factors how will changes in interest rates affect financial situation Life situation how will dependents39 ages affect saving goals Assess Personal values BUSN38O Week 1 Notes Risk best way to consider risk is to gather Time Value Of Money Opportunity info based on experience or advice and use Cost financial planning information sources Types of risk include i In ation rising or falling prices cause changes in buying decide to buy now or later Risk of paying more later i Interest Rate 39 changes affect costs when borrowing and benefits when investing or saving 39 Borrow at low interest rate when rates are rising could be to your advantage 39 If variable loan rates increase your payments will be higher 39 If saving when interest rates are falling you will earn a lower return with a siX month savings certificate than with one having a longer maturity i Income loss of job may be from change in consumer spending or technology eXpansion save while employed or acquire skills to use in a different line of work i Personal 39 Buying brand at one store creates risk of having to obtain repairs from an inconvenient location 39 Health safety or additional costs associated with purchases or financial decisions i Liquidity some savings or investments have potential for higher earnings but may be more difficult to convert to cash or sell without significant loss in value Time value of money opportunity cost trade off what a person gives up by making a choice It may be the money you forego by attending school rather than working or the time spent comparison shopping for a big purchase The resources you give up have a value that is lost Relevant info is needed at each stage of the decision making process and you should use informational resources to continually supplement and update knowledge Financial Planning Information Sources i Printed Materials i Media Sources i Financial Specialists i School CoursesCommunity Seminars i Financial Institutions i Online sources Step 5 Create amp implement your financial action plan develop action plan that identifies ways to achieve goals E g work more hours to increase income reduce spending increase savings shelter current income in a taX deferred retirement program buy municipal securities As you achieve short term and intermediate goals the goals next in priority will come into focus Use outside forces to help in implementing financial plan e g insurance agents investment brokers to buy property insurance or stocks bonds or mutual funds Step 6 Review amp revise the financial plan do a financial review at least once a year When life events affect your financial needs this process will help you make priority adjustments that will bring goals and activities in line with current life situation CONCEPT CHECK 1 What are the main elements of every decision we make Answer Opportunity Cost amp Risk 1 What are some risks associated with nancial decisions Answer In ation Income Interest Rate Liquidity amp Personal 1 What are some common sources of nancial planning info Answer Printed materials media sources online sources schoolcommunity seminars financial institutions financial specialists 1 Why should you reevaluate your actions after making a personal financial decision Answer to bring current life situations up to date with financial goals when life changes financial needs DEVELOPING PERSONAL FINANCIAL GOALS Reasons for poor money problems in America 1 Poor planning amp weak money management habits in areas such as spending and use of credit 1 Extensive advertising selling efforts amp product availability Achieving personal financial satisfaction starts with clear financial goals Two factors influence future financial aspirations 0 Time frame 0 Type of financial need Timing of Goals 0 Short term goals saving for a vacation within a year Set these as basis for achieving long term goals 0 Intermediate goals two to five years 0 Long term goals longer than five years retirement money kids39 college education vacation home Plan in coordination with short term and intermediate goals Goal frequency eg annual vacations holiday gifts OR less frequent college education car or house purchase GOALS FOR DIFFERENT FINANCIAL NEEDS Tangible Items ConsumableProduct goals a occur on a periodic basis a Involve items that are used up quickly eg food clothing entertainment If made unwisely these purchases can have a negative effect on your financial situation 1 Durableproduct goals Infrequently purchased expensive items like cars appliances and sporting equipment 2 Intangible Purchase Goals These relate to personal relationships health education and leisure They are usually overlooked but goal setting for these life circumstances are also necessary for overall well being GOAL SETTING GUIDELINES Goal setting is central to financial decision making Financial goals are the basis for implementing your spending saving and investing activities The 4 main characteristics of useful financial goals 1 Realistic based on income amp life situation 2 Stated in specific measurable terms so you can create a plan to achieve them 3 Have a time frame helps measure progress 4 Indicate the type of action to be taken the goals are the basis for the various financial activities you will undertake a Focus on a few main financial objectives Make list of things you need to feel secure Decide which goals can be delayed or ignored Form priorities b Work on financial aspects Set up savings or investment accounts to increase the value of your money c Prepare for change Efforts to identify your most important goals will ensure you get what you want if you decide which goals take priority work toward the smaller goals only after you start to address the primary ones Specialized financial activities for 50 Review financial assets and estate plans Consider household budget changes several years prior to retirement Plan retirement housing living eXpenses recreational activity and part time work Arrange for long term healthcare coverage Review will and estate plan t l 1 ner 33quot Fate Sher t terr n Beale Ieee then eyeerj Fey tax erreere 3551 fail P Intermediate Gale E E veeret Leg term Gale Lenet then 5 veerei Ere il
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