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AAEC 2104

by: Savah Notetaker
Savah Notetaker
Virginia Tech
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About this Document

These notes contain Chapter 1 notes
Personal Financial Planning
Dr. White
Class Notes
Personal, finance, chapter1, key, Principles, Planning, process




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This 4 page Class Notes was uploaded by Savah Notetaker on Friday September 9, 2016. The Class Notes belongs to AAEC 2104 at Virginia Polytechnic Institute and State University taught by Dr. White in Fall 2016. Since its upload, it has received 6 views. For similar materials see Personal Financial Planning in AAEC at Virginia Polytechnic Institute and State University.

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Date Created: 09/09/16
Personal Finance What you can accomplish: ­ Manage the unplanned ­ “find money in your budget” ­ Make big purchases (such as a house) ­ Accumulate wealth for special expenses and goals ­ Invest for retirement ­ “Cover your assets” NEVER GO WITHOUT HEALTH INSURANCE ­ Invest intelligently ­ Maximize after­tax income Financial planning process: ­ Ongoing process o As your life goals and situations ­ 5 steps 1. Evaluate current financial situation 2. Define financial goals 3. Develop a plan of action 4. Implement your plan 5. Review your decisions 1. What do you own? (assets) What do you owe? (liabilities or debts) What do you earn? (income) What do you spend? (expenses) These require careful record keeping  2. Goals ­ Short term (less than ~1 year) ­ Intermediate (~1­10 years) ­ Long term (~over 10 years) ­ Over time goals change so revise them! o Life events, aging, accomplishing other goals, etc. ­ SMART goals Specific o Make them real!  Measurable Achievable Rewarding Time frames 3. Written, organized plan with deadlines ­ Use Babe Ruth Rule: 3 reasons to do or not do something, make 3 plans, look at 3 car  companies/ insurances options, etc. Flexible plan for life changes and unexpected circumstances Liquidity is accessing cash quickly and easily Protection to prepare for the unexpected with insurance Manage taxes to keep more of what you earn 4. Put plan into action then stick to it 5. Review and revise as needed ­ The last step often returns to the first, no plan is fixed in stone. ­ No goals=No sense Life cycle of financial planning ­ Early years (college students or earlier) o Expenses > income ­ Earning years  o Starting the work force ­ Golden years o Prime earning years ­ Retirement years o Expenses are probably > income Key principles form the foundation of personal finance 1. Knowledge a. Keep up to date on financial matters b. Ask, read, observe, ask, read, and so on c. Lots of sources of information i. Rely on trustworthy sources!! d. Avoid mistakes of ignorance 2. Have a plan a. People spend money without thinking, but can’t save without thinking about it b. Saving must be planned i. Start off with a modest, uncomplicated plan ii. Modify later and expand plan 1. “pay yourself first” (put money into your savings account first) c. Remember­ time is your friend!! i. Earlier you start, the more tools you have 3. Time value of money a. Money has a time value (“RIO”) i. Risk ii. Inflation­ cost level is increasing iii. Opportunity cost b. $1 today is worth more than $1 to be received in the future c. Compound interest rocks! i. Interest paid on interest 4. Taxes affect Personal Finance Decisions a. Taxes influence your actual earnings b. Goal­ maximize your after tax­return c.   Compare investment alternatives on an after­tax return d. “Don’t let the tax tail wag the dog” i. Don’t make decisions strictly based on taxes 5. Stuff Happens, or the Importance of Liquidity a. Have funds available for the unexpected b. Without liquid funds: i. Long­term investments must be liquidated ii. Results in lower price, tax consequences, or missed opportunities c. With nothing to sell i. Pay higher interest to borrow money quickly 6. Waste not, want not a. Fastest way to improve your financial situation is to reduce your spending! b. What you want vs what you need c. Be a smart consumer d. Comparison shop (Brand name vs Generic) e. “Take care of your stuff” 7. Protect yourself against major catastrophes a. Have the right insurance before a tragedy occurs b. Know your policy coverage i. Know what’s NOT covered! c. Insurance focus should be on major catastrophes which can be financially  devastating 8. Risk­Return Trade­Off a. Low­risk  low return b. High risk  High return c. Investors demand higher return for taking added risk 9. Diversification Reduces Risk a. “Don’t put all your eggs in one basket” b. Place money in several types of investments c. Reduce your risk exposure i. “smooths out” 10. Just do it!! a. Making a commitment to start is difficult


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