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Personal Finance: Chapter 1

by: Lindsay Fialli

Personal Finance: Chapter 1 FIN 100

Marketplace > Salem State University > Finance > FIN 100 > Personal Finance Chapter 1
Lindsay Fialli
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About this Document

These are my notes for Chapter 1 of Personal Finance by Jeff Madura.
Personal Finance
Terrance Doyle
Class Notes
Personal, finance




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This 3 page Class Notes was uploaded by Lindsay Fialli on Friday October 7, 2016. The Class Notes belongs to FIN 100 at Salem State University taught by Terrance Doyle in Fall 2016. Since its upload, it has received 5 views. For similar materials see Personal Finance in Finance at Salem State University.


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Date Created: 10/07/16
Chapter 1: Overview of a Financial Plan  Personal Finance: the process of planning your spending, financing, and investing to optimize your financial situation  Personal Finance Plan: specifies your financial goals and describes the spending, financing, and investing plans that are intended to achieve those goals  After the 2008 financial crisis, people in America have less wealth and fewer opportunities to earn income  Opportunity Cost: what you give up as a result of a decision  Components of a Financial Plan: 1. Budgeting and tax planning 2. Managing your liquidity 3. Financing your larger purchases 4. Protecting your assets and income (insurance) 5. Investing your money 6. Planning your retirement and estate  Budgeting: the process of forecasting future expenses and savings o Determine how you spend money, the amount you spend, and how much you save o Can help you estimate how much of your income will be required to cover monthly expenses so you can save  Assets: what you own  Liabilities: what you owe; your debt  Net Worth: the value of what you own minus the value of what you owe  Want to build net worth by saving or investing income and reducing liabilities  Cash Inflows: money that you receive o Salary is the most important source  Cash Outflows: money that you spend  Cash inflows exceeds outflow: decide how money is saved/invested  Cash outflows exceed inflow: decide how to withdraw savings or obtain funds to cover expenses  Liquidity: access to funds to cover any short-term cash needs  Money Management: decisions regarding how much money to retain in a liquid form and how to allocate the funds among short-term investment instruments o Insufficient liquidity is having the money to cover expenses but it is not easily accessible o Keep some cash available  Credit Management: decisions regarding how much credit to obtain to support your spending and which sources of credit to use o Enhances liquidity o Should be used only when necessary  Amount of finance needed is the (amount of the purchase) - (the amount of money you have available)  Manage Loan by.. o Determining how much you can afford to borrow o The length of time (maturity) of the loan o Selecting a loan with a competitive interest rate  Insurance Planning: determining the types and amount of insurance needed to protect your assets o Automobile, home, health, disability, life  Any funds beyond what you need to maintain liquidity should be invested o Primary Objective: earning high return stocks, bonds, mutual funds, real estate  Risk: uncertainty surrounding the potential return on an investment  Determine how much you want to invest, how you want to invest it, and calculate the risk  Retirement Planning: determining how much money you should set aside each year for retirement and how you should invest those funds o You want to accumulate as much as possible  Money contributed to retirement plans is protected from taxes until withdrawn from account  Estate Planning: determining how your wealth will be distributed before or upon your death Options for when you need more cash:  Try to work more hours  Withdraw cash from savings  Obtain a loan  Cash in an insurance policy  Sell some of your investments  Withdraw funds from your retirement Options for when you have cash:  Purchase products and services  Deposit cash in checking or savings accounts  Pay interest payments on loan or pay off loan  Make insurance payments  Make new investments  Contribute to your retirement  If you spend all your money, you can't accumulate savings  If you don't have savings, you can't make big future purchases  If you borrow too much, you pay more interest and don't have money for insurance  If you spend too much on insurance, there is nothing to invest  If you can't invest, or invest badly, means your wealth declines over time and is less retirement so you have to work longer  Too much money in retirement means not enough for today's expenses Psychology  Immediate satisfaction and peer pressure = spending excessively o Impulse buys; shopping/retail therapy  Can become addictive  Leaves nothing for the future  Focus on the future  Avoid spending excessively to ensure no debt and less stress Developing Your Financial Plan 1 Establish financial goals  Identify general goals in life  Set realistic goals  Set timing for goals (short, intermediate, long) 2 Consider current financial position  Take account age and wealth (dependents) 3 Identify and evaluate alternative plans  Pursue additional education  Increase in income and job opportunities  Choose a major you can benefit from  Select a college you can afford  Plan to save money 4 Select and implement the best plan to achieve your goals'  Consider trade-offs  Use internet to compare prices and research before making decisions  Use reliable sources 5 Evaluate your financial plan  Monitor your progress 6 Revise your financial plan  Financial position will change over time  Financial goals may change Effect of 2008 Economy  Reduced new job opportunities  Eliminated jobs  Lowered pay of existing jobs  Values dropped


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