Kapoor – Personal Finance, 10e Notes
The Financial Planning Process
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Personal finance planning = process of managing your money to achieve personal
economic satisfaction
3 main decision areas:
o Spend
 Daily living expenses
 Major expenditures
 Recreational activities
o Save
 Long-term financial security
o Share
 Provide local and global assistance to those in need
Financial planning process is a logical, sex-step procedure
Step 1: Determine your current financial situation
o Prepare a list of current asset and debt balances and amounts spent for various
items
Step 2: Develop your financial goals
o Analyze your financial goals several times a year
o Identify how you feel about money and why you feel that way
 Differentiate your needs from your wants
o Develop specific financial goals
Step 3: Identify alternate courses of action
o Possible options:
 Continuing the same course of action
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 Expanding the current situation
 Change the current situation
 Take a new course of action
Step 4: Evaluate your alternatives
o Every decision closes off alternatives
 Opportunity cost (the trade-off of a decision) = what you give up by
making a choice
o Evaluating risk – types of risk
 Inflation risk
 Interest rate risk
 Income risk
 Personal risk
 Liquidity risk
o Financial planning information sources
 Print and media
 Digital sources
 Financial experts
 Financial institutions
Step 5: Create and implement your financial action plan
o Develop an action plan that identifies ways to achieve your goals
Step 6: Review and revise your plan
o Financial planning is a dynamic process that is affected by multiple factors
Developing Personal Financial Goals
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Types of financial goals
o Two factors influence your financial aspirations for the future:
 Time frame in which you’d like to achieve your goals
 Short-term goals – within the next year
 Intermediate goals – from 1-5 years
 Long-term goals – more than 5 years off
o Plan these in coordination with short-term/intermediate
goals because those are the basis for achieving the longterm goals
 Goal frequency – small financial goals can be set often, but bigger
financial goals are likely to be less frequent
 Type of financial need that drives your goals
 Consumable-product goals – occur on a periodic basis and involve
items that are used up relatively quickly
 Durable-product goals – infrequently purchased, expensive,
tangible items
 Intangible-purchase goals – personal relationships, health,
education, leisure, etc.
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Goal-setting guidelines
o S = specific (know exactly what your goals are so that you can create a plan
designed to achieve them)
o M = measurable (with a specific amount)
o A = action-oriented (what are you undertaking?)
o R = realistic (goals based on your income and life situation)
o T = time-based (allows you to measure your progress)
Influences on Personal Financial Planning
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3 main elements affect financial planning activities:
o Life situation – age, employment situation, marital status, number/age of
household members
 Adult life cycle = stages in the family and financial needs of an adult
o Personal values
 Values = ideas and principles that you consider correct, desirable, and
important
o Economic factors
 Economics = study of how wealth is created and distributed
 Federal Reserve System (the Fed) = U.S. central bank; maintains an
adequate money supply by influencing borrowing, interest rates, and the
buying/selling of government securities
 Global marketplace influences financial activities
 Economic conditions (especially consumer prices, consumer spending,
and interest rates) influence financial decisions
 Consumer prices
o Inflation = rise in the general level of prices
 Buying power of the dollar decreases
 Caused by an increase in demand without a
comparable increase in supply
 Most harmful to people living on fixed incomes and
lenders of money
 This is why interest rates rise in periods of
high inflation
o Consumer price index (CPI) = measure of the average
change in the prices urban consumers pay for a fixed
“basket” of goods/services; published by the Bureau of
Labor Statistics
o Deflation = decline in prices
 Consumer spending