Chapter 1
Personal Financial
Planning in Action
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Personal Financial Planning
Chapter Learning Objectives
LO1.1 Identify social and economic influences on
personal financial goals and decisions
LO1.2 Develop personal financial goals
LO1.3
Calculate time value of money situations
associated with personal financial decisions
LO1.4 Implement a plan for making personal financial
and career decisions.
1-2
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Financial Planning

Process of managing your money to
achieve personal economic satisfaction

Financial Plan:
◦
◦
◦
◦
Formalized report
Summarizes current financial situation
Analyzes financial needs
Recommends future financial activities
1-3
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Advantages of Financial Planning
Increased effectiveness in obtaining,
using, and protecting financial resources
 Increased control of your financial affairs
 Improved personal relationships
 Sense of freedom from financial worries

1-4
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Learning Objective LO1.1
Identify Social and Economic Influences on
Personal Financial Goals and Decisions
Life situation and personal values
 Financial planning in our economy

◦
◦
◦
◦
Domestic economic influences
Global Influences
Inflation
Interest rates
1-5
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Life Situation and Personal Values


Adult life cycle
Life Situation Factors:

Major events:

Values:
◦ Marital status, household
size, employment
 Exhibit 1-1
◦ Graduation, marriage, divorce
◦ Birth or adoption of child
◦ Career or health changes
◦ The ideas and principles you consider correct,
desirable, and important
1-6
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Financial Planning in Our Economy
Domestic Influences

Economy’s influence on financial planning
◦ Business, labor & government

The Federal Reserve
◦ “.. Sets the nation’s monetary policy to
promote the objectives of maximum
employment, stable prices and moderate
long-term interest rates.”
 http://www.federalreserve.gov/
1-7
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Financial Planning in Our Economy
Domestic Influences
1-8
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Financial Planning in Our Economy
Global Influences
U.S economy affected by foreign
investors and competition from foreign
companies
 Level of imports/exports affects
available supply of dollars
 Level of foreign investment affects
domestic money supply
 Money supply affects consumer interest
rates

1-9
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Financial Planning in Our Economy
Inflation
Inflation =  in the general level of
prices






Reduces buying power of the dollar
Most harmful to those on fixed incomes
Inflation rates vary
“Hidden inflation”
CPI = a measure of inflation
Deflation = decline in prices
1-10
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Financial Planning in Our Economy
Interest Rates
Interest Rate = the cost of money
Affected by supply and demand
 Risk premium:

◦ Length of time funds in use
◦ Expected inflation
◦ Uncertainty

Major impact on financial planning
1-11
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8 Basic Financial Planning Activities
 Obtaining







Planning
Saving
Borrowing
Spending
Managing Risk
Investing
Retirement/Estate
Planning
Chapter 1
Chapters 2,3
Chapter 4
Chapter 5
Chapters 6,7
Chapters 8-10
Chapters 11-13
Chapter 14
1-12
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Learning Objective LO1.2
Develop Personal Financial Goals

Time Frames for Achieving Financial Goals:
◦ Short-term goals . . . . . . . . . . .
◦ Intermediate goals . . . . . . . . .
◦ Long-term goals . . . . . . . . . . .

within 1 year
1-5 years
> 5 years
Financial Needs Goals:
◦ Consumable-product goals. . .
◦ Durable-product goals . . . . . .
◦ Intangible-purchase goals . . .
Food, clothing
Car, appliances
Education,
health
1-13
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Goal-Setting Guidelines
The “SMART” Approach
Effective Goals should be:
•S
= Specific
• M = Measurable
• A = Action-oriented
• R = Realistic
• T = Time-based
1-14
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Learning Objective LO1.3
Using Time Value of Money to Evaluate
Personal Financial Decisions
Opportunity cost = what you give up
making a choice



The trade-off of a decision
Not always measurable in dollars; may be
time
Consider lost opportunities resulting from
your decisions
1-15
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Time Value of Money

Increase in an amount of money
as a result of interest earned
◦ Saving today = more money tomorrow
◦ Spending today = lost interest

Saving and spending decisions involve
considering the trade-offs
◦ Current needs can make spending worthwhile
1-16
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Time Value of Money
Interest Calculations

Calculating interest earned:
◦ Principal = amount of savings
◦ Annual interest rate
◦ Length of time money on deposit (in years)

Simple interest:
Amt in
Svgs
X
Annual
Interest
Rate
X
Time
Period
=
Interest
1-17
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Time Value of Money
Interest Calculation Example
$500 on deposit at 6% annual interest for 6
months:
Principal = $500
Interest rate = 6%
Time period = ½ (6/12 months)
$500
X
6%
X
1/2
=
$15
1-18
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Time Value of Money
Types of TVM Calculations
Future Value = Amount that will be
available at a later date
 Present Value = Current value of an
amount desired in the future

1-19
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Time Value of Money
Calculation Methods
1.
2.
3.
4.
5.
Formula calculation
Time value of money tables
Financial calculator
Spreadsheet software
Websites and apps
1-20
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Future Value
The increased value of money from
interest earned
 Amount to which current savings will
increase
 Total amount available in the future


“Compounding” is earning interest on
your interest.
1-21
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Future Value
Formula Method
Future
Value
=
Original
Amount in
Savings
+
Interest
Earned
$100 deposited for 1 year at 6% per year
Future Value = $100 + ($100 X .06 X 1)
Future Value = $100 + $6 = $106
1-22
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Future Value
Formula method
This could be repeated for several
time periods, but there’s an easier
way:
FV = PV(1+i)n
 In the previous example:
FV = 100(1.06)1=$106

1-23
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Future Value
Formula method
If you left the money in for two years:
FV = 100(1.06)2=$112.36
 Notice that $6 interest for two years
would give you $12. The extra $0.36
is the result of compounding.


Another example:
◦ $650 invested at 8% for 10 years
FV = $650(1.08)10=$1,403.30
1-24
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Future Value
Table Method

Appendix Exhibit 1-A = FV of a Single
Amount
◦ Multiply Table Factor by amount deposited
◦ All Future Value factors > 1.0

Example:
◦ $650 invested at 8% for 10 years
◦ Factor = 2.159
◦ FV = $650 × 2.159 = $1,403.35
◦ Because of rounding, the answer is slightly off.
1-25
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Future Value
Financial Calculator Method

Every financial calculator has five buttons
of interest for time value of money:
N
 Means the number of time periods
I/YR
 Means the interest rate per period
PV
PMT
FV
 Means present value
 Means payment amount per period
 Means future value
1-26
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Future Value
Financial Calculator Method

In the example above, $650 at 8% for 10
years:
N
I/YR
PV
PMT
FV
 10
 8 (not 0.08!)
 -650
0
 1,403.30
Enter all the values you
know first (these are in
red here), then press the
key matching the value
you want to know. In
the TI BAII Plus, you
must press “CPT” before
solving. Notice you must
enter -650. Otherwise,
the answer will be
negative.
1-27
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Future Value
Spreadsheet Method





In a spreadsheet such as Microsoft Excel,
there are financial functions.
For FV, the function is:
=FV(rate,periods,payment,pv,type)
In the above example, it would be:
=FV(0.08,10,0,-650,0)
When you press enter, the answer will be
in the cell. ($1,403.30)
We will introduce “type” later.
1-28
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Time Value of Money
TVM Websites
www.moneychimp.com/calculator
 www.dinkytown.net

1-29
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Time Value of Money
Calculation Methods
1-30
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Future Value
Series of Deposits
“Annuity” = series of equal deposits at
equal intervals earning a constant rate
 Examples are retirement savings, or any
other savings goal in which you deposit an
equal amount at equal intervals.

1-31
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Future Value of a Series of Deposits
Formula method

The formula is:
(1+i)n −1
Annuity
i
FV =
 For example, if you deposit $50 per
year at 7 percent for six years, you’ll
have:
FV = $50
(1.07)6 −1
0.07
= $357.66
1-32
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Future Value of a Series of Deposits
Table Method

Appendix Exhibit 1- B = Future Value of an
Annuity
◦ Multiply Table Factor by Annuity amount
◦ All future value of an annuity factors > 0.

Example:
◦ Deposit $50 per year at 7% for 6 years
◦ Factor = 7.153
◦ FV = $50 × 7.153 = $357.65
◦ Because of rounding, the answer is slightly off.
1-33
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Future Value of a Series of Deposits
Financial Calculator Method

In the example above, $50 at 7% for 6
years:
N
I/YR
PV
PMT
FV
6
 7 (not 0.07!)
0
 -$50
 357.66
Enter all the values you
know first (these are in
red here), then press the
key matching the value
you want to know. In
the TI BAII Plus, you
must press “CPT” before
solving. Notice you must
enter -50. Otherwise,
the answer will be
negative.
1-34
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Future Value of a Series of Deposits
Spreadsheet Method
For FV, the spreadsheet function is:
=FV(rate,periods,payment,pv,type)
 In the above example, it would be:
=FV(0.07,6,-50, 0,0)
 When you press enter, the answer will be
in the cell. ($357.66)
 For annuities, you can change the type
from 0 to 1 if the payments occur at the
beginning of the year instead of the end.

1-35
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Present Value
The current value of a future amount
based on a certain interest rate and time
period
 The current value of an amount desired
in the future
 How much to deposit now to obtain a
desired total in the future
 “Discounting”

1-36
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Present Value
Formula method

The formula is:
1
PV = FV(1+i)n

For example, if you want $1,000 five
years from now and can earn 5% on
your deposit:
PV =
1
$1,000
=
5
(1.05)
$783.53
1-37
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Present Value
Table Method

Appendix Exhibit 1-C = PV of a single
amount
◦ Multiply Table Factor by amount deposited
◦ All present value of factors < 0.

Example:
◦ You want $1,000 five years from now
◦ You can earn 5% on your money
◦ Present Value = $1,000 × 0.784 = $784
◦ Because of rounding, the answer is slightly off.
1-38
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Present Value
Financial Calculator Method

In the example above, $1,000 at 5% in 5
years:
N
I/YR
PV
PMT
FV
5
 5 (not 0.05!)
 783.53
0
 -1000
Enter all the values you
know first (these are in
red here), then press the
key matching the value
you want to know. In
the TI BAII Plus, you
must press “CPT” before
solving. Notice you must
enter -1000. Otherwise,
the answer will be
negative.
1-39
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Present Value
Spreadsheet Method
For PV, the function is:
=PV(rate,periods,payment,fv,type)
 In the above example, it would be:
=PV(0.05,5,0,-1000,0)
 When you press enter, the answer will be
in the cell. ($783.53)

1-40
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Present Value of a Series of Deposits
Formula method

The formula is:
1−
1
(1+i)n
PV = Annuity i
 For example, if you want to withdraw
$400 per year for nine years and your
money is earning 8%, how much
should you deposit today?
1−
PV = $400
1
(1.08)9
0.08
=$2,498.76
1-41
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Present Value of a Series of Deposits
Table Method

Appendix Exhibit 1-D PV of an annuity
◦ Multiply Table Factor by amount deposited
◦ All present value of factors < 0.

Example:
◦ You want to withdraw $400/year for 9 years
◦ Your money is earning 8% per year
◦ Deposit = $400 × 6.247 = $2,498.80
◦ Because of rounding, the answer is slightly off.
1-42
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Present Value of a Series of Deposits
Financial Calculator Method

In the example above, $400 at 8% for 9
years:
N
I/YR
PV
PMT
FV
9
 8 (not 0.08!)
 $2,498.76
 -400
0
Enter all the values you
know first (these are in
red here), then press the
key matching the value
you want to know. In
the TI BAII Plus, you
must press “CPT” before
solving. Notice you must
enter -400. Otherwise,
the answer will be
negative.
1-43
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Present Value of a Series of Deposits
Spreadsheet Method
For PV, the function is:
=PV(rate,periods,payment,fv,type)
 In the above example, it would be:
=PV(0.08,9,-400,0,0)
 When you press enter, the answer will be
in the cell. ($2,498.76)

1-44
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The 6-Step Financial Planning
Process
1-45
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Learning Objective LO1.4
Implement a Plan for Making Personal
Financial and Career Decisions
Determine current financial situation
2. Develop financial goals
3. Identify alternative courses of action
1.
•
•
•
•
Continue same course of action
Expand current situation
Change current situation
Take a new course of action
1-46
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Learning Objective LO1.4
Implement a Plan for Making Personal
Financial and Career Decisions
4.
Evaluate alternatives
• Consequences of choices
• Evaluate risks
• Financial Planning information
sources
Create and implement financial action
plan
6. Review and revise plan
5.
1-47
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Financial Planning in Action
1-48
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Career Choice and Financial
Planning
1.
2.
3.
4.
The life work one selects = key to financial
well being and personal satisfaction
Career choices have risks and opportunity
costs
Career choices require periodic reevaluation of trade-offs related to
personal, social and economic factors
Changing personal and social factors
require continuous assessment of your
work situation
1-49
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Chapter Summary
Learning Objective LO1.1

Financial decisions are affected by:

Major elements of Financial Planning:
◦ Life situation
◦ Personal values
◦ Economic factors
1.
2.
3.
4.
Obtaining
Planning
Saving
Borrowing
5. Spending
6. Managing Risk
7. Investing
8. Retirement &
Estate planning
1-50
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Chapter Summary
Learning Objective LO1.2
Financial Goals should be:
•S
= Specific
• M = Measurable
• A = Action-oriented
• R = Realistic
• T = Time-based
1-51
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Chapter Summary
Learning Objective LO1.3
Every decision involves a trade-off
 Personal opportunity costs:

◦ Time
◦ Effort
◦ Health

Financial opportunity costs
◦ Based on the time value of money
1-52
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Chapter Summary
Learning Objective LO1.4
Personal financial planning involves:
1. Determine financial situation
2. Develop financial goals
3. Identify alternative courses of action
4. Evaluate alternatives
5. Create and implement a financial action
plan
6. Review and revise the financial plan
1-53
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