17 Personal Financial Planning17 demonstrate knowledge of personal financial planning

17a Short Term & Long Term Financial Goals•Financial planning calls for both short-

term and long-term goals

What is a short-term financial goal?

•To have funds to buy things that require money above what is normally allowed by a budget

•Examples:▫Emergencies▫Vacations▫Social events▫Automobile and home repairs▫gifts

What is a long-term financial goal?

•Anticipated major purchases that require extensive saving

•Examples:▫Home ownership▫Education▫Retirement▫investments

17b Anticipated & Unanticipated Income & Expenses•Some sources of income are anticipated,

while others are unanticipated•Some expenses are anticipated, while

others are unanticipated.

What are some examples of anticipated and unanticipated income?Anticipated Income:• Salary• Allowance• Wages• Educational grants or

scholarships

Unanticipated Income:• Gifts• Bonuses• Inheritances

What are some examples of anticipated and unanticipated expenses?Anticipated Expenses:• Fixed costs, which remain

the same each month (ex. rent, car payment)

• Variable costs (ex. restaurant meals)

Unanticipated Expenses:• Car repairs• Medical bills• Losses from natural

disaster or theft

17c Personal Net Worth Statement•A networth statement shows one’s

financial position

What is a net worth statement?

•The total value of a person’s financial holdings

How is net worth calculated?

•Deducting liabilities (ex. debts) from assets (ex. property)

•Examples of Assets:▫Savings account balances, car value,

personal property value•Examples of Liabilities:

▫Balances on car loans, bank loans, mortgage loans and credit cards

What are the purposes of a net worth statement?

•Useful as an analytical tool for individuals•Provides valuable insight to creditors,

investors, lenders and financial advisors

What is a personal inventory?

•A personal inventory is a list of all of one’s personal property.

•This is useful in cases of fire, theft, and property damage.

•This inventory can be supplemented with photographs.

•It is important to keep the record in a safe place away from the primary residence.

17d Personal Budget

•A budget is an important tool for managing one’s money to achieve short- and long-term goals

What does a budget include?• Developing a budget includes the following:

▫Writing a statement of long-term and short-term goals

▫Presenting a plan for managing one’s money over a short-term period

▫Outlining a long-term plan for managing money

• A budget should allow for discretionary income and take into account the impact of inflation

• A budget should also include funds set aside to use in the event of an emergency

17e Effects of Gov’t & Economy on Personal Financial Planning•Government actions, such as changes in

taxes, affect personal financial planning.

•Economic conditions affect personal financial planning

How can government actions affect one’s financial planning?

•Government tax policies, including what expenses are tax-deductible, influence financial planning. These tax policies may shift over time.

•Monetary and fiscal policy actions can affect personal financial planning.

How can economic conditions affect one’s financial planning?

•Economic conditions such as inflation and deflation affect financial planning.

•Planning should anticipate the possibility of inflation or deflation in the future by including safeguards against both.

17f Economic Influence on Personal Financial Plan•Economic understanding and economic

conditions affect a personal financial plan

How can understanding of economics concepts affect a personal financial plan?

Key economics principles that influence personal financial planning include the following:

• People must make choices due to scarcity. • Every choice incurs an opportunity cost. • All choices have consequences. • Secondary effects of choices are important. • Decisions are made based on marginal analysis.

Applying these key principles to financial planning means the following: • A budget details how one plans to use limited income to satisfy wants. • There is a tradeoff between spending now and saving. • People make decisions about which financial products to consume based

on several factors, including expected return and the associated risk of the product.

• Financial plans and financial products should take into account the goals of the individual

How can economic conditions affect a personal financial plan?

Changing economic conditions can influence a personal financial plan in the following ways:

• Inflation can negatively impact savings by eroding the purchasing power of savings over time.

• Unemployment can affect financial plans by making it more difficult for individuals to budget, save, and meet financial obligations.

• Deflation can reduce the value of assets one might own. • Slow economic growth can lead to a rise in unemployment

rates.

Fiscal policy actions can affect an individual’s current and future income. For example, actions of the Federal Reserve System affect interest rates and the availability of credit; thus it is important to be aware of what the Fed is doing and to understand what it means to one’s financial assets.