Financial Planning for Young Families and Adults

Personal Finance Chapter 1: Introduction

• Personal financial planning is managing money to achieve economic satisfaction.
• Advantages include increased effectiveness in managing resources, increased control, better relationships, and financial freedom.

Learning Objectives

• LO1: Analyze the process for making personal financial decisions.
• LO2: Develop personal financial goals.
• LO3: Assess economic factors that influence personal financial planning.
• LO4: Determine personal and financial opportunity costs associated with personal financial decisions.
• LO5: Identify strategies for achieving personal financial goals for different life situations.

The Financial Planning Process (1)

• Personal financial planning involves three main areas: spending, saving, and sharing.
• Spending is a significant challenge in personal finance.

The Financial Planning Process (3)

• Personal finance activities involve three main decision areas: Spending, Saving, and Sharing.
• Spending includes daily living expenses, large expenditures, and recreational activities.
• Saving includes emergencies and long-term financial security.
• Sharing includes local and global programs to help people in need.

The Financial Planning Process (Summary 5)

• The financial planning process involves several key steps.
• Develop financial goals.
• Determine current financial situation.
• Identify alternative courses of action.
• Evaluate alternatives.
• Create and implement a financial plan.
• Re-evaluate and revise the financial plan.

The Financial Planning Process (6)

• Evaluate Economic or Product Risks: Interest Rate Risk, Inflation Risk, Liquidity Risk, and Product Risk.

The Financial Planning Process (7)

• Evaluate Personal Risks: Risk of Death, Risk of Income Loss, Health Risk, Asset and Liability Risk.

Developing Personal Financial Goals (1)

• Financial goals are influenced by personal values, attitudes towards money, time frame (short-term, intermediate, long-term), the type of financial need driving the goal, and individual life situations.

Developing Personal Financial Goals (4)

• Life situation influences financial decisions based on age, employment, marital status, and the number and age of household members.

Developing Personal Financial Goals (5)

• Average person goes through four stages in financial management: Early years, Middle years (mid-30s to mid-50s), Middle years (50s+), and Retirement.

Developing Personal Financial Goals (6)

• Young, single (18-35): Establish financial Independence, obtain disability insurance, and consider a home purchase.

Developing Personal Financial Goals (7)

• Young couple with children under 18: Carefully manage the increased need for credit, obtain the appropriate amount of life insurance, and name a guardian for children.

Developing Personal Financial Goals (8)

• Single parent with children under 18: Obtain health, life, and disability insurance, and contribute to savings for children's education and make other estate plans.

Developing Personal Financial Goals (9)

• Young dual-income couple, no children: Coordinate insurance coverage and benefits, develop savings/investment plans, and consider tax-deferred retirement contributions.

Developing Personal Financial Goals (10)

• Older couple, no dependent children at home: Consolidate financial assets, review estate plans, obtain health insurance, plan retirement housing, living expenses, recreational activities, and part-time work

Developing Personal Financial Goals (11)

• Mixed-generation household: Obtain long-term health care insurance, provide arrangements for handling finances of elderly, and consider splitting investment cost.

Developing Personal Financial Goals (12)

• Older, single; Make arrangements for long-term health care, review a will/estate plan, and plan retirement living facilities, living expenses, and activities

Developing Personal Financial Goals (13)

• Goal-setting guidelines include Specific, Measurable, Action-oriented, Realistic, and Timely (SMART).

Developing Personal Financial Goals (14)

• Financial planning activity involves steps to determine specific financial goals, state goals in measurable terms, determine a timeframe, and take action.

The Influence of Economic Factors on Personal Financial Planning (1)

• Economics is the study of how wealth is created and distributed.
• Market forces include supply and demand, financial institutions, and the influence of the Bank of Canada.
• Global influences include levels of exports, foreign investors, and competition.

The Influence of Economic Factors on Personal Financial Planning (2)

• Consumer prices measure changes in inflation.
• Consumer spending influences employment opportunities.

The Influence of Economic Factors on Personal Financial Planning (3)

• Interest rates measure the cost of money for borrowing and the return when saving/investing.

The Influence of Economic Factors on Personal Financial Planning (4)

• Money supply is the amount of money available for spending.
• Unemployment rate measures people without jobs.
• Housing starts measure the number of new homes built.
• Gross Domestic Product (GDP) measures the value of goods and services produced in a country.

The Influence of Economic Factors on Personal Financial Planning (5)

• Trade balance measures the difference between a country's exports and imports.
• Stock market indexes (S&P/TSX) measure the relative value of stocks.

The Influence of Economic Factors on Personal Financial Planning (6)

• The rule of 72 can be used to estimate how long it will take for prices to double in a given inflation rate.

The Influence of Economic Factors on Personal Financial Planning (7)

• Professional Practice Inquiry questions assess the impact of inflation uncertainty and the factors that influence interest rates.

Opportunity Costs and the Time Value of Money (1)

• Opportunity cost describes what's given up to make a choice.
• Personal opportunity costs include time, health, etc.

Opportunity Costs and the Time Value of Money (2)

• Time value of money describes the increase in value over time due to interest earned.
• Consider money spent/borrowed/saved/invested as an opportunity cost.

Opportunity Costs and the Time Value of Money (3)

• Opportunity cost versus future value, personal opportunity costs (time,effort, health), financial opportunity costs (interest, liquidity,safety)

Opportunity Costs and the Time Value of Money (4)

• Setting aside money with little risk has the opportunity cost of potentially higher returns from investments with greater risk.

Opportunity Costs and the Time Value of Money (5)

• Calculating time value of money requires three factors: the amount of savings (P), annual interest rate (R), and the length of time (T).

Opportunity Costs and the Time Value of Money (6)

• Two methods exist to calculate interest: Simple interest and Compound interest.

Opportunity Costs and the Time Value of Money (7)

• Simple Interest: calculated on the principal.

Opportunity Costs and the Time Value of Money (8)

• Compound Interest: calculated on the principal and previously earned interests.

Opportunity Costs and the Time Value of Money (9)

• Future value of a single amount.
• Deposited money earns interest over time.
• Future value is a certain amount for a future time period with a particular rate of interest.

Opportunity Costs and the Time Value of Money (10)

• Future value of a series of deposits (annuity).
• An annuity is a series of equal amounts at regular time intervals.

Opportunity Costs and the Time Value of Money (11)

• Present Value of a Single Amount
• Present value is the current value of a future amount based on a given interest rate and time period.

Example 1

• Miguel's financial goal and the calculation to find the future value.

Achieving Financial Goals (2)

• Components of Personal Financial Planning: Controlling Your Financial Future, Investing Your Financial Resources, Insuring Your Resources, Planning Your Personal Finances, Managing Your Credit, Managing Risk, Saving, and Borrowing.

Achieving Financial Goals (3)

• A financial plan summarizes current situation, analyzes needs, and recommends future activities.
• Can be created by individuals, financial planners, or software.

Achieving Financial Goals (4)

• Developing good financial habits,
• Using a spending plan.
• Having appropriate insurance.
• Becoming informed about tax and investment alternatives.

Achieving Financial Goals (5)

• Financial planning involves assessing current situations, setting goals, and establishing action plans.
• Short-term strategies can include budgeting, paying off debts, and building emergency funds.

Achieving Financial Goals (6)

• Implementing your financial plan requires using a spending plan, having adequate insurance, and becoming knowledgeable about taxes and investments.

Summary (1)

• LO1: Analyze the process for making personal financial decisions.
• Determine current financial situation.
• Develop financial goals.
• Identify alternative courses of action.
• Evaluate alternatives.
• Create and implement a financial plan.
• Re-evaluate and revise the financial plan

Summary (2)

• LO2: Develop personal financial goals.
• Goals should be SMART.
• Affected by person's values/attitudes and life situation

Summary (3)

• LO3: Assess economic factors that influence personal financial planning.
• Consumer prices.
• Interest rates.
• Employment Opportunities.

Summary (4)

• LO4: Determine personal and financial opportunity costs associated with personal financial decisions.
• Every decision involves a trade-off.
• Personal opportunity costs include time, effort, and health.
• Financial opportunity costs are based on the time value of money.
• Future and present value calculations help measure increased value.

Summary (5)

• LO5: Identify strategies for achieving personal financial goals for different life situations.
• Requires spending, saving, investing, and borrowing strategies based on personal life situation and various social/economic factors.

Appendix 1A Financial Planners and Other Financial Planning Information Sources

• Describes sources like periodicals, financial institutions, courses, software, tax software, investment analysis programs, and the internet.

Appendix 1B The Time Value of Money: Future Value and Present Value Computations

• Discusses financial calculators, future value of a single amount, future value of a series of deposits, present value of a single amount, present value of a series of equal amounts, using present value to determine loan payments, and calculating the effective annual rate.