Module 1
Chapter 1
Financial Planning Process:
Is the process of managing your money to achieve personal and economic satisfaction.
Advantages of the financial planning process:
Increased effectiveness in obtaining using and protecting your financial resources throughout
your lifetime.
Increased control of your financial affairs by avoiding excessive debt, bankruptcy, and
dependence on others for economic security
Improved personal relationships.
A sense of freedom from financial worries is obtained by looking to the future.
Financial planning process
Step 1 Develop your financial goals: analyzing your values involves identifying what beliefs you
hold with respect to money and how these beliefs lead you to act in certain ways.
Step 2 determine your current financial situation:
Step 3 identify alternative courses of action: continue the same course of action, expand the
current situation, change the current situation, or take a new course of action.
Step 4 evaluate alternatives. Consequence of choices: opportunity cost (trade-off): is what you
give up by making a choice.
Personal opportunity cost: include the time and effort made by you personally and how it may
effect your health and lifestyle.
Financial opportunity cost: include interest, liquidity and safety of investments.
Evaluating risk, and financial planning information sources.
Step 5 create and implement a financial action plan.
Step 6 re-evaluate and revise your plan.
Uncertainty is part of every decision.
FACTORS THAT INFLUENCE YOUR FINANCIAL GOALS
1. Timings:
Short-term goal within a year
Long-term goal more than 5 years
Intermediate between 2-5 years
2. Goals for different financial needs:
consumable- product goals usually occur periodically, ex, food, clothes and
entertainment.
Durable product goals involve infrequently purchased expensive items:
appliances, cars and sporting equipment.
Intangible purchased goals relationship health and leisure.
3. Life situation:
adult life cycle: family situation and financial needs of an adult
The life cycle approach from early years till mid-30s focuses on emergency
funds, saving a down payment for a house.
Middle years 30s to mid 50s building wealth and paying down mortgages.
Middle age 50+ providing adequate retirement fund.
Retirement years focus on efficient management of wealth
Goal setting guidelines:
Financial goals should be realistic.
Specific, measurable
Time frame
Should indicate the type of action to take.
ECONOMIC FACTORS INFLUENCE ON PERSONAL FINANCIAL PLANNING
Economics: is the study of how wealth is created and distributed
Inflation is a rise in the general level of prices. The buying power of dollar drops or
decreases
Global influences such as foreign investors and competition,
When export level values of Canadian good is lower than imports the Canadian dollar leave the
country than the dollar value of the foreign currency.
Total demand in the economy influences the potential for income or employement
A decrease in demand without a decrease in supply will lead to deflation
Consumer spending measures demand of goods and services
Reduced spending generally leads to unemployment
Cpi is a measure of the average change in the price of a fixed basket of goods.
Personal opportunity coststime, effort,health) studying, working, shoppingwill not be
available for other uses.
The financial opportunity cost interest,liquidity,safety)
Financial acquisition: college education, home, automobile)
The amount of savings (p)
The annual interest rate(R)®
The length of time the money is deposited (T)
Simple interest
I=pxrxt
Compounding is interest that is earned on previously earned interest
The future value is the amount to which current savings will increase on the basis of a certain
interest rate and certain time period.
Present value is the current value of a future amount based on a certain interest rate and time
period.
The ability to readily convert financial resources into cash without a loss in value is called
liquidity
The time value of money is an opportunity cost
Three items needed to calculate future value include principal, length of time, annual interest
rate.
What is the current value of a future amount based on a certain interest rate and a certain time
period? Present value
The amount to which current savings will increase based on a certain interest rate and a certain
time period is called.
future value
The sooner, you make deposits, the bigger, the future value will be.
An annuity , is a series of equal amounts made at regular time intervals.
Another name used for calculating the present value is discounting
Planned spending through budgeting is the key to achieving goals.
Liquidity , refers to the ability to easily convert financial resources to cash.
Which term is a set of federal laws that allows you to either restructure your debts or remove
certain debts? Bankruptcy
You can achieve investment diversification by including a variety of assets in your portfolio.
Transferring money or property to others should be timed to the tax burden and ,
Unavailable the benefits for those receiving the financial resources.
