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First – A Perspective “It is a gloomy moment in history. Never has the future seemed so dark and incalculable. The United States is beset with racial, industrial and commercial chaos, drifting we know not where. Of our troubles, no one can see the end.” Harper’s Magazine , 1847 C HAPTER 1

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first a perspective
First – A Perspective

“It is a gloomy moment in history. Never has the future seemed so dark and incalculable. The United States is beset with racial, industrial and commercial chaos, drifting we know not where. Of our troubles, no one can see the end.”

Harper’s Magazine, 1847

c hapter 1

Personal Financial Planning in Action

“It is not money that brings happiness, it is lots of money.” – Russian Proverb

financial planning definition
Financial Planning, Definition
  • Personal financial planning is the process of managing your money to achieve personal economic satisfaction
    • This is our book’s definition
  • The ability to use knowledge and skills to manage one's financial resources effectively for lifetime financial security
    • Here is another that I thought was useful

How would you define personal financial planning?

the benefits of financial planning
The Benefits of Financial Planning
  • There are several advantages of effective personal financial planning
    • Increased effectiveness in obtaining, using, and protecting your financial resources
    • Increased control of your financial affairs
    • A sense of freedom from financial worries obtained by being able to look optimistically toward the future
    • Improved personal relationships
      • What is the number 1 reason for divorce in America?
developing a flexible financial plan
Developing a Flexible Financial Plan
  • A financial plan is a formalized report that...
    • Summarizes your current financial situation
    • Analyzes your financial needs
    • Recommends future financial activities
  • Your financial plan can be created by you, done with assistance from a financial planner, or made using a money management software package
the financial planning process
The Financial Planning Process
  • Determine your current financial situation
  • Develop your financial goals
  • Identify alternative courses of action
  • Evaluate your alternatives
    • Keep in mind opportunity costs and risks
  • Create and implement a financial action plan
    • Write it down!
  • Reevaluate and revise your plan

“My Goodness! Does anybody really do all this?!”

what is a more realistic and typical financial planning process
What is a More Realistic and TypicalFinancial Planning Process?
  • Make money
  • Spend it
  • Make some more money
  • Spend that …

… and then spend some more

  • Go into debt
  • Panic!
  • Take BUS-121, Financial Planning and Money Management

“Lots of anybodies have done this!”

simply put it all comes down to the choices we make
Simply Put, It All Comes Down to the Choices We Make!
  • Opportunity cost
    • What you give up by making a choice
      • The opportunity cost is sometimes referred to as the trade-off of a decision.
      • It cannot always be measured in dollars. Sometimes the cost is your time or your health.
      • Consider the lost opportunities that will invariably result from your decisions.

Example/Discussion: “There is no such thing as a free lunch!”

What are the opportunity costs of attending college?

opportunity costs and financial results evaluated when making decisions



Opportunity Costs


(time, effort, health)

(automobile, home, college education, investments, insurance, retirement fund, lifestyle)



Opportunity Costs

(interest, liquidity,



Opportunity Costs and Financial Results Evaluated When Making Decisions

Your Money or Your Life, Joe Dominguez & Vicki Robin,

Face-to-Face and OnLine Study Groups

every financial decision involves evaluating types of risk
Every Financial DecisionInvolves Evaluating Types of Risk
  • Inflation risk
    • Rising prices cause lost buying power
  • Interest-rate risk
    • Affect costs of borrowing and rate of return
  • Income risk
    • The loss of a job
  • Personal risk
    • Health or safety
  • Liquidity risk
    • Higher return may mean less liquidity
  • Culture of Consumerism risk
    • a.k.a. Die-Working-and-in-Debt-Up-to-Your-Eyeballs risk


Can you guard against all risks?

Should you try?

implementing your financial plan
Implementing Your Financial Plan
  • Developing good financial habits
    • Use a well-conceived spending plan to help you stay within your income, while allowing you to save and invest for the future
    • Have appropriate insurance protection to prevent financial disasters
    • Become informed about tax and investment alternatives
  • Achieving your financial objectives requires…
    • A willingness to learn, and
    • Appropriate information sources
financial planning information sources
Financial Planning Information Sources
  • Printed materials
    • Books, magazines
  • Financial institutions
    • Credit unions, banks, brokerages, etc.
  • School courses and educational seminars
  • Computer software and on-line information sources
    • The Internet is an inexhaustible supply
      • Sometimes useful, sometimes not…
  • Financial specialists

Taking this course is a great start!

influences on personal financial planning
Influences on Personal Financial Planning

Life situation and personal values

  • Marital status, household size, and employment
  • Major events
    • Marriage, Birth or adoption of child, Divorce!, Bankruptcy
  • Values
    • What are the ideas and principles you consider correct, desirable and important?
  • Where are you in the Adult Life Cycle stage?
    • “Traditionalist / Mature” – Pre 1946 – 62 million
    • “Baby Boomer” – 1946 to 1964 – 78 million
    • “Gen Xer” – 1965 to 1981 – 59 million
    • “Millennial” – 1981 to 1999 – 80 million
      • (a.k.a. Digital Generation, Gen Y)
    • The next generation? – 2001+
influences on personal financial planning continued
Influences on Personal Financial Planning(continued)

Millennial tee-shirt worn by an SDSU student.

influences on personal financial planning continued15
Influences on Personal Financial Planning(continued)

Economic factors:

  • Market Forces
    • Supply and demand
    • Production costs and competition
  • Financial institutions
    • Influence of the Federal Reserve Bank and the global financial markets
  • Global influences
    • Level of exports and imports
  • Economic conditions....
changing economic conditions
Changing Economic Conditions
  • Consumer Prices and Inflation
  • Consumer Spending
  • Interest Rates
  • Money Supply
  • Unemployment
  • Housing Starts
  • GDP: Gross Domestic Product
  • Trade Balance (a.k.a. Trade Inbalance!)
  • Budget Deficit
  • Financial Markets

But since none of us has much, if any, control over these matters, we will focus on the things that we can and do have control over.

components of financial planning
Components of Financial Planning
  • Planning (chapter 2)
  • Taxes (chapter 3)
  • Saving (chapter 4)
  • Borrowing (chapter 5)
  • Spending (chapters 6, 7)
  • Managing risk (chapters 8, 9, 10)
  • Investing (chapters 11, 12, 13)
  • Retirement and estate planning (chapter 14)
developing personal financial goals
Developing Personal Financial Goals
  • Types of financial goals include those...
    • Influenced by the time frame in which you want to achieve your goals
    • Influenced by the financial need that drives your goals
  • Timing of goals must be identified
    • Short-term, intermediate-term and long-term goals
  • Financial goals should...
    • Be realistic, be stated in specific, measurable terms, have a time frame, have a priority, and indicate the action or actions to be taken
timing of financial goals
Timing of Financial Goals
  • Short-term – up to 1 year “or so”
  • Intermediate-term – 2 to 5 years
  • Long-term – more than 5 years

The above are the book’s time frames. Here are mine:

  • Short-term – 1 to 3 years
  • Intermediate-term – 3 to 5, 6 or even 7 years
  • Long-term – 7 years or longer (10 to 30 years)
financial goal example
Financial Goal: Example
  • Pay off VISA
    • Balance: $3,500
    • Time frame: Within 12 months
    • Actions to be taken
      • Reduce dating and clubbing to twice a month
      • Cancel cable service and mobile phone
      • Stop buying coffee at FiveBuck$
      • Pay extra $300 per month
    • Priority: High

Which time frame does this belong to?

How would you measure the success of the goal?

Is the goal reasonable?

financial goal example21
Financial Goal: Example
  • Save up for a Home Theater system
    • Amount needed: $2,000
    • Time frame: Within 12 months
    • Actions to be taken
      • Take part-time job at Home Cheapo
      • Put $150 per month into a special savings account at the bank
    • Priority: Medium
financial goal example22
Financial Goal: Example
  • Save for down payment on a condo
    • Amount needed: $15,000
    • Time frame: 5 years
    • Actions to be taken
      • Set up $200 automatic investment per month to be taken from our checking account
      • Expected rate of return: 7%
    • Priority: High

Will $200 per month at 7% be enough to reach this goal?

We are going to learn how to calculate the future value of this stream of investments.

non financial goal example
Non-Financial Goal: Example
  • Be able to do 15 “good” push-ups
    • Can currently only do 7 “good” push-ups
    • Time frame: Within 3 months
    • Actions to be taken
      • Start with 7 push-ups, three times a day
      • Increase by 2 or 3 push-ups every three to four weeks
      • Work up to 15 push-ups within 3 months
    • Priority: Medium

Is this goal reasonable?

goal setting
Goal Setting

Which of the following goals would be the easiest to implement and measure its accomplishment?

  • Spend less so we can save more each month
  • Save $10,000 for a down payment on a condo
  • Save $100 each month to create a $4,000 emergency fund in 40 months by canceling the cable service
  • Save enough for a $4,000 vacation next year

The correct answer is (C).

the financial goal of most americans
The Financial Goal of Most Americans

Spend everything that you earn!

And then spend some more!

Most Americans Live Beyond Their Means

“Honey, Can We Make It to the Next Paycheck?”

Discussion: How do we do it? Why do we do it?

the most important financial goal


The Most Important Financial Goal!

Spend less than you earn!

“Live Beneath Your Means”

“Pay Yourself First” – 10%?

the most important financial goal27
The Most Important Financial Goal!


  • Pay Yourself First
    • By having the money come out of your paycheck or checking account automatically, most individuals easily adjust to investing
    • Works like a pay raise, only in reverse
  • The 10% Solution
    • Many financial planners recommend saving at least 10% of your income for long-term, compounded growth
    • The Wealthy Barber, David Chilton

Is 10% a reasonable goal?

the most important financial goal28
The Most Important Financial Goal!


“The magic of compound interest. Thirty dollars a month, a dollar a day, can magically turn into over a million dollars. And do you know what is even more impressive? You know someone who has done it,” Roy, our barber, said proudly.

“Thirty-five years ago, I started my savings with thirty dollars a month, approximately 10% of my earnings. I have achieved just under 13% return per year. In addition, as my income rose, my savings rose accordingly. Thirty dollars a month became sixty dollars, then a hundred, and eventually hundreds of dollars a month.”

“You three are looking at a very wealthy man.”

The Wealthy Barber, David Chilton

the most important financial goal29
The Most Important Financial Goal!


“One of my early students only followed the ‘Pay Yourself 10% First’ lesson. He bought the wrong life insurance, abused credit cards, overpaid for his mortgage, did not take advantage of his 401(k) at work, and lost all $15,000 of an inheritance playing the commodities market.”

“This is a real upbeat, encouraging story, Roy,” said Tom.

“Today, his net worth is $850,000, Tom. $300,000 of it is the equity in his house but the rest is his 10% savings.”

“He did everything else wrong but –” Cathy started.

“Because he had saved 10% of each paycheck and invested it for long-term, compounded growth, today he is in great shape,” Roy finished.

The Wealthy Barber, David Chilton

the rule of 72
The Rule of 72
  • A Quick ‘n’ Dirty Method for Calculating Compound Interest (or Inflation)
    • Divide the interest (or inflation) rate into 72
    • That is approximately how long it will take the amount to double
    • Example: 10% Interest Rate
      • 72 / 10 = 7.2 years – It will take about 7 years for your investment to double if you earn 10%
    • Example: 3% Consumer Price Index (inflation)
      • 72 / 3 = 24 years – It will take about 24 years for prices to double if inflation runs about 3%

But let us get more precise…

simple versus compound interest
Simple versus Compound Interest

Simple Interest

Interest = Principal * Rate * TimeInterest = $100 * 6% * 1 year = $6.00In one year you have $106 ($100 + $6.00)

Compound Interest

But the next year, you will earn interest on your interest…

$106 x 6% x 1 = $6.36

After the next year, you will have $112.36

I know what you are thinking, “Big Deal, Paiano!”

time value of money










Time Value of Money

Increases in an amount of money as a result of interest earned


future value of money
Future Value of Money
  • The amount to which a sum you invest now will increase based on a specified interest rate and time period
    • Future value is also called compounding
    • Future value can be computed for a single amount – a.k.a. a lump sum or principal
    • Future value can also be determined for a series of deposits – a.k.a. stream of investments, “annuity”

Start investing now to take advantage of the future value of money.

future value of money34
Future Value of Money


  • Future value formula for Lump Sum Principal

Future Value = Principal * (1 + Rate)Time

  • Future value formula for Series of Deposits

(1+Rate)Time - 1

Future Value = Deposit * ──────────Rate

Do not worry about the math. We use the future value of money tables.

present value of money
Present Value of Money
  • The current value for a future amount based on a certain interest rate and a certain time period
    • Present value is also called discounting
    • Present value of a single lump sum
    • Present value of a series of withdrawals

Not only is present value harder to comprehend, it is also not as important for personal finance. (We use present value very much in the BUS-123, Introduction to Investments, class.)

present value of money36
Present Value of Money


  • Present value formula for Lump Sum

Lump Sum

Present Value = ───────────

(1 + Rate)Time

  • Present value formula for Series of Withdrawals


1- ───────


Present Value = Deposit * ─────────── Rate

Please do not drop the class. We are not going to do any present value calculations.

future value of money37
Future Value of Money

Okay, let us do some exercises…

Future value handouts

hope for the future
Hope for the Future

As of March 31, 2010

financial aspects of career planning
Financial Aspects of Career Planning

Do you have a Job or a Career?

  • A Job–
    • An employment position obtained mainly to earn money, without regard for interests or opportunities for advancement
  • A Career –
    • A commitment to a profession that requires continued training and offers a clear path for occupational growth

“A job is something you do for a paycheck. A career is something you do regardless of the paycheck.”

how education relates to income
How Education Relates to Income

Source: U.S. Census Bureau Survey, 2004

service industries expected to have the greatest employment potential
Service Industries Expected to Havethe Greatest Employment Potential
  • Computer Technology
  • Health Care
  • Business Services
  • Social Services
  • Sales and Retailing
  • Hospitality and Food Services
  • Management and Human Resources
  • Education
  • Financial Services


but what is your career goal
But What Is Your Career Goal?
  • Most people believe you must become a doctor or lawyer or high-powered executive to become wealthy
    • But what if you want to be a writer or a teacher or an artist or a janitor or mechanic or plumber?
  • Can you become wealthy while doing what you love...
    • Even if it does not command a large salary?
  • As we saw, the answer is, “Yes!”

The key is to set a goal for yourself & start investing early.

In fact, your career is not your most important financial decision.

But if your career is not your most important decision, what is?

what is your most important financial decision
What is Your Most Important Financial Decision?

Who You Marry!

And then subsequently divorce …

the millenials go to work
The Millenials Go To Work

Fortune says…

“They are ambitious, they are demanding and they question everything, so if there is not a good reason for that long commute or late night, do not expect them to do it. When it comes to loyalty, the companies they work for are last on their list – behind their families, their friends, their communities, their co-workers and, of course, themselves.

But there are a whole lot of them. And as the baby-boomers begin to retire, triggering a … worker shortage, businesses are realizing that they may have no choice but to accommodate these curious Gen Y creatures. Especially because if they do not, the creatures will simply go home to their parents, who in all likelihood will welcome them back.”

could not have said it better myself
Could not have said it better myself…
  • “Choose a job you love, and you will never have to work a day in your life.”