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Personal Financial Planning – Part I. Dr. Steve Hays Personal Finance BKHS – Spring 2013. The New Economy. Emphasis in US has shifted Manufacturing and retailing to Telecommunications, high tech, financial services New career opportunities New perspectives on financial planning.

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personal financial planning part i

Personal Financial Planning – Part I

Dr. Steve Hays

Personal Finance

BKHS – Spring 2013

the new economy
The New Economy
  • Emphasis in US has shifted
    • Manufacturing and retailing


    • Telecommunications, high tech, financial services
  • New career opportunities
  • New perspectives on financial planning
money money money
Money, money, money!!!
  • People everywhere talk about money
  • Three types
    • Explorer – always searching uncharted areas
    • Passenger – just along for the ride
    • Researcher – seeking answers to questions
personal financial planning
Personal Financial Planning
  • Definition
    • Process of managing your money to achieve personal economic satisfaction
  • Allows you to control financial situation
  • Every person, family, household has unique position
  • Activities must be planned carefully to meet specific needs
advantages of personal financial planning
Advantages of Personal Financial Planning
  • Increased effectiveness in obtaining, using, and protecting financial resources
  • Increased control of financial affairs by avoiding excessive debt, bankruptcy, and dependence on others
  • Improved personal relationships resulting from well planned and effectively communicated financial decisions
  • Sense of freedom from financial worries obtained by looking to the future, anticipating expenses, and achieving personal economic goals
step 1 determine current financial situation
Step 1 – Determine Current Financial Situation
  • Determine financial situation regarding income, living expenses, and debts
  • Prepare a list of current assets, debt balances, and amounts spent for various items
step 2 develop financial goals
Step 2 – Develop Financial Goals
  • Periodically analyze financial values and goals
  • How do you feel about money?
  • Why?
  • Factual knowledge or influence of others?
  • SMART Goals
step 3 identify alternative courses of action
Step 3 – Identify Alternative Courses of Action
  • Categories
    • Continue same course of action
    • Expand current situation
    • Change current situation
    • Take new course of action
  • Creativity in decision making is vital to effective choices
  • Consider all possible alternatives
  • Doing nothing is a dangerous alternative!!
step 4 evaluate alternatives
Step 4 – Evaluate Alternatives
  • Evaluate courses of action
  • Consider
    • Life situation
    • Personal values
    • Current economic conditions
    • Opportunity cost
what is opportunity cost
What is Opportunity Cost?
  • What you give up by making a choice
  • Trade-off
  • The resources you give up (money or time) have a value you can never regain
evaluating risk
Evaluating Risk
  • Uncertainty is part of every decision
  • High degree
  • Low degree
  • In many financial decisions, identifying and evaluating risk is difficult
  • Gather information based on your experience and experience of others
  • Use financial planning information sources
types of risk
Types of Risk
  • Inflation Risk
  • Interest Rate Risk
  • Income Risk
  • Personal Risk
  • Liquidity Risk
inflation risk
Inflation Risk
  • Rising prices cause lost buying power
  • Decide whether to buy something now or later
    • If you buy, you may have to pay more
comparing prices
Comparing Prices


Coca-Cola: $0.05/bottle

Bread:  $0.21/loaf Milk:  $1.04/gal US Eggs:  $0.96/doz Car:  $2,300 Gas:  $0.30/gal House:  $19,300 Stamp:  $0.05/ea

Ave. Income:  $6,998/yr

Min Wage:  $1.25/hr

DOW Ave:    763



Bread:  $1.88/loaf Milk:  $2.79/gal US Eggs:  $1.54/doz

Car:  $ 30,748

Gas:  $3.72/gal House:  $263,200

Stamp:  $0.46/ea

Ave. Income:  $47,000/yr

Min Wage:  $7.25/hr

DOW Ave:    13,553

interest rate risk
Interest Rate Risk
  • Changing interest rates affect your costs when you borrow and your benefits when you save or invest
  • Borrowing at low rates saves you money
  • Investing when rates are dropping costs you money
income risk
Income Risk
  • Loss of job could result in change in consumer spending
  • Individuals who face risk of unemployment need to save while employed
  • Acquire skills they can use to obtain different type of work
personal risk
Personal Risk
  • Tangible and intangible factors can create less than desirable situations
  • Purchasing certain brands pr from certain stores may entail risk (i.e repairs)
  • Health risks
  • Safety risks
liquidity risk
Liquidity Risk
  • Some investments have potential for higher earnings
  • Mat be more difficult to convert to cash or sell without significant loss in value
    • Art
    • Jewelry
    • Sports Collectibles
    • Precious Metals
financial planning information sources
Financial Planning Information Sources
  • Financial Specialists
    • Financial planners
    • Bankers, CPAs
    • Lawyers
  • WWW, Computer Software
  • School Courses
  • Financial Institutions
  • Printed Materials
step 5 create and implement plan
Step 5 – Create and Implement Plan
  • Develop an action plan identifying ways to achieve goals
  • Prioritize goals
  • Seek assistance from others
step 6 review and revise plan
Step 6 – Review and Revise Plan
  • Dynamic process that always changes
  • Regularly assess financial decisions
  • Changing personal, social, and economic factors require more frequent assessment
developing personal financial goals
Developing Personal Financial Goals
  • Two factors influence financial aspirations
    • Time frame
    • Financial needs
timing of goals
Timing of Goals
  • Short-term
    • Less than one year
  • Intermediate
    • Two to fives years
  • Long-term
    • Greater than five years
financial needs
Financial Needs
  • Consumable Products Goals
    • Periodic basis
      • Food, clothing, entertainment
      • Can have negative impact on financial situation if made unwisely
  • Durable Product Goals
    • Infrequently purchased
    • Expensive items
  • Intangible Purchase Goals
    • Personal relationships, health, education, leisure
homework due friday february 1 2013
Homework – Due Friday, February 1, 2013
  • Using Excel, develop two charts
  • Compare the prices of goods for the year you were born with 2012 (see PPT slide for items to compare)
    • What is the percentage of increase from the year you were born to 2012?
  • Develop SMART financial goals for both you and your family – short term, intermediate, and long-term.