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Financial Planning - Coggle Diagram
Financial Planning
1. Setting Financial Goals - Assessing Situation
SMART goals
: Help create specific action steps, Measure of progress over time
SMART goals
Specific: narrowed down
Measurable: do research on cost
Agreed upon: when sharing finances
Realistic: achievable
Timed: deadline to be certain
Financial Goal List
Date: The day the list is created
Goal: E.g. Have house payment down, Pay off college loans
Total Money Amount Needed
Target Date to be Done: The day loans/ savings are expected to be completed
Date Done: The day goal is actually completed
Money Amount Needed: $?/ month or $?/ week
Personal Balance Sheet
(aka Networth Statement): Tools to help determine and assess the current financial situation at a specific time, Examines that you own and what you owe
Net Worth
= Assets (everything you own) - Liabilities (everything you owe)
List of Assets
Monetary assets: Things that are in cash, checking and saving accounts balances
Tangible assets: Things that you can hold, personal property (vehicles, furniture, clothing, tools)
Investment assets: Things you own or invest in that can grow over time (stocks, bonds, mutual funds, real estate, property on real estate, retirement account)
List of Liabilities
Current bills (credit card account balances, unpaid services, borrowed money, rental utilities)
Long-term loans: Things that are bigger in term of money amounts (car loans, college loans, student loans, home/ real estate mortgages)
Resource
:
Example of Balance Sheet
Money Personalities
: One's habit, attitude and personality will influence their financial decisions. Money personalities are created by Olivia Mellon to categorize some common types of financial habits and help people solve conflicts that might come up because of money personalities.
The Money Hoarder
: Likes to save money, Enjoy creating and working with a budget, May find it hard to spend money for self or buy gifts for others, Often purchases seem frivolous or unnecessary
The Spender
: Likes to buy things to enjoy immediately, Likely spend all their money earned - may carry a lot of debt, Find it hard to save money
The Money Worrier
: Tend to worry about money all the time, Wants to have control of their money, Having more money doesn't lead to less worrying
The Money Avoider
: Maybe late to paying bills, Likely don't know how much money they have - or how much is spent, Managing finances seems boring/ overwhelming, May not feel competent to handle money management tasks
The Money Monk
: Believes that money is bad and the cause of all problems, Doesn't want to accumulate money, Likely avoids investing money
The Amasser
: Likes to have a LOT of money, always working to accumulate more money, May find it hard to spend money
Resource
: Olivia Mellan's book, "Money Harmony: A Road Map for Individuals and Couples" -
Moneyharmony Quiz
Values
: Things that are important to you/ you want to prioritize when making a financial decision.
Examples of Values
: Family, Security, Spirituality, Independence, Friendship, Education, Environmentalism, Achievement, Beauty, Dependability, Health, Fun.
Things that influence Values
: Family, Friends, Society, Religion, Media
4. The Time Value of Money
1.1 Time Value Basics
A dollar today is worth more than a dollar tomorrow
Inflation
Nominal cost - the cost associated with things tend to increase over time
Opportunity cost
Opportunity to invest money and (hopefully) earn positive earnings/ interest.
Risk and uncertainty
There are a level of risks that money might now be there in the future when you need/ want it
Impatience
Rather have things now than waiting to have that later
2. Single Payment Time Value Formula
Single Payment Compound Amount (SPCA)
Vt = Vo x (1+r)t
Used to find the future value of a single amount today
Example: If I save or invest $100 today and earn 6% interest, how much money will I have in 10 years?
Single Payment Present Value (SPPV)
Vo = Vt / ((1+r)^t)
Used to find the present value of a single future amount
Example: If I would like to have $1000 in 5 years, how much would I need to save or invest today if I can earn 5% interest?
3. Series of Payment Time Value Formulas
Uniform Series Compound Amount (USCA)
Vt = P x {((1+r)^t - 1)/ r)}
Used to find the future value of a series of payments
Example: If I save $100 each month, how much will I have in 10 years if I can earn 6% interest
Sinking Fund Deposit (SFD)
P = Vt x {r/ ((1+r)^t - 1)}
Used to find the payment size based on a future value
Example: If I would like to have $50.000 in 18 years, how much do I need to save each month if I can earn 5% interest?
Uniform Series Present Value (USPV)
Vo = p x {((1+r)^t - 1) / (r x (1+r)^t)}
Used to find the present value of a series of payment
Example: How much do I need to have in my retirement account if I can earn 5% interest and I would like to withdraw $2000 each month during retirement?
Capitol Recovery (CR) - Loan Amortization Formula (LA)
P = Vo x {((r x (1+r)^t) / ((1+r)^r - 1)}
Used to find the payment associated with a specific present value
Example: What's the monthly payment on a $100.000 home mortgage loan with a 30-year term and an interest rate of 6%?
1.2 Factors Impacting Time Value
Interest rates
Size of the interest rates (r)
How often interest is calculated or compounded (m)
Time (t)
How long will you save or interest?
Over what time period are you going to pay back a loan?
Value
How many dollars are we talking about?
Are those dollar relevant today (present value - Vo) or at some date later (future value - Vt)?
Are we dealing with a single amount or a series of payment (P)?
5. Borrowing and Credit
Loans and Consumer Credit
Loan Contracts
Typically used to finance specific purchases.
For example, home mortgage loans, car loans, student loans
Factors considered in qualifying for Consumer Credit:
Personal financial information
Credit report and score
Characteristics of the purchase being financed with the loan
Consumer Lines of Credits
Used to finance a broader range of personal expenses. Accounts often associated with a maximum credit line or spending amount. For example, credit cards
Factor considered in qualifying for Consumer Credit
Personal financial information
Credit report and score
Pros and Cons
of Borrowing
Pros
Borrowing and Loan Contracts
Allow consumers to make purchases otherwise not be feasible
Consumer Credit Lines
Allow for more flexibility
Arguably safer and more secure than using cash
Spending documentation
Building a Positive Credit History
Responsible borrowers and credit users can be rewarded with more favourable borrowing and credit opportunities in the future
Cons
Borrowing and Loan Contracts
Commitment to making payments over time
Uncertainty related to future ability to repay
Interest represents the cost of borrowing
Consumer Credit Lines
Accounts can have very high and variable interest rates
Responsible use requires discipline
Building a Negative Credit History
Irresponsible borrowers and credits users can severely limit their future credit opportunity
Loan Amortization
Loan Terms
Refer to the rules associated
with any loan contract
Principal
Refers to the amount borrowed. the amount of money the borrower still owns the lender
Initial principal balance = amount originally borrowed or initial amount of loan
Over time principal balance declines if loan payments are made on time
Interest Rate
Represents the cost of borrowing money
Almost always given on a annual basis
Determines interest expenses paid by borrower or interest earned by lender
Term Length
Refers to the length of the loan, the amount of time the borrower has agreed to pay the loan back. 30-year mortgage loan has 30 year term length
If paid on time, principal on loan balance will reach zero after 30 years
Loan will be paid off when principal = zero
Payment Frequency
Refer to how often payments are regularly scheduled
Annual payment vs Monthly paymeny
Loan Amortization Table
A schedule of regular payments that must be made by the borrower to pay off the loan on time.
Formula
Credit Report and Score
Contain a wide range of personal credit information
Information is used in a mathematical algorithm to compute your credit score
Credit Report
Personal Information
Social security number, DOB
Current and former addresses
Current and former phone numbers
Current and former employers
Credit Account Information
How you've used any current or past accounts in recent years.
Revolving accounts (credit cards): credit accounts or lines of credit that don't necessarily have a fixed payment associated with them or a fixed balance or amount owed.
Mortgage accounts: loan contracts or credit accounts where a specific amount was borrowed, and there is a specific payment associated with the amount that the borrower or the credit user owes in those cases.
Installment loans: credit accounts that have a very specific amount that is owed on them and a very specific payment that is required to be made to pay off that balance over a certain period of time
Others: surprising areas in a credit report (negative public records, foreclosures, bankruptcies, etc)
Credit Scores
Check CIC
Factors
Length of Credit History: includes entire credit history and individual accounts. Longer credit history provide more data, and can lead to better scores if history is positive.
Type of Credit Used: Mix of accounts (revolving, loans, etc.) impacts your credits scores
Improving Credit Score
Use existing account responsibly and regularly: Make payments on time, keep balances in current account low relative to credit limits
Avoid having a large number of inactive accounts
Avoid opening a large number of new accounts in a short period of time
Regularly monitor credit report
Report any inaccurate credit information
3. Saving Strategies
Barriers to saving
Competing goals
Short-term versus long-term desires: Hard to resist daily desire to focus on long-term goals.
Multiple long-term goals: Challenge on how to save for all long-term goals at the same time
Emotional spending
Retail therapy: Tendency to go out and spend money when stressed or worried.
Decision fatigue
Low on mental energy leads to poor financial management
Lead to impulse purchases
Choosing the default option with no further research
Interest costs on debts
Interest rates make a different.
When making decisions to purchase use debt, pay attention to interest rates and think about the fact that the money putting toward interest can't be going toward savings. There's an opportunity cost there that you need to be aware of.
Why Save Money?
Build a smart foundation for your finances, including savings
Save for emergencies
Save for unexpected opportunities
Let compound interests work for your benefits
Saving Strategies
Mental accounting - categorize money for your goal
Small amount adds up
Save regularly and automatically
2. Budgeting and Cash Flow Management
Personal Budgeting
: Process of itemizing your income and expenses over a period of time
Useful for monitoring income/ expenses and managing cash flow
1. Assess current financial standing
Assess current personal balance sheet
2. Itemize Income
Create a complete list of all income
Income from current employment (Pre-tax salary vs actual take home pay)
Other income (Loans, Scholarships, Income from family, friends)
3. Itemize Expenses
Track expenses through apps or manual processes
Fixed expenses: Things that are billed in the same amount every time (rent, cell phone, Internet, insurance, loan payment)
Variable expenses: Things that are billed monthly but not certain of the amount (food, gas, utilities, credit card payment)
Non-essential expenses: Things that you spend on regularly but can be easily adjusted (entertainment, leisure)
4. Required Savings
Emergency savings for irregular or unanticipated expenses
Job loss
Sudden home or auto repair
Medical expenses
Typical rule of thumb: save 3 - 6 months of expenses
Short-term savings
Travel, new furniture
Longer-term savings
College/ education for kids
New car or home
5. Add Things Up
Add all sources of income
Add all sources of expenses
Compare income with expenses to determine if you have a surplus or deficit in the budget
6. Make Required Adjustments
Surplus
: Income exceed expenses
More flexibility for variable and non-essential expenses
Double check to make sure that all expenses have been accounted for
Ability to dedicate more toward savings
Deficit
: Expenses exceed income
Can you generate more income?
Identify areas where expenses can be reduced
Re-evaluate saving goals