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PERSONAL FINANCE BASICS AND THE TIME VALUE OF MONEY, IMPLEMENTING YOUR…
PERSONAL FINANCE BASICS AND THE TIME VALUE OF MONEY
WHAT IS PERSONAL FINANCIAL PLANNING?
The process of managing your money to achieve personal economic satisfaction
ADVANTAGES OF PERSONAL FINANCIAL PLANNING
Increased effectiveness in obtaining, using and protecting financial resources
Increase control of one’s financial affairs
Improved personal relationships
Sense of freedom from financial worries
THE FINANCIAL PLANNING PROCESS
Step 1: Determine your current financial situation
Determine current financial situation regarding income, savings, living expenses, and debts
Prepare a list of current asset and debt balances and amount spent for various items
Match financial goals to current income and potential earning power
Step 2: Develop your financial goals
Identify feelings about money and the reasons for those feelings
Determine the source of your feelings about money
Determine the effects of economy on your goals and priorities
Make sure that your goals are your own and are specific to your situation
Step 3: Identify alternative courses of action
Continue the same course of action
Expand the current situation
Change the current situation
Take a new course of action
Creativity in decision making is vital to effective choices
“Do nothing” can be a dangerous alternative
Step 4: Evaluate your alternatives
Consequences Of Choices
Opportunity cost - What you give up when you make a choice
The cost or trade-off of a decision cannot always be measured in ringgit. Sometimes the cost is your time
Evaluating Risk
Uncertainty is a part of every decision
Best way to analyze and minimize risk is to gather information from financial planning sources
Types of Risk
Inflation Risk
Rising or falling prices impact buying power
Buying later might cost more
Interest Rate Risk
Borrowing costs change with interest rates
Low rates = benefits; high rates = higher payments
Income Risk
Job loss from changing consumer behavior or tech use.
Save for unemployment or skills upgrade.
Personal Risk
Risks from choices like brands or stores like inconvenient repairs
Health, safety, and financial decision risks
Liquidity Risk
Some investments may be hard to convert to cash without loss.
Step 5: Create and implement your financial action plan
Develop an action plan that identifies ways to achieve financial goals
Possible action plans can be increasing savings, reducing spending, or making provisions for taxes
To implement action plans you may need assistance from others
Step 6: Review and revise your plan
Financial planning decisions need to be assessed regularly
Complete review should be done at least once a year
Regular reviews of decision-making process can help in making priority adjustments to achieve financial goals
INFLUENCES ON PERSONAL FINANCIAL PLANNING
Life Situation & Personal Values
Personal values guide your financial decisions.
FINANCIAL SYSTEMS AND ECONOMY
Money flows through financial markets and institutions.
Funds move from savers to borrowers.
ECONOMIC CONDITIONS
Inflation: Measured by CPI. Prices rise over time.
Rule of 72: Estimate how fast prices double.
Spending & Rates: Driven by demand and supply of money.
GLOBAL INFLUENCES
Trade deficits affect currency value and prices.
Foreign investment impacts money supply.
US companies compete with global firms.
FINANCIAL GOALS
Goals depend on time frame (short/long-term).
Based on financial needs (saving, buying, retiring).
PATH TO FINANCIAL SECURITY
Take action: save money, control credit use.
Know yourself: spender or saver
Set a personal finance mission statement.
KEY ECONOMIC FACTORS
Interest Rates
GDP: Measures total economic activity.
Trade Balance
Housing Starts
Stock Indexes
Money Supply
Unemployment
Consumer Prices
Consumer Spending
ACHIEVING FINANCIAL GOALS
DEVELOPING A FLEXIBLE FINANCIAL PLAN
A Financial Report is a formalized report :
Tools
With financial planner
Using software
Self- created
Analyzes financial needs
Recommends future actions
Summarize current financial situation
COMPONENT OF PERSONAL FINANCIAL PLANNING
•Borrowing - Chapter 6 & 7
•Spending - Chapter 8 & 9
•Saving - Chapter 5
•Managing Risk - Chapter 10 to 12
•Planning - Chapter 3 & 4
•Investing - Chapter 13 to 17
•Obtaining - Chapter 2
• Retirement & Estate Planning - Chapter 18 & 19
FINANCIAL PLANNING FOR DIFFERENT LIFE SITUASTIONS
SHORT-TERM ( WITHIN A YEAR
)
•Get adequate insurance
•Set up savings plan
•Pay off credit card debit
•Use rental housing
•Create & follow a budget
•Start investing safely
LONG-TERM ( BEYOND A YEAR
)
•Choose tax-deferred investments
• Pay off debs & mortgage
•Invest for long-term growth
EXAMPLES
Middle-aged Person: Support parents → Buy insurance + invest in mutual funds
Single Parent: Save $20,000 for child’s education → Save regularly & get life insurance
Young Couple: Save for house → Budget + savings/investment
STUDYING PERSONAL FINANCE
•Quizzes, activities
•Apps & websites
•Connect (library site)
•Expert & peer discussions
•Financial Planner Sheets
Developing Personal Financial Goals
Opportunity Cost
• What you give up to get something else
• Personal (time, effort, health)
• Financial (interest you could have earned)
SMART Goal Setting
• Specific – clear target
• Measurable – use numbers
• Action-oriented – define steps
• Realistic – doable with your resources
• Time-based – set deadline
Types of Financial Goals
Time-Based Goals
• Short-term (< 1 year)
• Intermediate (1–5 years)
• Long-term (> 5 years)
Needs-Based Goals
• Consumable goods
• Durable goods
• Intangible goals
Time Value of Money (TVM)
Interest Calculation
3 Elements:
• Principal
• Interest rate
• Time period
Simple Interest Formula:
Interest = Principal × Rate × Time
How to Calculate TVM
• Formula
• TVM tables
• Financial calculator
• Excel spreadsheet
•Apps or websites
Future Value (FV)
•FV = How much your money grows to
•Single deposit: Interest added over time
•Multiple regular payments grow over time
• Why? Because of interest earning potential
• Concept: Money today > money tomorrow
Present Value (PV
PV = What future money is worth today
Always lower than FV
Used to compare future earnings to today’s value
IMPLEMENTING YOUR FINANCIAL PLAN
Obtain appropriate insurance
Understand taxes & investment
Track spending → Create a spending plan
Now
Develop financial goals
Select appropriate plans of action
Assess your current situations
Life stages affect financial needs (marriage, kids, job, retirement).