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Analyze the process for making personal financial decisions

Develop personal financial goals Assess personal and economic factors that influence personal financial planning Determine personal and financial opportunities cost associated with personal financial decisions Identify the strategies for achieving personal financial goals for different life situations.

OBJECTIVE 1 Analyze personal financial planning

Typical financial goals Set priorities Achieving personal economic satisfaction

To analyze the process for making personal financial decisions following are the steps
Determine your current financial position Develop your financial goal Identify your alternative course of action Evaluating your alternatives Creating and implementing your current financial plan Reviewing and revising your plan

The Situation Understanding how to determine financial positions:Jane Smith is college senior majoring in marketing. She has realized that she is near to her graduation and she needs to make some decisions regarding her future. She wants to financially secure and understands she needs to plan for her financial future. Jane has determined that she has Rs 6000 in students loan and Rs 2,500 in credit card debt..

She has saving account of Rs 1,300. she has part time job in local department store where she earns Rs750 p.m. she has got money from her parents to help her for rent Rs. 500. Her households expense are Rs 1,300. Determine her current situation/ position, what more information you need to plan for her finance.

Determine your current financial position

Determine your current position i.e. you are going to graduate, starting his/her career, peak of his/her career or close to retirement On the basis of above situation decide your income, saving , living expense and debts. Some of above decisions can be affected by social pressure, household needs, desires or luxurious habbits. You should be able to differentiate between needs and wants.

OBJECTIVE 2 Developing Financial and Personal goal

Based on factual knowledge or on the influence of others Based on social pressure, household needs or desire for luxury Financial goal can range from spending all your current income on your needs, luxury or to build saving and investment for future Financial goals can be influenced by time frame and type of financial needs

Example: Jane need new suit for interview Jane needs to reduce her expenditure so that she can improve her saving account balance

Common Financial goals and Activities

Obtain appropriate career training Create an effective financial recording system Develop a regular savings and investment program Accumulate an appropriate emergency fund Purchase appropriate insurance coverage Evaluate and select investment plan establish a retirement plan

Identify the Alternative course of action

Developing alternative is influenced by various factors that continue the same course of action

Expand the current situation

Change the current situation

Take a new course of action

Example: Jane can use saving account money or credit card to buy suit Jane can use her employee discount or shop at local mall

Evaluating Alternative Course of action

On the basis of your life situation, personal values and current economic conditions

On the basis of consequence of the choices

Every decision closes off an alternative (opportunity cost) Consider amount of risk involved in each decision. Risk include : inflation risk, interest rate risk, income risk, personal risk and liquidity risk.

Example: A new suit will help Jane look better in her interview A new suit will make it harder to reduce expenditure and meet her credit card debt.

Creating &Implementing your financial Plan

Develop your action plan that identifies ways to achieve your goal

Increasing saving, reducing spending or extra income

Achieve first your short term goal and then goal next is priority

Example: Jane has decide not to buy new suit Jane will wear something best from her wardrobe She has decided to reduce her expense, so that she can increase her savings

Reviewing and Revising Janes financial plan

It is a dynamic process

Need to keep on assessing your action

Example: Jane has been successful in reducing credit card debts She need entire new wardrobe for her job

Exercise:
Within next two , Kent Mullins will complete his undergraduate degree with major in international studies. He has worked parttime in various sales job. He has small saving Fund $ 1,700 and over $ 8,500 in students loans. Do the financial planning process on the basis of following:1. What additional information should Kent have available when planning his personal finance 2. What goals might be appropriate for Kent 3. What are the alternative choices to fulfill that goal 4. What risk he should consider while analyzing his alternative

Objective 3
Assess personal and economic factors that influence personal financial planning
Financial decisions are affected by personals, life situations(income, age, health , household size) As well as economic factors that is various types of risk

Evaluating Risk
Inflation risk Interest rate risk Income risk Personal risk

Liquidity risk

Inflation Risk
Examine the general increase in price level Measured by looking at the basket of goods we purchase and change in their prices overtime Can affect those who are living on fixed income Example:-Mr. A knows that price of gasoline has gone up and so it can effect the prices of grocery and other consumable items he uses.

Interest Rate Risk

Change in Interest rate on borrowed or invested money Advantage for one and disadvantage for another Example:Mr. B is concerned about changing interest rate. He has just purchased a bond that is paying him 6% interest. However he knows that if interest rate rise than others will be benefited more on the same bond.

Income Risk
loss of job can hamper the spending pattern of indivisual, borrowing one should start saving today to meet these unforeseen events such as unemployment As well as enhance their skills to get better job in future Example:- Mr C is working as realtor. His income depends on no. and size of house he sells. He is doing very well but concerned about the economy slowing down and so the sale will be less and so his income will reduce.

Personal risk
Indivisual personal situations- spending and buying habbits, health and safety issues.

Example:Mr. D always purchases electronic item from the branded shop and never from local shops as there is safety, guarantee and advantage of right servicing

Liquidity Risk
Convert asset into cash with little loss in value Trade off between liquidity and interest rate on invest. Probability of making withdrawals should be considered while making invest. Indivisual liquidity requirement changes during lifetime as personal situation changes Example:Mr. E has decided to spend her saving between an investment in PPF and money market mutual Fund. He knows that he is going to get higher interest rate in PPF but will not be able to get fund back whenever he wants. On the other hand he take his money out from MF whenever he wants but will get low rate of return.

Objective 4
Determine personal and financial opportunity cost associated with the personal financial decisions

OPPORTUNITY COST: In every decision we have choice to make These choice is to be made between risk of an invest. or return on that invest. we sacrifice something to obtain something else that is more desirable we can forgo current buying to invest fund for future purchase or long term financial security

Opportunity cost can be 2 types

Personal Opportunity Cost: is the time when used for one activity cannot be used for another activity. Time used for studying will not be available for shopping

Financial Opportunity Cost: In making financial decisions Time Value of Money must be considered. Every time you spend money you should consider time value of that money as an opportunity cost. Spending money from saving account means lost interest earnings however is having more priority for you.

Objective 5 Identify strategies for achieving personal financial goal for different life situations
Successful financial planning require: specific financial goal combined with spending, saving, investing and borrowing strategies Based on personal situation and various social and economic factors

Excercise
Life situation Single Age 22 Starting a career No dependents financial data: monthly income $ 2,600 living expenses $ 2,180 Asset $ 8,200 liabilities $ 3, 470 Emergency Fund $ 530

While in college, Pan Jenkins worked part-time and was never concerned about long term financial planning. Rather than creating a budget, she has used her cheque book and savings account ( which usually had a very low balance) to handle her financial needs. After completing college, Pam began her career as a sales representative for clothing manufacturer located in California. After one year, her asset consist of a 1999 automobile, a TV, some electronic equipment and clothing and personal belongs, with total value of about $ 8200

Future Value of Money

Robert has $8000 that he want to invest in 10 years. He knows tat this interest will pay him 6% per year. What is the value of investment at the end of 10 years FV = PV ( 1+ i)n or FV = PV * FVIF = $ 8000 ( 1 + .06 )10 = $ 14, 327

Future value of annuity

Mr. Fed is planning a depositing a amount of $250 into investment account at the end of each of next 12. He knows that this will earn 5% each years. He wants to know how much will he earn after end of 12 years. FV = Annuity ( 1 + i )n 1 i

PV of a single amount
If you want to know how much you need to deposit now to receive a certain amount in future

PV =

FV ( 1 + i)n

PV of a Annuity

PV = Annuity 1- 1 (1+I)n i