Lecture 1 - Ch.1 Overview of a Financial Plan

Question 1

Define personal finance

Answer 1

the process of planning your
spending, financing, and investing activities, while
taking into account uncontrollable events such as
death or disability, in order to optimize your financial
situation over time.

Question 2

Define

Answer 2

a plan that specifies your
financial goals, describes the spending, financing, and
investing activities that are intended to achieve those
goals and the risk management strategies that are
required to protect against uncontrollable events such
as death or disability.

Question 3

Benefits of Understanding Personal
Finance
– Opportunity cost: what you give up as a result of a
decision.

Answer 3

Make Informed Financial Decisions
– Know there is an opportunity cost to your decisions.
• Judge the Advice of Financial Planners

Question 4

Key Components of a Financial Plan

Answer 4

1. Budgeting and tax planning
2. Managing your financial resources
3. Protecting your assets and income (insurance)
4. Investing your money
5. Planning your retirement and estate

Question 5

1.Budget Planning

Answer 5

Budget planning: The process of forecasting future
income, expenses, and savings goals. Evaluating your current financial position

Question 6

1.Budget Planning
Assets:
Liabilities:
Net worth:

Answer 6

– Assets: what you own
– Liabilities: what you owe; your debt
– Net worth: the value of what you own minus the value
of what you owe

Question 7

2. Managing Your Financial Resources
   - Liquidity
   -Money management:

Answer 7

• Liquidity: access to ready cash, including savings
and credit, to cover short-term or unexpected
expenses; also, the ease with which an investor can
convert an investment into cash without a loss of
capital.
• Money management: decisions regarding how much
money to retain in liquid form and how to allocate the
funds among short-term investment instruments

Question 8

2. Managing Your Financial Resources
   • Emergency fund
   • Credit management:

Answer 8

Emergency fund: a portion of savings that you have
allocated to short-term needs such as unexpected
expenses in order to maintain adequate liquidity.
• Credit management: decisions regarding how much
credit to obtain to support your spending and which
sources of credit to use.

Question 9

2. Managing Your Financial Resources
   - Factors to consider when Managing loans

Answer 9

• Managing loans
– How much can you afford to borrow?
– Determining maturity of the loan
– Selecting a loan with a competitive interest rate

Question 10

3. Protecting Your Assets and Income
   - Risk
   - Risk Management
   - Insurance planning

Answer 10

• Risk: exposure to events (or perils) that can cause a
financial loss.
• Risk management: decisions about whether and how
to protect against risk.
• Insurance planning: determining the types and
amount of insurance needed to protect your assets
and/or income.

Question 11

4. Investing Your Money
   • Investment risk
   • Risk tolerance

Answer 11

• Any savings you have beyond what you need to
maintain liquidity should be invested to earn a return.
– Stocks, bonds, mutual funds, real estate
• Investment risk: uncertainty surrounding the
potential return on an investment and its future
potential value.
• Risk tolerance: a person’s ability to accept risk,
usually defined as a potential loss of return and/or
loss of capital.

Question 12

5. Planning Your Retirement and Estate
   - Retirement planning
   - Estate planning

Answer 12

Retirement planning: determining how much money
you should set aside each year for retirement and how
you should invest those funds.
• Estate planning: determining how your wealth will be
distributed before and/or after your death.

Question 13

How the Components of Financial
Planning Relate to Your Cash Flows

Answer 13

• Income is cash that you receive from your job or other
sources (scholarship, grant, etc.).
• You spend some cash on products and services.
• Budgeting focuses on the relationship between
income and expenses.
• Financial management focuses on depositing excess
cash to establish an emergency fund, establishing
your credit record and developing your investment
portfolio. Ultimately it also establishes the base for
your retirement funds and final estate

Question 14

Steps in Developing Your Financial Plan

Answer 14

1. Establish your financial goals
2. Consider your current financial position
3. Identify and evaluate alternative plans
4. Select and implement the best plan
5. Evaluate your financial plan
6. Revise your financial plan