Chapter01 - Personal Finance Basics and Time Value of Money
1
PERSONAL FINANCE BASICS AND TIME VALUE OF MONEY
CHAPTER OVERVIEW
This chapter provides the foundation for Personal Finance and the study of financial planning. The
chapter starts with a discussion of an overview of the financial planning process. Next, the opportunity
costs, or trade-offs, of decisions are considered in relation to personal and financial resources. This is
followed by coverage of the personal, social, and economic factors that make up the financial planning
environment. Next, the main components of financial planning (obtaining, planning, saving, borrowing,
spending, managing risk, investing, and retirement and estate planning) are discussed. Finally, strategies
for creating and using a financial plan are introduced.
LEARNING OBJECTIVES CHAPTER SUMMARY
After studying this chapter, students will be able to:
Obj. 1 Analyze the process When making major financial decisions, use a variety of
for making personal information sources to implement the personal financial planning
financial decisions. process: (1) determine your current financial situation, (2) develop
financial goals, (3) identify alternative courses of action, (4)
evaluate alternatives, (5) create and implement a financial action
plan, and (6) review and revise the financial plan.
Obj. 2 Develop personal Financial goals should (1) be realistic; (2) be stated in specific,
financial goals. measurable terms; (3) have a time frame; (4) indicate the type of
action to be taken.
Obj. 3 Assess personal and Financial decisions are affected by personal factors (income,
economic factors that household size, health, values, and goals), social factors
influence personal (demographic trends and government actions), and economic
financial planning. factors (prices, interest rates, and employment opportunities).
Obj. 4 Calculate time value of Every decision involves a trade-off; the selection of one alternative
money situations prevents the selection of another. Personal opportunity costs may
associated with include time, effort, and health. Financial opportunity costs are
personal financial based on the time value of money. Future value and present value
decisions. calculations enable you to measure the increased value (or lost
interest) that results from a saving, investing, borrowing, or
purchasing decision.
Obj. 5 Identify strategies for Successful financial planning requires specific goals combined
achieving personal with spending, savings, investing, and borrowing strategies based
financial goals for on your personal situation and various social and economic factors.
different life situation.
1-1
,INTRODUCTORY ACTIVITIES
Ask students to comment on their responses to the “My Life” chapter opening exercise (p. 1).
Point out the learning objectives (p. 1) in an effort to highlight the key points in the chapter.
Ask students to provide examples of social and economic factors that have increased the importance
of personal financial planning today.
Have students answer these three questions as individuals or in small discussion groups:
1. What do you currently know about personal financial planning?
2. What questions do you need answers for about personal finance?
3. How and where might you obtain answers to the questions you have about personal finance?
CHAPTER 1 OUTLINE
I. The Financial Planning Process
A. Step 1: Determine Your Current Financial Situation
B. Step 2: Develop Your Financial Goals
C. Step 3: Identify Alternative Courses of Action
D. Step 4: Evaluate Your Alternatives
1. Consequences of Choices
2. Evaluating of Risk
3. Financial Planning Information Sources
E. Step 5: Create and Implement a Financial Action Plan
F. Step 6: Review and Revise Your Plan
II. Developing Personal Financial Goals
A. Types of Financial Goals
1. Timing of Goals
2. Goals for Different Financial Needs
B. Goal-Setting Guidelines
III. Influences on Personal Financial Planning
A. Life Situation and Personal Values
B. Economic Factors
1. Global Influences
2. Economic Conditions
IV. Opportunity Costs and the Time Value of Money
A. Personal Opportunity Costs
1-2
,Chapter01 - Personal Finance Basics and Time Value of Money
B. Financial Opportunity Costs
1. Interest Calculations
2. Future Value of a Single Amount
3. Future Value of a Series of Deposits
4. Present Value of a Single Amount
5. Present Value of a Series of Deposits
V. Achieving Financial Goals
A. Components of Personal Financial Planning
1. Obtaining
2. Planning
3. Saving
4. Borrowing
5. Spending
6. Managing Risk
7. Investing
8. Retirement and Estate Planning
B. Developing a Flexible Financial Plan
C. Implementing Your Financial Plan
D. Studying Personal Finance
CHAPTER 1 APPENDIX: The Time Value of Money: Future and Present Value Computations
I. Interest Rate Basics
II. Future Value of a Single Amount
III. Future Value of a Series of Equal Amounts (an Annuity)
IV. Present Value of a Single Amount
V. Present Value of a Series of Equal Amounts (an Annuity)
VI. Using Present Value to Determine Loan Payments
1-3
, CHAPTER 1 LECTURE OUTLINE Instructional Suggestions
I. THE FINANCIAL PLANNING PROCESS (p. 2) Use PPT slides 1-2, 1-3, 1-4, 1-
5, 1-6, and 1-7.
Personal financial planning is the process of
Text Highlight: Use the visual
managing your money to achieve personal economic display on p. 2 to provide an
satisfaction. overview of the spending,
saving, and sharing elements of
Step 1. Determine Your Current Financial Situation personal financial planning.
(p. 3)
Discussion Question: Why do
Determine your current financial situation with regard some decisions require more
to income, savings, living expenses, and debts. time and effort than others?
Text Highlight: Discuss the in-
Step 2. Develop Your Financial Goals (p. 4) text, boxed examples for each
Analyze your financial values and goals to set a step of the Financial Planning
Process. Discussion questions
course for action. and personal applications are
included in each example.
Step 3. Identify Alternative Courses of Action (p. 4) Class Exercise: Select a
situation (such as obtaining
Various alternatives associated with financial decision funds to start a business or
making are usually based on deciding to: getting work-related experience
without a job) and have students
Continue the same course of action; for example, create a list of alternatives for
you may determine that the amount saved each this problem.
month is still appropriate.
Use PPT slides 1-8 and 1-9.
Expand the current situation; you may choose to
save a greater amount each month.
Change the current situation; you may decide to
buy U.S. savings bonds instead of using a regular
savings account.
Take a new course of action; you use monthly
saving budget to pay off credit card debts.
Creativity in decision making is vital to making
effective choices. The more alternatives that are
considered, the more likely a person or household will
make wise financial choices.
1-4
1
PERSONAL FINANCE BASICS AND TIME VALUE OF MONEY
CHAPTER OVERVIEW
This chapter provides the foundation for Personal Finance and the study of financial planning. The
chapter starts with a discussion of an overview of the financial planning process. Next, the opportunity
costs, or trade-offs, of decisions are considered in relation to personal and financial resources. This is
followed by coverage of the personal, social, and economic factors that make up the financial planning
environment. Next, the main components of financial planning (obtaining, planning, saving, borrowing,
spending, managing risk, investing, and retirement and estate planning) are discussed. Finally, strategies
for creating and using a financial plan are introduced.
LEARNING OBJECTIVES CHAPTER SUMMARY
After studying this chapter, students will be able to:
Obj. 1 Analyze the process When making major financial decisions, use a variety of
for making personal information sources to implement the personal financial planning
financial decisions. process: (1) determine your current financial situation, (2) develop
financial goals, (3) identify alternative courses of action, (4)
evaluate alternatives, (5) create and implement a financial action
plan, and (6) review and revise the financial plan.
Obj. 2 Develop personal Financial goals should (1) be realistic; (2) be stated in specific,
financial goals. measurable terms; (3) have a time frame; (4) indicate the type of
action to be taken.
Obj. 3 Assess personal and Financial decisions are affected by personal factors (income,
economic factors that household size, health, values, and goals), social factors
influence personal (demographic trends and government actions), and economic
financial planning. factors (prices, interest rates, and employment opportunities).
Obj. 4 Calculate time value of Every decision involves a trade-off; the selection of one alternative
money situations prevents the selection of another. Personal opportunity costs may
associated with include time, effort, and health. Financial opportunity costs are
personal financial based on the time value of money. Future value and present value
decisions. calculations enable you to measure the increased value (or lost
interest) that results from a saving, investing, borrowing, or
purchasing decision.
Obj. 5 Identify strategies for Successful financial planning requires specific goals combined
achieving personal with spending, savings, investing, and borrowing strategies based
financial goals for on your personal situation and various social and economic factors.
different life situation.
1-1
,INTRODUCTORY ACTIVITIES
Ask students to comment on their responses to the “My Life” chapter opening exercise (p. 1).
Point out the learning objectives (p. 1) in an effort to highlight the key points in the chapter.
Ask students to provide examples of social and economic factors that have increased the importance
of personal financial planning today.
Have students answer these three questions as individuals or in small discussion groups:
1. What do you currently know about personal financial planning?
2. What questions do you need answers for about personal finance?
3. How and where might you obtain answers to the questions you have about personal finance?
CHAPTER 1 OUTLINE
I. The Financial Planning Process
A. Step 1: Determine Your Current Financial Situation
B. Step 2: Develop Your Financial Goals
C. Step 3: Identify Alternative Courses of Action
D. Step 4: Evaluate Your Alternatives
1. Consequences of Choices
2. Evaluating of Risk
3. Financial Planning Information Sources
E. Step 5: Create and Implement a Financial Action Plan
F. Step 6: Review and Revise Your Plan
II. Developing Personal Financial Goals
A. Types of Financial Goals
1. Timing of Goals
2. Goals for Different Financial Needs
B. Goal-Setting Guidelines
III. Influences on Personal Financial Planning
A. Life Situation and Personal Values
B. Economic Factors
1. Global Influences
2. Economic Conditions
IV. Opportunity Costs and the Time Value of Money
A. Personal Opportunity Costs
1-2
,Chapter01 - Personal Finance Basics and Time Value of Money
B. Financial Opportunity Costs
1. Interest Calculations
2. Future Value of a Single Amount
3. Future Value of a Series of Deposits
4. Present Value of a Single Amount
5. Present Value of a Series of Deposits
V. Achieving Financial Goals
A. Components of Personal Financial Planning
1. Obtaining
2. Planning
3. Saving
4. Borrowing
5. Spending
6. Managing Risk
7. Investing
8. Retirement and Estate Planning
B. Developing a Flexible Financial Plan
C. Implementing Your Financial Plan
D. Studying Personal Finance
CHAPTER 1 APPENDIX: The Time Value of Money: Future and Present Value Computations
I. Interest Rate Basics
II. Future Value of a Single Amount
III. Future Value of a Series of Equal Amounts (an Annuity)
IV. Present Value of a Single Amount
V. Present Value of a Series of Equal Amounts (an Annuity)
VI. Using Present Value to Determine Loan Payments
1-3
, CHAPTER 1 LECTURE OUTLINE Instructional Suggestions
I. THE FINANCIAL PLANNING PROCESS (p. 2) Use PPT slides 1-2, 1-3, 1-4, 1-
5, 1-6, and 1-7.
Personal financial planning is the process of
Text Highlight: Use the visual
managing your money to achieve personal economic display on p. 2 to provide an
satisfaction. overview of the spending,
saving, and sharing elements of
Step 1. Determine Your Current Financial Situation personal financial planning.
(p. 3)
Discussion Question: Why do
Determine your current financial situation with regard some decisions require more
to income, savings, living expenses, and debts. time and effort than others?
Text Highlight: Discuss the in-
Step 2. Develop Your Financial Goals (p. 4) text, boxed examples for each
Analyze your financial values and goals to set a step of the Financial Planning
Process. Discussion questions
course for action. and personal applications are
included in each example.
Step 3. Identify Alternative Courses of Action (p. 4) Class Exercise: Select a
situation (such as obtaining
Various alternatives associated with financial decision funds to start a business or
making are usually based on deciding to: getting work-related experience
without a job) and have students
Continue the same course of action; for example, create a list of alternatives for
you may determine that the amount saved each this problem.
month is still appropriate.
Use PPT slides 1-8 and 1-9.
Expand the current situation; you may choose to
save a greater amount each month.
Change the current situation; you may decide to
buy U.S. savings bonds instead of using a regular
savings account.
Take a new course of action; you use monthly
saving budget to pay off credit card debts.
Creativity in decision making is vital to making
effective choices. The more alternatives that are
considered, the more likely a person or household will
make wise financial choices.
1-4
