Focus on Personal Finance, Ch. 1
- 1-The eight components of personal financial planning are obtaining, planning, saving, borrowing, spending, managing risk, investing, and retirement and estate planning. The obtaining component relates to acquiring resources through employment and investments. The planning component involves budgeting while considering future events that may impact an individual’s financial position. The saving component creates a financial safety net for the individual that allows for large expenses that could be either planned (tuition) or unplanned (hospital bills). The borrowing component allows for financial smoothing. In situations when the individual does not have liquid cash available for current expenses, they can borrow funds and repay the lender in the future when they have cash available. The spending component is the use of the acquired and saved resources. The managing risk component involves the consideration of many different variables in order to mitigate risk exposure in a way that appropriately meets risk appetite. Each individual has a different risk appetite based on variables such as their age, income, health, etc. The investing component relates to allocating resources in a way that allows them to grow and produce return. Retirement and estate planning involves making decisions to secure a financially stable life after retirement.
I believe the most important component is risk management. Every individual must consider their risk appetite. If the individual is young with very few expenses, it would make sense for them to make investments that have a relatively higher risk exposure because they have a long investment horizon and can recover losses in the long run. However if an individual is nearing retirement and has many expenses, they cannot afford to take on excess risk and would probably prefer to plan for retirement and save. Each individuals risk appetite will affect how the approach the other components of financial planning.
Focus on Personal Finance, Ch. 2
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- 2-Budgeting and financial planning can make or break a relationship. Everyone hears about people that are fighting over money all the time, this is simply because the couple doesn’t sit down and discuss their financial issues and talk about ways to fix it. When people can come together and put a budget together that can be agreed upon and have legitimate financial plans, this can release tons of stress in a relationship. There are all kinds of different people and the ways in which people deal with money are also very different, so coming up with a good financial plan and a good budget will help a relationship stand on a more solid foundation financially. This type of planning will also give both parties something to hold them accountable for if they stray off path.
Focus on Personal Finance, Ch. 11
- 3-Once we establish our comfortable financial plan, we can maximize our financial assets through investing. Many start by investing in a retirement fund once they begin their careers, while others start investing dependent on their goals and knowledge. Investment goals can mean different things, in the reading it provided monetary examples like owning a vacation home, or even being able to purchase your first home. The goals should be broken down into short term, intermediate, and long-term; allowing there to be a checkpoint to make sure the investment is on track for the overall goal of owning the vacation home or paying of student loans. It is important to assess the risk tolerance and the amount of money to begin investing that will not affect the current financial plan. What is the point in investing if you are unable to pay off credit card debt and pay your bills? Also, the money invested, if lost, is that going to put you into a financial hardship? Being patient is important. The return may not be available tomorrow or even next year, so understanding the time allowed for the investment to grow is comfortable.
There are so many types of investments that are available, but only a few may fit the needs of the investor. Continually learning and checking in on investments will provide the necessary information to make decisions for high returns.
Economic and Financial Stability
4-The economy is always changing, and since there was a recession not that long ago it makes me feel cautious when it comes to finances. I think it is important to save in general, but now it is even more important with the economy still low and trying to rise to a good level. When the economy changes so do jobs and markets, these will affect your income and your cash flow. For instance if you buy a house, then the economy crashes, you are left paying for a house that is now expensive because the housing market is low and your job may have fallen through due to the changes too. This put a lot of people in debt; I think it would be wise to make sure you devise a plan for big purchases such as a home. Take a look at your finances and make back up plans based on not only the economy changing but other risks like losing a job or if your car is old, needing to purchase a new one soon.
Setting Financial Goals
- 5-The video setting financial goals was very informative; setting financial goals is very important and will make give you a game plan and a visual on how to achieve the goal. Financial goals can be set up into three stages short term, medium term and long term. The short time goal is something that can be accomplished within a few months. Medium goals can take up to three months to three years, while long term goals can go way past three years. Writing your goals down on paper give you a visual which allow you to see the process that take place trying to attain those goals. This is something I would definitely utilize, because it would help me for the now and the future.
Time Value of Money
- 6-Time value of money is one of the most basic fundamentals in all of finance. The underlying principle is that a dollar in your hand today is worth more than a dollar you will receive in the future because a dollar in hand today can be invested to turn into more money in the future. Additionally, there is always a risk that a dollar that you are supposed to receive in the future won’t actually be paid to you. The underlying principles of time value of money are used in finance to value investments like stocks and bonds.
Introduction to Present Value
7-Present value is important to understand to be able to measure the compound interest and also the future value. If someone explained they would give you a set amount in a year, and if you invested a set amount today it could be a lower amount in a year than what was promised in that set amount to be given in the same amount of time. If you went throught he calculations of PV it may show that the present value of the set amount given in a year is more than the present value of the amount to be invested. When the present value is understood, it holds as base to understand the value that the investment would make in a set of years to come.
Present Value 2
- 8-Present Value is understandable once I paused and actually took time to digest the meaning. The Present Value formula has a broad range of uses and may be applied to various areas of finance including corporate finance, banking finance, and investment finance. Apart from the various areas of finance that present value analysis is used, the formula is also used as a component of other financial formulas. The way to calculate the present value of the ongoing payment depends on whether it’s a part of a different set of ongoing payments.