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Welcome to the exciting world of personal finance! This lesson will give you a basic overview of personal financial planning. It details the overall processes we go through, discusses some factors which influence our decisions, and offers some strategies to help you realize your goals. More specifically, the chapter will:
Personal financial planning can be defined as the process of managing your money in a way that will help you reach your goals. Doing financial planning is important because it will help you —  Define and reach your financial goals Stay focused on those goals by regularly evaluating how things are going Develop a sense of financial freedom by taking charge of your own affairs Grow, manage and protect your finances Reduce financial worries by having a carefully thought-out plan
Not having enough information — you may have to "guess."
Not having the right or accurate information — you may make a "bad choice."
Not anticipating what could happen — you may "get caught by surprise."
Because good information is imperative in successful financial planning, you should be aware of the variety of sources from where you can locate and obtain financial information. These include:
Newspapers, books, magazines, periodicals
Banks, credit unions, financial service companies
Financial Planners, Brokers, Accountants and CPA's
Money-management and investment web sites, search engines
For example, this course at Webversity!
Microsoft Money™, Quicken™, TurboTax™
Personal finance is just like life — there's no such thing as a "free lunch." Whenever we are called upon to make decisions, there are always pros and cons for and against one choice over another. In personal finance, this mix of pros and cons translates into a concept called opportunity cost; in other words, it asks the question: What are the trade-offs of going with this decision? When making financial decisions, you should identify and carefully consider the opportunity costs involved. This will help you make the right choice, because you would have carefully weighed the pros and cons. Let's look at some examples of opportunity cost: Suppose you see something you like for $10 and decide to buy it.
A few days later, you see the item at another store for $8.75. What is your
opportunity cost? It is the $1.25 that you could have saved had you waited and
shopped around.
Suppose you're job hunting and get two offers. One involves lots of
travel and the other does not. What's your opportunity cost? It's a combination of how much money
you will spend while traveling that you would not have to spend if you did not travel, and how much
"free time" you will have with the job where you travel versus the job where you don't have to travel!
To determine the opportunity cost factor, you must always ask yourself: What's the trade-off?
Assets — what you own (your "valuables")
and your Liabilities — what you owe (loans, etc.. This will be used to calculate your
Net Worth. The simple equation is Assets minus Liabilities equals your
Net Worth.
Income — money coming in
Expenses — money going out
Your marital status and family situation
Your age, job, and desired career path
Major events like marriage, childbirth, divorce, loss of job, war, etc.
Personal values (ideas and behaviors you consider appropriate or correct)
 Dow Jones ("The Dow") NASDAQ (National Over the Counter Market) S&P 500 (Standard and Poors Index)
Value of all goods and services produced in this country. The most important indicator of overall economic strength
Measures how many people are unemployed and looking for work
— the lower, the better!
Tracks how prices are changing, and a good measure of inflation
Tracks spending by consumers —
a good indicator of economic strength and buying habits
The costs of borrowing and investing
— a barometer of when to borrow and/or invest
The difference between exports (what we sell to other countries) and imports (what we buy from other countries)
Number of new homes being constructed
— a good measure of the nation's economic strength
Tracks how much money is available and circulating in the overall economy
— controlled by the Federal Reserve Board ("the Fed")
Step 5: Creating and Implementing Your Financial Plan Now that you've gathered all of the necessary information, set your goals, and identified the best way to reach those goals, you can begin putting together a written action plan. In the world of money and accounting, we call this a financial plan. A financial plan is formalized report that — Summarizes your current financial situation and analyzes your financial needs (from Step 1)
Lists your goals (from Step 2)
Recommends future financial activities to achieve your goals (from Steps 3 & 4)
Just yourself
A financial planner
Money management software
Any combination of these
Achieving your financial objectives requires —
A willingness to learn
Finding and using appropriate information sources
Staying focused on your goals
To develop good financial habits —
Use a well-conceived spending plan to help you live within your means, while permitting you to save and invest for the future
Have good insurance protection to prevent financial disasters
Become informed about tax and investment alternatives.
The fundamental principle of Time Value of Money is simply the notion that money received today isn't worth the same as money received tomorrow. Why? Because of Opportunity Cost. Money you have today can be used immediately! But if you have to wait until tomorrow to use that money, you'll need some form of compensation — interest, for example — to make up for not having the use of your money now. This added compensation helps to ensure that the money you get tomorrow will be worth more than money that you have today! Present Value is the dollar value of money received today, while Future Value is the dollar value of money which you receive tomorrow. It is important to understand that Future Value is always greater than Present Value due to Opportunity Cost. So why should you care? Because it can effect things like: how much you money you'll get from interest
how much it will cost you to borrow money (your payment amounts)
how much money you'll earn from investments
As you just saw from the above discussion of present and future value, making regular deposits ultimately gives you more money down the road. Similarly, different rates of interest give you different multipliers, which directly effects the amount you'll have at the end. Interest is typically calculated using either of two methods: Simple Interest
Compound Interest
First and foremost, you must understand that a "job" and a "career" are not the same! A job is an employment position taken primarily to earn money. It really doesn't matter what your duties are, just that it pays you money. A career is a commitment or dedication to a profession. It usually involves continued training and education; and it generally requires taking a number of jobs along the way. To get on the right path to a career, you need to: Assess and research personal goals, abilities and career fields
Evaluate the employment market to identify current and potential opportunities
Develop your resume and cover letter
Apply for jobs, take interviews, and evaluate your performance
Carefully assess positions you are offered
Plan and implement a program for career development
Many things can influence your choice of careers, but generally speaking, these factors fall into three categories: personal (how your individual attitudes, beliefs, values and abilities influence your decisions); social (the impact of social norms on your decisions); and economic (how economic conditions and trends may impact your decisions). Personal factors affecting career selection include aptitudes and interests inventories. Aptitudes are natural abilities you have or things you're "just plain good at." For example, you might be very mechanical or good at math, a "born leader," or very creative or artistic. An interest inventory is a listing of what you like or would like to do. Such lists can help you decide what you enjoy or help find the "right" job for you. Social influences on career opportunities include: Demographic trends — "people" and behavioral trends
More working parents means higher demand for food service and child care
More leisure time may yield greater interest in personal fitness and recreation
As a population ages, demand for travel, health care services, and retirement facilities increases
Increased demand for further employment training
Geographic trends — local, regional, national
Where jobs are
Salaries you can expect
Costs of living (rent, food, clothing, etc.)
Computer and Information Technology, Health Care, Business Services, Social Services
Sales and Retailing, Hospitality, and Food Services
Management and Human Resources, Education, and Financial Services
Now that you have a basic understanding of the many factors that can influence one's choice of career, some attention should be paid to the process individuals go through to gain employment. It's called the hiring process and it is comprised of five main steps:
A
cover letter's purpose is to introduce you to a prospective
employer and to briefly describe your background and why you're right for that job.
A
resume's purpose is to provide specific details regarding your background.
It expands on your cover letter and showcases your education, work
experience and skills.
An
interview's purpose is to see whether you are the person you appear to
be on paper. In other words, it's the time when a prospective
employer can assess if you "really know your stuff" and are right for that
job because it's generally the one-time you meet face-to-face.
Grab the reader's attention and state why you are writing
Indicate the job for which you are applying, where you found it, and the date you found it
Mention that you are enclosing your resume for consideration and to provide more details about your qualifications and experiences.
Briefly highlight or summarize your background, training/education,
and experience, focusing on those relevant to this job and company
Point the reader to the resume for more indepth details.
Announce your willingness and availability for an interview. Give
at least several options for contacting you — your telephone number, email address
and snail mail address.
You never know when a prospective employer might try to reach you; if you're not
available when they call, they probably won't try again and will just move on to the next
person.
A thank-you is very important! You want to thank the reader to
taking his or her time to read
your cover letter, and for considering
you for the position.
Briefly restate why you feel that you are right for this job and company.
Resumes provide the "details" regarding your education, work experience, and any other skills you possess that would make an employer want to hire you. Unlike cover letters, however, there are various formats for resumes, each having pros and cons.
Personal data section
Name, phone, address, e-mail
Career objectives section — the type of work you really want (optional)
If you want to a very specific type of work and nothing else would
be acceptable to you, then this
section may be appropriate to let an employer know.
However, I generally suggest leaving this
off your resume because employers are pretty
good at matching applicants with positions. There
may even be another position you weren't
aware of that's perfect for you. You can always decide
not to take a job, but it's a good idea to
leave all options open!
Education section
Degrees, certificates, and other training
Work experience section (emphasizes the Chronological)
List only those relevant to the job you want!
Skills / abilities section (emphasizes the Functional)
References section (optional)
Names and contact information for people who can say what a good
employee you'd be. Most resumes don't include this unless an employer asks for it,
because references generally aren't checked until you have the job, or
are close to getting it.
Lets move on to the most crucial stage in the hiring process — the interview. Here are some tips to remember.
Obtain resources such as annual reports or recent articles about
the company; do an Internet search for company and industry
information so you know something about the firm and their product or service.
Observe the company's employees while waiting to be interviewed —
An excellent judge of possible working conditions should you be hired.
Make a list of possible questions you want to ask such as:
Your job duties
Possibility for career advancement
Hours, benefits, and work environment
Take practice interviews with a friend or family member — practice makes perfect!
Arrive about 15 minutes early so you can relax and prepare for the actual interview.
Dress appropriately and behave professionally at all times
Answer questions in a clear, organized and calm manner
Show enthusiasm and interest
Express appreciation with a follow-up letter
Evaluate your interview performance
In this section, we'll discuss some of the ways to search for jobs, obtain information on various jobs and careers, and research potential employers. This is extremely important, because many interviewers will ask what you know about their company, and why you want to work for them rather than someone else. Your options for finding employment include: Working full-time, part-time, contract, or temporary
Volunteering
Internships; or doing campus or school projects and assignments
Library materials
Mass media—TV and radio
The Internet
Campus placement offices—Career Services
Professional associations and business contacts
Help Wanted Ads
Career and job fairs — on and off-campus
Employment agencies
Job creation — a position is literally created for you which didn't exist before
Visiting and calling companies
Telephone and business directories
Internet searches
Talking with alumni in your field
Networking — using contacts (friends, family, etc.) to see if they know of any jobs.
Get Career planning assistance
Identify potential employment opportunities
Post resumes and cover letters online or by e-mail
Conduct Internet and e-mail interviews
Take an online class
Access Career resource centers
When seeking employment or evaluating job offers, there are some financial and legal considerations to take into account. These considerations include: The work environment
Corporate culture, beliefs, and value system
Company policies and procedures
Factors affecting your salary
Your performance
Your actual job responsibilities
Evaluating benefits
Some companies offer Cafeteria-style benefits where you can "pick and choose" your benefits
Other companies offer Flexible spending plans which allow you to set aside
part of your salary to pay for medical or dependent care. These monies
are usually non-taxable but any unused amount
is forfeited.
Comparing different benefit packages
Determine their market value — the cost if you paid for them
yourself.
Determine their future value — how they compare to other savings or
investment options.
Knowing your legal rights, which include
What you'll be paid for overtime, minimum wage, vacation, and sick pay
The right to a safe and healthy work place
Not being sexually harassed or discriminated against
Reaching your long-term career goals takes planning, hard work, and will normally require taking a number of different jobs, each providing you with added experience, training, and responsibility. By following a carefully thought-out plan, your chances of career development are greatly enhanced. Here are some tips that will assist you in reaching those goals:
Strive to learn more and stay current!
Take advantage of additional training that will help you down the road
Choose jobs that will help you get to where you want to be
Choose jobs
that build on each other and expand your skills and abilities
Few, if any, jobs in your field are available
Jobs that you get tend to be rather low-paying
Jobs in your field offer little or no room for career advancement
Here are the written homework tasks for the first week of the course. See below for posting instructions and due dates.
Introduce yourself on the class
discussion board.
State your current occupation and the type of work that you ultimately
would prefer. State whether you regard your present position as a "job" or
a "career" (as defined in this lesson.) If your present employment is
merely a job, describe what steps you have taken in the past twelve months
and what steps you will take in the next twelve months to advance your
career? Also, discuss what you hope you'll be doing ten years from
now. To achieve your desired lifestyle, list some short-term goals you can
accomplish in the next 12-24 months and several major long-term goals which
you will endeavor to accomplish over the next five years.
Visit the Bureau of Labor Statistics at
http://www.bls.gov/eag
and see if you can find the most current economic statistics on the following:
A new trend in employer hiring practices has emerged recently where companies
are offering unpaid "internships" rather than paying jobs to unemployed
workers. Firms are doing this because an estimated eight million people are
looking for work. Many of these job seekers don't want a gap in
their employment history and these internships allow them to
establish continuous employment and perhaps develop new job skills. Also,
workers who accept these jobs are hoping that when the economy
turns around, these jobs will be converted to compensated
positions. Post your thoughts about the following:
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