FP 1
Reasons for money problems - answer Two main factors
1. Poor planning and weak money management habits in areas such as spending and
the use of credit.
2. The other factor is extensive advertising, selling efforts, and product availability that
encourage overbuying.
Must have clear financial goals.
Types of financial goals - answer Short-term: achieved within the next year or so, such
as saving for a vacation or paying off small debts.
Intermediate: have a time frame of two to five years
Long-term: involve financial plans that are more than five years off, such as retirement,
money for children's college education, or the purchase of a vacation home
Consumable-product goals: period basis and involve food, clothing, entertainment
Durable-product goals: appliances, cars, ect
Intangible-purchase goals: personal relationships, health, education
Goal-setting - answerYour financial goals are the basis for planning, implementing, and
measuring the progress of your spending, saving, and investing activities.
SMART approach
S-specific
M-measurable
A-action-oriented
R-realistic
T-time based
1. Realistic goals
2. State goals in measurable terms
3. Determine time frame
4. Actions to be taken
Opportunity cost - answerWhat a person gives up by making a choice.
, Trade-off
Personal opportunity cost involves time that when used for one activity cannot be used
for other activities. Time for Studying, working, shopping, will not be available for other
uses.
Poor eating habits, lack of sleep, avoiding exercise can result in illness, time away from
school or work, increased health care costs, and reduced financial security. Like
financial resources, your personal resources (time, energy, health, abilities, knowledge)
require planning and wise management.
Time value of money - answerIncrease in an amount of money as a result of interest
earned
Simple interest - answerAmount of savings (principal)
Annual interest rate
Length of time money is on deposit
Principal x Rate x Time = Interest
Five methods for calculating time value of money - answer1. Formula calculation. With
this conventional method, math notations are used for computing future value and
present value.
2. Time value of money tables. Traditionally, before calculators and computers, future
value and present value tables were used (see the Chapter 1 Appendix) to provide for
easier computations.
3. Financial calculator. A variety of calculators are programmed with financial functions.
Both future value and present value calculations are performed using appropriate
keystrokes.
4. Spreadsheet software. Excel and other spreadsheet programs have built-in formulas
for financial computations, including future value and present value.
5. Websites and apps. Many time value of money calculators are available online and
through mobile devices. These programs may be used to calculate the future value of
savings as well as loan payment amounts.
Future value - answeris the amount to which current savings will grow based on a
certain interest rate and a certain time period.
Ex. $100 deposited in 6% account for 1 year
FV = $100 + ($100 x 0.06 x 1 year) = $106
Reasons for money problems - answer Two main factors
1. Poor planning and weak money management habits in areas such as spending and
the use of credit.
2. The other factor is extensive advertising, selling efforts, and product availability that
encourage overbuying.
Must have clear financial goals.
Types of financial goals - answer Short-term: achieved within the next year or so, such
as saving for a vacation or paying off small debts.
Intermediate: have a time frame of two to five years
Long-term: involve financial plans that are more than five years off, such as retirement,
money for children's college education, or the purchase of a vacation home
Consumable-product goals: period basis and involve food, clothing, entertainment
Durable-product goals: appliances, cars, ect
Intangible-purchase goals: personal relationships, health, education
Goal-setting - answerYour financial goals are the basis for planning, implementing, and
measuring the progress of your spending, saving, and investing activities.
SMART approach
S-specific
M-measurable
A-action-oriented
R-realistic
T-time based
1. Realistic goals
2. State goals in measurable terms
3. Determine time frame
4. Actions to be taken
Opportunity cost - answerWhat a person gives up by making a choice.
, Trade-off
Personal opportunity cost involves time that when used for one activity cannot be used
for other activities. Time for Studying, working, shopping, will not be available for other
uses.
Poor eating habits, lack of sleep, avoiding exercise can result in illness, time away from
school or work, increased health care costs, and reduced financial security. Like
financial resources, your personal resources (time, energy, health, abilities, knowledge)
require planning and wise management.
Time value of money - answerIncrease in an amount of money as a result of interest
earned
Simple interest - answerAmount of savings (principal)
Annual interest rate
Length of time money is on deposit
Principal x Rate x Time = Interest
Five methods for calculating time value of money - answer1. Formula calculation. With
this conventional method, math notations are used for computing future value and
present value.
2. Time value of money tables. Traditionally, before calculators and computers, future
value and present value tables were used (see the Chapter 1 Appendix) to provide for
easier computations.
3. Financial calculator. A variety of calculators are programmed with financial functions.
Both future value and present value calculations are performed using appropriate
keystrokes.
4. Spreadsheet software. Excel and other spreadsheet programs have built-in formulas
for financial computations, including future value and present value.
5. Websites and apps. Many time value of money calculators are available online and
through mobile devices. These programs may be used to calculate the future value of
savings as well as loan payment amounts.
Future value - answeris the amount to which current savings will grow based on a
certain interest rate and a certain time period.
Ex. $100 deposited in 6% account for 1 year
FV = $100 + ($100 x 0.06 x 1 year) = $106
