MCS 2100 - Reading Notes
Chapter 1 - Personal Financial Planning: An Introduction
● The Financial Planning Process:
○ Personal Financial Planning - the process of managing your money to achieve personal
economic satisfaction
○ Opportunity Cost - what a person gives up by making a choice
○ Time Value of Money - increases in an amount of money as a result of interest earned
○ Six-step financial planning process:
■ 1. Develop financial goals
■ 2. Determine your current financial situation
● Determine current financial situation regarding income, savings, living
expenses, and debts
■ 3. Identify alternative courses of action
● Alternatives course of action usually fall into these categories:
○ Continue the same course of action, expand the current situation,
change the current situation, or take a new course of action
■ 4. Evaluate alternatives
● Personal opportunity costs include effort made and the effects on your
health
● Financial opportunity costs include interest, liquidity, and safety of
investments
■ 5. Create and implement a financial action plan
■ 6. Re-evaluate and revise the plan
○ Types of Risks:
■ Economic and Product Risk:
● Interest Rate Risk - changing interest rates affect your costs when you
borrow, and your benefits when you invest
● Inflation Risk - rising prices cause lost buying power
● Liquidity Risk - some investments may be more difficult to convert to
cash or to sell without significant loss in value
● Product Risk - products may be flawed or services may not meet your
expectations. Retailers may not honour their obligations.
■ Personal Risk:
● Risk of Death - premature death may cause financial hardship to family
members left behind
● Risk of Income Loss - your income could stop as a result of job loss or
because you fall ill or are hurt in an accident
● Health Risk - poor health may increase your medical costs. At the same
time, it may reduce your working capacity or life expectancy.
● Asset and Liability Risk - your assets may be stolen or damaged. Others
may sue you for negligence or for damages caused by your actions.
● Developing Personal Financial Goals:
○ Factors that Influence Your Financial Goals:
, ■ Timing of goals
● Short-term goals are for 1 year or less
● Intermediate goals are for 2-5 years
● Long-term goals are for 5+ years
■ Goals for different financial needs
● Consumable-product goals - usually occur on a periodic basis and
involve items that are used up quickly
● Durable-product goals - usually involve infrequently purchased,
expensive items (tanginble items)
● Intangible-purchase goals - may relate to personal relationships, health,
education, and leisure
■ Life situation
● Life Cycle - the idea that the average person goes through four basic
stages in personal financial management
● The Influence of Economic Factors on Personal Financial Planning:
○ Economic Conditions:
■ Factors that affect personal finances include:
● Consumer prices - the value of the dollar; changes in inflation
● Consumer spending - the demand for goods and services by individuals
and households
● Interest rates - the cost of money; the cost of credit when you borrow; the
return on your money when you save or invest
● Money supply - the dollars available for spending in our economy
● Unemployment rate - the number of people without employment who are
willing and able to work
● Housing starts - the number of new homes being built
● Gross domestic product (GDP) - the total value of goods and services
produced within a country’s borders, including items produced with
foreign resources
● Trade balance - the difference between a country’s exports and imports
● S&P/TSX composite index and other stock market indexes - the relative
value of stocks represented by the index
■ Main cause of inflation is an increase in demand without a comparable increase
in supply
● Opportunity Costs and the Time Value of Money:
○ Interest Calculations:
■ 3 amounts used to calculate the time value of money for savings in the form of
interest earned:
● The amount of the savings (AKA the principal)
● The annual interest rate
● The length of time the money is on deposit
■ Simple Interest - interest computed on the principal, excluding previously
earned interest
, ■ Amount in savings (P) x Annual Interest Rate (R) x Time Period (T) = Interest
(I)
■ Compounding - a process that calculates interest based on previously earned
interest
○ Future Value of a Single Amount:
■ Future Value - the amount to which current savings will increased based on a
certain interest rate and a certain time period; typically involves compounding
■ To use a future value table, multiply the amount deposited by the factor for the
desired interest rate and time period
○ Future Value of a Series of Deposits:
■ Annuity - a series of equal amounts (deposits or withdrawals) made at regular
time intervals
○ Present Value of a Single Amount:
■ Present Value - the current value for a future amount based on a certain interest
rate and a certain time period; also referred to as discounting
● Achieving Financial Goals:
○ Components of Personal Financial Planning:
■ Liquidity - (1) The ability to readily convert financial resources into cash
without a loss in value; (2) The ability to buy or sell an investment quickly
without substantially affecting the investment’s value
Chapter 2 - Money Management Strategy: Financial Statements and Budgeting
● Planning for Successful Money Management:
○ Components of Money Management:
■ 1) Storing, and maintaining personal financial records and documents
■ 2) Creating personal financial statements (balance sheets and cash flow
statements of income and outflows)
■ 3) Creating and implementing a plan for spending and saving (budgeting)
● Personal Financial Statements for Measuring Financial Sustainability:
○ The Personal Balance Sheet - a financial statement that reports what an individual or a
family owns and owes; also called a net worth statement
■ Items of Value - Amount of Debt = Net Worth
■ Assets - cash and tangible property and intangible items with a monetary value
■ Liabilities - amounts owed to others but do not include items not yet due
■ Insolvency - the inability to pay debts when they are due because liabilities far
exceed the value of assets
○ The Cash Flow Statement - a financial statement that summarizes cash receipts and
payments for a given period
■ Total Cash Received During Time Period - Cash Outflows During Time Period
= Cash Surplus or Deficit
● Budgeting: A Money Management Skill:
○ Starting the Budgeting Process:
Chapter 1 - Personal Financial Planning: An Introduction
● The Financial Planning Process:
○ Personal Financial Planning - the process of managing your money to achieve personal
economic satisfaction
○ Opportunity Cost - what a person gives up by making a choice
○ Time Value of Money - increases in an amount of money as a result of interest earned
○ Six-step financial planning process:
■ 1. Develop financial goals
■ 2. Determine your current financial situation
● Determine current financial situation regarding income, savings, living
expenses, and debts
■ 3. Identify alternative courses of action
● Alternatives course of action usually fall into these categories:
○ Continue the same course of action, expand the current situation,
change the current situation, or take a new course of action
■ 4. Evaluate alternatives
● Personal opportunity costs include effort made and the effects on your
health
● Financial opportunity costs include interest, liquidity, and safety of
investments
■ 5. Create and implement a financial action plan
■ 6. Re-evaluate and revise the plan
○ Types of Risks:
■ Economic and Product Risk:
● Interest Rate Risk - changing interest rates affect your costs when you
borrow, and your benefits when you invest
● Inflation Risk - rising prices cause lost buying power
● Liquidity Risk - some investments may be more difficult to convert to
cash or to sell without significant loss in value
● Product Risk - products may be flawed or services may not meet your
expectations. Retailers may not honour their obligations.
■ Personal Risk:
● Risk of Death - premature death may cause financial hardship to family
members left behind
● Risk of Income Loss - your income could stop as a result of job loss or
because you fall ill or are hurt in an accident
● Health Risk - poor health may increase your medical costs. At the same
time, it may reduce your working capacity or life expectancy.
● Asset and Liability Risk - your assets may be stolen or damaged. Others
may sue you for negligence or for damages caused by your actions.
● Developing Personal Financial Goals:
○ Factors that Influence Your Financial Goals:
, ■ Timing of goals
● Short-term goals are for 1 year or less
● Intermediate goals are for 2-5 years
● Long-term goals are for 5+ years
■ Goals for different financial needs
● Consumable-product goals - usually occur on a periodic basis and
involve items that are used up quickly
● Durable-product goals - usually involve infrequently purchased,
expensive items (tanginble items)
● Intangible-purchase goals - may relate to personal relationships, health,
education, and leisure
■ Life situation
● Life Cycle - the idea that the average person goes through four basic
stages in personal financial management
● The Influence of Economic Factors on Personal Financial Planning:
○ Economic Conditions:
■ Factors that affect personal finances include:
● Consumer prices - the value of the dollar; changes in inflation
● Consumer spending - the demand for goods and services by individuals
and households
● Interest rates - the cost of money; the cost of credit when you borrow; the
return on your money when you save or invest
● Money supply - the dollars available for spending in our economy
● Unemployment rate - the number of people without employment who are
willing and able to work
● Housing starts - the number of new homes being built
● Gross domestic product (GDP) - the total value of goods and services
produced within a country’s borders, including items produced with
foreign resources
● Trade balance - the difference between a country’s exports and imports
● S&P/TSX composite index and other stock market indexes - the relative
value of stocks represented by the index
■ Main cause of inflation is an increase in demand without a comparable increase
in supply
● Opportunity Costs and the Time Value of Money:
○ Interest Calculations:
■ 3 amounts used to calculate the time value of money for savings in the form of
interest earned:
● The amount of the savings (AKA the principal)
● The annual interest rate
● The length of time the money is on deposit
■ Simple Interest - interest computed on the principal, excluding previously
earned interest
, ■ Amount in savings (P) x Annual Interest Rate (R) x Time Period (T) = Interest
(I)
■ Compounding - a process that calculates interest based on previously earned
interest
○ Future Value of a Single Amount:
■ Future Value - the amount to which current savings will increased based on a
certain interest rate and a certain time period; typically involves compounding
■ To use a future value table, multiply the amount deposited by the factor for the
desired interest rate and time period
○ Future Value of a Series of Deposits:
■ Annuity - a series of equal amounts (deposits or withdrawals) made at regular
time intervals
○ Present Value of a Single Amount:
■ Present Value - the current value for a future amount based on a certain interest
rate and a certain time period; also referred to as discounting
● Achieving Financial Goals:
○ Components of Personal Financial Planning:
■ Liquidity - (1) The ability to readily convert financial resources into cash
without a loss in value; (2) The ability to buy or sell an investment quickly
without substantially affecting the investment’s value
Chapter 2 - Money Management Strategy: Financial Statements and Budgeting
● Planning for Successful Money Management:
○ Components of Money Management:
■ 1) Storing, and maintaining personal financial records and documents
■ 2) Creating personal financial statements (balance sheets and cash flow
statements of income and outflows)
■ 3) Creating and implementing a plan for spending and saving (budgeting)
● Personal Financial Statements for Measuring Financial Sustainability:
○ The Personal Balance Sheet - a financial statement that reports what an individual or a
family owns and owes; also called a net worth statement
■ Items of Value - Amount of Debt = Net Worth
■ Assets - cash and tangible property and intangible items with a monetary value
■ Liabilities - amounts owed to others but do not include items not yet due
■ Insolvency - the inability to pay debts when they are due because liabilities far
exceed the value of assets
○ The Cash Flow Statement - a financial statement that summarizes cash receipts and
payments for a given period
■ Total Cash Received During Time Period - Cash Outflows During Time Period
= Cash Surplus or Deficit
● Budgeting: A Money Management Skill:
○ Starting the Budgeting Process:
