Wealth Management Topic 2:Setting Financial Goals

1
Wealth ManagementTopic 2Setting Financial Goals

• Mrs. Tobe

2
Topic 2.01 Explain forms of financial exchange

• Cash ready money money on hand money in the
  form of bills or coins.
• Credit the ability to buy something or to
  borrow money with the promise to pay for it
  later agreement based largely on trust under
  which goods, services, or money is exchanged
  against a promise to pay later. It has the
  effect of decreasing an asset or expense account,
  or of increasing a capital, liability, or revenue
  account. For example, you open a line of credit
  with the Union Bank and get a credit card to use
  for purchases. You pay monthly for purchases
  made throughout the billing period.

3
Topic 2.01 Explain forms of financial exchange

• Debit it has the effect of decreasing a
  capital, liability, or revenue account, or of
  increasing an asset or expense account.
• EFT electronic funds transfer as defined in
  the Electronic Fund Transfer Act (Title XX of the
  Financial Institutions Regulatory and Interest
  Rate Control Act of 1978), any transfer of funds,
  other than a transaction originated by a paper
  instrument, that is initiated through an
  electronic terminal, telephone, or computer or
  magnetic tape and that orders or authorizes a
  financial institution to debit or credit an
  account. An example would be an ATM (Automatic
  Teller Machine) transaction.

4
Topic 2.01 Explain forms of financial exchange

• Checks
• A check typically is a paper document signed by
  you, making it a negotiable instrument that
  authorizes a withdrawal from your checking
  account. Americans are using fewer and fewer
  checks to pay for purchases and bills. In
  addition, recent check regulations (Check 21)
  allow merchants and financial institutions to
  process checks as electronic transfers speeding
  up the transfer of funds and eliminating the
  paper check in mid process. If you authorize a
  direct withdrawal from your checking account over
  the phone or on an Internet web site, you are
  allowing the merchant or vendor to create a form
  of check known as a demand draft that doesn't
  require your signature.
• Benefits
• Paper trail.
• Some security issues.
• Comfort.
• Cautions
• Security issues.
• Postage costs.
• Possibility of overdrawing your account.

5
Topic 2.01 Explain forms of financial exchange

• Credit Cards
• Unlike debit cards which provide access to your
  own money, credit cards access loans from the
  card issuers. When you use a credit card to make
  a purchase, the merchant or service provider is
  paid for your purchase by the card issuer, then
  you pay back the card issuer when you pay your
  monthly statement. If you don't pay off your
  entire balance each month, you'll pay interest on
  the unpaid balance. If you pay late, you will
  incur late fees.
• Benefits
• Convenience.
• Flexibility.
• Emergency access to cash.
• Good consumer protection.
• Record keeping.
• Cautions
• Self-discipline is required.
• Interest and fees.
• Risk of card theft or compromise of account
  information.

6
Topic 2.01 Explain forms of financial exchange

• Debit Cards
• Recently, debit cards became the most popular
  payment method in the US for purchases made in
  person at the point of sale or service. A debit
  card, also called a check card, links directly to
  a checking account and typically has a Visa or
  MasterCard logo on it. It usually serves as your
  ATM card for all your accounts at the issuing
  institution. When you use a debit card to make a
  purchase the money is electronically deducted
  directly from your checking account.
• Benefits
• Convenience.
• Debt management.
• Record keeping.
• Cautions
• Risk of card theft or compromise of account
  information.
• Timeliness of access to your funds during
  investigation.
• Less consumer protections than credit cards.
• Possibility of overdrawing your account.

7
Topic 2.01 Explain forms of financial exchange

• Cash
• What's the role for good, old-fashioned cash?
  Depending on your individual circumstances, you
  may find that cash still offers the best option
  for many everyday purchases.
• What's more, cash in your hand is not working for
  you. Keeping money in your savings account until
  you absolutely need it allows your money to grow.

8
Topic 2.02 What will your money do for you

• Explain why money is used as a medium of
  exchange.
• It must be generally accepted as a means of
  payment by all parties. Did you ever wonder why a
  restaurant owner is willing to give you a pizza
  for a piece of paper with Alexander Hamilton's
  picture on it?
• Discuss how money is used as a unit of measure.
• It must provide a common unit for measuring the
  value of every good and service. This allows
  those who are selling to set prices.
• Describe how money is used as a store of value.
• It must retain its purchasing power over time.
  People do not want to make purchases every time
  they sell something. You can see that items like
  corn, or other goods that spoil, are not very
  good substitutes for money because they cannot
  function as a store of value.

9
Topic 2.02 What will your money do for you

• Economic Incentives are offered to influence our
  behavior.
• Positive economic incentives reward people
  financially for making certain choices and
  behaving in a certain way.
• They reward you with money or some sort of
  financial gain such as a better price, a free
  item, or an upgraded item. Coupons, sales,
  freebies, discounts, and rewards can be positive
  economic incentives. They are called positive
  because they are associated with things many
  people would like to get.
• Negative economic incentives punish people
  financially for making certain choices and
  behaving in a certain way.
• These incentives cost you money. Fines, fees, and
  tickets can be negative economic incentives. They
  are called negative because they are things you
  don't want to get.

10
Topic 2.03 Why is money an incentive

• Incentives employee motivation technique that
  offers cash, gifts, special recognition, or other
  awards for exceeding performance goals. An
  incentive program may be a contest with a single
  employee or group of employees winning a prize,
  or it may be structured to reward as many
  employees as are able to achieve the defined
  performance goal. Many incentive programs are
  designed to support sales or piecework goals. To
  be effective, the rules of the incentive program
  must be clearly understood and fairly
  administered.
• Values worth of all benefits and rights of
  arising from ownership price X quantity. For
  example, the value of all desks in the room is
  250 X 14 4,250.
• Risk the potential for loss of value
  probability that an actual return on an
  investment will be lower than the expected
  return.

11
Topic 2.03 Why is money an incentive

• Return profit on a securities or capital
  investment, usually expressed as an annual
  percentage rate.
• Profit best known measure of the success of a
  company, it is the surplus remaining after total
  costs are deducted from total revenue, and the
  basis on which tax is computed and dividend is
  paid. Profit is reflected in reduction in
  liabilities, increase in assets, and/or increase
  in owners' equity.
• Interest cost of using money, expressed as a
  rate per period of time, usually one year, in
  which case it is called an annual rate of
  interest.
• Self-interest personal advantage or interest.

12
Topic 2.03 Why is money an incentive

• Identify types of economic incentives
• Prices, wages, profits, subsidies, and taxes
• Positive - Coupons, sales, freebies, discounts,
  and rewards
• Negative - Fines, fees, and tickets

13
Topic 2.03 Why is money an incentive

• Discuss the relationship between risk and return.
• All investments provide a certain level of return
  and are subject to a certain level of risk.
  Basically this means that as well as making money
  on your investment there's also a chance you
  could either lose money or not make as much as
  you expected.
• As a general rule, the larger the potential
  investment return, the higher the investment
  risk, and the longer you need to remain invested
  to reduce that risk.

14
Topic 2.03 Why is money an incentive

• Explain ways to use incentives to increase an
  activity.
• The surest way to get people to behave in
  desirable ways is to reward them for doing soin
  other words provide them with incentives. This is
  so obvious that you might think it hardly
  deserves mention. But it does.
• You might say that people shouldn't have to be
  rewarded (bribed) to do desirable things. Even
  when you acknowledge that incentives are
  necessary, it is not obvious how to establish the
  ones that motivate desirable action.

15
Topic 2.03 Why is money an incentive

• Describe ways to use incentives to decrease an
  activity.
• Just like rewarding a person to increase an
  activity, you can punish people to try to
  decrease an activity. Fees, fines, tickets,
  detentions, Saturday schools and being grounded
  are all ways to decrease and activity.

16
Topic 2.04 What is saving and investing

• Saving a reduction in the amount of time or
  money used avoidance of excess expenditures.
• Investing to commit money or capital in order
  to gain a financial return.
• Financial needs technique used to determine how
  much life insurance is required, by considering
  the future needs of the policy's beneficiaries.
• Financial goals objective or target, usually
  driven by specific future financial needs. For
  example, common financial goals for an individual
  are saving for a comfortable retirement, saving
  to send children to college, managing finances to
  enable a home purchase, minimizing taxes,
  maximizing return on investments given a certain
  risk tolerance, and estate or trust planning.

17
Topic 2.04 What is saving and investing

• Identify types of financial needs.
• College loan, car loan, house mortgage, business,
  retirement fund, kids college and monthly bills
• Discuss ways individuals meet financial needs.
• Saving and investing
• Various types for each

18
Topic 2.04 What is saving and investing

• Investing is a way to make money with your money.
  First, you have to earn money. As a kid, you get
  money from allowance, gifts, services, or from
  selling goods such as lemonade. Try to save some,
  if not all of this money. The next step is to
  make your money grow through investing.

19
Topic 2.04 What is saving and investing

• Why Should I Invest?
• There are two main reasons why you should invest
• To stay ahead of inflation
• To achieve financial goals

20
Topic 2.04 What is saving and investing

• Compare the outcome of saving/investing early
  versus late in life.
• Matt and Chuck Example
• Rule of 72 formula to find out how quick your
  money will double
• Divide 72 by the interest rate
• 72 divided by 6 12 years

21
Topic 2.05 What are legal aspects of exchange

• Good faith the observance of honorable intent
  in business relations and the avoidance of any
  attempts to deceive in assuming and performing
  contractual obligations. For example, the
  autoworkers bargained with management in good
  faith so that all parties would benefit.
• Disclosure the release of relevant information.
  For example, a college or university will
  disclose the people who gave money to it for tax
  purposes.
• Float period between the beginning and the
  close of a transaction.

22
Topic 2.05 What are legal aspects of exchange

• Describe how borrowers and lenders benefit from
  financial exchanges.
• Many individuals are not aware that they are
  lenders, but almost everybody does lend money in
  many ways. A person lends money when he or she
• puts money in a savings account at a bank
• contributes to a pension plan
• pays premiums to an insurance company
• invests in government bonds/company share

23
Topic 2.05 What are legal aspects of exchange

• Borrowers
• Individuals borrow money via bankers loans for
  short term needs or longer term mortgages to help
  finance a house purchase.
• Companies borrow money to aid short term or long
  term cash flows. They also borrow to fund
  modernization or future business expansion.

24
Topic 2.05 What are legal aspects of exchange

• Explain how the concept of good faith applies to
  financial exchanges.
• A Good Faith Estimate is an estimate that lists
  all fees paid before closing, all closing costs,
  and any escrow costs you will encounter when
  purchasing a home.
• The lender must supply it within three days of
  your application so that you can make accurate
  judgments when shopping for a loan.

25
Topic 2.05 What are legal aspects of exchange

• Discuss the lenders responsibility to disclose
  terms and conditions of financial exchanges.
• It protects borrowers from abuses by lending
  institutions by mandating that lenders fully
  inform borrowers about all closing costs, lender
  servicing and escrow account practices, and
  business relationships between closing service
  providers and other parties to the transaction.
• Lenders are not allowed to discriminate in any
  way against potential borrowers on the basis of
  race, color, nationality, religion, sex, familial
  status, or disability

26
Topic 2.05 What are legal aspects of exchange

• Explain the borrowers responsibility to disclose
  information that would prohibit repayment to the
  lender.
• Be sure to read and understand everything before
  you sign.
• Refuse to sign any blank documents.
• Do not buy property for someone else.
• Do not overstate your income.
• Do not overstate how long you have been employed.
  
• Do not overstate your assets.

27
Topic 2.05 What are legal aspects of exchange

• Accurately report your debts.
• Do not change your income tax returns for any
  reason.
• Tell the whole truth about gifts.
• Do not list fake co-borrowers on your loan
  application.
• Be truthful about your credit problems, past and
  present.
• Be honest about your intention to occupy the
  house.
• Do not provide false supporting documents.

28
Topic 2.05 What are legal aspects of exchange

• Explain the impact of electronic financial
  services on financial exchanges.
• Establishes the rights and liabilities of the
  consumer, as well as the responsibilities of all
  participants in EFT activities (including
  financial institutions).
• ATM and POS (point of sale) transactions, like
  using your debit or check card at the grocery
  store.
• Telephone transfers and preauthorized transfers
  in other words, whenever you tell your bank to
  make some type of automatic transfers for you.
  Monthly direct deposits and monthly mortgage
  payments all count.

29
Topic 2.05 What are legal aspects of exchange

• Describe federal legislation that protects
  borrowers.
• Truth in Lending and Consumer Leasing Acts
• Equal Credit opportunity Act (ECOA)
• Fair Credit Opportunity Act
• Fair Credit Reporting Act
• Consumer Credit Reporting Reform Act

30
Topic 2.06 Whats your money worth

• Time value of money (TMV) price put on the time
  an investor or lender has to wait until the
  investment or loan is fully recouped. TVM is
  based on the concept that money received earlier
  is worth more than the same amount of money
  received later, because it can be 'employed' to
  earn interest over time. Computed as compound
  interest.
• Inflation persistent increase in the average
  price level in the economy. Inflation occurs when
  the AVERAGE price level (that is, prices IN
  GENERAL) increases over time. This does NOT mean
  that ALL prices increase the same, nor that ALL
  prices necessarily increase. Some prices might
  increase a lot, others a little, and still other
  prices decrease or remain unchanged. Inflation
  results when the AVERAGE of these assorted prices
  follows an upward trend. Inflation is the most
  common phenomenon associated with the price level.

31
Topic 2.06 Whats your money worth

• Interest rate price of funds expressed as a
  percentage of the total amount loaned or
  borrowed. This is the cost of borrowing funds and
  the payment received for lending. Interest rates
  are invariably expressed as an annual percentage
  of the amount borrowed/loaned. A 10 percent
  interest rate, to run through an easy example,
  tells us that the cost of borrowing 1,000 for
  one year is 100.
• Present value amount of money today that, after
  interest is added, would have the same value as
  an amount some time in the future. For example,
  100 today, given a 10 percent interest rate,
  would have a value of 110 in one year (100 plus
  10 in interest). Conversely, 110 in one year,
  given a 10 percent interest rate, would be
  equivalent to 100 today. The process of
  translating a future payment into its present
  value, such an amount to be received when a bond
  reaches its date of maturity, is often termed
  discounting.

32
Topic 2.06 Whats your money worth

• Compound interest interest that's added to a
  principal at regular intervals such that each
  subsequent interest calculation is based on the
  original principal and the added interest. For
  example, suppose you have a 100 savings account
  that pays 5 percent interest. Without compound
  interest, such that your 5 percent interest is
  paid only at the end of a year, you will have
  exactly 105 in one year. However, if your
  interest is compounded each month you end up with
  105.12 after a year. The extra 12 cents comes
  from interest on the interest paid the first
  month, interest on the interest paid the second
  month, interest on the interest paid the third
  month...

33
Topic 2.06 Whats your money worth

• Describe how time impacts the value of money.
• The increase of an amount of money due to earned
  interest or dividends
• Save or invest money instead of spending it, the
  money could be worth more later because you would
  earn interest or dividends
• Think of the time value of money as an
  opportunity costs

34
Topic 2.06 Whats your money worth

• Explain information that is needed when
  considering the time value of money
• Date at which the dollar amount is measured and
  the interest rate applied
• Principal
• Future value
• Annuity
• Present value

35
Topic 2.06 Whats your money worth

• Explain the impact of inflation on the value of
  money.
• During rapid inflation-it takes more money to buy
  the same amount of goods or services
• Inflation 5 - computer a year ago 1000, would
  now cost 1050
• Main cause of inflation is increase in demand
  without an increase in supply

36
Topic 2.06 Whats your money worth

• Discuss situations in which the present value is
  needed.
• To see the amount of money need to deposit now to
  have a desired amount in the future
• If you want to have 1000 in 5 yrs for a down
  payment on a car, you would need to deposit 784
  now.

37
Topic 2.07 What are your financial goals

• Discuss the value of planning in meeting
  financial goals.
• Life situations
• Personal values
• Economics factors
• Identify obstacles to meeting financial goals.
• Consumer pricing
• Consumer spending
• Interest rates

38
Topic 2.07 What are your financial goals

• Describe characteristics of useful financial
  goals.
• Assessing your present financial situations
• Making a list of your current needs
• Deciding how to plan for future needs

39
Topic 2.07 What are your financial goals

• Explain a financial goal-setting process.
• Obtain- working, making investments and owning
  property
• Plan- how to spend and save money
• Spend Wisely- spend less than you earn
• Save- save on a regular basis, you will have more
  money to pay your bills, make major purchases,
  and cope with emergencies
• Borrow Wisely- borrow only when needed

40
Topic 2.07 What are your financial goals

1. Invest- to increase current growth and achieve
   long term growth
2. Manage Risk- insurance to protect resources in
   case or injury, sickness, or death
3. Plan for Retirement- consider the age you want to
   retire, where you wan to live, how you want to
   spend your time part time job, doing
   volunteering work, enjoying hobbies/sports