Personal Finance Basics and the

Time Value of Money

Lecturer: Jieyu LIN 林洁瑜
Assistant Professor

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 Financial Planning
• What is personal finance planning?
The process of management your money to achieve personal economics
satisfaction

• Advantages of Personal Financial Planning are:

1. Increased effectiveness in obtaining, using, and protecting financial resources
2. Increased control of one’s financial affairs
3. Improved personal relationships
4. Sense of freedom from financial worries

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Financial Planning Process

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Step 1
DETERMINE YOUR CURRENT FINANCIAL SITUATION

• Prepare a list of current asset and debt Iris will complete her undergraduate
balances studies with a major in RIM next month
(June).
Asset Debt
Saving from part- Student loans
By time job and
June scholarship

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Step 1
DETERMINE YOUR CURRENT FINANCIAL SITUATION
She has received a job offer from an
• Prepare a list of current asset and debt insurance company, which will start in
balances August.

• Evaluate income, savings, living expenses, Asset Debt

and debts By Saving from part- Student loans

time job and
June
scholarship

Income Expense
No Living expenses
(Rent, furniture,…)
From Monthly salary Living expenses
August
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Step 1
DETERMINE YOUR CURRENT FINANCIAL SITUATION
She expects that after 3-5 years’
• Prepare a list of current asset and debt working, she is able to
balances
Potential earning power Financial
goals
• Evaluate income, savings, living expenses,
• Increase in salary …
and debts • Income from investment
• …
• Match financial goals to current income
and potential earning power

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Step 2
DEVELOP YOUR FINANCIAL GOALS
• Make sure that your goals are your own She expects that after 5 - 10 years’
and are specific to your situation working, she is able to

Financial goals
• Pay off her student loans
Save as much as possible • Apply for an MBA program
• Rent/buy a better apartment
VS • Seasonal oversea travel
• …
Spend as much as possible

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Step 3
IDENTIFY ALTERNATIVE COURSES OF ACTION
Take the goal of obtaining an MBA
• Possible courses of action can be: degree for example
Continue the same course of action
Apply for an MBA program
Expand the current situation
• Saving or additional loans
• When to apply
Change the current situation • Full-time or part-time programs
Take a new course of action

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Step 4
EVALUATE YOUR ALTERNATIVES
• Opportunity cost is what you give up by
making one choice.
• The cost or trade-off of a decision cannot
always be measured in dollars. Sometimes
the cost is your time.
Take the goal of obtaining an MBA
degree for example
Apply for an MBA program
• By using additional loan, she can
start her MBA program earlier –
additional loan
• By applying for a part-time MBA
program, she can also start earlier –
no weekend; less-valued degree
• Using saving and applying for a full-
time MBA program, she needs to
work for a longer time.
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Step 4
EVALUATE YOUR ALTERNATIVES
Take the goal of obtaining an MBA
• Evaluate Risk degree for example
 Inflation risk  Personal risk
 Interest rate risk  Liquidity risk Apply for an MBA program
 Income risk • By using additional loan, she can
start her MBA program earlier –
additional loan
• Financial planning information sources • By applying for a part-time MBA
program, she can also start earlier –
 Print and Media no weekend; less-valued degree
 Digital sources • Using saving and applying for a full-
time MBA program, she needs to
 Financial experts work for a longer time.
 Financial institutions

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Step 5
CREATE AND IMPLEMENT YOUR FINANCIAL ACTION PLAN
• Develop an action plan that identifies ways
to achieve financial goals
• Possible action plans can be increasing
savings, reducing spending, or making
provisions for taxes
Iris decides to use additional loan and
apply for a full-time MBA program after
5-7 years’ working
Actions
• Increase monthly saving after
paying off her student loan
• Invest her saving into stock / bond /
mutual fund
• …

• To implement action plans you may need

assistance from others

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Step 6
REVIEW AND REVISE THE PLAN
• Financial planning decisions need to be
assessed regularly
• More frequent reviews may be required for FATORS
changing personal, social, and economic • Promotion & great increase in salary
• Economic downturn & decrease in salary
factors • Getting married and giving birth to a baby
• Regular reviews of decision-making • Winning a lottery
• …
process can help in making priority
adjustments to achieve financial goals

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Influences on Personal Financial Planning
1. LIFE SITUATION AND PERSONAL VALUES

• Adult life cycle stage

• Marital status, household size, and employment
• Major events
• Graduation, engagement, career change, children, retirement, etc
• Values influence spending and saving decisions

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Influences on Personal Financial Planning
2. THE FINANCIAL SYSTEM

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Influences on Personal Financial Planning
3. ECONOMIC FACTORS
• Consumer prices
• Consumer spending
• Interest rates
• Money Supply
• Unemployment
• Housing Starts
• Gross domestic product (GDP)
• Trade balance
• Stock market indexes

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Developing Personal Financial Goals

Timing of goals Goals for different financial needs

• Short-term goals • Consumable-product goals

• Intermediate goals • Durable-product goals
• Long-term goals • Intangible-purchase goals

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Developing Personal Financial Goals
Goals should be SMART:

• Specific: know what your goals are to create a plan

• Measurable: with a specific amount
• Action-oriented: identify the personal financial activities
• Realistic: utilizing your income and life situation
• Time-based: identify the time frame to achieve the goal

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Opportunity Costs

She expects that after 5 - 10 years’

working, she is able to

Financial goals
• Pay off her student loans
• Apply for an MBA program
• Rent/buy a better apartment
• Seasonal oversea travel
• …

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Opportunity Costs

PERSONAL OPPORTUNITY COSTS

• Time
• Other personal opportunity costs can be
related to health, leisure etc.
• Personal resources like financial
resources require careful management

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Opportunity Costs

FINANCIAL OPPORTUNITY COSTS

Time Value of Money
• Increases in an amount of money as a
result of interest earned
• Cash VS Estate (liquidity)
• Saving in bank VS investment in stock
market (safety)

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Time Value of Money

Which do you prefer to receive:

$100 today VS $100 in one year

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Time Value of Money

Which do you prefer to receive:

$100 today VS $110 in one year

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Time Value of Money

Which do you prefer to receive:

$100 today VS $120 in one year

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Time Value of Money

Which do you prefer to receive:

$100 today VS $150 in one year

? How to compare money today with money in future?

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Time Value of Money
Present Value / Future Value

Present Value

$100 today VS $150 in one year

Future Value

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Time Value of Money
Terminology: compounding VS discounting

discounting
Present Value

$100 today VS $150 in one year

Future Value
compounding

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Time Value of Money
Interest rate:
Save $100 ?

Now Year 1

• Suppose the bank offers an annual interest rate 5%

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Time Value of Money
Interest rate:
Save $100 $105

Now Year 1

• Suppose the bank offers an annual interest rate 5%

$100 + $100*5% = $105

principal Interest

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Time Value of Money
Interest rate is also called discount rate:
Save ? $100

Now Year 1

• Suppose the bank offers an annual interest rate 5%

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Time Value of Money
Interest rate is also called discount rate:
Save $95.2 $100

Now Year 1

• Suppose the bank offers an annual interest rate 5%

$ 100
=$ 95.2
1+5 %
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Time Value of Money
Simple interest rate VS compound interest rate:

Save $100 ?

Now Year 1 Year 2

• Suppose the bank offers an annual interest rate 5%

$100 + $100*5%*2 = $110

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Time Value of Money
Simple interest rate:

Save $100 $110

Now Year 1 Year 2

• Suppose the bank offers an annual interest rate 5%

Year 1 $100 + $100*5% = $105

Year 2 $105 + $100*5% = $110
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Time Value of Money
Compound interest rate:

Save $100 $110

Now Year 1 Year 2

• Suppose the bank offers an annual interest rate 5%

Year 1 $100 + $100*5% = $105

Year 2 $105 + $105*5% = $113.4
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Time Value of Money

Simple interest rate VS compound interest rate:

Year 1 $100 + $100*5% = $105 $100 + $100*5% = $105

Year 2 $105 + $100*5% = $110 $105 + $105*5% = $113.4

……
n
Year n FV = $100 + $100*5%*n FV = $100*(1+5%)

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Time Value of Money
$100 $100 $100 ?

Now Year 1 Year 2 …… Year n

$100*(1+10%) $110*(1+10%)

$100 $110 $121 ?

Now Year 1 Year 2 …… Year n

RETIREMENT
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Achieving Financial Goals
COMPONENTS OF PERSONAL FINANCIAL PLANNING
• Obtaining
• Planning
• Saving
• Borrowing
• Spending
• Managing risk
• Investing
• Retirement and estate planning
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Achieving Financial Goals
IMPLEMENTING YOUR FINANCIAL PLAN

• Develop good financial habits

• Use a well-conceived spending plan to help you stay within your
income, while allowing you to save and invest for the future
• Have appropriate insurance protection to prevent financial disasters
• Become informed about tax and investment alternatives

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A case for presentation

FIRE: financial independence, retire early

• FIRE is a lifestyle movement that prioritizes extreme saving and

investing to be able to retire earlier than traditional methods might allow
• The goal of FIRE is to achieve financial freedom so investors can
choose how to spend their time

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THANK YOU

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