Unit 6: Financial Planning

Driving Question: Why is it important that we invest in ourselves?

By the end of this lesson I CAN:

1. Explain what tradeoffs are and provide an example to show how a person’s choices involve trade-offs

2. Describe 3 ways that I can impact my future standard of living

3. Analyze the relationship between risk and return when investing

What does it mean to pay yourself first?

• Pay yourself first: A phrase commonly used in personal finance that means to automatically route your specified savings contribution from each paycheck at the time it is received.

• How can we do it?

Why do people save for the future?

• Reasons…………

Disposable Income & Saving

• Disposable Income:• What you have left over after paying bills, taxes,

etc.• Saving involves using part or your disposable

income• Saving• Putting money aside for later use• Must determine the amount to save based on the

amount of your disposable income

How is saving impacted by interest?

• How is saving impacted by interest?• Accruing interest increases the amount of your

savings• Which provides more returns, simple interest

or compound interest?• Simple interest: interest pain only on principal

(amount your originally saved)• Calculation: principal x interest• Example: 8% simple interest earned on $100 = $24

How is saving impacted by interest?

• Compound Interest: interest earned on principal AND previously earned interest• Formula to calculate: Amount = Principal (1 +

Interest)number of years

• Example of compound interest earned on $1000 over 3 years with 5% compound interest = $1157.62

Why might people choose not to save?

• Trade off: When you make a choice you give up something else• Example: Money you spend on clothes can’t be

spent on something else you want• Costs & Benefits of Saving:• Costs: • you use money that you could use on other things• your savings aren’t instantly accessible

Why might people choose not to save?

• Costs & Benefits of Saving continued• Benefits:• You have money set aside to use later• Examples: college, emergencies, retirement, etc.

• People are Inconsistent:• We often know what we should do but we don’t

always do it• Example: we know that we should eat healthy but we

still make unhealthy choices

Why might people choose not to save?

• Instant Gratification• Many people want to get the things they want

immediately• Saving involves sacrifice: you have to pass up

instant gratification for a reward later on• Example: When you save you can’t always buy

something you want BUT later you will have money that you need for something important like retirement

How can goal setting help us save?

• Types of Goals:• Short term: achieved in 1 year or less• Example: vacation

• Medium term: achieved in 1-5 years• Example: down payment on a car

• Long term: achieved in more than 5 years• Example: college or retirement

How can we invest in ourselves and our future?

• Your career & salary are based on human capital• Career/Occupation: your job• Human Capital: your skills and education

Investing in ourselves – Look closely at this chart

How can we invest in ourselves and our future?

• What is the relationship between education & wages?

• What is the relationship between education & unemployment?

• What can we conclude from this?

What should we keep in mind when investing in ourselves and our future?• Costs vs. Returns: is what I am paying/giving

up going to be worth what I receive later• Example: Is it worth having $30,000 in student

loans to become a nail technician?• How does debt impact our investment in

education today?

What other choices can we make when planning our financial future?

• Investment: Putting money to work to make more money• Ex: Stocks, bonds, real estate, etc.

• Risks in Investment• Risk of principal: The risk that some or all of the original deposit or

investment may be lost.

• Market risk: The risk that the forces of supply and demand or unforeseen events may affect the value of an investment.

• Interest-rate risk: The risk that interest rates will change. An investor, for example, might hold a fixed-rate investment, such as a bond. If the bond holder decides to sell the bond before maturity and market interest rates are higher than what the bond is earning, the price of the bond will be lower.

• Inflation risk: The risk that the return on an investment will not keep pace with inflation, and the saver’s purchasing power will fall.

What is the relationship between investment and risk?

What other choices can we make when planning our financial future?