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Personal Finance Ch 1 The Importance of Personal Finance I. Why Study Personal Finance? a. Personal finance: the study of personal and family resources considered important in achieving financial success. b. It is how people save, spend, protect, and invest their financial resources. c. Why does one save?……………..to spend! d. Personal financial planning: the development and implementation of coordinated and integrated long range plans to achieve financial success. II. The 5 Lifetime Financial Objectives a. Financial success: the achievement of financial aspirations that are desired, planned, or attempted. i. The specifics of what financial success is depends on the individuals risk tolerance, attitude, and personality. b. Current consumption: spending on present needs and wants. c. Savings: income not spent on current consumption. d. Future consumption: goods and services expected to be consumed in the future. e. Standard of living: the level or plane of living that an individual or group seeks and strives to attain, maintain, preserve, and regain. i. It defines financially the kind of lifestyle you want to live. 1. Maximizing Earnings and Wealth a. To maximize wealth, you must firs maximize earnings. b. You can make more or spend less! 2. Practicing Efficient Consumption a. Spend money wisely and efficiently. b. Develop good habits of record keeping, budgeting, debt and insurance expenses. c. Must be knowledgeable and disciplined. d. Ex: a 10% savings on expense is also at least a 10% raise in income. (make more or spend less) 3. Finding Life Satisfaction a. This will vary greatly from person to person. b. You must define what will make your life satisfying and then address the financial aspects needed to achieve that satisfaction. c. Depends again on tolerance of risk, attitude, and personality. d. You will have some financial decisions to make no matter what your occupation is or what your life satisfaction level is. e. Things to consider: i. Where do you want live? ii. What career do you want? iii. What do you want to buy? iv. How do you want to invest? v. What does retirement mean? 4. Reaching Financial Security (Independence) a. Financial security (independence): the comfortable feeling that your financial resources will be enough to fulfill any needs you have as well as most of your wants. b. This is also defined by the individual’s tolerance of risk, attitude, and personality. c. You must have a long-term and short-term game plan for achieving financial security. 5. Accumulating Wealth for Retirement and an Estate a. Retirement is the number 1 reason people save money. b. You will have a desired retirement life style to get ready for from now until the day you retire. c. 2 reasons people accumulate wealth: i. Provide an income after they quit working. ii. Pass it on to their heirs. d. Some people pass their money out to their heirs before they die. i. This is cheaper on a tax basis.