Download Understanding Personal Finance

Understanding Personal Finance
Good $$$$$ Habits
• Spend less than you make
• Pay yourself 1st
• Stay up‐to‐date with current economic conditions and knowledge to manage your $ • Use marginal and opportunity costs and time value of money calculations
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• Establish goals
• Take advantage of tax sheltering
• Allow your money to work for you – compounding
• Keep debt under control
• Take responsibility – manage your own financial success
Financial Responsibility
•Financial responsibility means
– being accountable for your future financial well being.
– that you strive to make good decisions in personal y
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Financial Literacy
• the ability to understand money and how to manage it, so that current and future financial
current and future financial decisions will be beneficial.
Financial Success
• Spend less to save and invest!
• Savings
• Investments
• Standard of Living
Standard of Living
• Level of Living
Financial Happiness: Satisfaction about money matters.
Discuss . . .
•How do you make yourself feel financially happy?
What is Financial Success??
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The Building Blocks of Your Financial Success
The Economy and Business Cycles
• Economy
• System of managing the resources of a country, state, or community.
• Economic Growth
• Increasing production and consumption in the economy.
• Economic System
• An organization for the production and distribution of goods and services
The Economy and Business Cycles
• The economy grows and contracts over time:
– Expansion – Peak
– Expansion
– Trough
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Business Cycle Phases
Future Direction of the Economy?
• Track the Gross Domestic Product
• Measures the economic health of nation; reports how much economic activity has occurred within US borders
• Track the Employment Report
• Tracks # of jobs created every month j
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• Track the Index of Leading Economic Indicators
• Tracks future direction of the US economy by growth of different segments, such as building permits, factory orders, etc.
• Track the Consumer Confidence Index
• Consumers willingness to spend
Law of Supply and Demand
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If demand is high, price will be high
If demand is low, price will be low
If supply is low, price will be high
If supply is high, price will be low
demand price
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Law of Supply and Demand
• Equilibrium‐where supply and demand meet
Supply
Demand
Socialism
Producers possess both political power and means of producing and distributing goods.
Producer Sovereignty
• Producers have the power to decide which products and services society will produce and consume.
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Capitalism
• Open competition
• Free market
Consumer Sovereignty
• A market situation where consumers have the power to ultimately decide which products and services society will produce and consume
will produce and consume.
• Coca‐Cola Classic
Inflation
• Inflation: Steady rise in the general level
of prices. • Price of milk??
• How does inflation affect income and consumption?
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Inflation
• How inflation is measured:
– Consumer Price Index (or CPI)
• Measure of changes in prices of all goods and services purchased for consumption by household.
– Personal Inflation Rate
• Rate of increase in prices of items purchased by a particular person
Track the Federal Funds Rate
• Federal Funds Rate:
– Rates banks charge each other
– Set by the FED
– When FEDS believe that the economy is growing too fast, it raises the rate and in turn lenders raise their rates. Spending in the economy slows down.
Think Like an Economist
Opportunity Cost
Cost of decision measured by the value of the next best alternative
Every decision involves a trade‐off
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Consumer Perspective
Opportunity Costs
Values of what you must give up in order to get something else
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Opportunity Costs
• What opportunity cost(s) have you experienced?
– Attending EIU = giving up tuition money
– Working full time = child in daycare
– Joining the military = safety
Think Like an Economist
• Utility • ability of a good/service to satisfy a human want
• How much utility will you gain from a decision?
• Marginal Utility/Cost: Extra satisfaction derived from a decision.
• Marginal Tax Rate: Tax rate at which your last dollar earned is taxed‐ higher the income, higher the tax rate.
• Tax exempt income – totally tax free **The BEST
• Tax sheltered/deferred – 2nd best, exempt that year, taxed later
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Tax‐Sheltered Returns are Greater than Taxable Returns
Rule of 72
# of years it takes $ to double
Future Value of $200 Annual Investments
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Table 1.2: Cost of Saving for Retirement Employer Retirement Plans
• First advantage: tax‐deductible contributions
• Second advantage: employer’s matching contributions
• Third advantage: tax‐deferred growth
• Fourth advantage: starting early really pays off
Salary vs. Benefits
Table 1.3: Starting to Save Early vs. Starting Late 10
Top 3 Financial Missteps
in Personal Finance
• People slip up in building and maintaining good credit when they do the following:
– Think only about money matters when Think only about money matters when
faced with a financial problem.
– Spend more than they earn.
– Get financial advice from amateurs.
Discuss . . .
• What have been some of your personal finance missteps?
Think about it
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It’s not an asset if you are wearing it
Is it a need or want?
Sweat the small stuff
Cash is better than credit
Keep it simple
Priorities lead to prosperity
Enough is enough!
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