Download Factors Affecting Family Finance

Factors Affecting
Family Finance
Factors not in your Control:
 Economy
 Inflation
 Interest Rate
 Taxes
Economy:
Business Cycle (Economic cycle)
Expansion – economy is increasing. Production and retail activities are high,
unemployment is low, and prices and interest rates are low or falling. It is the
preferred cycle, and it is easier for the consumer to buy homes, cars, and other
goods.
Peak – end of expansion/beginning of contraction
Contraction – economy is falling. If the contraction continues, there may be a
recession which would include a reduction in production and retail sales, high
unemployment, and an increase in
interest rates and prices.
Trough – end of contraction/
beginning of expansion. The
economy will then proceed to the
beginning of the expansion stage.
When the economy is in the trough
is actually a good time to buy stocks.
Question for Thought?
 Where do you think the economy is right now?
a.
b.
c.
d.
Expansion
Peak
Contraction
Trough
 What is good/bad about where we are?
Two Indicators of the Economy
 Gross Domestic Product (GDP) - current
 A measure of the total production & consumption of services
in the U.S.


<2% is low growth, >4% is vigorous growth
2.5% is optimal
 Index of Leading Economic Indicators (LEI) - future
 An index designed to predict economic conditions in the next
term.


Rule of Thumb – 3 consecutive months of decline is a sign of
recession
LEI has predicted every recession since 1950 + 5 that didn’t happen
“The only function of economic
forecasting is to make astrology
look respectable.”
-John Kenneth Galbraith, Economist
Inflation:
 As inflation goes up, purchasing power (PP) goes
down.
Price:
$1.00 per lb.
$1.25 per lb.
$1.25 per lb.
$1.25 per lb.
Income:
$10.00
$10.00
$11.00
$12.50
PP:
10 lbs.
8 lbs.
8.8 lbs.
10 lbs
Note: Wage increases do not always keep up with inflation
Measurement of Inflation:
 Consumer Price Index (CPI) – measures inflation
 a measure of a fixed market basket of consumer goods
and services
 Each month the Bureau of Labor Statistics records the
prices of more than 400 goods and services to measure
the price change in the CPI (inflation)
 “Basket” has changed over time (where once it included
a Sony Walkman, now it would include an iPad)
Consumer Price Index
Interest Rates:
 The cost of borrowing
 Example: Mortgage Loan for $150,000 for 30
years
Interest rate:
8%
10%
Monthly payment:
$1,100.65
$1,316.36
Total paid:
$396,232.87
$473,888.65
Does the Interest rate make much of a difference? YES!
Taxes:
 As citizens we have to pay taxes
 Goal is to legally pay as little tax as possible
 Good record keeping helps greatly!
 Tax avoidance is legal…Tax evasion is illegal
Review!
 Which of the following measures inflation?
a. Gross Domestic Product
b. Index of Leading Economic Indicators
c. Consumer Price Index
Review!
Correct answer:
c. Consumer Price Index
Factors in your Control:
 Interest (yes, it is on both lists)
 Time
 Education
 Career
 Benefits
Interest – the price of money:
 “earn it” or “pay it” the choice is yours
 Compound Interest vs. Simple Interest
 Compound is better…it is when you make interest on the
interest!
 Rule of 72
 Calculates the number of years it takes for principal to
double (includes compound interest)
 72 divided by % = # of years to double
 Example: 8% interest, 72/8 = 9 years
Time
Q. When is the best time to invest?
At age 65, with an 8% average return
compounded monthly, a dollar:
 At age 55 will increase in value 1.2 times
 At age 45 will increase in value 3.9 times
 At age 35 will increase in value 9.9 times
 At age 25 will increase in value 23.3 times
A. NOW!
Adapted from URS Viewpoint, Summer 2000
Time Value of Money Examples
 For the example shown in class see:

http://www.extension.org/pages/12449/how-time-affects-the-value-of-money#.VVu5ZWP9w2I
 There are many ways to calculate the Time Value of
Money:
 A Financial calculator
 The Rule of 72
 Formulas and the appendixes in the back of our
textbook (A-1 & A-3)
Calculations
ONE LUMP SUM INVESTMENT
PV = present value
F = factor from chart (A-1)
FV = future value
PV X F = FV
See an example of the chart in the back of the book on the
next side…
Calculations – Lump Sum
 $1,000 to invest for 5 years at 6%
 1,000 X by factor
 [To find the factor go down the left side of the chart to the
“n” number of years (5) then go across to the right to the
interest (6) column…that will be the factor.]
Calculations – Lump Sum
 $1,000 to invest for 5 years at 6%
 1,000 X 1.3382 = $1,338.20
Calculations – Lump sum
 $3,000 to invest for 3 years at 7%
 3,000 X by factor
Calculations – Lump Sum
 $3,000 to invest for 3 years at 7%
 3,000 X 1.2250 = $3,675.00
Calculations
FUTURE VALUE OF EQUAL PAYMENTS
(ANNUITY or investing equal deposits into a
retirement fund every year for a certain number
of years)
 Pymt = equal payment (deposit) amount
 F = factor from chart (A-3)
 FV = future value
Pymt X F = FV
Calculations - Annuity
 Yearly payments of $2,000 for 10 years at
12%
2,000 X factor
n
9% 10% 11% 12% 13% 14% 15%
9
13.0210 13.5795 14.1640 14.7757 15.4157 16.0853 16.7858
10
15.1929 15.9374 16.7220 17.5487 18.4197 19.3373 20.3037
Calculations - Annuity
 Yearly payments of $2,000 for 10 years at
12%
2,000 X 17.5487 = $35,097.40
Calculations - Annuity
 Yearly payments of $1,200 for 7 years at 5%
1,200 X factor
n
1% 2% 3% 4% 5% 6% 7%
7
7.2135
7.4343
7.6625
7.8983
8.1420
8.3938
8.6540
8
8.2857
8.5830
8.8923
9.2142
9.5491
9.8975
10.2598
Calculations - Annuity
 Yearly payments of $1,200 for 7 years at 5%
1,200 X 8.1420 = $9,770.40
Question for Thought?
 Are you comfortable with the Time Value of Money
problems?
a. Yes
b. No
Economy Today?