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Chapter 1
Overview of
Personal Finance
Essential Question:
Why is personal financial
planning important?
Learning Objectives
• Define personal finance and personal
financial planning
• Analyze the benefits of good financial
decision-making
• Examine the goals for which people make
financial plans
• Identify sources of financial planning
information
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What is Personal Financial
Planning?
• Personal Finance
– Financial issues that
affect an individual
• Personal Financial
Planning
• Become knowledgeable about
financial issues that affect you
• Make a plan for your spending,
borrowing and financing, and
saving and investing
• Learn to manage your cash
wisely
– The process of
planning every aspect
of your personal
finances
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Steps to Personal Financial
Planning
• Liquid assets
– Things you
might have that
can be rapidly
converted to
cash without a
risk of
significant loss
• Create a budget for yourself
• Manage your liquid assets (i.e. savings
account)
• Manage your borrowing
• Plan to have enough insurance to
protect your assets (i.e. car)
• Develop a plan for investing
• Develop a plan for retirement
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Steps to Personal Financial
Planning
• A few things to keep in mind when deciding on
your career:
– Find a job to match your personality
– Research the salary and employee benefit package
– Research the training and education needed for the job
• The next slide depicts the most recent fastest
growing jobs and salaries
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Figure 1.1: Fastest Growing
Occupations
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Figure1.1: (continued)
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Math for Personal Finance
• Lindsey just got her first pay check and
noticed that she only brought home $62.45
this week. She worked 10 hours and
thought she was making $8 an hour
• How much did her employer hold out of her
paycheck?
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Math for Personal Finance
• Solution: Lindsey’s gross pay was $8 an
hour x 10 hours = $80. However taxes
withheld by her employer reduced her bring
home pay to $62.45. The total amount
withheld from her check was $80 - $62.45 =
$17.55.
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The Need for Personal Financial
Planning
• Bankruptcy
– A legal process in
which a court
takes over some of
the finances of a
person who is
unable to pay his
or her bills
•
•
•
•
•
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Over 30% of high school students, and more
than 80% of undergraduate students use a
credit card,
1.3 million people will file for bankruptcy in
2012
25% of consumers have more credit card debt
than emergency savings
About half of all people surveyed in the U.S.
who are working full-time tell us that they live
paycheck to paycheck
About 40% of people who work full-time do not
save money for retirement
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What is personal financial planning?
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The process of planning all aspects of your
personal finances.
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The Benefits of Good Financial
Decision-Making
• Opportunity
Cost
– Cost of pursuing
one option instead
of another
expressed as the
value of the
activity you gave
up
• Understanding personal
finance helps you to make
informed financial decisions
• Every purchase you make
incurs an opportunity cost
• Viewing purchases in terms
of its opportunity costs might
help you change your
spending habits
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Math for Personal Finance
• Jacob makes $8 an hour at the pizza place and he
is scheduled to work four hours this afternoon.
However, Tara called and wanted to know if he
could go to the movies
• Assuming the movies will cost Jacob $10, what is
his opportunity cost of going to the movies?
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Math for Personal Finance
• Solution: Jacob will forego earning $8 an hour x 4
hours = $32. His opportunity cost of attending
the movie is therefore $32. However, his total cost
will include the $10 he spent at the movie and is
equal to $32 + $10 = $42.
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EQ: Why is personal financial planning
important?
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You will be better able to accomplish your
goals in life.
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What are you Planning For?
• Goals can be reduced to 3 categories
– Short-term goals
• Buying a Car
– Medium-term goals,
• Education
• Emergencies/Rainy Day Fund
• Buying a Home
– Long-term goals
• Having a Family
• Retirement
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Education
• Decide what kind of higher education is right
for you
• Research various career options
• Determine the education required to pursue
each option
• Understand the relationship between
education and annual salary (See figure 1.2)
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Figure 1.2: Comparison of Income
among Education Levels
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Emergencies/Rainy Day Fund
• Save money to prepare for unexpected
events such as:
– Car breakdowns
– Job changes
– Medical emergencies
• Financial planning forces you to think about
and plan for those unexpected expenses
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Buying a Car
• When do you want
to own a car by?
• Will your parents or
you pay for it?
• What type of car do
you want?
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• Keep in mind other
types of car
expenses
– Gas
– Car maintenance
– Car insurance
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Math for Personal Finance
• Michael is thinking about buying a car and is
comparing two vehicles. One gets 14 miles
to the gallon (mpg) and the other gets 28
miles to the gallon
• Assuming he drives 4,000 miles a year how
much money would he save buying the
more fuel efficient car if gas is $3 a gallon?
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Math for Personal Finance
• Solution: Since he expects to drive 4,000
miles per year we can calculate that he
will use 4,000/28 mpg = 143 gallons of
gas at $3 per gallon = $429 per year on
fuel. The other vehicle will cost twice as
much to drive since he would use
4,000/14 mpg = 286 x $3 a gallon =
$858 total gas for the year. Therefore his
savings for buying the more fuel efficient
vehicle would be the difference or $858 $429 = $429.
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Buying a Home
• What kind of house
do you want?
• Where do you want
to live?
• What type of
neighborhood do
you want to live in?
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• These are the
questions to ask
yourself while
thinking of owning a
home
• Start saving now
and you could have
a down payment
ready for when you
buy your first home
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Having a Family
• When should you
• These are all
start saving for
questions to
consider when you
child’s college fund?
have a family
• Will you buy your
children their first
• A good financial plan
car?
allows financial
flexibility to make
• Will your children go
these choices
to public or private
instead of having
school?
them made for you
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Retirement
• What age would you • Financial planning
like to retire?
can allow you to
• Do you know anyone build your wealth at
an early age
who retired young
and now does
• Although it may be
exactly what he/she
difficult to think of
wants to do?
now, it is a good
idea to save for
retirement
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Charitable Giving
• Charitable giving is an important component
of many financial plans
• Some people give a large sum to one
charity, while others give smaller amounts
on a regular basis
• Knowledge of financial planning can help
you achieve whatever goals you may have
in this area
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What are three categories of goals you
should be planning for?
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Short-term goals, medium-term goals, and
long-term goals
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Sources of Financial Planning
Information
• There are many resources available to help
you make good financial choices
• Some examples include the Internet and
financial advisors
• Time is one your side when it comes to
financial planning
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The Internet
Pros
• Research prices of
major purchases
• Look up investment
performance data
• There are many
websites that provide
payment calculators or
information on wealth
building
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Cons
• Be cautious about
advice from sources
that are selling a
service
• Can be a source of
people trying to
defraud you and
increase their wealth at
your expense
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Judging the Advice of Financial
Planners/Advisors and Financial
Information
• Financial advisors understand tax laws and
can monitor investments closely
• This job requires training, education, and
certification
• The next slide contains a list of questions to
consider when deciding if you want to use a
financial advisor
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Figure 1.3: Questions to Ask When
Selecting a Financial Advisor
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Who is responsible for judging the quality
of financial advice you receive?
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Each person is responsible for judging the
quality of the advice he or she receives.
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Summary
• Personal financial planning helps create the
best possible financial future for you
• Your financial planning decisions allow you
to develop a financial plan
• A financial place involves a set of decisions
on how you plan to manage your spending,
financing, and investments
• An early knowledge of personal finance can
help you avoid common financial pitfalls
and accomplish your goals
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Summary
• There are many
• There are many
good reasons to plan resources available
for your financial
to help you make
future including:
your financial
decisions such as:
– Education
–
–
–
–
–
Emergencies
Buying a car or home
Having a family
Retirement
Giving to charity
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– Internet
– Financial planners or
advisors
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Key Terms and Concepts
• Bankruptcy
• Liquid asset
• Opportunity cost
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• Personal finance
• Personal financial
planning
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Websites
• Finance.yahoo.com
• www.cfp.net
• www.careers-in-finance.com/fpskill.htm
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