Download Personal Finance

Personal
Finance
Theme 1: Money and an introduction to
Personal Finance
Finance
• What is finance? What is
the purpose of financial
markets?
• Draw it!
Finance Defined
1) The study of money management
and the allocation of assets.
2) To match people who have money
with people who don’t have (need)
money.
• Is this an important industry? What
service/good is being made
available to its consumers?
Money
• Does it have value? How?
• Where does its value come
from?
• So what is money? What
are its functions?
Functions of Money
1) Medium of exchange: trade money for
goods and services
2) Stores value: an individual can maintain
wealth in the form of money.
3) Measure of value: society assigns a value
using their monetary systems. (What is $20
worth to you?)
4) Portable medium
Types of Money
• Currency:
• Coins
• Paper Money
• Accounts for withdrawal
• Savings Account
• Checking Account
• Bitcoin
Bitcoin
• http://money.cnn.com/infographic/technology/wh
at-is-bitcoin/
• Bitcoin: A type of digital currency in which
encryption techniques are used to regulate the
generation of units of currency and verify the
transfer of funds, operating independently of a
central bank.
• Like U.S. currency, what is required for this currency
to work?
The Penny? Really?
• Should we get
rid of the
penny? Why or
why not? (10
minutes to
create your
arguments)
Money has an evolution
• What does that tell us about money as resource if it
continues to change? As an item having value?
Personal Finance: Creating a
Plan (6 steps)
• Step 1: Determine one’s current financial situation
o “What do I have?”
• Savings
• Income
• Expenses
• Debt
• Wealth (Liquid/Non-Liquid)
o Create a record of spending
• Step 2: Develop Goals
o Long-term v. Short-term
o Investments (education, monetary, time)
o Determine value (What is important or desirable to you?)
• Consumerism 101: Why is it cool to have the latest gadget or style? Is it
more “valuable?”
o Consider Wants v. Needs
Plan Continued
• Step 3: Identify Goals
o What are the means and mediums in which to use your money?
o What are the best practices and strategies? (Proven strategies)
o Know your Trade Offs [the alternative you face of you decide to do one thing rather
than another. (the situation in which there is a gain in one area and a loss in
another)]
o Research Investment Choices (TESLA STORY)
• Step 4: Evaluate those options
o Consider the Opportunity Costs [the cost of the next best thing, use of time, or
resources when you choose to do one thing rather than another. (consider: the
value of the choice made in the trade off)]
o Understanding Risks
• Inflation Risks- prices change
• Interest Rates Risks- Interest rates change
• Income Risks- incomes…change
• Personal Risk- Money can come at personal risk…ask crab fisherman
• Liquidity Risk- [ability to convert an asset into cash without loss of value] a house
is not very liquid
• Step 5: Create and USE your plan
• Step 6: Review and revise your plan
Types of Financial Goals
1) Time Frame1) Short-term goals: one year or less
2) Intermediate goals: ~two to five years
3) Long-term goals: ~five or more years (retirement,
college)
2) Needs/wants which “inspire” your goals1) Wants v. needs
2) Services v. Goods
1) Consumable goods: items you use often
2) Durable goods: items that you don’t buy often
3) Intangible goods: service provided that has utility,
but does not physically exist.
Influences on Personal
Finance
1) Life situation and Personal Values
2) Economic Factors
1)
2)
-
-
-
Economics: the study of how individuals or groups choose to use resources.
An Economy: the ways in which individuals and groups choose to use
resources.
Market Forces: Supply and Demand
Financial Institutions:
- The institutions that exist and the services that they make available.
- The policies and regulations that shape those institutions.
- How the Federal Reserve affects those institutions. (The Rules of the Game)
Global Influences: global markets, trends, and foreign economies
- How other markets and economies affect us?
- Questions:
- If your best importer of goods is going through a recession, what
happens?
- How does a bad growing season of wheat across Europe help
American farmers? How does it hurt American consumers?
Economic conditions: [NEXT SLIDE]
Economic Conditions
(continued)
1) Consumer prices
 Inflation: the sustained rise in the level of prices for goods and services
 Question: What does inflation do to the value of a currency?
2) Consumer spending
•
Consumer spending affects the overall economy, and therefore, can affect
the financial options and choices at that time.
3) Interest Rates
•
Interest Rates: the price that one pays to borrow money
•
The percentage of the value of a balance or debt that one pays or is
paid each time period. For example, if one holds a bond with a face
value of $1,000 and a 3% interest rate payable each quarter, one
receives $30 each quarter. The percentage of the interest rate remains
constant (usually), but the amount one pays or is paid changes
according to the amount of the balance or debt. For example, if one
pays off part of the principal on a loan each month, the amount one
pays in interest decreases even though the rate remains the same.
Calculating
Interest…Math
Consider the time value of money: the increase in the
value of your money due to interest earned from
investments.
Primarily, you need to know three things:
1) Principle: The original amount of money
deposited/invested.
1)
Note: if you are taking a loan, the principle is the original amount
borrowed)
2) Time
3) Annual Interest Rate (Annual Percentage Rate-APR):
The annual rate charged or earned through an
investment.
Interest
• Future value: the amount your original deposit
(principle) will be worth in the future earning a
specific rate over a specific amount of time.
• What is the future value if you deposit $1000 at a 4%
rate after one year?
Interest
• Principle x APR = Interest earned
• $1000 x .04 = $40
• Future Value after one year is: $1040.
• What is the future value if your principle is $1000 at a
3% after two years?
o What is the equation?
Interest
• (Principle + Earned Interest) x APR =
• ($1000 + $30) x .03 = $30.90
• Future Value = $1060.90
• Create a principle (nothing over $15 million) and a
reasonable interest rate (nothing over 10%) after 2
years.
• Power of compounding interest: the earlier you
invest, the greater power of the investment if there
is compounding interest and you have the time to
allow it to grow.
Specific Calculations
• Annuity: a series of equal regular deposits.
o Example: I give my financial advisor $30 every month
• Present Value: the amount of money you need to
deposit now at a specific rate in order to have a
desired amount in the future
Calculate the following:
• Future Value of a Single Deposit
o $1000 x .03 = …
• Future Value of a Series of Equal Annual (applying
annuities)
o $1000 annuity @ 5% interest for six years?
o Create a scenario
• Present Value of a Single Deposit
o You want $1000 at the end of 5 years with a 5% interest rate:
o Create an amount that you would like to have waiting for you at the END
of college (7 years)