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Business and Finance Basics
Introduction
Financial literacy is knowledge of:
 Facts
 Concepts
 Principles
 Technological tools
…that are fundamental to being smart
about money.
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Introduction
 Personal finance is the study of
resources important for achieving
financial success and involves
 spending
 saving
 protecting and
 investing resources.
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6 Steps of Financial Planning
 Determine Current Financial
Situation
 Develop Your Financial Goals
 Identify Your Options
 Evaluate Your Options or Alternatives
 Create and Use a Financial Plan of
Action
 Review and Revise Your Plan
Group Work
 Rosa and her friend Linda are students in Chicago. They
want to drive cross country next summer to visit Rosa’s
aunt in Arizona and Linda’s brother in California. They
both work part time and take home $77 per week after
taxes. They think they need to save $1200 each to pay for
the trip.
 Each group is assigned to help Rosa and Linda apply one
of the six steps of the financial planning process to help
them reach their goal.
 Be prepared to give a brief oral outline
of your part of the plan.
Business Cycle
 Expansion (prosperity)
 Production and sales high
 Unemployment, prices and interest rates low
 Contraction (recession)
 Decline in employment, output, income and sales
 Trough (recovery)
 Production, employment and sales begin to improve
 leads to eventual expansion
Figure 1.2: Business Cycle Phases
Business Cycle 1953 - 2008
What is the Future Direction of the
Economy?
 The Gross Domestic Product is a procylical
indicator.
 The Unemployment Rate is a countercyclical
indicator.
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What is the Future Direction
of the Economy?
 The Index of Leading Economic
Indicators and the Consumer
Confidence Index
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Key Economic Factors
 Consumer Prices (Inflation)
 Gross Domestic Product (GDP)
 Consumer Spending
 Interest Rates
 Money Supply
 Unemployment
 Housing Starts
 Stock Market Indices
What Is the Future Direction of
Inflation
 Inflation: Steady rise in the general level
of prices.
 How does inflation affect income and
consumption?
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Inflation
 How inflation is measured:
 Consumer Price Index (or CPI)
 Personal Inflation Rate
 Inflation reduces real incomes.
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Inflation
(later value – original value)
% Inflation =
X 100
original value
= increase/original X 100
Inflation Example
 What is the inflation rate if an item that costs $120
today costs $140 next year?
% infl. = (140 – 120)/120 X100 = (20/120)X100 =
16.7 %
 What is the cost of an item today if it cost $65 last year
and the inflation rate has been 4.0%?
0.040 X 65 = $2.6  increase
 $65 + $2.6 = $67.6 cost today
Strategies to Reach Financial Goals
 Obtain
 Plan
 Spend Wisely
 Save, Save More, Keep on Saving
 Borrow Wisely
 Invest
 Manage Risk
 Plan for Retirement
Time Value of Money
 Future Value (FV) of a current lump sum:
FV = (Present Value) (i + 1.0)n
i = Interest Rate
n = number of time periods
See appendix A.1 (p. A-4)
Rule of 72  Double your money in how many years?
- Divide the interest rate (as a whole number)
into 72
Time Value of Money
 FV lump sum calculation
 You have $2,400 to invest. Calculate the value
of your money in 8 years assuming:
a) 3% interest
b) 5% Interest
c) 8% interest
Time Value of Money
 Future Value (FV) of a Series of Payments
(Annuity)
 See Table A.3 (page A-8)
- For example, putting $100 per year for 5 years into
an account making 4% interest per year gives you
how much money?
- What if you put in $350 per year for 8 years at 3%
interest?
Time Value of Money
 Present Value (PV) of a future lump sum (single amount)
 See Table A.2 (p. A-6)
 How much money would you have to set aside right now in
an account making 5% interest to have $1,000 in 10 years?
 How much money would you have to set aside right now in
an account making 3% interest to have $7,000 in 12 years?
 How much money would you have to set aside right now in
an account making 8% interest to have $50,000 in 7 years?
Time Value of Money
 Present Value (PV) of a series of payments over time
(annuity)
 See Table A.4 (p. A-10)
 You buy an investment that will pay you $1,000 per
year for 10 years. The annual interest rate is 5%. What
is the present value of that stream of money?
 You win a scholarship that will pay $5,000 per year for
4 years. What is the present value of that scholarship
assuming 5% per year?