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Chapter 1
Overview of Personal
Finance
© 2010 Pearson Education, Inc.
All rights reserved
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
© 2010 Pearson Education, Inc. All rights reserved
0-2
What is Personal Finance and
Personal Financial Planning?
• Personal Finance is
financial issues that
affect and individual
• Personal Financial
Planning is the process
of planning every
aspect of your personal
finances
© 2010 Pearson Education, Inc. All rights reserved
• 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.
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Steps to Personal Financial
Planning
• Liquid assets are
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
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Steps to Personal Financial Planning
• Taxes - most states and local governments will take
a cut of your paycheck in taxes
• Economy – the health of the economy factors into
employment prospects and taxation
• Credit - borrowing and credit are also important to
understand when discussing both short term and
long term financial health
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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.
• Over 30% of high school students use a
credit card
• More than 2.0 million people files for
personal bankruptcy in 2005.
• The level of savings in the U.S. has
recently been negative. In other words,
people are spending more than they can
earn.
• 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 fulltime do not save money for retirement.
© 2010 Pearson Education, Inc. All rights reserved
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Check Your Financial IQ
• What is personal financial planning?
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Check Your Financial IQ
• The process of planning all aspects of your
personal finances.
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The Benefits of Good Financial
Decision-Making
• Opportunity
Cost - is the
value of the next
best choice that
one gives up
when making a
finance decision
• 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. He will also spend $10
that he would not have spent working.
Therefore his opportunity cost of going to
the movie is equal to $32 + $10 = $42.
© 2010 Pearson Education, Inc. All rights reserved
0-15
Check Your Financial IQ
• What do you stand to gain from your
knowledge of personal finance?
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Check Your Financial IQ
• You will be better able to accomplish your
goals in life.
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What are you Planning For?
• Personal Financial Goals
–
–
–
–
–
–
Education
Emergencies/Rainy Day Fund
Buying a Car
Buying a Home
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
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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.
© 2010 Pearson Education, Inc. All rights reserved
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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 start
saving for child’s
college fund?
• Will you buy your
children their first car?
• Will your children go
to public or private
school?
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• These are all questions
to consider when you
have a family.
• A good financial plan
allows financial
flexibility to make
these choices instead
of having them made
for you.
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Retirement
• What age would you
like to retire?
• Do you know anyone
who retired young and
now does exactly what
he/she wants to do?
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• Financial planning can
allow you to build your
wealth at an early age.
• Although it may be
difficult to think of
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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Check Your Financial IQ
• What are three categories of goals you
should be planning for?
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Check Your Financial IQ
• Short-term goals, intermediate-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
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Check Your Financial IQ
• Who is responsible for judging the quality of
financial advice you receive?
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Check Your Financial IQ
• 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.
© 2010 Pearson Education, Inc. All rights reserved
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Summary
• There are many good
reasons to plan for
your financial future
including:
–
–
–
–
–
–
Education
Emergencies
Buying a car or home
Having a family
Retirement
Giving to charity
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• There are many
resources available to
help you make your
financial decisions
such as:
– Internet
– Financial planners or
advisors
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Key Terms
• Bankruptcy
• Liquid asset
• Opportunity cost
© 2010 Pearson Education, Inc. All rights reserved
• 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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