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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 an 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. 0-3 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 © 2010 Pearson Education, Inc. All rights reserved 0-4 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. © 2010 Pearson Education, Inc. All rights reserved 0-5 Figure 1.1 © 2010 Pearson Education, Inc. All rights reserved 0-6 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 © 2010 Pearson Education, Inc. All rights reserved 0-7 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? © 2010 Pearson Education, Inc. All rights reserved 0-8 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. © 2010 Pearson Education, Inc. All rights reserved 0-9 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 0-10 Check Your Financial IQ • What is personal financial planning? © 2010 Pearson Education, Inc. All rights reserved 0-11 Check Your Financial IQ • The process of planning all aspects of your personal finances. © 2010 Pearson Education, Inc. All rights reserved 0-12 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. © 2010 Pearson Education, Inc. All rights reserved 0-13 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? © 2010 Pearson Education, Inc. All rights reserved 0-14 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? © 2010 Pearson Education, Inc. All rights reserved 0-16 Check Your Financial IQ • You will be better able to accomplish your goals in life. © 2010 Pearson Education, Inc. All rights reserved 0-17 What are you Planning For? • Personal Financial Goals – – – – – – Education Emergencies/Rainy Day Fund Buying a Car Buying a Home Having a Family Retirement © 2010 Pearson Education, Inc. All rights reserved 0-18 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) © 2010 Pearson Education, Inc. All rights reserved 0-19 Figure 1.2 © 2010 Pearson Education, Inc. All rights reserved 0-20 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. © 2010 Pearson Education, Inc. All rights reserved 0-21 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? © 2010 Pearson Education, Inc. All rights reserved • Keep in mind other types of car expenses – Gas – Car maintenance – Car insurance 0-22 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? © 2010 Pearson Education, Inc. All rights reserved 0-23 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 0-24 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? © 2010 Pearson Education, Inc. All rights reserved • 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! 0-25 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? © 2010 Pearson Education, Inc. All rights reserved • 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. 0-26 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? © 2010 Pearson Education, Inc. All rights reserved • 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. 0-27 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. © 2010 Pearson Education, Inc. All rights reserved 0-28 Check Your Financial IQ • What are three categories of goals you should be planning for? © 2010 Pearson Education, Inc. All rights reserved 0-29 Check Your Financial IQ • Short-term goals, intermediate-term goals, and long-term goals. © 2010 Pearson Education, Inc. All rights reserved 0-30 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 © 2010 Pearson Education, Inc. All rights reserved 0-31 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 © 2010 Pearson Education, Inc. All rights reserved 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 0-32 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. © 2010 Pearson Education, Inc. All rights reserved 0-33 Figure 1.3 © 2010 Pearson Education, Inc. All rights reserved 0-34 Check Your Financial IQ • Who is responsible for judging the quality of financial advice you receive? © 2010 Pearson Education, Inc. All rights reserved 0-35 Check Your Financial IQ • Each person is responsible for judging the quality of the advice he or she receives. © 2010 Pearson Education, Inc. All rights reserved 0-36 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 0-37 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 © 2010 Pearson Education, Inc. All rights reserved • There are many resources available to help you make your financial decisions such as: – Internet – Financial planners or advisors 0-38 Key Terms • Bankruptcy • Liquid asset • Opportunity cost © 2010 Pearson Education, Inc. All rights reserved • Personal finance • Personal financial planning 0-39 Websites • Finance.yahoo.com • www.cfp.net • www.careers-in-finance.com/fpskill.htm © 2010 Pearson Education, Inc. All rights reserved 0-40