chapter 1: understanding personal finance garman/forgue personal finance ninth edition ppt slide...
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Chapter 1:Understanding Personal Finance
Garman/Forgue
Personal FinanceNinth Edition
PPT slide program prepared by Amy Forgue and Ray Forgue.
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Learning Objectives
1. Use the building blocs to achieving financial success.
2. Understand how the economy affects your personal financial success.
3. Apply economic principles when making financial decisions.
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Learning Objectives
1. Perform time value of money calculations.
2. Make smart decisions about your employee benefits.
3. Identify the professional qualifications of providers of financial advice.
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Financial Literacy
• Financial literacy is knowledge of:– Facts
– Concepts
– Principles
– Technological tools
…that are fundamental to being smart about money.
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Financial Responsibility
• Financial responsibility means
– being accountable for your future financial well being.
– that you strive to make good decisions in personal finance.
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Financial Success
• Spend less to save and invest!
• Savings
• Investments
• Standard of Living
• Level of Living
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Financial Success
• Financial Happiness: Satisfaction about money matters.
• Use the Building Blocks of financial success
• Know how the economy affects your personal financial success
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The Economy and Business Cycles
• Economy: System of managing the resources of a country, state, or community.
• Economic Growth: Increasing production and consumption in the economy.
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The Economy and Business Cycles
• The economy grows and contracts over time:– Expansion
– Peak
– Expansion
– Trough
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Future Direction of the Economy?
• Track the Gross Domestic Product
• Track the Employment Report
• Track the Index of Leading Economic Indicators
• Track the Consumer Confidence Index
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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
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Track the Federal Funds Rate
• Federal Funds Rate:
– Rates banks charge each other
– Set by the FED
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Think Like an Economist
• Opportunity Cost: Cost of decision measured by the value of the next best alternative.
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Think Like an Economist
• Marginal Utility/Cost: Usefulness or cost of the next increment of something.
• Marginal Tax Rate: Tax rate at which your last dollar earned is taxed.
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FAQ in Personal Finance
• What will an investment (or a series of investments) be worth after a period of time?
• This question asks for a future value.
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FAQ in Personal Finance
• How much has to be put away today (or as a series of investments) to provide some dollar amount in the future?
• This question asks for a present value.
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Calculating Future Values
• Future Value (FV): Valuation of an asset projected to the end of a particular time period in the future.
• Compounding
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Calculating Future Values
• Future value of a lump sum
• Future value of an annuity
• Rule of 72: Reveals number of years for principle to double
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Calculating Present Values
• Present value of a lump sum
• Present value of an annuity
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Smart Money Decisions at Work
• Flexible benefit plans offer tax-free money
• Flexible Benefit (Cafeteria) Plan
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Smart Money Decisions at Work
• Making decisions about employer-sponsored health care plans
• High-Deductible Health Care Plan
• Health Savings Accounts (or HSAs)
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Smart Money Decisions at Work
• Making decisions about employer’s Flexible Spending Accounts
• Pretax Dollars: Money income that has not been taxed by the government.
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Smart Money Decisions at Work
• Making decisions about… – Participating in employer life, disability, and
long-term care insurance plans
– Participating in your employer’s retirement (or tax-sheltered retirement) plan
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Employer Retirement Plans
• First advantage: tax-deductible contributions
• Second advantage: employer’s matching contributions
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Employer Retirement Plans
• Third advantage: tax-deferred growth
• Fourth advantage: starting early really pays off
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Professional Financial Planning Advice
• A true financial planner should be able to analyze a family’s total needs in such areas as:– investments– taxes– insurance– education goals– retirement
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Professional Financial Planning Advice
• Appropriate professional designations and credentials for planners:– Certified Financial Planner (CFP)– Chartered Financial Consultant (CFC)– Certified Public Accountant (CPA)– Accredited Financial Counselor (AFC)– Mutual Fund Chartered Counselor (MFCC)– Registered Investment Advisor (RIA)
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Professional Financial Planning Advice
• How financial planners are compensated:– Commission-only financial planners/brokers
– Fee-based financial planner/brokers
– Fee-offset financial planners/brokers
– Fee-only financial planners
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Top 3 Financial Missteps in Personal Finance
People slip up in building and maintaining good credit when they do the following:
1. Think only about money matters when faced with a financial problem.
2. Spend more than they earns.
3. Get financial advice from amateurs.
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Good Money Habits in Personal Finance
• Spend significantly less than you make and save using pay-yourself-first.
• Stay up-to-date with current economic conditions and the knowledge to manage your personal finances.
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Good Money Habits in Personal Finance
• When making financial decisions, use marginal and opportunity costs and time value of money calculations.
• Establish financial goals and take actions to achieve them.
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Good Money Habits in Personal Finance
• Take advantage of tax sheltering through your employer’s benefits program.
• Believe in compounding by allowing your money to earn interest on top of the principal and other accrued interest.
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Good Money Habits in Personal Finance
• Keep debt under control.
• Take responsibility for managing your own financial success.