overview of personal finance © 2010 pearson education, inc. all rights reserved chapter 1

Overview of Personal

Finance

© 2010 Pearson Education, Inc.All rights reserved

Chapter 1

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

• 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.


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



• 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.


Figure 1.1



• 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


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?



• 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.


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 full-time do not save money for retirement.


Check Your Financial IQ

• What is personal financial planning?



• The process of planning all aspects of your personal finances.


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.



• 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?



• 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.



• What do you stand to gain from your knowledge of personal finance?



• You will be better able to accomplish your goals in life.


What are you Planning For?

• Personal Financial Goals– Education– Emergencies/Rainy Day Fund– Buying a Car– Buying a Home– Having a Family– Retirement


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)


Figure 1.2


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.


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?

• Keep in mind other types of car expenses– Gas

– Car maintenance

– Car insurance



• 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?



• 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.


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?

• 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!


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?

• 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.


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?

• 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.


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.



• What are three categories of goals you should be planning for?



• Short-term goals, intermediate-term goals, and long-term goals.


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


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

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


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.


Figure 1.3



• Who is responsible for judging the quality of financial advice you receive?



• Each person is responsible for judging the quality of the advice he or she receives.


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.


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

• There are many resources available to help you make your financial decisions such as: – Internet

– Financial planners or advisors


Key Terms

• Bankruptcy• Liquid asset• Opportunity cost

• Personal finance• Personal financial

planning


Websites

• Finance.yahoo.com

• www.cfp.net

• www.careers-in-finance.com/fpskill.htm


overview of personal finance © 2010 pearson education, inc. all rights reserved chapter 1

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