Personal Finance: An Overview Chapter 1 Personal Finance: An Overview

Terms financial planning financial security financial literacy management goods services needs wants values value system ethics goal priority standard resources

Financial Competence Financial planning helps you reach important goals and financial security over your lifetime Financial security is the ability to meet essential needs without taking on more debt than you can repay Financial literacy is possessing and applying financial knowledge to make informed and responsible financial choices

Financial Competence (Continued) Management is using your resources to achieve predetermined objectives Management involves: Identifying resources Setting goals Making decisions Solving problems Evaluating the results

Choices Goods are tangible items that can be purchased Services are intangible activities that another person usually performs for a fee (haircut) Needs are necessities Physical needs (food, clothing, shelter) Psychological needs (safety, security, love, acceptance, approval, and success) Wants are things you would like but they are not essential

Values Values are your beliefs about what is important and desirable A value system is the overall structure of values and goals that guides your behavior

Ethics Ethics are the moral principles or beliefs that direct a person’s behavior Ethical behavior is important in personal relationships and in business and government Honesty, fairness reliability, respect, courage, tolerance, civility, and compassion Unethical behavior is usually considered wrong and is sometimes illegal

Goals A goal is an objective you want to attain “To be” goals are related to personality and character (smart, reliable, career goals, etc.) “To do” goals are things you want to accomplish (play piano, go to college, clean your closet, etc.) “To have” goals continually change (new clothes, new car, new phone, etc.)

Timing of Goals Short-term goals take less than a year to achieve Medium-term goals may take one to three years to achieve Long-term goals may take several years to achieve

Did You Know? Your goals today will probably be different from your goals in the next few years It is important to have a plan to review your goals on a regular basis

Evaluating Goals Is the goal realistic and possible? Can you break big goals into smaller pieces? Can you measure your progress? What will the goal cost in time, money, and effort? Will you still want the goal by the time you are able to reach it?

Interdependent and Conflicting Goals An interdependent goal is one goal you have to achieve in order to reach another goal Conflicting goals cannot all be achieved; you must decide which of the goals is more important to you When your goals conflict, your priorities and values will help you choose wisely

Priorities A priority is a value or goal that is given more importance than other values and goals You set your priorities by ranking goals in their order of importance Money and financial matters can have a major impact on the choices you make in the marketplace and in your financial life

Standards of Quality and Excellence A standard is an established measure of quality, value, or quantity You set standards for the way you want to live, what you want to do, and what you want to buy Your standards depend on your values and goals

Resources Resources are tools you can use to reach goals Human resources are internal (knowledge, experience, skills, motivation, etc.) Nonhuman resources are external (money, time, equipment) Resources are scarce; by planning you can make the most of them Resources are manageable Resources are related to one another

In Your Opinion Which of your resources are plentiful and which are scarce? Can you combine several resources for more effective use of each? How can you use your human resources to make up for what you are missing?

Review 1.1 What is the process of organizing and using your resources to achieve predetermined objectives? Management What is the difference between goods and services? Goods are tangible items Services are intangible activities

Objectives Discuss the various factors that influence financial decisions. Apply management principles to achieve your important goals.

Terms cost-benefit analysis marginal benefit marginal cost trade-off opportunity cost systematic decision-making

Making Financial Decisions We make financial decisions: Out of habit (shopping in the same stores) On impulse (spending money without considering whether you can afford to) By failing to act (being broke when you need money because you failed to save)

Cost-Benefit Analysis A cost-benefit analysis is weighing the costs against the benefits of an action, purchase or financial decision Example: you are taking a vacation and must decide whether to fly or drive to the destination Flying costs $350 more than driving, but saves eight hours of driving time Is the benefit of saving eight hours worth $350?

Marginal Analysis Marginal analysis measures the added benefit, versus the added cost, of one more unit of a product Marginal benefit is the change in total benefit of using one additional unit Marginal cost is the change in total cost of using one more unit

In Your Opinion Suppose you buy a banana for $1. It tastes so good, you buy a second, and a third. Will the second banana bring as much satisfaction as the first? Will the third banana be even less satisfying? Would you be willing to pay more for the first banana than the second, and more for the second than the third? Eventually there is no marginal benefit and you stop eating because you are full.

Trade-Offs and Opportunity Costs A trade-off is the choice you give up when you make one choice over another If you buy a new cell phone, the tradeoff is the other ways you could have used that money The opportunity cost is the value of the option you gave up It can be measured in dollars, time, or enjoyment

Common Sense Rule Do not spend more than you can afford Your financial future is in your hands Spend less than you make Borrow no more than you can repay Live within your means

Systematic Decision-Making Systematic decision-making is a process of choosing a course of action after evaluating information and the costs and benefits of alternative actions Define the decision to be made Explore all alternatives Choose the best alternative Act on your decision Evaluate your solution or decision

Systematic Decision-Making (Continued) Goodheart-Willcox Publisher

Managing Resources to Reach Goals Management involves more than making decisions Management is a three part process: Planning Acting Evaluating

Planning The planning phase of management involves: What goals do you want to achieve? What obstacles stand between you and your goals? What must you overcome? What resources can you use to overcome the obstacles and reach your goals?

Action The success of putting your resources to work to overcome obstacles that stand between you and your goals depends on determination and flexibility Determination keeps you focused on the final goal Flexibility helps you adjust to new and unexpected situations

Evaluation Evaluation is a continuous process used to assess your progress through all stages of the management process: Evaluating plans Evaluating actions Evaluating results

Evaluation (Continued) Goodheart-Willcox Publisher

Review 1.2 What is the value of something that you give up when you choose to do something else? Opportunity cost What is the Common Sense Rule? Don’t spend more than you can afford

Financial influencers Section 1.3 Financial influencers

Objectives Identify and explain factors that impact your financial future. Describe how the government influences the economy. Explain how globalization influences your finances.

Terms economic conditions recession inflation demographics culture technology globalization

Career Corner The average high school graduate can expect to earn just over one million dollars in a lifetime College graduates can expect to earn more than two million dollars in a lifetime

Your Financial Future Important factors that will influence your financial life now and in the future include: Economic conditions Social forces Technological forces Government action Globalization

Did You Know? Did you know that economics is a science? It deals with examining how goods and services are produced, sold, and used Economics focuses on how people, governments, and businesses make choices about how to use their limited resources to satisfy their unlimited needs and wants

Economic Conditions Economic conditions – the state of the economy at a given time Recession – period of slow or no economic growth (consumers spend less, businesses cut back leading to rising unemployment) Inflation – period of rising prices (buying power is reduced, consumers cannot buy or save as much)

Did You Know? When interest rates rise, consumers tend to spend less money. Why? When interest rates go down, people tend to spend more. Why?

Demographics Demographics is the statistical characteristics of the population such as: Vital statistics of records of births, deaths, marriages Social statistics of age, sex, race, geographic distributions and growth rates Social-economic statistics of education levels, income levels, employment, religion, etc.

Demographic Trends Couples are marrying and having children later The percentage of single-parent families is growing The average age of the population is growing Skilled workers are in greater demand More young adults are living at home with their parents The number of unmarried adults is increasing

Culture Culture is the beliefs, behaviors, and other characteristics common among members of a group or society Culture and ethnic traditions affect many everyday choices and routines in a family: Role each partner plays in the family Who makes financial/spending/management decisions Whether both partners work How the family uses credit

Technology Technology is the application of science and research to human life and environment Buying goods online Latest information about products, services, and issues from around the world Money management software to perform financial tasks (banking, bill paying, investing, etc.) Brings more and cheaper goods/services to consumers and creates jobs in many new fields

Government The fiscal and monetary policies of a government affect: Prices and wages Availability and cost of credit Job opportunities and employment trends Growth International trade

Government (Continued) Government entitlement and public assistance programs account for over 60 percent of the federal budget Medicaid Medicare Social Security

Globalization Globalization refers to worldwide markets, links and communications Our financial and consumer interests are linked to world trade and international economics Globalization give us access to news, goods and services through worldwide markets Global business competition brings price and quality advantages for consumers

Review 1.3 What is the study of the statistical characteristics of the population? Demographics What is a period of slow or no economic growth? Recession