Business and Finance Basics

Copyright ©Cengage Learning. All rights reserved Introduction Financial literacy is knowledge of: Facts Concepts Principles Technological tools …that are fundamental to being smart about money.

Copyright ©Cengage Learning. All rights reserved Introduction Personal finance is the study of resources important for achieving financial success and involves spending saving protecting and investing resources.

6 Steps of Financial Planning Determine Current Financial Situation Develop Your Financial Goals Identify Your Options Evaluate Your Options or Alternatives Create and Use a Financial Plan of Action Review and Revise Your Plan

Group Work Rosa and her friend Linda are students in Chicago. They want to drive cross country next summer to visit Rosa’s aunt in Arizona and Linda’s brother in California. They both work part time and take home $77 per week after taxes. They think they need to save $1200 each to pay for the trip. Each group is assigned to help Rosa and Linda apply one of the six steps of the financial planning process to help them reach their goal. Be prepared to give a brief oral outline of your part of the plan.

Business Cycle Expansion (prosperity) Production and sales high Unemployment, prices and interest rates low Contraction (recession) Decline in employment, output, income and sales Trough (recovery) Production, employment and sales begin to improve  leads to eventual expansion

Figure 1.2: Business Cycle Phases

Business Cycle

Copyright ©Cengage Learning. All rights reserved. What is the Future Direction of the Economy? The Gross Domestic Product is a procylical indicator. The Unemployment Rate is a countercyclical indicator.

Copyright ©Cengage Learning. All rights reserved What is the Future Direction of the Economy? The Index of Leading Economic Indicators and the Consumer Confidence Index

Key Economic Factors Consumer Prices (Inflation) Gross Domestic Product (GDP) Consumer Spending Interest Rates Money Supply Unemployment Housing Starts Stock Market Indices

LEI Index

Copyright ©Cengage Learning. All rights reserved What Is the Future Direction of Inflation Inflation: Steady rise in the general level of prices. How does inflation affect income and consumption?

Copyright ©Cengage Learning. All rights reserved Inflation How inflation is measured: Consumer Price Index (or CPI) Personal Inflation Rate Inflation reduces real incomes.

Inflation (later value – original value) % Inflation = X 100 original value = increase/original X 100

Inflation Example What is the inflation rate if an item that costs $120 today costs $140 next year? % infl. = (140 – 120)/120 X100 = (20/120)X100 = 16.7 % What is the cost of an item today if it cost $65 last year and the inflation rate has been 4.0%? X 65 = $2.6  increase  $65 + $2.6 = $67.6 cost today

Strategies to Reach Financial Goals Obtain Plan Spend Wisely Save, Save More, Keep on Saving Borrow Wisely Invest Manage Risk Plan for Retirement

Time Value of Money Future Value (FV) of a current lump sum: FV = (Present Value) (i + 1.0) n i = Interest Rate n = number of time periods See appendix A.1 (p. A-4) Rule of 72  Double your money in how many years? - Divide the interest rate (as a whole number) into 72

Time Value of Money FV lump sum calculation You have $2,400 to invest. Calculate the value of your money in 8 years assuming: a) 3% interest b) 5% Interest c) 8% interest

Time Value of Money Future Value (FV) of a Series of Payments (Annuity)  See Table A.3 (page A-8) - For example, putting $100 per year for 5 years into an account making 4% interest per year gives you how much money? - What if you put in $350 per year for 8 years at 3% interest?

Time Value of Money Present Value (PV) of a future lump sum (single amount)  See Table A.2 (p. A-6) How much money would you have to set aside right now in an account making 5% interest to have $1,000 in 10 years? How much money would you have to set aside right now in an account making 3% interest to have $7,000 in 12 years? How much money would you have to set aside right now in an account making 8% interest to have $50,000 in 7 years?

Time Value of Money Present Value (PV) of a series of payments over time (annuity)  See Table A.4 (p. A-10) You buy an investment that will pay you $1,000 per year for 10 years. The annual interest rate is 5%. What is the present value of that stream of money? You win a scholarship that will pay $5,000 per year for 4 years. What is the present value of that scholarship assuming 5% per year?