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 and 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. © 2010 Pearson Education, Inc. All rights reserved 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 $ The total amount withheld from her check was $80 - $62.45 = $ © 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 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. © 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? Keep in mind other types of car expenses –Gas –Car maintenance –Car insurance © 2010 Pearson Education, Inc. All rights reserved 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? 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! © 2010 Pearson Education, Inc. All rights reserved 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? 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. © 2010 Pearson Education, Inc. All rights reserved 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? 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. © 2010 Pearson Education, Inc. All rights reserved 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 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 © 2010 Pearson Education, Inc. All rights reserved 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 There are many resources available to help you make your financial decisions such as: –Internet –Financial planners or advisors © 2010 Pearson Education, Inc. All rights reserved 0-38

Key Terms Bankruptcy Liquid asset Opportunity cost Personal finance Personal financial planning © 2010 Pearson Education, Inc. All rights reserved 0-39

Websites Finance.yahoo.com © 2010 Pearson Education, Inc. All rights reserved 0-40