1 | 1 Chapter 1: Learning Objectives 1.Use the building blocks to achieve financial success. 2.Understand how the economy affects your personal financial success. 3.Apply economic principles when making financial decisions. 4.Perform time value of money calculations. 5.Make smart decisions about your employee benefits. 6.Identify the professional qualifications of providers of financial advice.

1 | 2 Personal Finance –How you spend, save, protect, invest your financial resources Financial Literacy –Your knowledge of facts and tools that help you be smart about money –It empowers you! –Helps you face challenges, avoid mistakes, and take advantage of opportunities Financial Responsibility –WHO is accountable for your future financial well-being? –WHO controls your financial destiny?

1 | 3 1.Building Blocks to Achieving Financial Success Is being wealthy a function of how much you earn or inherit? Reality: wealth is a function of the trade-offs and decisions you make Personal Finance is not Rocket Science! –Spend less, so you can save and invest more –Sacrifice current consumption to achieve financial goals GOOD MONEY HABITS => BEING IN CONTROL => ACHIEVE GOALS => FINANCIALLY HAPPY

1 | 4 How do you make yourself feel financially happy?

1 | 5 Invest money in a retirement fund Put money away in a savings account Pay off debt early (loans, credit card, car) Avoid relying too much on credit for purchases Avoid impulse buying Distinguish between needs and wants

1 | 6 2. The Economy Affects Your Financial Success  Economic Growth: –Increasing production & consumption in the economy  Business Cycle: –Our economy grows & contracts over time –A wavelike pattern of rising and falling economic activity What is the preferred stage of the economic cycle? production = high retail sales = high unemployment = low interest rates = low

1 | 7 Purchasing power Interest rates  Inflation: –Steady rise in the general level of prices –How does inflation affect consumers? –What can the Fed do to “pump up” the economy?  Interest: –How does inflation affect consumers? Does your income keep up with inflation?  Calculating Percent Change: –A very handy formula! = (Change) Original Federal funds rate Spending

1 | 8 3. Think Like an Economist When Making Financial Decisions A basic economic principle: OPPORTUNITY COST ****** Every decision we make involves a trade-off… Personal Opportunity Costs Time Sleep Health Financial Opportunity Costs Interest Safety Liquidity

1 | 9 Marginal Utility: The extra satisfaction we enjoy from “1 more” Marginal Cost: The added cost we incur from “1 more” We tend to seek “1 more” if _________ exceeds _______. When considering trade-offs, we ask ourselves… “is it worth it?”

1 | 10 Why Tax-Sheltered Returns are Better than Taxable Returns

1 | The Time Value of Money Enables us to compare money over time: –Ex: What will an investment be worth after a certain period of time? –Ex: How much should be invested now to provide some dollar amount in the future? We must know 3 values to do TVM computations: p = principal r = rate of interestSimple Interest Formula: t = time i = prt But what is missing here? PRESENT VALUE FUTURE VALUE

1 | 12 i = prt This assumes that the earned interest is withdrawn each year. Most people do not invest this way! Ex: $1000 put into an account that earns 5% annually: At end of year one: i = $1000 x.05 x 1 = $5 When interest stays in an account so that it earns additional interest each year, it is called “The way to build wealth is to make money on your money, not simply to put money away. Compounding over time is what really builds wealth. Getting rich is the result of investing regularly for long periods of time!” COMPOUNDING

1 | 13 Future Value : The value of an asset at some time in the future Ex: What is the future value of $1000 invested for 4 years earning 8% interest? Table 1.1: Future Value of $1 After a Given Number of Periods

1 | 14 Future Value of $10,000 The effects of compounding are greatest over time!

1 | 15 Rule of 72 Illustrated: A SHORT-CUT WORTH REMEMBERING! How long will it take for my initial investment to double? The RULE of 72: 72 ÷ the interest rate the money will be earning

1 | 16 Future Value of $2000 Annual Investments (APPENDIX TABLE A.3 WAS USED TO CALCULATE ON PG A-9) Ex: Future value of a series of deposits:

1 | 17 Present Value of a Lump Sum: (The current value of money that will be received some time in the future) Ex: What do I need to invest now in order to reach my desired goal of $20,000 in 10 years if my interest rate is 7% ? (APPENDIX TABLE A.2 CAN BE USED TO CALCULATE ON PG A-7) (factor) x 20,000 (principal) = $10,166 Present Value of an Annuity: Ex: Starting now, I need to have $30,000 per year for the next 20 years. If I can earn 7% on my investment, what amount should be put away now in order to achieve this? (APPENDIX TABLE A.4 CAN BE USED TO CALCULATE ON PG A-11) (factor) x 30,000 = $317,820

1 | 18 HOMEWORK: Finish reading chapter one Start reading chapter three PG 28 #3 (a) through (g) Due next Wednesday

1 | Where to Seek Expert Financial Advice Financial advisors… are they impartial or are they salespeople? (insurance agents, stockbrokers, etc.) A true financial planner is able to analyze a family’s total needs in such areas as: –investments –taxes –insurance –education goals –Retirement