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Published by Flat World Knowledge, Inc. © 2014 by Flat World Knowledge, Inc. All rights reserved. Your use of this work is subject to the License Agreement available here http://www.flatworldknowledge.com/legal. No part of this work may be used, modified, or reproduced in any form or by any means except as expressly permitted under the License Agreement.
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EXPLORING BUSINESS V. 2.1 By Karen Collins
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CHAPTER 14 PERSONAL FINANCES
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CHAPTER OBJECTIVES Explain how to build a good credit rating. Understand the cost of borrowing. Explain the financial planning life cycle. Discuss the advantages of a college education and understand the ways to finance a degree. Describe the steps to take to get a job.
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CHAPTER OBJECTIVES Explain compound interest and the time value of money. Discuss the value of getting an early start saving. Explain how to prepare a net worth statement, personal cash flow statement and a personal budget. Discuss the advantages and risks of buying a home.
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PERSONAL FINANCE APPLICATION OF PRINCIPLES OF FINANCE TO THE MONETARY DECISIONS FOR YOUR INDIVIDUAL BENEFIT OR FAMILY
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FINANCIAL PLANNING THE ON-GOING PROCESS OF MANAGING YOUR PERSONAL FINANCES TO MEET GOALS THAT YOU’VE SET FOR YOURSELF OR YOUR FAMILY
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QUESTIONS FOR FINANCIAL PLANNING Annual Income? Debt and payments? Value of assets? Annual budget? Wealth accumulation? Money for retirement?
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FINANCIAL PLANNING LIFE CYCLE
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EDUCATION AND AVERAGE INCOME EDUCATION LEVELAVERAGE INCOME High school dropout$20,873 High school diploma$31,071 College degree$56,788 Advanced degree$82,320
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FUNDING SOURCES FOR COLLEGE EDUCATION Scholarships Grants Education Loans Work-Study
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STEPS TO GETTING A JOB OFFER Resume Cover letter Create company list General search Interview
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EVALUATING A JOB OFFER Salary Opportunity Quality of Life Benefits –Health Insurance –Disability Insurance –Flexible Spending Account –Retirement Plan
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COMPOUND INTEREST REFERS TO THE EFFECT OF EARNING INTEREST ON YOUR INTEREST
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TIME VALUE OF MONEY A DOLLAR RECEIVED IN THE PRESENT IS WORTH MORE THAN A DOLLAR RECEIVED IN THE FUTURE
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STEPS IN FINANCIAL PLANNING Evaluate Current Financial Status. Set Financial Goals. Use a budget to plan and assess your financial performance by comparing budgeted figures with actual amounts.
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PERSONAL FINANCIAL STATEMENTS Personal Net Worth Statement Cash Flow Statement
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PERSONAL NET WORTH STATEMENT (ASSETS) ASSETVALUE Cash$200 Checking accounts$1,000 Savings accounts/CDs/Money Market Accounts $400 Cars$8,000 Furniture and appliances$1,500 Computers$900 Stereo/Video Equipment/Cell Phones$400 Clothing$300 Total Assets$12,700
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PERSONAL NET WORTH STATEMENT (LIABILITIES) LIABILITYVALUE Credit card balances$1,200 Charge account balances$200 Student loans$7,000 Car loans$2,300 Total Liabilities$10,700 Total Net Worth = Assets – Liabilities$12,700 - $10,700 Total Net Worth$2,000
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CASH FLOW STATEMENT INFLOW/OUTFLOWVALUE ($) Cash Inflows Wages18,700 Student loan7,000 Total inflow of cash27,000 Cash Outflows Housing Rent5,400 Utilities700 Communication900 Food Groceries2,300 Eating out1,200
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CASH FLOW STATEMENT INFLOW/OUTFLOWVALUE ($) Transportation Gas and maintenance1,400 Car and loan payments1,400 Personal and healthcare Medical co-payments and dental200 Clothing200 Laundry/cleaning supplies/misc.100 Savings1,200 Other expenses800 Total outflow of cash15,800
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FINANCIAL GOALS Short-Term Intermediate-Term Long-Term
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WELL-CONCEIVED GOALS Realistic Measurable Definite Time Frames Specific Courses of Action
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JOE’S FINANCIAL GOALS SHORT-TERM GOALS (LESS THAN 2 YEARS) Pay off car loan Pay off credit card and charge account debt INTERMEDIATE-TERM GOALS (2-5 YEARS) Complete college Take one-month vacation after completing college LONG-TERM GOALS (MORE THAN 5 YEARS) Pay off student loans Buy a home Save for retirement
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BUDGET ITEMBUDGET ($)ACTUAL ($)VARIANCE (ACTUAL VS. BUDGETED) ($) Cash inflow Wages18,70019,000300 unfavorable Student loan7,000 --- Total25,70026,000300 unfavorable Cash Outflow Housing Rent5,100 --- Utilities700800100 unfavorable Communication800 --- Food Groceries2,3002,100200 favorable Eating out1,2001,300100 unfavorable
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BUDGET ITEMBUDGET ($)ACTUAL ($)VARIANCE (ACTUAL VS. BUDGETED) ($) Transportation Gas and maintenance1,3001,400100 unfavorable Car loan payments900 --- Personal and healthcare500700200 unfavorable Recreation/entertainment1,1001,200100 unfavorable Education6,500 --- Insurance1,700 --- Savings1,200 --- Other expenses800600200 favorable Total24,10024,300200 unfavorable Surplus (deficit)1,6001,700100 unfavorable
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DEVELOP BUDGET AND EVALUATE PERFORMANCE Wages Student loan Pay off credit cards Actual v. Budget- Variance Mature goals
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THREE LEVEL GOALS AND PLANS Primary goal: financial independence Secondary goals: Certain standard of living, college education for children, comfortable retirement lifestyle Tertiary goals: Housing, food, transportation, personal and health care, recreation/entertainment, education, insurance, savings
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U.S. SAVINGS RATE
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RISKY MORTGAGES Subprime: made to borrowers who don’t qualify for market-set interest rates. Adjustable Rate Mortgages (ARM): pegged to increase or decrease of certain interest rates.
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THE MELTDOWN Housing prices started to go down in 2006 and 2007. Homeowners with subprime ARM loans were not able to refinance, and foreclosures became commonplace. Because of the mortgage-loan defaults, banks lost huge amounts of money. These costs carried over the Fannie Mae and Freddie Mack (government-sponsored organizations who make and back mortgage loans). Major investment firms that had been buying subprime mortgages took a big hit. Getting loans became very difficult and many lost their homes.
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LESSONS OF SUBPRIME CRISIS All mortgages are not created equal –Avoid ARM’s; you are better off with a fixed-rate loan. Risk in the marketplace –Management risk –Business risk –Financial Risk Not all income is equally disposable –Watch how much you borrow; your home is not a piggy-bank.
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