1. Overview of Personal Finance Essential Question: Why is personal financial planning important? Chapter 1

2. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-2 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

3. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-3 What is Personal Financial Planning? Personal Finance –Financial issues that affect an individual Personal Financial Planning –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

4. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-4 Steps to Personal Financial Planning Liquid assets –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

5. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-5 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

6. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-6 Figure 1.1: Fastest Growing Occupations

7. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-7 Figure1.1: (continued)

8. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-8 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?

9. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-9 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 $62.45. The total amount withheld from her check was $80 - $62.45 = $17.55.

10. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-10 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, and more than 80% of undergraduate students use a credit card, 1.3 million people will file for bankruptcy in 2012 25% of consumers have more credit card debt than emergency savings 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

11. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-11 What is personal financial planning?

12. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-12 The process of planning all aspects of your personal finances.

13. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-13 The Benefits of Good Financial Decision-Making Opportunity Cost –Cost of pursuing one option instead of another expressed as the value of the activity you gave up 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

14. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-14 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?

15. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-15 Math for Personal Finance Solution: Jacob will forego earning $8 an hour x 4 hours = $32. His opportunity cost of attending the movie is therefore $32. However, his total cost will include the $10 he spent at the movie and is equal to $32 + $10 = $42.

16. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-16 EQ: Why is personal financial planning important?

17. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-17 You will be better able to accomplish your goals in life.

18. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-18 What are you Planning For? Goals can be reduced to 3 categories –Short-term goals Buying a Car –Medium-term goals, Education Emergencies/Rainy Day Fund Buying a Home –Long-term goals Having a Family Retirement

19. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-19 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)

20. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-20 Figure 1.2: Comparison of Income among Education Levels

21. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-21 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

22. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-22 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

23. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-23 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?

24. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-24 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.

25. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-25 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

26. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-26 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

27. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-27 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

28. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-28 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

29. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-29 What are three categories of goals you should be planning for?

30. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-30 Short-term goals, medium-term goals, and long-term goals

31. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-31 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

32. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-32 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

33. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-33 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

34. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-34 Figure 1.3: Questions to Ask When Selecting a Financial Advisor

35. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-35 Who is responsible for judging the quality of financial advice you receive?

36. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-36 Each person is responsible for judging the quality of the advice he or she receives.

37. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-37 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

38. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-38 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

39. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-39 Key Terms and Concepts Bankruptcy Liquid asset Opportunity cost Personal finance Personal financial planning

40. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-40 Websites Finance.yahoo.com www.cfp.net www.careers-in-finance.com/fpskill.htm