Chapter 1 Overview of Personal Finance © 2010 Pearson Education, Inc.

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

What is Personal Finance and Personal Financial Planning?
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. Personal Finance is financial issues that affect and individual Personal Financial Planning is the process of planning every aspect of your personal finances Discuss how the purpose of planning is to assure that you have the life you see for yourself down the road. Ask students why wouldn’t they want to plan for future goals? Ask students what their future goals are? © 2010 Pearson Education, Inc. All rights reserved

Steps to Personal Financial Planning
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 Liquid assets are things you might have that can be rapidly converted to cash without a risk of significant loss Discuss how a good plan should include a budget. Explain that a budget is a tool that enables you to have everything you want for your future Discuss the importance of making contributions to liquid assets because it helps you save for the future. Discuss how you only want to borrow what you can bay back. Ask students what would happen to your car if you didn’t have insurance? Discuss the importance of saving money and how it is important for that money to be making money. © 2010 Pearson Education, Inc. All rights reserved

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. Ask students what type of job interests them. © 2010 Pearson Education, Inc. All rights reserved

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 Discuss how these all relate to people’s financial health. © 2010 Pearson Education, Inc. All rights reserved

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

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 = $17.55. © 2010 Pearson Education, Inc. All rights reserved

The Need for Personal Financial Planning
Over 30% of high school students use a credit card More than 2.0 million people files for personal bankruptcy in 2005. 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. 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. Discuss how saving a little bit every day can help you avoid these problems. What do these statistics say about people and financial planning? © 2010 Pearson Education, Inc. All rights reserved

Check Your Financial IQ
What is personal financial planning? © 2010 Pearson Education, Inc. All rights reserved

The Benefits of Good Financial Decision-Making
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. Opportunity Cost - is the value of the next best choice that one gives up when making a finance decision Make sure students understand the term opportunity cost. Explain how every choice we make in life requires the sacrifice or tradeoff of something else. If we buy something now, what else could we have done with the money? © 2010 Pearson Education, Inc. All rights reserved

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

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

What are you Planning For?
Personal Financial Goals Education Emergencies/Rainy Day Fund Buying a Car Buying a Home Having a Family Retirement Explain how some of these goals are short-term, intermediate-term, and long-term. Give more specific examples of each. © 2010 Pearson Education, Inc. All rights reserved

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) Discuss how education is costly, but the benefits can outweigh this. © 2010 Pearson Education, Inc. All rights reserved

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. Discuss the importance of saving for unexpected events © 2010 Pearson Education, Inc. All rights reserved

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 Discuss the need to plan for this type of thing. © 2010 Pearson Education, Inc. All rights reserved

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

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

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! Explain to students that although this may seem a while away, it is important to save now because it can help you when the time comes to buy a home. Introduce the topic that some people may rent instead of buying a home. What decision is right for them? © 2010 Pearson Education, Inc. All rights reserved

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. Discuss how having a financial plan helps you when you have to make these decisions. © 2010 Pearson Education, Inc. All rights reserved

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. Discuss the importance of planning for these goals even though it isn’ t in the near future. © 2010 Pearson Education, Inc. All rights reserved

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. Discuss the importance of financial planning in relationship to charitable giving. If you plan ahead, you can contribute. © 2010 Pearson Education, Inc. All rights reserved

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 Discuss how some financial decisions require research and there are many resources available. Ask students if they know anyone in this field? © 2010 Pearson Education, Inc. All rights reserved

The Internet Pros Cons Research prices of major purchases
Look up investment performance data There are many websites that provide payment calculators or information on wealth building 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 Discuss how the internet can be valuable but also to be cautious. When it comes to finances there are people trying to scam you. © 2010 Pearson Education, Inc. All rights reserved

This job requires training, education, and certification.
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

Figure 1.3 Discuss how it is always good to ask questions.
Explain how you can check the credibility of these financial sources with the government such as the SEC. © 2010 Pearson Education, Inc. All rights reserved

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

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

Chapter 1 Overview of Personal Finance © 2010 Pearson Education, Inc.

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Chapter 1 Overview of Personal Finance © 2010 Pearson Education, Inc.

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