1. Llad Phillips1 Introduction to Economics Elements of Personal Finance

2. Llad Phillips2 Outline: Lecture Two car loans car loans the economic approach to problem solving the economic approach to problem solving personal financial planning personal financial planning

3. Economics 109Llad PhillipsFall 1998 Introduction to Economics Hour, Location: 2:00-3:15, Phelps 1260 Instructor: Llad Phillips Office Hours: NH 3032, 9:30-10:15 TuTh and 3:30-3:50 TuTh, and by appointment, Texts:Kenneth Morris and Alan Siegel,The Wall Street Journal Guide to Understanding Personal Finance, Revised(1997) Arthur O’Sullivan and Steven Sheffrin, Economics, Principles and Tools(1998)

4. Labs(sections) in the Micro Computer Lab(MCL) 11189 F 9:00-9:50P333 Lab, Phelps 1526, JD 11197M 7:00-7:50 PM P333 Lab, Phelps 1526, JA 11205W 8:00-8:50P333 Lab, Phelps 1526, JD 11213 M 5:00-5:50 PM P200 Lab, Phelps 1525, JA 62646T 4:00-4:50 PM P333 Lab, Phelps 1526, LP 66381 TH 4:00-4:50 PM P333 Lab, Phelps 1526, LP Teaching Assistants: Joshua Anderson, Office Hours: NH 2036 Th 3:30-4:30, F 3-4;John Davis, Office Hours: NH 2032 Exams: Quiz: Thursday, Oct. 15,. You will need a scantron sheet and a #2 pencil Midterm: Tuesday, Nov. 3, 2:00-3:15 PM. Scantron & #2 Final: Tuesday, Dec. 8, 4:00-7:00 PM, Scantron & #2

5. Problem Assignments: At least half of the questions on the 25 minute quiz will be from the assigned problems. Due at the next Lab(section). Standing Assignment: Read the business section of the Los Angeles Times Course Home Page: http://www.econ.ucsb.edu/econ109

6. Lecture Topics and Reading List Part One Personal Finance: Economics in Everday Life 1. Tuesday Sept. 29, Lecture One: "Choosing a method to finance a car" Buying or Leasing a car The choice between: paying cash leasing buying on time

7. Reading Assignment: Guide to Understanding Personal Finance, Ch. 2, "Credit" O’Sullivan and Sheffrin: Ch.1, “Introduction: What is Economics?” emphasis: concepts of scarcity and production possibilities curve O’Sullivan and Sheffrin: Appendix to Ch.1, “Using Graphs and Formulas” Problems O & S Text: p.14: 1, 2, 3, 4, 5. p. 21: 1, 2, 3, 4, 5, 6

8. Llad Phillips8 Outline: Lecture Two car loans car loans the economic approach to problem solving the economic approach to problem solving personal financial planning personal financial planning

9. Llad Phillips9 Elements of Personal Finance Economics in every day life Economics in every day life  loans  car loans

10. Llad Phillips10 Example: Buying a New ‘96 Taurus Knowns Knowns  advertised price + tax + documents: $17,760  down payment: $2,137  loan amount: $15,623  loan amount = $17,760 - $2,137  annual interest rate: 6.9%  loan term in months: 24 months Unknowns Unknowns  monthly payment

11. Using Excel 5.0 for a Solution

12. Excel: select cell for monthly payment, click on Function Wizard select Financial and PMT

13. Excel: click on the help button in the previous window for examples

14. Using Excel 5.0 for a Solution

15. http://www.fordcredit.com/calculator/calcbuffer.html

17. Llad Phillips17 Choice: Lease drive-off costs(payments due at lease signing): $2,136.77 drive-off costs(payments due at lease signing): $2,136.77 total of 24 monthly payments: $7248 = 24 months * $302 per month total of 24 monthly payments: $7248 = 24 months * $302 per month  monthly Payment: $249 + tax  tax + documents = $1237 + $35 = $1272, or $53 per month total: $9384.77 total: $9384.77

18. Example 249 + tax 24 months 5,976 + tax

19. Llad Phillips19 Increasing the Length of the Loan monthly payment amount decreases monthly payment amount decreases amount of total payments increases amount of total payments increases amount of total interest payments increases amount of total interest payments increases total interest as % of total payments increases total interest as % of total payments increases

20. Using Excel 5.0 for a Solution

21. Llad Phillips21 Interest as a Fraction of Cost

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24. Llad Phillips24 Summary: Loans interest is front-loaded in payment plan interest is front-loaded in payment plan interest cost increases with the loan term interest cost increases with the loan term total cost increases with the loan term total cost increases with the loan term equity is low at the beginning of the loan equity is low at the beginning of the loan

25. Llad Phillips25 The Economic Approach to Problem Solving The Economic Paradigm

26. Llad Phillips26 The Economic Paradigm describing the alternatives to choose among describing the alternatives to choose among pricing the alternatives pricing the alternatives choosing the best alternative choosing the best alternative

27. Llad Phillips27 The Economic Paradigm example: buying a car describing the alternatives to choose among describing the alternatives to choose among  cash: the opportunity cost of losing interest  lease: depreciation included in payments  loan: sell the car to account for depreciation pricing the alternatives: valuation pricing the alternatives: valuation  Oscar Wilde- economists know the price of everything and the value of nothing choosing the best alternative choosing the best alternative  best: lowest cost  possibly subject to a constraint: having the $

28. Llad Phillips28 Personal Financial Planning Financing Life Events

29. Llad Phillips29 Life Event* Approach marriage marriage children children  financial security: insurance  housing  education retirement retirement long term care long term care estate estate *reference: Ernst & Young’s Personal Financial Planning Guide, 2nd Ed. John Wiley

30. Life Cycle Approach: Learning & Earning Age Infancy Nurturing Adolescence High School Education Young Adult College Adult Work Senescence Retirement Activity/Phase:

31. Life Cycle Approach: The Planners Age InfancyAdolescence Young AdultAdultSenescence 100% 50% 0 % You Parents

32. Life Cycle Approach: Planning Age Nurturing High School Education CollegeWorkRetirement Education: Investment in Human Capital or Earning Power Accumulating Assets cars appliances furnishings --------------------- house financial assets Spending

33. Llad Phillips33 Planning Tools Assets-Liabilities Statement Assets-Liabilities Statement  Assets Minus Liabilities = Net Worth  measure of wealth Income-Expenditure Statement Income-Expenditure Statement  Income Minus Expenditures = Saving  measure of change in wealth

34. Llad Phillips34 Assets-Liabilities Statement

35. Llad Phillips35 Income-Expense Statement

36. http://www.fordcredi.com/fplanner.cgi

37. Llad Phillips37 Income-Expense Statement: US Population 1988 other: health, 5%; pensions & Soc. Sec., 7%; other, 15% Source: Guide to Understanding Personal Finance, p. 87

38. Llad Phillips38 Strategies for Meeting Future Expenses Buy a House Buy a House Tax-Sheltered Savings Plans Tax-Sheltered Savings Plans Stocks and Bonds Stocks and Bonds

39. Llad Phillips39 Buying a House Positives Positives  provides space  builds equity  interest is deductible Negatives? Negatives?  down payment requires saving for this goal  interest payments are front-loaded, equity growth delayed  opportunity cost of not investing in stocks

40. Llad Phillips40 Summary - Vocabulary - Concepts economic paradigm economic paradigm down payment down payment loan term loan term monthly payment monthly payment annual percentage rate or APR annual percentage rate or APR equity equity personal financial planning personal financial planning life event ananysis life event ananysis human capital human capital assets assets liabilities liabilities net worth, wealth net worth, wealth income income expenditures expenditures savings savings

41. Llad Phillips41 2. Thursday, Oct. 1, Lecture Two: " Car loans; the economic paradigm; personal financial planning" Car loans The economic approach to problem solving Personal financial planning Reading Assignment: Guide to Understanding Personal Finance, Ch. 4, "Financial Planning" O’Sullivan and Sheffrin: Ch.2, “Key Principles of Economics” emphasis: concepts of choice and opportunity cost Problems O & S Text p. 35: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13

42. Llad Phillips42 The Principle of Opportunity Cost No matter what we do, there are always tradeoffs. No matter what we do, there are always tradeoffs. Scarcity -- limited resources -- is the reason. Scarcity -- limited resources -- is the reason. The opportunity cost of something is what you sacrifice to get it.

43. Llad Phillips43 Opportunity Costs and Production Possibilities The production possibility curve illustrates the principle of opportunity cost for an entire economy. The production possibility curve illustrates the principle of opportunity cost for an entire economy. -- shows all possible combinations of goods and services available to entire economy. -- shows all possible combinations of goods and services available to entire economy. --- principle of opportunity cost explains why production possibility curve is negatively sloped. --- principle of opportunity cost explains why production possibility curve is negatively sloped.

44. Llad Phillips44 THE MARGINAL PRINCIPLE Marginal Benefit Marginal Benefit The extra benefit resulting from a small increase in the activity. The extra benefit resulting from a small increase in the activity. Marginal Cost Marginal Cost The additional cost resulting from a small increase in the activity. The additional cost resulting from a small increase in the activity.