1. Overview of Personal Finance © 2010 Pearson Education, Inc. All rights reserved Chapter 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 © 2010 Pearson Education, Inc. All rights reserved 0-2

3. What is Personal Finance and Personal Financial Planning? Personal Finance is financial issues that affect and individual Personal Financial Planning is 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. © 2010 Pearson Education, Inc. All rights reserved 0-3

4. Steps to Personal Financial Planning Liquid assets are 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 © 2010 Pearson Education, Inc. All rights reserved 0-4

5. 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 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. © 2010 Pearson Education, Inc. All rights reserved 0-5

6. Check Your Financial IQ What is personal financial planning? © 2010 Pearson Education, Inc. All rights reserved 0-6

7. Check Your Financial IQ The process of planning all aspects of your personal finances. © 2010 Pearson Education, Inc. All rights reserved 0-12

8. The Benefits of Good Financial Decision-Making Opportunity Cost - is the value of the next best choice that one gives up when making a finance decision 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. © 2010 Pearson Education, Inc. All rights reserved 0-8

9. 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? © 2010 Pearson Education, Inc. All rights reserved 0-9

10. Math for Personal Finance 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 0-10

11. Check Your Financial IQ What do you stand to gain from your knowledge of personal finance? © 2010 Pearson Education, Inc. All rights reserved 0-11

12. Check Your Financial IQ You will be better able to accomplish your goals in life. © 2010 Pearson Education, Inc. All rights reserved 0-17

13. Setting Goals Financial Planning helps you to achieve: Short-term goals, intermediate-term goals, and long-term goals. © 2010 Pearson Education, Inc. All rights reserved 0-30

14. What are you Planning For? Personal Financial Goals –Education –Emergencies/Rainy Day Fund –Buying a Car –Buying a Home –Having a Family –Retirement © 2010 Pearson Education, Inc. All rights reserved 0-14

15. 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 on your side when it comes to financial planning © 2010 Pearson Education, Inc. All rights reserved 0-15

16. 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 © 2010 Pearson Education, Inc. All rights reserved 0-16

17. 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 0-17

18. Figure 1.3 © 2010 Pearson Education, Inc. All rights reserved 0-18

19. 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 0-19

20. 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 0-20