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An Overview of Personal Finance. Chapter 1. Meaning and Importance of Personal Finance. Can improve your standard of living Today’s environment has impacted personal finance over the years Sluggish growth in personal income

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meaning and importance of personal finance
Meaning and Importance of Personal Finance
  • Can improve your standard of living
  • Today’s environment has impacted personal finance over the years
    • Sluggish growth in personal income
      • After adjusting for inflation and taxes, personal income growth has only been about 2% a year for the last 2 decades
    • Charges in the labor market
    • Most people starting jobs today will work at numerous companies during their career(s)
    • More options
      • Many more options available today in investments, retirement planning, banking, etc.
personal financial planning a lifelong activity
Personal Financial Planning—A Lifelong Activity
  • No matter how old you are, you’ll have financial goals
  • What works when you’re 20, won’t necessarily work when you’re 40
    • In your 20s your goals may be paying off student loans, buying your 1st house
    • In your 70s your goal may be making sure your retirement funds last your lifetime
personal financial toolbox
Personal Financial Toolbox
  • Once you graduate from college (and now have a ‘real’ job)
    • Figure out your current financial standing
      • How much do you owe?
      • What assets do you have?
        • Prepare an income statement and balance sheet
    • Put yourself on a budget
    • Insure yourself against financial ruin
      • Life, health, property
personal financial toolbox1
Personal Financial Toolbox
  • Get your debts under control (if they’re not already)
    • Pay off high-rate loans (or roll over into lower-rate loans)
  • Start saving for retirement
  • Set up a regular savings program (pay yourself)
    • Have money automatically transferred from checking to savings
    • Treat this like a fixed expense
getting professional help
Getting Professional Help
  • Many colleges & universities offer credit counseling
  • May use services of a CPA or professional investment advisor
  • Dozens of financial self-help books
  • Online financial information is available
  • If you use a financial planner make sure they are qualified
web links
Web Links
  • www.moneycentral.com
  • www.quicken.com
  • www.motleyfool.com
a personal financial management model
A Personal Financial Management Model
  • Financial plan is a guide to help you reach your targeted future goals
    • Step 1: Develop short and long-term goals
      • Influenced by your personal values & current financial situation
    • Step 2: Establish financial strategies
    • Step 3: Put plan in action & monitor performance
a personal financial management model1
A Personal Financial Management Model
  • All financial plans revolve around:
    • Maximizing income and wealth
      • The amount of money you earn is a vital past of any plan
    • Using money more effectively
      • Spend (and save) your money wisely
        • Little things add up
    • Monitoring expenditures
      • Use a budget to help control expenditures
      • The more you know about loans, investments, etc., the more likely you are to make a good decision
a personal financial management model2
A Personal Financial Management Model
  • Pitfalls of Poor Financial Planning
    • Missed or late payments will be noticed
      • Creditors may:
        • Repossess your property
        • Garnish your wages
        • Force you to file for personal bankruptcy
      • A bad credit record can last for years
setting personal goals
Setting Personal Goals
  • Your values will influence your financial goals
    • What things in life are important to you?
  • Your financial goals are influenced by your current financial situation
    • Prepare current financial statements
      • Review them to determine what you own, what you owe, & where you’re spending your money
    • Prepare a budget
    • Prepare a list of short and long-term goals
      • Make sure they are realistic and obtainable
    • Write down your goals and periodically review them
your personal financial decisions
Your Personal Financial Decisions
  • Career choice
    • Most of your income comes from salaries/wages– determines your lifestyle
  • Basic money management
    • Prepare a budget
    • Select the right bank
    • Establish a regular savings plan
  • Credit management
    • Don’t bite off more than you can chew
    • Find a good credit card
    • Learn how to compute interest charges/monthly payments
    • Find out your credit history (report)
    • Learn what to do if you get into trouble
your personal financial decisions1
Your Personal Financial Decisions
  • Tax Planning
    • How can you reduce your taxes?
  • Effective Buying
    • Real estate, cars, etc.
      • Renting vs. owning
  • Insurance
    • How much insurance should you have (if any)?
      • Life
      • Health
      • Property
      • Disability
      • Liability
your personal financial decisions2
Your Personal Financial Decisions
  • Investment Management
    • Invest to increase your future wealth
      • Difficult to substantially increase future wealth without investing
    • Investments are risky, choices include:
      • Mutual funds
      • Stocks
      • Bonds
      • Options and futures
      • Real estate
      • Art
      • Coins
      • Metals (gold, silver, etc.)
your personal financial decisions3
Your Personal Financial Decisions
  • Financial Planning for Tomorrow
    • Planning for your children’s college education
      • Becoming more and more expensive
  • Retirement Planning
    • How do you want to live your retirement?
    • How much (if any) do you want to pass along to your heirs?
    • How long remains until you retire?
    • Will Social Security be enough?
external factors
External Factors
  • External Factors to consider
    • Government policy
      • Tax rates, credits, deductions, etc.
        • Will the capital gains rate increase?
        • Interest on student loans
      • Changes to Social Security
        • Will the retirement age be increased?
        • Will payroll taxes increase?
        • Will benefits to ‘wealthy’ retirees be reduced?
      • Health insurance reform
        • The cost of health insurance will probably rise over the years
external factors1
External Factors
  • Economic Conditions
    • The Business Cycle
      • Shorter-term sequences of expansions and contractions (recession)
        • Typical business cycle has four stages: prosperity, decline, recession, and recovery
    • Gross Domestic Product
      • Represents the total value of goods and services produced by a nation’s economy
        • Important determinant of personal income
          • Disposable personal income—what remains after income taxes
          • Discretionary personal income—what remains after all necessary living expenses have been paid
external factors2
External Factors
  • Unemployment rate:
    • The percentage of workforce currently looking for a job
      • Inversely related to economic activity
  • Inflation
    • Inflation decreases the purchasing power of the dollar
    • Inflation has been about 3% in recent years
    • Income sources with cost-of-living increases are tied to inflation
  • Interest Rates
    • If you think interest rates are going to rise sharply, buy that house/car now instead of waiting
    • Interest Rates are tied to inflation
    • Nominal interest rates are those that you pay or receive where as real interest rates are nominal rates less the rate of inflation
      • For instance, if a six month CD pays a 5% nominal rate, but inflation is 2%, then you are earning a real rate of 3%
external factors3
External Factors
  • Government Policy and Economic Activity
    • Government influences economy
      • If taxes increase and government spending remains unchanged, economic growth will slow
      • Federal Reserve Board can increase or decrease the supply of money
        • Impacts interest rates, inflation, and economic growth
  • Recession/Expansion
    • If you think a recession is in the near future, save more now (in case you get laid off)