An Overview of Personal Finance

1. An Overview of Personal Finance Chapter 1

2. 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.

3. 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

4. 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

5. 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

6. 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

7. Web Links • www.moneycentral.com • www.quicken.com • www.motleyfool.com

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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.)

15. 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?

16. 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

17. 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

18. 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%

19. 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)

20. Figure 1.5: Real GDP

21. Figure 1.6: Breakdown of Personal Income