Chapter 1 · Chapter 1 . Learning Objectives • Define personal finance and personal financial planning • Analyze the benefits of good financial decision-making • Examine the

Overview of Personal

Finance

© 2010 Pearson Education, Inc.

All rights reserved

Chapter 1

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

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.


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.

checking and 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



• 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.


Figure 1.1



• 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


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?



• 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 $62.45. The total amount

withheld from her check was $80 - $62.45 =

$17.55.


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.


Check Your Financial IQ

• What is personal financial planning?



• The process of planning all aspects of your

personal finances.

© 2010 Pearson Education, Inc. All rights reserved

0-12

Study Guide Questions

• When should you start investing money to reach

financial goals?

– Now

• Finanical planners use the same thought process to

make plans about their personal finances?

– Nope

• If you use credit irresponsibly, it will be more

difficult to buy anything on credit in the future?

– Yep


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.



• 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?



• 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.



• What do you stand to gain from your

knowledge of personal finance?



• What does the opportunity of a purchase tell

you?

– The cost of the purchase plus the cost of not

doing or purchasing something else



• You will be better able to accomplish your

goals in life.


What are you Planning For?

• Personal Financial Goals

– Education

– Emergencies/Rainy Day Fund

– Buying a Car

– Buying a Home

– Having a Family

– Retirement


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)


Figure 1.2


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.


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



• 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?



• 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.


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?

• Buying a home is a long

term financial goal you

will have to make.

• 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!


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.


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.


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.



• What are three categories of goals you

should be planning for?



• Short-term goals, intermediate-term goals,

and long-term goals.



• The earlier you begin saving to finance a

long-term goal, the less you have to set aside

on a regular basis.


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


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

• Is the internet always

reliable?


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.


Figure 1.3



• Who is responsible for judging the quality of

financial advice you receive?



• Each person is responsible for judging the

quality of the advice he or she receives.



• Do people with a good understanding of

personal financial planning have any need

for a financial advisor?

– Yes


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.


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


Key Terms

• Bankruptcy

• Liquid asset

• Opportunity cost

• Personal finance

• Personal financial

planning


Websites

• Finance.yahoo.com

• www.cfp.net

• www.careers-in-finance.com/fpskill.htm


http://finance.yahoo.com/

http://www.cfp.net/

http://www.careers-in-finance.com/fpskill.htm





Documents

Chapter 1 · Chapter 1 . Learning Objectives • Define personal finance and personal financial planning • Analyze the benefits of good financial decision-making • Examine the