Chapter 1 Overview of Personal Finance Essential Question

Chapter 1 Overview of Personal Finance Essential Question: Why is personal financial planning important?

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 Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -2

What is Personal Financial Planning? • Personal Finance – Financial issues that affect an individual • Personal Financial Planning • 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 – The process of planning every aspect of your personal finances Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -3

Steps to Personal Financial Planning • Liquid assets – 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 Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -4

Steps to Personal Financial Planning • 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 Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -5

Figure 1. 1: Fastest Growing Occupations Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -6

Figure 1. 1: (continued) Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -7

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? Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -8

Math for Personal Finance • 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. Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -9

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 • • • Copyright © 2014 Pearson Education, Inc. All rights reserved. Over 30% of high school students, and more than 80% of undergraduate students use a credit card, 1. 3 million people will file for bankruptcy in 2012 25% of consumers have more credit card debt than emergency savings 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 1 -10

What is personal financial planning? Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -11

The process of planning all aspects of your personal finances. Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -12

The Benefits of Good Financial Decision-Making • Opportunity Cost – Cost of pursuing one option instead of another expressed as the value of the activity you gave up • 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 Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -13

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? Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -14

Math for Personal Finance • Solution: Jacob will forego earning $8 an hour x 4 hours = $32. His opportunity cost of attending the movie is therefore $32. However, his total cost will include the $10 he spent at the movie and is equal to $32 + $10 = $42. Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -15

EQ: Why is personal financial planning important? Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -16

You will be better able to accomplish your goals in life. Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -17

What are you Planning For? • Goals can be reduced to 3 categories – Short-term goals • Buying a Car – Medium-term goals, • Education • Emergencies/Rainy Day Fund • Buying a Home – Long-term goals • Having a Family • Retirement Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -18

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) Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -19

Figure 1. 2: Comparison of Income among Education Levels Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -20

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 Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -21

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? Copyright © 2014 Pearson Education, Inc. All rights reserved. • Keep in mind other types of car expenses – Gas – Car maintenance – Car insurance 1 -22

Math for Personal Finance • 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? Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -23

Math for Personal Finance • 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. Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -24

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? Copyright © 2014 Pearson Education, Inc. All rights reserved. • 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 1 -25

Having a Family • When should you • These are all start saving for questions to child’s college fund? consider when you have a family • Will you buy your children their first • A good financial plan car? allows financial flexibility to make • Will your children go these choices to public or private instead of having school? them made for you Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -26

Retirement • What age would you • Financial planning like to retire? can allow you to • Do you know anyone build your wealth at an early age who retired young and now does • Although it may be exactly what he/she difficult to think of wants to do? now, it is a good idea to save for retirement Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -27

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 Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -28

What are three categories of goals you should be planning for? Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -29

Short-term goals, medium-term goals, and long-term goals Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -30

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 Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -31

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 Copyright © 2014 Pearson Education, Inc. All rights reserved. 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 1 -32

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 Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -33

Figure 1. 3: Questions to Ask When Selecting a Financial Advisor Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -34

Who is responsible for judging the quality of financial advice you receive? Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -35

Each person is responsible for judging the quality of the advice he or she receives. Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -36

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 Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -37

Summary • There are many good reasons to plan resources available for your financial to help you make future including: your financial decisions such as: – Education – Emergencies – Buying a car or home – Having a family – Retirement – Giving to charity Copyright © 2014 Pearson Education, Inc. All rights reserved. – Internet – Financial planners or advisors 1 -38

Key Terms and Concepts • Bankruptcy • Liquid asset • Opportunity cost Copyright © 2014 Pearson Education, Inc. All rights reserved. • Personal finance • Personal financial planning 1 -39

Websites • Finance. yahoo. com • www. cfp. net • www. careers-in-finance. com/fpskill. htm Copyright © 2014 Pearson Education, Inc. All rights reserved. 1 -40