Chapter 1: Understanding Personal Finance Garman/Forgue Personal Finance Ninth Edition PPT slide program prepared by Amy Forgue and Ray Forgue

Chapter 1:Understanding Personal Finance

Garman/Forgue

Personal FinanceNinth Edition

PPT slide program prepared by Amy Forgue and Ray Forgue.

Copyright ©Houghton Mifflin Company. All rights reserved. 1 - 2

Learning Objectives

1. Use the building blocs to achieving financial success.

2. Understand how the economy affects your personal financial success.

3. Apply economic principles when making financial decisions.


Learning Objectives

1. Perform time value of money calculations.

2. Make smart decisions about your employee benefits.

3. Identify the professional qualifications of providers of financial advice.


Financial Literacy

• Financial literacy is knowledge of:– Facts

– Concepts

– Principles

– Technological tools

…that are fundamental to being smart about money.


Financial Responsibility

• Financial responsibility means

– being accountable for your future financial well being.

– that you strive to make good decisions in personal finance.


Financial Success

• Spend less to save and invest!

• Savings

• Investments

• Standard of Living

• Level of Living


Financial Success

• Financial Happiness: Satisfaction about money matters.

• Use the Building Blocks of financial success

• Know how the economy affects your personal financial success


The Economy and Business Cycles

• Economy: System of managing the resources of a country, state, or community.

• Economic Growth: Increasing production and consumption in the economy.


The Economy and Business Cycles

• The economy grows and contracts over time:– Expansion

– Peak

– Expansion

– Trough


Future Direction of the Economy?

• Track the Gross Domestic Product

• Track the Employment Report

• Track the Index of Leading Economic Indicators

• Track the Consumer Confidence Index


Inflation

• Inflation: Steady rise in the general level of prices.

• How does inflation affect income and consumption?


Inflation

• How inflation is measured:

– Consumer Price Index (or CPI)

– Personal Inflation Rate


Track the Federal Funds Rate

• Federal Funds Rate:

– Rates banks charge each other

– Set by the FED


Think Like an Economist

• Opportunity Cost: Cost of decision measured by the value of the next best alternative.


Think Like an Economist

• Marginal Utility/Cost: Usefulness or cost of the next increment of something.

• Marginal Tax Rate: Tax rate at which your last dollar earned is taxed.


FAQ in Personal Finance

• What will an investment (or a series of investments) be worth after a period of time?

• This question asks for a future value.


FAQ in Personal Finance

• How much has to be put away today (or as a series of investments) to provide some dollar amount in the future?

• This question asks for a present value.


Calculating Future Values

• Future Value (FV): Valuation of an asset projected to the end of a particular time period in the future.

• Compounding


Calculating Future Values

• Future value of a lump sum

• Future value of an annuity

• Rule of 72: Reveals number of years for principle to double


Calculating Present Values

• Present value of a lump sum

• Present value of an annuity


Smart Money Decisions at Work

• Flexible benefit plans offer tax-free money

• Flexible Benefit (Cafeteria) Plan



• Making decisions about employer-sponsored health care plans

• High-Deductible Health Care Plan

• Health Savings Accounts (or HSAs)



• Making decisions about employer’s Flexible Spending Accounts

• Pretax Dollars: Money income that has not been taxed by the government.



• Making decisions about… – Participating in employer life, disability, and

long-term care insurance plans

– Participating in your employer’s retirement (or tax-sheltered retirement) plan


Employer Retirement Plans

• First advantage: tax-deductible contributions

• Second advantage: employer’s matching contributions


Employer Retirement Plans

• Third advantage: tax-deferred growth

• Fourth advantage: starting early really pays off


Professional Financial Planning Advice

• A true financial planner should be able to analyze a family’s total needs in such areas as:– investments– taxes– insurance– education goals– retirement



• Appropriate professional designations and credentials for planners:– Certified Financial Planner (CFP)– Chartered Financial Consultant (CFC)– Certified Public Accountant (CPA)– Accredited Financial Counselor (AFC)– Mutual Fund Chartered Counselor (MFCC)– Registered Investment Advisor (RIA)



• How financial planners are compensated:– Commission-only financial planners/brokers

– Fee-based financial planner/brokers

– Fee-offset financial planners/brokers

– Fee-only financial planners


Top 3 Financial Missteps in Personal Finance

People slip up in building and maintaining good credit when they do the following:

1. Think only about money matters when faced with a financial problem.

2. Spend more than they earns.

3. Get financial advice from amateurs.


Good Money Habits in Personal Finance

• Spend significantly less than you make and save using pay-yourself-first.

• Stay up-to-date with current economic conditions and the knowledge to manage your personal finances.



• When making financial decisions, use marginal and opportunity costs and time value of money calculations.

• Establish financial goals and take actions to achieve them.



• Take advantage of tax sheltering through your employer’s benefits program.

• Believe in compounding by allowing your money to earn interest on top of the principal and other accrued interest.



• Keep debt under control.

• Take responsibility for managing your own financial success.

Documents

Chapter 1: Understanding Personal Finance Garman/Forgue Personal Finance Ninth Edition PPT slide program prepared by Amy Forgue and Ray Forgue