Chapter 1Introduction to Personal Finance

What is personal finance?

• Financial issues that can affect an individual• Knowledge is a key to making good financial decisions• Varies from person to person, and situation to situation

The financial plan

Record KeepingRetirement/Estate

Planning

Personal InvestingProtecting Assets and

income

Personal FinancingLiquidity ManagementBudgeting and Taxes

Ways to acquire assets!

• Work- salary or commissions• Investing• Inheritance/Gifts• Credit• Others?

Why do people work?

American Credit Industry

• Began in the 19th century but borrowing was reserved for:• Needs or things that increased productivity or value• Borrowing for nonessentials was seen as immoral• Borrowing was much more local

• Industrial Revolution changed the magnitude of production• Reduced costs and increased inventory• Borrowing for fun or frivolous items began

American Credit Industry cont.

• 1940’s-1960’s: disposable income and spare time increased• Central banks are established due to the Great

Depression• First credit cards are introduced

• 1990’s and beyond• Average household debt is between $10,000-$15,000• Average number of cards per user 3.7

• WHY????

Type of earning statements• Pay stub• W-4• W-2

The W’s

W-4

• Used to withhold the correct federal income tax from your pay• Complete a new one

when your personal or financial situations change

W-2

• Wage and tax statement• Used to file your federal

and state taxes• Reports the amount of

taxes withheld from your pay• Must be sent to you no

later than Jan. 31 of the following year

Gross vs. Net Income• Gross- An individual’s total personal income before taking out

deductions and taxes• Net- gross income minus taxes and all deductions• Common Deductions can add up to (20-40% of gross income)• Medicare tax• Social Security tax• Federal Income tax• State Income tax• State disability tax• Health care contributions• Retirement

Setting Smart Goals

• 3 ranges of goals• Short term- within 1

year• Intermediate- 1 to 5

years• Long term- will take

more than 5 years to accomplish

• Must be achievable, realistic, and specific

Needs vs. Wants• Need- something you have to have or can’t do without• Want- something you would like to have, not absolutely

necessary• Needs can fall under 2 categories• Fixed expenses- a set amount that must be paid each budget

period (monthly, quarterly)• Variable expenses- a cost that changes in amount or time it must

be paid, or both• Wants are purchased with discretionary income:• Discretionary expenses offer best opportunities for adjusting

spending