Download - An Overview of Personal Finance
Slides by Pamela L. Hall
Western Washington University
An Overview of Personal Finance
Chapter 1
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Meaning and Importance of Personal Finance
Can improve your standard of livingToday’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.
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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
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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
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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 retirementSet up a regular savings program (pay
yourself) Have money automatically transferred from
checking to savings Treat this like a fixed expense
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Getting Professional Help
Many colleges & universities offer credit counseling
May use services of a CPA or professional investment advisor
Dozens of financial self-help booksOnline financial information is
availableIf you use a financial planner make
sure they are qualified
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Web Links
www.moneycentral.com www.quicken.com www.motleyfool.com
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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
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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
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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
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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
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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
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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
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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.)
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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?
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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
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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
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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%
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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)
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Figure 1.5: Real GDP
1,000.0
2,000.0
3,000.0
4,000.0
5,000.0
6,000.0
7,000.0
Re
al G
DP
($
bill
ion
s)
Notice generally that the U.S. economy has grown over the past 30 years.
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Figure 1.6: Breakdown of Personal Income