2. Personal Finance: An Overview
Chapter 1
Personal Finance: An Overview

3. Personal finance basics
Section 1.1
Personal finance basics

4. Objectives Explain financial competence.
Describe the personal side of consumer choices.

5. Terms financial planning financial security financial literacy
management
goods
services
needs
wants
values
value system
ethics
goal
priority
standard
resources

6. Financial Competence
Financial planning helps you reach important goals and financial security over your lifetime
Financial security is the ability to meet essential needs without taking on more debt than you can repay
Financial literacy is possessing and applying financial knowledge to make informed and responsible financial choices

7. Financial Competence (Continued)
Management is using your resources to achieve predetermined objectives
Management involves:
Identifying resources
Setting goals
Making decisions
Solving problems
Evaluating the results

8. Choices Goods are tangible items that can be purchased
Services are intangible activities that another person usually performs for a fee (haircut)
Needs are necessities
Physical needs (food, clothing, shelter)
Psychological needs (safety, security, love, acceptance, approval, and success)
Wants are things you would like but they are not essential

9. Values Values are your beliefs about what is important and desirable
A value system is the overall structure of values and goals that guides your behavior

10. Ethics
Ethics are the moral principles or beliefs that direct a person’s behavior
Ethical behavior is important in personal relationships and in business and government
Honesty, fairness reliability, respect, courage, tolerance, civility, and compassion
Unethical behavior is usually considered wrong and is sometimes illegal

11. Goals A goal is an objective you want to attain
“To be” goals are related to personality and character (smart, reliable, career goals, etc.)
“To do” goals are things you want to accomplish (play piano, go to college, clean your closet, etc.)
“To have” goals continually change (new clothes, new car, new phone, etc.)

12. Timing of Goals Short-term goals take less than a year to achieve
Medium-term goals may take one to three years to achieve
Long-term goals may take several years to achieve

13. Did You Know?
Your goals today will probably be different from your goals in the next few years
It is important to have a plan to review your goals on a regular basis

14. Evaluating Goals Is the goal realistic and possible?
Can you break big goals into smaller pieces?
Can you measure your progress?
What will the goal cost in time, money, and effort?
Will you still want the goal by the time you are able to reach it?

15. Interdependent and Conflicting Goals
An interdependent goal is one goal you have to achieve in order to reach another goal
Conflicting goals cannot all be achieved; you must decide which of the goals is more important to you
When your goals conflict, your priorities and values will help you choose wisely

16. Priorities
A priority is a value or goal that is given more importance than other values and goals
You set your priorities by ranking goals in their order of importance
Money and financial matters can have a major impact on the choices you make in the marketplace and in your financial life

17. Standards of Quality and Excellence
A standard is an established measure of quality, value, or quantity
You set standards for the way you want to live, what you want to do, and what you want to buy
Your standards depend on your values and goals

18. Resources Resources are tools you can use to reach goals
Human resources are internal (knowledge, experience, skills, motivation, etc.)
Nonhuman resources are external (money, time, equipment)
Resources are scarce; by planning you can make the most of them
Resources are manageable
Resources are related to one another

19. In Your Opinion
Which of your resources are plentiful and which are scarce?
Can you combine several resources for more effective use of each?
How can you use your human resources to make up for what you are missing?

20. Review 1.1
What is the process of organizing and using your resources to achieve predetermined objectives?
Management
What is the difference between goods and services?
Goods are tangible items
Services are intangible activities

21. Managing Your Personal Finances
Section 1.2
Managing Your Personal Finances

22. Objectives
Discuss the various factors that influence financial decisions.
Apply management principles to achieve your important goals.

23. Terms cost-benefit analysis marginal benefit marginal cost trade-off
opportunity cost
systematic decision-making

24. Making Financial Decisions
We make financial decisions:
Out of habit (shopping in the same stores)
On impulse (spending money without considering whether you can afford to)
By failing to act (being broke when you need money because you failed to save)

25. Cost-Benefit Analysis
A cost-benefit analysis is weighing the costs against the benefits of an action, purchase or financial decision
Example: you are taking a vacation and must decide whether to fly or drive to the destination
Flying costs $350 more than driving, but saves eight hours of driving time
Is the benefit of saving eight hours worth $350?

26. Marginal Analysis
Marginal analysis measures the added benefit, versus the added cost, of one more unit of a product
Marginal benefit is the change in total benefit of using one additional unit
Marginal cost is the change in total cost of using one more unit

27. In Your Opinion
Suppose you buy a banana for $1. It tastes so good, you buy a second, and a third.
Will the second banana bring as much satisfaction as the first?
Will the third banana be even less satisfying?
Would you be willing to pay more for the first banana than the second, and more for the second than the third?
Eventually there is no marginal benefit and you stop eating because you are full.

28. Trade-Offs and Opportunity Costs
A trade-off is the choice you give up when you make one choice over another
If you buy a new cell phone, the tradeoff is the other ways you could have used that money
The opportunity cost is the value of the option you gave up
It can be measured in dollars, time, or enjoyment

29. Common Sense Rule Do not spend more than you can afford
Your financial future is in your hands
Spend less than you make
Borrow no more than you can repay
Live within your means

30. Systematic Decision-Making
Systematic decision-making is a process of choosing a course of action after evaluating information and the costs and benefits of alternative actions
Define the decision to be made
Explore all alternatives
Choose the best alternative
Act on your decision
Evaluate your solution or decision

31. Systematic Decision-Making (Continued)
Goodheart-Willcox Publisher

32. Managing Resources to Reach Goals
Management involves more than making decisions
Management is a three part process:
Planning
Acting
Evaluating

33. Planning The planning phase of management involves:
What goals do you want to achieve?
What obstacles stand between you and your goals? What must you overcome?
What resources can you use to overcome the obstacles and reach your goals?

34. Action
The success of putting your resources to work to overcome obstacles that stand between you and your goals depends on determination and flexibility
Determination keeps you focused on the final goal
Flexibility helps you adjust to new and unexpected situations

35. Evaluation
Evaluation is a continuous process used to assess your progress through all stages of the management process:
Evaluating plans
Evaluating actions
Evaluating results

36. Evaluation (Continued)
Goodheart-Willcox Publisher

37. Review 1.2
What is the value of something that you give up when you choose to do something else?
Opportunity cost
What is the Common Sense Rule?
Don’t spend more than you can afford

38. Financial influencers
Section 1.3
Financial influencers

39. Objectives
Identify and explain factors that impact your financial future.
Describe how the government influences the economy.
Explain how globalization influences your finances.

40. Terms economic conditions recession inflation demographics culture
technology
globalization

41. Career Corner
The average high school graduate can expect to earn just over one million dollars in a lifetime
College graduates can expect to earn more than two million dollars in a lifetime

42. Your Financial Future
Important factors that will influence your financial life now and in the future include:
Economic conditions
Social forces
Technological forces
Government action
Globalization

43. Did You Know? Did you know that economics is a science?
It deals with examining how goods and services are produced, sold, and used
Economics focuses on how people, governments, and businesses make choices about how to use their limited resources to satisfy their unlimited needs and wants

44. Economic Conditions
Economic conditions – the state of the economy at a given time
Recession – period of slow or no economic growth (consumers spend less, businesses cut back leading to rising unemployment)
Inflation – period of rising prices (buying power is reduced, consumers cannot buy or save as much)

45. Did You Know?
When interest rates rise, consumers tend to spend less money. Why?
When interest rates go down, people tend to spend more. Why?

46. Demographics
Demographics is the statistical characteristics of the population such as:
Vital statistics of records of births, deaths, marriages
Social statistics of age, sex, race, geographic distributions and growth rates
Social-economic statistics of education levels, income levels, employment, religion, etc.

47. Demographic Trends Couples are marrying and having children later
The percentage of single-parent families is growing
The average age of the population is growing
Skilled workers are in greater demand
More young adults are living at home with their parents
The number of unmarried adults is increasing

48. Culture
Culture is the beliefs, behaviors, and other characteristics common among members of a group or society
Culture and ethnic traditions affect many everyday choices and routines in a family:
Role each partner plays in the family
Who makes financial/spending/management decisions
Whether both partners work
How the family uses credit

49. Technology
Technology is the application of science and research to human life and environment
Buying goods online
Latest information about products, services, and issues from around the world
Money management software to perform financial tasks (banking, bill paying, investing, etc.)
Brings more and cheaper goods/services to consumers and creates jobs in many new fields

50. Government The fiscal and monetary policies of a government affect:
Prices and wages
Availability and cost of credit
Job opportunities and employment trends
Growth
International trade

51. Government (Continued)
Government entitlement and public assistance programs account for over 60 percent of the federal budget
Medicaid
Medicare
Social Security

52. Globalization
Globalization refers to worldwide markets, links and communications
Our financial and consumer interests are linked to world trade and international economics
Globalization give us access to news, goods and services through worldwide markets
Global business competition brings price and quality advantages for consumers

53. Review 1.3
What is the study of the statistical characteristics of the population?
Demographics
What is a period of slow or no economic growth?
Recession