1. Personal Finance
Chapter 1: Understanding Personal Finance

2. Learning Objectives
Use the building blocs to achieving financial success.
Understand how the economy affects your personal financial success.
Apply economic principles when making financial decisions.
Perform time value of money calculations.
Make smart decisions about your employee benefits.
Identify the professional qualifications of providers of financial advice.
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3. Financial Literacy Financial literacy is knowledge of: Facts Concepts
Principles
Technological tools
…that are fundamental to being smart about money.

4. The Building Blocks of Your Financial Success

5. Class Discussion Question #1
How do you make yourself feel financially happy?

6. Possible Answers Invest money in a retirement fund
Put money away in a savings account
Pay off debt early (house, credit card, car note, etc.)
Avoid relying too much on credit to make purchases
Avoid impulse buying
Don’t collect things that you don’t need

7. The Economy and Business Cycles
The economy grows and contracts over time:
Expansion
Peak
Contraction
Trough
Economy: System of managing the resources of a country, state, or community.
Economic Growth: Increasing production and consumption in the economy.

8. Business Cycle Phases

9. The 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
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10. Inflation Inflation: Steady rise in the general level of prices.
How does inflation affect income and consumption?
How inflation is measured:
Consumer Price Index (or CPI)
Personal Inflation Rate
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11. Think Like an Economist
Opportunity Cost: Cost of decision measured by the value of the next best alternative.

12. 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.
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13. FAQ in Personal Finance
What will an investment (or a series of investments) be worth after a period of time?
How much savings will I have for retirement?
This question asks for a future value.
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14. Calculating Future Values
Future Value (FV): Valuation of an asset projected to the end of a particular time period in the future.
Savings/Compounding: Interest earned on interest from multiple periods
Ex: “How much will I have in 10 years if I invest $1,000 at 8% interest?”
$1, Principle Amount
x(1.08) Interest Rate (annual)
$2, Investment Value
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15. Future Value of $1 After a Given Number of Periods
Appendix A-1

16. Calculating Future Values
Future value of a lump sum
Future Value (FV) = P(1 + r)t
Ex: “How much will I have in 10 years if I invest $100 at 10% interest?” $100(1.10)10 = $259.37
Future value of an annuity
Future Value (FV) = P(1 + r)t + P(1 + r)t + P(1 + r)t
Ex: “How much will I have if I invest $100 at the end of each year for 3 yrs at 10% interest?” = $100(1.10)0 + $100(1.10)1 + $100(1.10)2 = $100 + $110 + $121 = $331 FV in 3 years !
Rule of 72: An approximate interest rate earned based upon the time it will take for an investment to double is determined by: 72
r r = interest rate earned, so:
Ex: If doubling period is 8 years, the interest rate is
72/8 = 9 %
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17. Rule of 72 Illustrated
Rule of 72: Reveals number of years it takes for the principle amount invested to double in value.

18. Future Value of $10,000

19. 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.
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20. Calculating Present Values
Present value of a lump sum – “How much do I need to save today to have $ in 10 years if I can earn a 10% return?”
Present Value (PV) = FV
(1+r)t
Ex: $ future value discounted at 10% for 10 years = $ = $100 needed today (1.10)10
r = discount rate measures the present or future value of $1
received at time period (t)
t = time period of investment
Present value of an annuity – “How much do I need to save today to be able to withdraw $4,000 each year for the next 3 years if I can earn a 10% return?”
A fixed stream of cash flows at the end of each period over time.
PV = Pmt =PV of $4,000 received each year for (1+r)t years at 10% interest: $4, $4, $4,000 = $9, (1.10)1 (1.10) (1.10)3
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21. 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.
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22. Smart Money Decisions at Work
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
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23. Tax-Sheltered Returns
Assumes $2,000 Annual Contribution and 8% Return

24. Employer Retirement Plans
First advantage: tax-deductible contributions
Second advantage: employer’s matching contributions
Third advantage: tax-deferred growth
Fourth advantage: starting early really pays off
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25. Starting to Save Early Versus Starting Late at 9%
Earlier Later
Age $ Value Age $ Value
23 $ 3, $
, ,000
39 12, ,000
47 24, ,000
55 48, ,000
63 $96, $48,000

26. 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

27. Professional Financial Planning Advice
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)
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28. Professional Financial Planning Advice
How financial planners are compensated:
Commission-only financial planners/brokers
Fee-based financial planner/brokers
Fee-offset financial planners/brokers
Fee-only financial planners
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29. Top 3 Financial Challenges in Personal Finance
People are challenged to build and maintain financial well being when they:
Think only about money matters when faced with a financial problem.
Spend more than they earns.
Get financial advice from amateurs.
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30. 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.
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31. Good Money Habits in Personal Finance
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.
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32. Questions ?