1. Finance 1200 Fall 2012

2. Discuss what you will gain from the study of personal finance.
Five Objectives of studying personal finance:
1. Introduction to the subject of personal finance
2. Develop personal financial goals.
3. Define opportunity costs and determine how opportunity costs are associated with personal financial planning.
4. Identify the key components of a financial plan, and
5. Outline the steps involved in developing your personal financial plan.

3. and how they affect who you are today.
“. . . True financial freedom doesn’t depend on how much
money you have. Financial freedom is when you have
power over your fears and anxieties instead of the other
way around.”
-- Suze Orman, The 9 Steps to Financial Freedom, p.2
Step 1 Think back to your formative experiences with money and consider what these memories have taught you about who you were then
and how they affect who you are today.
Step 2 Replace your financial fears with new, positive, empowering messages (i.e. "I have more money than I will ever need"; "I am in control
of all my affairs"; "I have the power to put my money in good hands").
Step 3 Be honest with yourself about your current financial status and decide how you want to start spending your money.
Step 4 Be responsible to those you love by taking care of these "must-do's"wills, trusts, life insurance, durable power of attorney for health care,
long-term-care insurance, and estate planning.
Step 5 Respect yourself and your money by investing wisely in retirement plans, stocks, money market accounts, and mutual funds and by
eliminating credit card debt. Your actions will give that respect meaning.
Step 6 You must trust yourself more than you trust others. Pay attention to your inner voice it will tell you if how and in what you are investing
is right for you.
Step 7 Give a portion of your money to others. By releasing an anxious grasp on your money, you will open yourself to receive all that is meant
to be yours.
Step 8 Understand and accept the cycles of money. The setbacks you may have today or next year will not keep you from financial freedom.
If you hold on to your goals and dreams, you will get there.
Step 9 Learn to recognize true wealth. Money itself will not make you financially free. That comes as a result of only that powerful state of
mind which tells us that we are worth far more than our money.

4. Discuss what you will gain from the study of personal finance.
Financial literacy -- the vocabulary necessary to manage one’s personal finances
Personal finance -- the study of personal and family resources considered important in achieving financial success.
Personal financial planning – the process of planning your spending, financing, and investing to optimize your financial situation.
Financial success -- the achievement of financial aspirations that are desired, planned, or attempted. It is defined by the individual or family that seeks it.

5. - = - = Overview of Financial Plan Financial Planning Decisions
Cash Flow Statement
Your Cash Inflow -
Your Cash Outflow
Balance Sheet
Use dollars to
Increase assets =
Your Net Cash Flows
Value of Your Assets -
Value of Your Liabilities
Use dollars to
Increase assets =
Your Net Worth

6. 6 Steps of Personal Financial Planning

7. Step 1: Determine Your Current Financial Situation
Personal Financial Statements
Budget
Cash Flow Statement
Balance Sheet

8. Step 2: Develop Your Financial Goals
SMART goals
Specific
Measurable
Action Oriented
Realistic
Timely
Dreams/Visions

9. Step 3: Identify Alternative Courses of Action
Continue the same course of action.
Expand the current situation.
Change the current situation.
Take a new course of action.
According to the National Endowment for Financial Education, 70 percent of major lottery winners end up with financial difficulties.

10. Step 4: Evaluate Your Alternatives
Consequences of Choices
Opportunity Cost
Evaluating Risk
Inflation Risk
Interest Rate Risk
Income Risk
Personal Risk
Liquidity Risk

11. Step 5: Create and Implement Your Financial Action Plan
Saving
Tax withholding
Retirement
Investing

12. Step 6: Review and Revise Your Plan
Regularly assess your financial decisions
Specific date each year.
When significant events occur in your life.

13. Goal Setting Financial Goals Should Be: Specific Measurable
Make sure the goal you are working for is something you really want, not just something that sounds good.
One goal cannot contradict any of your other goals.
Develop goals in the 6 areas of life:
Family and Home.
Financial and Career
Spiritual and Ethical
Physical and Health
Social and Cultural
Mental and Educational
Write your goal in the positive instead of the negative.
Express your goal in time and unit detail.
Make sure your goal is high enough.
Write your goals down.
Share your goals with people that will help you achieve them.
Financial Goals Should Be: Specific
Measurable
Action Oriented
Realistic
Timely

14. Developing Personal Financial Goals
TYPES OF FINANCIAL GOALS can be:
a) Influenced by the time frame in which you want to achieve your goals
b) Influenced by the financial need that drives your goals
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15. Developing Financial Goals
STEP 1
Realistic goals for your life situation
STEP 2
State goals in measurable terms
STEP 3
Determine time frame
STEP 4
Action to be taken
SHORT TERM GOALS (LESS THAN 1 YEAR)
INTERMEDIATE GOALS (1TO 5 YEARS)
LONG TERM GOALS (MORE THAN 5 YEARS)

16. Describe five lifetime financial objectives of most people
Maximizing Earnings and Wealth
Wealth -- an abundance of money, property, investments, and other resources.
Practicing Efficient Consumption
We use money for two purposes: consumption and savings
Finding Life Satisfaction
Reaching Financial Security
Financial Security -- the comfortable feeling that your financial resources will be adequate to fulfill any needs you have as well as most of your wants.
To reach financial security, first you need to set and prioritize your long-and short-term goals.
Accumulating Wealth for Retirement and an Estate

17. Tools in every financial situation
Reduce debt usage
Reduce spending
Review savings investments
Evaluate insurance coverage
Avoid financial scams
Communicate with family
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18. Influences on Personal Financial Planning (continued)
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19. A Typical Individual’s Financial Life Cycle
Stage 1
Early years-A time of
Wealth accumulation
Stage 2
Approaching Retirement-The Golden Years $
Stage 3
The Retirement Years
Reassessment of Retirement Goals
Tax and Estate Planning
Family Formation
Saving for Goals-Pay Yourself First
Insurance Planning
Home Purchase
Initial Goal Setting
Age

20. Understanding the Economic Environment of Personal Finance
The State of the Economy
Economics is the study of how wealth is created and distributed.
Economy is a system of managing the productive and employment resources of a country, community, or business.
Economic growth is a condition of increasing production and consumption in the economy.
Business cycle (or economic growth) is a wavelike pattern of economic activity that includes temporary phases that undulate from boom to bust.
Expansion occurs when production is at a high capacity, unemployment is low, retail sales are high, and prices and interest rates are low or falling.
Recession is generally a decline in business “a recurring period of decline in total output, income, employment, trade, usually lasting from six months to a year and marked by widespread contractions in many sectors of the economy.”
Depression is a severe downward phase of the economic cycle where unemployment is very high, prices are very low, the level of living decreases sharply, and economic activity virtually ceases.

21. Understanding the Economic Environment of Personal Finance (cont.)
Tracking at least two statistics may help understand the direction of the economy:
Gross Domestic Product (GDP) -- the value of all goods and services produced by workers and capital located in the United States, regardless of ownership.
Consumer Price Index (CPI) – measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
Inflation-- a steady rise in the general level of prices.
Deflation -- falling prices.
When prices are rising, an individual’s income also must rise to maintain its purchasing power, which is a measure of the goods and services that one’s income will buy.
Your real income reflects the actual buying power of your nominal income (also called money income.)

22. Phases of the Business (Economic Cycle)
Expansion
(Prosperity)
Recession
(or Depression)
Recovery
Business Production and Retail Sales
Average growth rate expected
in economy

23. Personal Finance Calculations
Percentage change in personal income -
(nominal income after raise/nominal income before raise -1) x 100
For example, if Edward received a $1,600 raise to increase his annual salary from $37,000 to $38,600 during a year with annual inflation of 4%, his personal change in income would be calculated as follows:
His nominal increase would be:
$38,600
37,000 = x 100 = 4.3%
However, because inflation was 4%, his real increase was only .3% (4.3% nominal increase – 4% inflation = .3% real increase). In real dollars Edward’s increase would be calculated as follows:
Real income -
nominal income after raise/1 + previous inflation rate
Edward’s real income =
= $37,115

24. Rule of 72
A handy formula to calculate the number of years it takes to double principal using compound interest is the Rule of 72. You simply divide the interest rate the money will earn into the number 72. For example, if interest is compounded at a rate of 7 % per year, your principle will double every 10.3 years. If the rate is 6 %, it will take 12 years.The rule of 72 also works for determining how long it would take for the price of something to double given a rate of increase in the price. For example, if college tuition costs are rising 8 % per year, the cost of college education doubles in just over nine years.

25. Economic Considerations That Affect Decision Making
Opportunity Costs -- the value of the next best alternative that must forgone.
Opportunity costs are hard to quantify because most involve personal tastes and preferences “[For many, the] biggest problems in life today Are directly connected with their early, formative experience with money.” (9 Steps to Financial Freedom, p. 7).
Utility -- the ability of a good or service to satisfy a human want.
Marginal Utility -- the extra satisfaction derived from having one more incremental unit of a product or service.
Marginal Costs -- the additional cost of one more incremental unit of some item.

26. Effect of Compound Interest

28. Income Taxes in Decision Making
Marginal Tax Rate -- is the tax rate at which your last dollar earned is taxed.
Assume Juanita has taxable income of $32,000 and receives a $1,000 bonus from her employer. Juanita’s federal tax rate is 28% and her state tax rate is 6%. What is Juanita’s effective marginal tax rate?
1,000 x = $ Federal taxes
1,000 x = $ State taxes
1,000 x = $ Social Security Taxes
Total Taxes $416.40

29. Tax Sheltered Returns Are Greater Than Taxable Returns

30. Methods for computing Time Value of Money
Formulas
Time value of money tables
Financial calculators
Spreadsheet software
Time value of money web sites
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31. The Time Value of Money in Decision Making
Time value of money is the idea that paying or receiving money over time is affected by the fact that money can earn a positive rate of return over time.
For example, if you were to win the lottery and be offered the choice to receive a lump sum of $1,000,000 now or payments of $60,000 per year for 20 years for a total of $1,200,000. The more favorable answer for you depends upon the interest rate you could earn on your investment.
Present value (or discounted value) is the current value of an asset that will be received in the future.
Future value is the valuation of an asset projected to the end of a particular time period in the future.
Basic calculations:
FV = (Present value of sum of money)( I + 1.0)(I + 1.0)(I + 1.0) . . .
Or FV = (PV)(1 + r) n
PV = (FV)
(1 + r)n
(Calculation assumes compound interest)

32. The Time Value of Money in Decision Making
Assume you have the option of two different investment options. First, a friend wanted to borrow $5,000 for three years and pay you back $6,000 in a lump sum. Second, you could invest the same $5,000 for three years in a government bond paying 7 percent annual interest. Which investment would be the best financial decision?
FV = (PV)(1 + r) n
= (5,000)(1+.07)3
= 5,000 x
= $6,125.22
You would earn $ more by investing in the government bonds.

33. Future Value of a Dollar (Single Payment)

34. Future Value of a Series of Annual Deposits (Annuity)

35. Present Value of a Dollar (Single Payment)

36. Present Value of a Series of Annual Deposits (Annuity)

37. Keeping the Time Value of Money Formulas Straight
Do I have the money now?
Yes No
Is it a lump sum?
Is it a lump
sum?
Use FV
Use Future Value Table
Use PV
Use PVA
Use Present Value Table
Use FVA

38. The Difference Between Simple Interest and Compound Interest
Simple Interest is the interest computed on principal only Interest = Principle x Rate x Time or I = P x R x T.
Compound Interest is the calculation of interest on interest as well as interest on the original investment.

39. How Work Decisions Affect Success in Personal Finance
Fringe Benefit is compensation for employment that does not take form of wages, salaries, commissions, or other cash payments. Examples include paid holidays, health insurance, and a retirement plan. Some fringe benefits are tax-sheltered, such as a flexible spending accounts and retirement accounts.

40. How Work Decisions Affect Success in Personal Finance
Fringe Benefit is compensation for employment that does not take form of wages, salaries, commissions, or other cash payments. Examples include paid holidays, health insurance, and a retirement plan. Some fringe benefits are tax-sheltered, such as a flexible spending accounts and retirement accounts.
The Positive Effects of a Flexible Spending Account
Without With Flexible Spending
the Plan The Plan Account
Monthly salary $2, $2,
To FSA account (410) $410
Taxable salary $2, $2,090
Income tax* (248) (186)
Social Security tax (191) (160)
Salary after taxes $2, $1,744
Medical and/or
Dependent care expenses (410) (410)
Take home pay $1, $1,344
FSA reimbursement (410)
Effective take home pay $1, $1,744

41. Steps in Successful Management of Personal Finance
Lifetime Financial Objectives
Retirement and estate planning
Investment planning
Income and asset protection
Managing expenditures
Cash and credit management
Financial planning
Accumulate wealth for retirement
Reach financial security
Find life satisfaction
Practice efficient consumption
Maximize earnings and wealth
Wealth

42. The Building Blocks of Financial Success
Stocks and
Bonds
Mutual
Funds
Real
Estate
Installment
Loans
Education
Costs
Credit
Cards
Pension
Plans
Transportation
Expenses
Organized
Financial Records
Housing
Insurance
Savings
Accounts
Realistic
Budget
Short-Term
Goals
Long-Term
Contingencies
Income
Taxes
Emergency
Savings Fund
Protection
Employee
Fringe Benefits
Checking
Account
Money Market
Use of regular income to provide basic lifestyle and savings to meet emergencies
Financially
Successful Life
Achieve
Invest
Handle
Manage
Establish
Base
Foundation

43. Good Debt vs. Bad Debt Debt incurred for consumption is bad debt.
= Debt Danger Ratio
Annual Income
Debt Danger Ratio beyond 25% can spell trouble.