1. Personal Finance Garman/Forgue Tenth Edition
Chapter 1: Understanding Personal Finance
PPT slide program prepared by Amy Forgue and Ray Forgue.

2. Introduction Financial literacy is knowledge of: Facts Concepts
Principles
Technological tools
…that are fundamental to being smart about money.
Copyright ©Cengage Learning. All rights reserved.

3. Introduction
Personal finance is the study resources important for achieving financial success and involves
spending
saving
protecting and
investing resources.
Copyright ©Cengage Learning. All rights reserved.
1 - 3 3

4. Introduction Financial responsibility means
You are accountable for your future financial well-being.
You strive to make wise personal financial decisions.
Copyright ©Cengage Learning. All rights reserved.

5. Your Next Five Years In the next five years :
1. Stay up-to-date with current economic conditions.
2. Use marginal and opportunity costs and time value of money calculations when making financial decisions.
Copyright ©Cengage Learning. All rights reserved.

6. Your Next Five Years
3. Harness the power of compounding by saving a consistent amount each month for long-term goals.
4. Take responsibility for managing your own financial success.
5. Take advantage of tax sheltering through your employer’s benefits program.
Copyright ©Cengage Learning. All rights reserved.
1 - 6

7. Learning Objective #1
Use the building blocks to achieving financial success.
Copyright ©Cengage Learning. All rights reserved.

8. Achieving Financial Success
Spend less to save and invest!
Savings
Investments
Standard of Living versus Level of Living
Copyright ©Cengage Learning. All rights reserved.

9. Achieving Financial Success
Financial Success: achievement of financial aspirations.
Financial Happiness: Satisfaction about money matters.
Use the Building Blocks of financial success
Copyright ©Cengage Learning. All rights reserved.

10. Figure 1.1: Building Blocks to Achieving Financial Success

11. Concept Check 1.1 Describe financial success.
What is financial happiness?
What are the building blocks to achieving financial success?

12. Learning Objective #2
Understand how the economy affects your personal financial success.
Copyright ©Cengage Learning. All rights reserved.
1 - 12

13. The Economy and Financial Success
Economy: System of managing the resources of a country, state, or community.
Economic Growth: Increasing production and consumption in the economy.
Copyright ©Cengage Learning. All rights reserved.

14. Where Are We in the Business Cycle?
The economy grows and contracts over time:
Expansion
Peak
Contraction
Trough
Copyright ©Cengage Learning. All rights reserved.

15. Figure 1.2: Business Cycles Phases

16. What is the Future Direction of the Economy?
The Gross Domestic Product is a procylical indicator.
The Unemployment Rate is a countercyclical indicator.
Copyright ©Cengage Learning. All rights reserved.

17. What is the Future Direction of the Economy?
The Index of Leading Economic Indicators and the Consumer Confidence Index are leading indicators.
Copyright ©Cengage Learning. All rights reserved.
1 - 17

18. What Is the Future Direction of Inflation
Inflation: Steady rise in the general level of prices.
How does inflation affect income and consumption?
Copyright ©Cengage Learning. All rights reserved.

19. Inflation How inflation is measured: Consumer Price Index (or CPI)
Personal Inflation Rate
Inflation reduces real incomes.
Copyright ©Cengage Learning. All rights reserved.

20. What Is the Future Direction of Interest Rates?
Federal Funds Rate:
Rates banks charge each other
Set by the FED
Copyright ©Cengage Learning. All rights reserved.

21. Concept Check 1.2 Summarize the phases of the business cycle.
Describe two statistics that help predict the future direction of the economy.
Give an example of how inflation affects income and consumption.
Explain how the federal government measures inflation.

22. Learning Objective #3
Apply economic principles when making financial decisions.
Copyright ©Cengage Learning. All rights reserved.
1 - 22

23. Think Like an Economist
Opportunity Cost: Cost of decision measured by the value of the next best alternative.
Copyright ©Cengage Learning. All rights reserved.

24. Think Like an Economist
Marginal Utility/Cost: Usefulness or cost of the next increment of something.
Copyright ©Cengage Learning. All rights reserved.
1 - 24

25. Think Like an Economist
Marginal Tax Rate: Tax rate at which your next dollar earned is taxed.
The very best kind of income is tax-exempt income.
The second best kind of income is tax-sheltered income.
Copyright ©Cengage Learning. All rights reserved.
1 - 25

26. Figure 1.3: Tax-Sheltered Returns

27. Concept Check 1.3
Define opportunity cost and give an example of how opportunity costs might affect your financial decision making.
Explain and give an example of how marginal analysis makes some financial decisions easier.
Describe and give an example of how income taxes can affect financial decision making.

28. Learning Objective #4
Perform time value of money calculations in personal financial decision making.
Copyright ©Cengage Learning. All rights reserved.

29. Time Value of Money
What will an investment (or a series of investments) be worth after a period of time?
This question asks for a future value.
Copyright ©Cengage Learning. All rights reserved.

30. Time Value of Money
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.
Copyright ©Cengage Learning. All rights reserved.

31. Compounding
Compounding: When interest on an investment itself earns interest.
Compounding is the roadmap to wealth.
Copyright ©Cengage Learning. All rights reserved.

32. Calculating Future Values
Future Value (FV) of a Lump-Sum: Valuation of an asset projected to the end of a particular time period in the future.
Copyright ©Cengage Learning. All rights reserved.

33. Table 1.1: Future Value of $1 After a Given Number of Periods

34. Figure 1.4: The Importance of Higher Yields and More Time

35. The Rule of 72
Rule of 72: Reveals number of years for principle to double
$1000 invested at 8% would double to $2000 in 9 years (72/9)
$2000 to $4000 in 9 more years
$4000 to $8000 in 9 years
without ever having to invest another $1
Copyright ©Cengage Learning. All rights reserved.
1 - 35

36. Figure 1.5: Rule of 72 Illustrated

37. Calculating Future Values
Future Value (FV) of an Annuity: Valuation of a series of deposits projected to the end of a particular time period in the future.
Copyright ©Cengage Learning. All rights reserved.
1 - 37

38. Figure 1.6: Future Value of $2000 Annual Investments

39. Calculating Present Values
Present value of a lump sum; what is the equivalent value today of a dollar amount to be received in the future?
Present value of an annuity; what is the equivalent value today of a series of payments to be received in the future?
Copyright ©Cengage Learning. All rights reserved.

40. Concept Check 1.4
Explain the difference between simple interest and compound interest, and describe why that difference is critical.
What are the two components used when figuring the time value of money?
Use Table 1.1 to calculate the future value of (a) $2000 at 5 percent for four years, (b) $4500 at 9 percent for eight years, and (c) $10,000 at 6 percent for ten years.

41. Learning Objective #5
Make smart decisions about your employee benefits.
Copyright ©Cengage Learning. All rights reserved.
1 - 41 41

42. Smart Money Decisions at Work
Flexible benefit plans offer tax-free money
Flexible benefit plans offer a menu of benefits from which you may select
Copyright ©Cengage Learning. All rights reserved.

43. Making Decisions About Health Care Plans
Health Care Plans may be fully or partially paid by an employer
High-Deductible Health Care Plans may cost less
Health Savings Accounts (or HSAs) provide tax-sheltered savings for health expenses
Copyright ©Cengage Learning. All rights reserved.

44. Making Decisions About Flexible Spending Accounts
Pretax Dollars: Money income that has not been taxed by the government.
Flexible-spending accounts can pay for child care and medical expenses with pre-tax dollars
Copyright ©Cengage Learning. All rights reserved.

45. Making Decisions About Employer Insurance Plans
Participating in employer
life insurance,
disability insurance, and
long-term care insurance plans
Copyright ©Cengage Learning. All rights reserved.
1 - 45

46. Making Decisions About Retirement Plans
First advantage: tax-deductible contributions
Second advantage: employer’s matching contributions
Copyright ©Cengage Learning. All rights reserved.

47. Employer Retirement Plans
Third advantage: tax-deferred growth
Fourth advantage: starting early really pays off
Copyright ©Cengage Learning. All rights reserved.

48. Table 1.3: Starting to Save Early Versus Starting Late
Earlier Later
Age $ Value Age $ Value
23 $ $ 0 ,
, ,000
, ,000
63 $96, $48,000

49. Concept Check 1.5
Summarize the benefits of participating in a high-deductible health care plan at work.
Show a math example of why many employees participate in a tax-sheltered employee benefit plan, such as an HAS or 401(k) plan.
List two ways you can maximize the benefits from a tax-sheltered retirement program.

50. Learning Objective #6
Identify the professional qualifications of providers of financial advice.
Copyright ©Cengage Learning. All rights reserved.
1 - 50 50

51. 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
Copyright ©Cengage Learning. All rights reserved.

52. 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)
Copyright ©Cengage Learning. All rights reserved.

53. 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
Copyright ©Cengage Learning. All rights reserved.

54. Concept Check 1.6
What are the four ways financial planners may be compensated?
Describe two professional certification programs for financial planners.

55. Top 3 Financial Missteps in Personal Finance
People slip up in personal finance when they do the following:
1. Think about money matters only when faced with a financial problem.
2. Spend more than they earn.
3. Get financial advice from amateurs.
Copyright ©Cengage Learning. All rights reserved.

56. Do It NOW!
Understanding the economy can help you manage your personal finances appropriately. Start today by:
1. Searching the Internet to identify the current stage of the business cycle.
Copyright ©Cengage Learning. All rights reserved.

57. Do It NOW!
2. Visiting to determine the current inflation rate.
3. Going to to assess expectations for economic growth for the next 12 months.
Copyright ©Cengage Learning. All rights reserved.