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

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. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Perform time value of money calculations. Make smart decisions about your employee benefits. Identify the professional qualifications of providers of financial advice. Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Literacy Financial literacy is knowledge of: Facts Concepts Principles Technological tools …that are fundamental to being smart about money. Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Responsibility Financial responsibility means being accountable for your future financial well being. that you strive to make good decisions in personal finance. Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Success Spend less to save and invest! Savings Investments Standard of Living Level of Living Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Success Financial Happiness: Satisfaction about money matters. Use the Building Blocks of financial success Know how the economy affects your personal financial success Copyright ©Houghton Mifflin Company. All rights reserved.

The Economy and Business Cycles Economy: System of managing the resources of a country, state, or community. Economic Growth: Increasing production and consumption in the economy. Copyright ©Houghton Mifflin Company. All rights reserved.

The Economy and Business Cycles The economy grows and contracts over time: Expansion Peak Trough Copyright ©Houghton Mifflin Company. All rights reserved.

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 Copyright ©Houghton Mifflin Company. All rights reserved.

Inflation Inflation: Steady rise in the general level of prices. How does inflation affect income and consumption? Copyright ©Houghton Mifflin Company. All rights reserved.

Inflation How inflation is measured: Consumer Price Index (or CPI) Personal Inflation Rate Copyright ©Houghton Mifflin Company. All rights reserved.

Track the Federal Funds Rate Rates banks charge each other Set by the FED Copyright ©Houghton Mifflin Company. All rights reserved.

Think Like an Economist Opportunity Cost: Cost of decision measured by the value of the next best alternative. Copyright ©Houghton Mifflin Company. All rights reserved.

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. Copyright ©Houghton Mifflin Company. All rights reserved.

FAQ in Personal Finance What will an investment (or a series of investments) be worth after a period of time? This question asks for a future value. Copyright ©Houghton Mifflin Company. All rights reserved.

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. Copyright ©Houghton Mifflin Company. All rights reserved.

Calculating Future Values Future Value (FV): Valuation of an asset projected to the end of a particular time period in the future. Compounding Copyright ©Houghton Mifflin Company. All rights reserved.

Calculating Future Values Future value of a lump sum Future value of an annuity Rule of 72: Reveals number of years for principle to double Copyright ©Houghton Mifflin Company. All rights reserved.

Calculating Present Values Present value of a lump sum Present value of an annuity Copyright ©Houghton Mifflin Company. All rights reserved.

Smart Money Decisions at Work Flexible benefit plans offer tax-free money Flexible Benefit (Cafeteria) Plan Copyright ©Houghton Mifflin Company. All rights reserved.

Smart Money Decisions at Work Making decisions about employer-sponsored health care plans High-Deductible Health Care Plan Health Savings Accounts (or HSAs) Copyright ©Houghton Mifflin Company. All rights reserved.

Smart Money Decisions at Work Making decisions about employer’s Flexible Spending Accounts Pretax Dollars: Money income that has not been taxed by the government. Copyright ©Houghton Mifflin Company. All rights reserved.

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 Copyright ©Houghton Mifflin Company. All rights reserved.

Employer Retirement Plans First advantage: tax-deductible contributions Second advantage: employer’s matching contributions Copyright ©Houghton Mifflin Company. All rights reserved.

Employer Retirement Plans Third advantage: tax-deferred growth Fourth advantage: starting early really pays off Copyright ©Houghton Mifflin Company. All rights reserved.

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 ©Houghton Mifflin Company. All rights reserved.

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 ©Houghton Mifflin Company. All rights reserved.

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 ©Houghton Mifflin Company. All rights reserved.

Top 3 Financial Missteps in Personal Finance People slip up in building and maintaining good credit when they do the following: Think only about money matters when faced with a financial problem. Spend more than they earns. Get financial advice from amateurs. Copyright ©Houghton Mifflin Company. All rights reserved.

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. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Personal Finance When making financial decisions, use marginal and opportunity costs and time value of money calculations. Establish financial goals and take actions to achieve them. Copyright ©Houghton Mifflin Company. All rights reserved.

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. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Personal Finance Keep debt under control. Take responsibility for managing your own financial success. Copyright ©Houghton Mifflin Company. All rights reserved.