1 | 1 Chapter 1: Learning Objectives 1.Use the building blocks to achieve financial success. 2.Understand how the economy affects your personal financial success. 3.Apply economic principles when making financial decisions. 4.Perform time value of money calculations. 5.Make smart decisions about your employee benefits. 6.Identify the professional qualifications of providers of financial advice.

1 | 2 Living with Economic Turbulence YOUR MONEY: Making good decisions is difficult in amidst the ups & downs! Pg 4

1 | 3 Personal Finance –How you spend, save, protect, invest your financial resources Financial Literacy –Your knowledge of facts and tools that help you be smart about money empowers –It empowers you! –Helps you face challenges, avoid mistakes, and take advantage of opportunities Financial Responsibility –WHO is accountable for your future financial well-being? –WHO controls your financial destiny? “The biggest barrier to achieving financial success is to live like you are rich before you are!”

1 | 4 Building Blocks to Achieving Financial Success Is being wealthy a result of how much you earn or inherit? Reality: NO! Your wealth (or lack of!) is due to the trade-offs and decisions you make every day of your life. Personal Finance is not Rocket Science! –Spend less, so you can save and invest more –Sacrifice current consumption to achieve financial goals FINANCIALLY HAPPY GOOD MONEY HABITS => ACHIEVE GOALS => FINANCIALLY HAPPY

1 | 5 What is FINANCIAL HAPPINESS? What is FINANCIAL SECURITY? People who are happy about their finances are likely to have a budget set reasonable goals live within their means “This happiness spills over in a positive way to feelings about their overall enjoyment of life.” Financial Powerpoint Pg. 5

1 | 6 The Economy Affects Your Financial Success  Economic Growth: –Increasing production & consumption in the economy  Business Cycle: –Our economy grows & contracts over time [6 yrs] –A wavelike pattern of rising and falling economic activity What is the preferred stage of the economic cycle? production = high retail sales = high unemployment = low interest rates = low

1 | 7 What is a Recession?  Consumers are pessimistic  Average 10 month decline in economic activity  Average unemployment rate of 6%+ The Great Recession: 2007 – 2009 Worst recession since Great Depression Lasted 18 months Unemployment => 10%+ Decline in stock market => 50%+ Real estate values plunged 35%+

1 | 8 Using INDICATORS to predict the future direction of the economy… Unemployment, GDP, Production, Sales The Stock Market is a LEADING INDICATOR

1 | 9 Inflation, Prices, & Interest RatesINFLATION: Steady rise in the general level of prices Interest rates move in same direction How does inflation affect us as consumers?DEFLATION: Decline in prices due to consumers not spending What can the Fed do to “pump up” the economy? CPI: measures changes in prices of goods ***Does your income keep up with inflation?***

1 | 10 Think Like an Economist When Making Financial Decisions A basic economic principle: OPPORTUNITY COST ****** Every decision we make involves a trade-off… Personal Opportunity Costs Time Sleep Health Financial Opportunity Costs Interest Safety Liquidity

1 | 11 Marginal Utility: The extra satisfaction we enjoy from “1 more” Marginal Cost: The added cost we incur from “1 more” We tend to seek “1 more” if the ______ exceeds the ______. When considering trade-offs, we ask ourselves… “is it worth it?”

1 | 12 Consider Income Taxes When Making Financial Decisions… Marginal Tax Rate: the rate at which your last dollar of earnings is taxed Legally Avoid Paying Taxes?  Tax-exempt income  Tax-deferred income

1 | 13 Why Tax-Sheltered Returns are Better than Taxable Returns

1 | 14 The Time Value of Money “A dollar today is worth more than a dollar received 5 years from now!” 2 Common Questions about money: 1)What will an investment be worth after a certain period of time? 2)How much should be invested now to provide some dollar amount in the future? PRESENT VALUE = DISCOUNTING FUTURE VALUE = COMPOUNDING

1 | 15 Therefore, TVM calculations take into consideration INTEREST THAT IS EARNED OVER A PERIOD OF TIME A simple way of calculating interest: I = P * R * T Ex: $1000 put into an account that earns 5% annually: At end of year one: INTERST = $1000 x.05 x 1 = $50 At end of year two: INTEREST = $1050 x.05 X 1 = $52.50 At end of year three:

1 | 16 “The way to build wealth is to make money on your money, not simply to put money away. Compounding over time is what really builds wealth.” COMPOUNDING When we keep our saved money AND the interest it has earned in an account, it grows faster:

1 | 17 Ex: What is the future value of $1000 invested for 4 years earning 8% interest? Future Value = Compounding : Finding the value of an asset at some time in the future Ex: What is the future value of $1000 invested for 4 years earning 8% interest?

1 | 18 The Future Value of $10,000 The effects of compounding are greatest over time! This chart shows the importance of higher rates and more time! Pg. 19

1 | 19 A SHORT-CUT WORTH REMEMBERING! How long will it take for my initial investment to double? The RULE of 72: 72 ÷ the interest rate the money will be earning

1 | 20 The Future Value of $2000 Invested Annually (EACH YEAR) What if we ADD to our savings each year?

1 | 21 2 ND TYPE OF TVM QUESTION: I know the amount I need in the future… what do I have to put away now to reach that goal? Ex: What do I need to invest now in order to reach my desired goal of $20,000 in 10 years if my interest rate is 7% ? (factor) x 20,000 (principal) = $10,166

1 | 22 In retirement, we WITHDRAW money each year from our “nestegg” to live off of… Ex: When I retire, I need to have $30,000 per year for the next 20 years. If I can earn 7% on my investment, what amount should be put away now in order to achieve this? (factor) x 30,000 = $317,820 How large does our nestegg need to be? Present Value = Discounting :

1 | 23 Make Smart Decisions at Work Employee Benefit: non-monetary compensation Ex: Paid holidays, health insurance, retirement plans Value can be 30%+ of your salary Some benefits are TAX-SHELTERED You do not pay income taxes on the value of the benefit –Cafeteria Plan (Flex-Spending Plan) –Health Savings Account (HSA) Tax advantage: paying with pre-tax dollars

1 | 24 Participating in your Employer’s Retirement Plan 1.Tax-Deductible Contributions 2.Employer’s Matching Contributions 3.Tax-Deferred Growth 4.Starting Early is a must! See example pg. 25 So Many Advantages!

1 | 25 Where to Seek Expert Financial Advice Financial advisorsFinancial advisors Tend to focus on specific areas of your finances (tax preparer, insurance agent, stock broker, etc.) Financial plannersFinancial planners Analyze your total needs; recommend long-term financial strategies taxes insurance education goals retirement investments How are they paid? How are they paid? Fee-Based Commission-Based

1 | 26 HOMEWORK: Reading chapter one Preview chapter three PG 31 #3 (a) through (g) Due next Thursday