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3. EXPLORING BUSINESS V. 2.1 By Karen Collins

4. CHAPTER 14 PERSONAL FINANCES

5. CHAPTER OBJECTIVES Explain how to build a good credit rating. Understand the cost of borrowing. Explain the financial planning life cycle. Discuss the advantages of a college education and understand the ways to finance a degree. Describe the steps to take to get a job.

6. CHAPTER OBJECTIVES Explain compound interest and the time value of money. Discuss the value of getting an early start saving. Explain how to prepare a net worth statement, personal cash flow statement and a personal budget. Discuss the advantages and risks of buying a home.

7. PERSONAL FINANCE APPLICATION OF PRINCIPLES OF FINANCE TO THE MONETARY DECISIONS FOR YOUR INDIVIDUAL BENEFIT OR FAMILY

8. FINANCIAL PLANNING THE ON-GOING PROCESS OF MANAGING YOUR PERSONAL FINANCES TO MEET GOALS THAT YOU’VE SET FOR YOURSELF OR YOUR FAMILY

9. QUESTIONS FOR FINANCIAL PLANNING Annual Income? Debt and payments? Value of assets? Annual budget? Wealth accumulation? Money for retirement?

10. FINANCIAL PLANNING LIFE CYCLE

11. EDUCATION AND AVERAGE INCOME EDUCATION LEVELAVERAGE INCOME High school dropout$20,873 High school diploma$31,071 College degree$56,788 Advanced degree$82,320

12. FUNDING SOURCES FOR COLLEGE EDUCATION Scholarships Grants Education Loans Work-Study

13. STEPS TO GETTING A JOB OFFER Resume Cover letter Create company list General search Interview

14. EVALUATING A JOB OFFER Salary Opportunity Quality of Life Benefits –Health Insurance –Disability Insurance –Flexible Spending Account –Retirement Plan

15. COMPOUND INTEREST REFERS TO THE EFFECT OF EARNING INTEREST ON YOUR INTEREST

16. TIME VALUE OF MONEY A DOLLAR RECEIVED IN THE PRESENT IS WORTH MORE THAN A DOLLAR RECEIVED IN THE FUTURE

17. STEPS IN FINANCIAL PLANNING Evaluate Current Financial Status. Set Financial Goals. Use a budget to plan and assess your financial performance by comparing budgeted figures with actual amounts.

18. PERSONAL FINANCIAL STATEMENTS Personal Net Worth Statement Cash Flow Statement

19. PERSONAL NET WORTH STATEMENT (ASSETS) ASSETVALUE Cash$200 Checking accounts$1,000 Savings accounts/CDs/Money Market Accounts $400 Cars$8,000 Furniture and appliances$1,500 Computers$900 Stereo/Video Equipment/Cell Phones$400 Clothing$300 Total Assets$12,700

20. PERSONAL NET WORTH STATEMENT (LIABILITIES) LIABILITYVALUE Credit card balances$1,200 Charge account balances$200 Student loans$7,000 Car loans$2,300 Total Liabilities$10,700 Total Net Worth = Assets – Liabilities$12,700 - $10,700 Total Net Worth$2,000

21. CASH FLOW STATEMENT INFLOW/OUTFLOWVALUE ($) Cash Inflows Wages18,700 Student loan7,000 Total inflow of cash27,000 Cash Outflows Housing Rent5,400 Utilities700 Communication900 Food Groceries2,300 Eating out1,200

22. CASH FLOW STATEMENT INFLOW/OUTFLOWVALUE ($) Transportation Gas and maintenance1,400 Car and loan payments1,400 Personal and healthcare Medical co-payments and dental200 Clothing200 Laundry/cleaning supplies/misc.100 Savings1,200 Other expenses800 Total outflow of cash15,800

23. FINANCIAL GOALS Short-Term Intermediate-Term Long-Term

24. WELL-CONCEIVED GOALS Realistic Measurable Definite Time Frames Specific Courses of Action

25. JOE’S FINANCIAL GOALS SHORT-TERM GOALS (LESS THAN 2 YEARS) Pay off car loan Pay off credit card and charge account debt INTERMEDIATE-TERM GOALS (2-5 YEARS) Complete college Take one-month vacation after completing college LONG-TERM GOALS (MORE THAN 5 YEARS) Pay off student loans Buy a home Save for retirement

26. BUDGET ITEMBUDGET ($)ACTUAL ($)VARIANCE (ACTUAL VS. BUDGETED) ($) Cash inflow Wages18,70019,000300 unfavorable Student loan7,000 --- Total25,70026,000300 unfavorable Cash Outflow Housing Rent5,100 --- Utilities700800100 unfavorable Communication800 --- Food Groceries2,3002,100200 favorable Eating out1,2001,300100 unfavorable

27. BUDGET ITEMBUDGET ($)ACTUAL ($)VARIANCE (ACTUAL VS. BUDGETED) ($) Transportation Gas and maintenance1,3001,400100 unfavorable Car loan payments900 --- Personal and healthcare500700200 unfavorable Recreation/entertainment1,1001,200100 unfavorable Education6,500 --- Insurance1,700 --- Savings1,200 --- Other expenses800600200 favorable Total24,10024,300200 unfavorable Surplus (deficit)1,6001,700100 unfavorable

28. DEVELOP BUDGET AND EVALUATE PERFORMANCE Wages Student loan Pay off credit cards Actual v. Budget- Variance Mature goals

29. THREE LEVEL GOALS AND PLANS Primary goal: financial independence Secondary goals: Certain standard of living, college education for children, comfortable retirement lifestyle Tertiary goals: Housing, food, transportation, personal and health care, recreation/entertainment, education, insurance, savings

30. U.S. SAVINGS RATE

31. RISKY MORTGAGES Subprime: made to borrowers who don’t qualify for market-set interest rates. Adjustable Rate Mortgages (ARM): pegged to increase or decrease of certain interest rates.

32. THE MELTDOWN Housing prices started to go down in 2006 and 2007. Homeowners with subprime ARM loans were not able to refinance, and foreclosures became commonplace. Because of the mortgage-loan defaults, banks lost huge amounts of money. These costs carried over the Fannie Mae and Freddie Mack (government-sponsored organizations who make and back mortgage loans). Major investment firms that had been buying subprime mortgages took a big hit. Getting loans became very difficult and many lost their homes.

33. LESSONS OF SUBPRIME CRISIS All mortgages are not created equal –Avoid ARM’s; you are better off with a fixed-rate loan. Risk in the marketplace –Management risk –Business risk –Financial Risk Not all income is equally disposable –Watch how much you borrow; your home is not a piggy-bank.