1. Managing Your Personal Finances
Business Essentials
Eleventh Edition
Appendix III
Managing Your Personal Finances
Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved

2. Introduction
Dealing with personal finances is a lifelong job involving a crucial choice between two options:
Committing to the rational management of your personal finances by controlling them, helping them grow, and therefore enjoying greater personal satisfaction and financial stability
Letting the financial chips fall where they may and hoping for the best (which seldom happens) and therefore inviting frustration, disappointment, and financial distress

3. Building Your Financial Plan
Financial Planning
process of looking at one’s current financial condition, identifying one’s goals, and anticipating requirements for meeting those goals

4. Developing a Personal Financial Plan

5. Assessing Your Current Financial Condition
Personal Net Worth
value of one’s total assets minus one’s total liabilities (debts)

6. Worksheet for Calculating Net Worth (1 of 2)

7. Worksheet for Calculating Net Worth (2 of 2)

8. Develop Your Financial Goals

9. Compounding Money over Time

10. Timetable for Growing $1.00
FIGURE AIII.5 Timetable for Growing $1.00 n 1% 2% 4% 6% 8%
10% 1
1.010
1.020
1.040
1.060
1.080
1.100 2
1.082
1.124
1.166
1.210 3
1.030
1.061
1.125
1.191
1.260
1.331 4
1.041
1.170
1.262
1.360
1.464 5
1.051
1.104
1.217
1.338
1.469
1.611 6
1.062
1.126
1.265
1.419
1.587
1.772 7
1.072
1.149
1.316
1.504
1.714
1.949 8
1.083
1.172
1.369
1.594
1.851
2.144 9
1.094
1.195
1.423
1.689
1.999
2.358 10
1.105
1.219
1.480
1.791
2.159
2.594 15
1.161
1.346
1.801
2.397
3.172
4.177 20
1.220
1.486
2.191
3.207
4.661
6.727 25
1.282
1.641
2.666
4.292
6.848
10.834 30
1.348
1.811
3.243
5.743
10.062
17.449
Note: n = number of time periods; % = various interest rates

11. Save Your Money: Lower Interest Rates and Faster Payments
Seeking Lower Interest Rates
Making Faster Payments 
Declining Asset Value: A Borrower’s Regret
FIGURE AIII.6 Paying off Credit-Card Debt
Balance = $5,000
MPD 3%
MPD 5%
MPD 10%
APR
Months
Costs 6%
144
$5,965.56 92
$5,544.58 50
$5,260.74 9%
158
$6,607.24 96
$5,864.56 51
$5,401.63
12%
175
$7,407.50
102
$6,224.26 53
$5,550.32
18%
226
$9,798.89
115
$7,096.70 55
$5,873.86
21%
266
$11,704.63
123
$7,632.92 57
$6,050.28
Note: APR, annual percentage rate; MPD, minimum payment due

12. Financial Commitments of Home Ownership
Mortgage Loan
loan secured by property (the home) being purchased
FIGURE AIII.7 To Buy or Not Buy
Renting
Buying
No down payment to get started
Must make payments for mortgage, property taxes, and insurance
Flexibility to leave
Equity builds up over time
No obligation for upkeep or improvements
More privacy
No groundskeeping
Value of property may increase
Easy cash-flow planning (a single monthly payment)
Lower income taxes: mortgage-interest and property tax payments reduce taxable income
May provide access to recreation and social facilities
Financial gains from selling house can be exempt from taxes
Rental conditions may be changed by owner
Greater control over use of property and improvements
Timing for repairs controlled by owner
The home can become a source of cash by refinancing with another mortgage loan or a home-equity loan

13. Monthly Payments on a $10,000 Loan
FIGURE AIII.8 Monthly Payments on a $10,000 Loan
Length of Loan
Interest Rate (%)
3 Years
5 Years
10 Years
20 Years
30 Years
5.0
$299.71
$188.71
$106.07
$66.00
$53.68
6.0
304.22
193.33
111.02
71.64
59.96
6.5
306.49
195.66
113.55
74.56
63.21
7.0
308.77
198.01
116.11
77.53
66.53
8.0
313.36
202.76
121.33
83.65
73.38
9.0
318.00
207.58
126.68
89.98
80.47
10.0
322.67
212.47
132.16
96.51
87.76
11.0
327.39
217.42
137.76
103.22
95.24
12.0
332.14
222.44
143.48
110.11
102.86

14. Worksheet for PITI Calculations

15. Cashing Out from Tax Avoidance (Legally)
Traditional Individual Retirement Account (IRA)
provision allowing individual tax-deferred retirement savings
Roth IRA
provision allowing individual retirement savings with tax-free accumulated earnings
Coverdell Education Savings Account
(also known as an Education IRA) you can contribute up to $2,000 annually for each child under age 18

16. Cash Flows: Roth IRA versus Traditional IRA
FIGURE AIII.10 Cash Flows: Roth IRA versus Traditional IRA
Assumptions:
Initial contribution and earnings average 10 percent growth annually.
Initial contribution and earnings remain invested for 40 years.
Income tax rate is 30 percent.
blank
Traditional IRA
Roth IRA
Initial cash contribution to IRA
$3,000
Income tax paid initially: $4,285 income x 30% tax rate = $1,285 tax
1,285
Total initial cash outlay
$4,285
Accumulated earnings (40 years)
$132,774
Initial contribution +
3,000
Total available for distribution after 40 years =
$135,774
Income tax at time of distribution −
$40,732
Blank
After-tax distribution (cash)
$95,042