COA 4131 1st Edition Lecture 2 Outline of Last Lecture I Personal Finance and its Importance II The General Economy III Economic Cycle IV Indicators of the Direction of the Economy V The Changing World of Work and Importance of Education Outline of Current Lecture I Microeconomics II Presidents and the Economy III Financial Statements and Budgets IV Important Numbers List V Financial Statements VI The Personal Balance Sheet Net Worth VII How Solvent Are You VIII Selecting Financial Advisors Current Lecture A Microeconomics a Definition deals with smaller units within the economy such as understanding the decision making behavior of firms and households and how they interact in the marketplace i 50 of Americans don t balance or use check books ii There are 500 000 financial planners in U S B Presidents and the Economy a 1977 1981 i Jimmy Carter 1 Interest rates such as home mortgage were very high 2 Inflation was high 18 at the time 3 Democrat 4 He is still alive today b 1981 1988 i Ronald Reagan 1 Supply side economics a Government will give money to businesses and will trickle down to employees and give tax breaks to businesses to help them 2 Encouraging the growth of business through tax incentives c 1989 1993 i George Bush 1 Continued many of Reagan s policies 2 Oldest living president d 1993 2001 i Bill Clinton 1 New Economy a technology and invention and growth b great economy at this time c boom expansion 2 Emphasized growth 3 Economy influenced by proliferation of computers cell phones and the Internet 4 Innovation prosperity and expansion e 2001 2009 i George W Bush 1 Corporate and personal responsibility 2 Personally invest more 3 More choices 4 More personal finance education f 2009i Barack Obama 1 Recession 2 Economic stimulus package 3 Tax credits direct to employees through employer 4 Came in during recession a Bottom of recession was Fall 2009 5 Package to General Motors and education places 6 Take money to help businesses C Financial Statements and Budgets a Why keep good financial records i Records reflect consumption 1 Where is the money going and what am I spending it on 2 Decide where to cut back on some things ii Internet banking 1 Moving to all online iii Organizing Records 1 Safe Deposit Boxes a Things to put in the box something you don t need on the weekend i Military papers ii Divorce papers iii Jewelry b Really small box can range from 15 40 per year bigger ones are more expensive 2 Home Storage of Records a Safe at home i Make sure it is fire proof b Do not put things in underwear drawer that is the first place robbers look c Should be hidden and safe d People hide money everywhere in their homes e Money large amounts and foreign are not allowed in safety deposit box 3 Tax Considerations a Keep tax records for about 3 years b More than 3 years if you have been audited recently moved from out of country something weird happened to you iv Longer term financial records to keep 1 Things to hold onto a Birth certificates b Wills c Marriage certificates 2 Large financial transactions a Keep receipts in case you have to show them to the IRS D Important Numbers List a Write down important numbers and put it somewhere safe deposit box i Credit card ii Social Security iii Phone numbers iv Insurance companies and agents v Lawyers vi Bank numbers vii Serial number from car or TV E Financial Statements a Budgets i Trace the flow of income and expenses over a period of time 1 Monthly guide because credit card statements come once a month 2 After monthly budget then do a yearly budget 3 See if you are spending too much 4 Use it to plan for future 5 Expensive months December and February summer months a Figure out high and low months b c d e f g h ii Income can come from many sources 1 Wages salaries bonuses commissions 2 Alimony child support 3 Return or investments 4 Allowances or gifts inheritances 5 Social security benefits 6 Public assistance 7 Gains or loses form sale of assets 8 Other sources rent income royalties loans scholarships tax refunds iii In the black 1 Good cash flow statement 2 Good time to save 3 This is a good thing iv In the red 1 In trouble financially 2 Not so good 3 Review expenditures 4 Reduce spending v Focus on eliminating debt Balance sheets or net worth statements i List the value of assets and liabilities ii Net worth assets things worth money minus liability debt iii Students are usually negative net worth 1 We owe more money than we are making and that s normal Fixed Expenses i Same every month ii Car tuition rent ect Variable Expenses i Utilities groceries entertainment ii Another way to say variable is discretionary spending Flexible Expenses i Some things are more flexible than others ii Dorms are different prices Forecast i Predict earnings and expenses as a planning tool 1 Plan in advance 2 Weddings Emergency Funds i How much is enough 1 3 6 months of take home pay 2 Emergency money set aside 3 If you lose your job it may take 6 months to get a new one To get ahead i Spend less than you earn ii Own things that go up in value 1 Things that go down in value clothes computers laptops car 2 Things that go up in value stocks real estate antiques designer things sometimes i Budget making steps i Setting goals ii Planning iii Implementing 1 Putting into action iv Evaluating 1 Was that money well spent 2 Look back and reflect F The Personal Balance Sheet Net Worth a Assets i What is owned b Liabilities i What is owed c Net worth i Assets minus liabilities ii Most American s do not know their net worth iii Fluctuates a little bit but should have general idea d Evaluating your Net Worth i If your net worth is negative meaning you owe more than you own you should concentrate on getting out of debt ii Sounds easy but is not G How Solvent Are You a Solvency i Ability to pay debts ii Can pay for it b Insolvent i Person owes more than he or she owns ii In debt iii Lots of college students H Selecting Financial Advisors a Charges and fees i Fee only 1 Have to watch credentials ii Commission only 1 Usually do not want because they will try to sell you expensive things to make more iii Fee and commission based 1 Most people are this one 2 If you work with bank or brokerage firms it can be free b Credentials and regulations i Over 500 000 calling themselves financial planners ii There are fraudulent with limited skills iii Securities and Exchange Commission SEC 1 Looks for fraudulent financial advisors 2 Regulators c Recommendations i When people
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