COA 4131 1st Edition Lecture 2 Outline of Last Lecture I. Personal Finance and its Importance II. The General EconomyIII. Economic CycleIV. Indicators of the Direction of the EconomyV. The Changing World of Work and Importance of EducationOutline of Current Lecture I. MicroeconomicsII. Presidents and the Economy III. Financial Statements and BudgetsIV. Important Numbers ListV. Financial StatementsVI. The Personal Balance Sheet: Net WorthVII. How Solvent Are You?VIII. Selecting Financial AdvisorsCurrent LectureA. Microeconomicsa. 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 marketplacei. 50% of Americans don’t balance or use check booksii. There are 500,000 financial planners in U.S.B. Presidents and the Economya. 1977-1981i. Jimmy Carter1. Interest rates, such as home mortgage, were very high2. Inflation was high- 18% at the time3. Democrat4. He is still alive todayb. 1981-1988i. Ronald Reagan1. Supply side economicsa. Government will give money to businesses and will trickle down to employees and give tax breaks to businesses to help them2. Encouraging the growth of business through tax incentivesc. 1989-1993i. George Bush1. Continued many of Reagan’s policies2. Oldest living presidentd. 1993-2001i. Bill Clinton1. “New Economy”a. technology and invention and growthb. great economy at this timec. boom expansion2. Emphasized growth3. Economy influenced by proliferation of computers, cell phones, and the Internet4. Innovation, prosperity, and expansione. 2001-2009i. George W. Bush1. Corporate and personal responsibility2. Personally invest more 3. More choices4. More personal finance educationf. 2009-i. Barack Obama1. Recession2. Economic stimulus package3. Tax credits direct to employees through employer4. Came in during recessiona. Bottom of recession was Fall 20095. Package to General Motors and education places6. Take money to help businessesC. Financial Statements and Budgetsa. Why keep good financial records?i. Records reflect consumption1. Where is the money going and what am I spending it on?2. Decide where to cut back on some thingsii. Internet banking1. Moving to all onlineiii. Organizing Records1. Safe Deposit Boxesa. Things to put in the box: something you don’t need on the weekendi. Military papersii. Divorce papersiii. Jewelryb. Really small box can range from $15-$40 per year, bigger ones are more expensive2. Home Storage of Recordsa. Safe at homei. Make sure it is fire proofb. Do not put things in underwear drawer; that is the first place robbers lookc. Should be hidden and safed. People hide money everywhere in their homese. Money (large amounts and foreign) are not allowed in safety deposit box3. Tax Considerationsa. Keep tax records for about 3 yearsb. 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 keep1. Things to hold onto:a. Birth certificatesb. Willsc. Marriage certificates2. Large financial transactionsa. Keep receipts in case you have to show them to the IRSD. Important Numbers Lista. Write down important numbers and put it somewhere safe (deposit box?)i. Credit cardii. Social Securityiii. Phone numbersiv. Insurance companies and agentsv. Lawyersvi. Bank numbersvii. Serial number from car or TVE. Financial Statementsa. Budgetsi. Trace the flow of income and expenses over a period of time1. Monthly guide because credit card statements come once a month2. After monthly budget, then do a yearly budget3. See if you are spending too much4. Use it to plan for future5. Expensive months: December and February, summer monthsa. Figure out high and low monthsii. Income can come from many sources1. Wages, salaries bonuses commissions2. Alimony, child support3. Return or investments4. Allowances or gifts (inheritances)5. Social security benefits6. Public assistance7. Gains or loses form sale of assets8. Other sources (rent income, royalties, loans, scholarships, tax refunds)iii. In the black1. Good cash flow statement2. Good time to save3. This is a good thingiv. In the red1. In trouble financially2. Not so good3. Review expenditures4. Reduce spendingv. Focus on eliminating debtb. Balance sheets or net worth statements i. List the value of assets and liabilitiesii. Net worth: assets (things worth money) minus liability (debt)iii. Students are usually negative net worth1. We owe more money than we are making and that’s normalc. Fixed Expenses i. Same every monthii. Car, tuition, rent, ectd. Variable Expensesi. Utilities, groceries, entertainmentii. Another way to say variable is discretionary spendinge. Flexible Expensesi. Some things are more flexible than othersii. Dorms are different pricesf. Forecasti. Predict earnings and expenses as a planning tool1. Plan in advance2. Weddingsg. Emergency Fundsi. How much is enough?1. 3-6 months of take home pay2. Emergency money set aside3. If you lose your job it may take 6 months to get a new oneh. To get aheadi. Spend less than you earnii. Own things that go up in value 1. Things that go down in value: clothes, computers, laptops, car2. Things that go up in value: stocks, real estate, antiques, designer things (sometimes)i. Budget making stepsi. Setting goalsii. Planningiii. Implementing1. Putting into actioniv. Evaluating1. Was that money well spent?2. Look back and reflect F. The Personal Balance Sheet: Net Wortha. Assetsi. What is owned b. Liabilitiesi. What is owedc. Net worthi. Assets minus liabilities ii. Most American’s do not know their net worthiii. Fluctuates a little bit but should have general idea d. Evaluating your Net Worthi. If your net worth is negative (meaning you owe more than you own), you should concentrate on getting out of debtii. Sounds easy but is notG. How Solvent Are You?a. Solvencyi. Ability to pay debtsii. Can pay for it b. Insolvent i. Person owes more than he or she ownsii. In debtiii. Lots of college studentsH. Selecting Financial Advisorsa. Charges and feesi. Fee-only1. Have to watch credentialsii. Commission only1. Usually do not want because they will try to sell you expensive things to make moreiii. Fee and commission based1. Most people are this one2. If you work with bank or brokerage firms, it can be freeb. Credentials and regulationsi. Over 500,000 calling themselves financial plannersii. There are fraudulent with limited skillsiii. Securities and
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