First Exam Study Guide Chapter 1 Personal Finance how people spend save invest and protect their financial resources Children at the grocery store is number one place easiest to spend Step 1 Setting Financial goals Values Principles that guide behavior Attitude like and dislike Goals end results Needs What you must have Wants what you would like to have Inflation rising prices about 2 Unemployment rate 7 Tallahassee 5 Opportunity costs giving something up to do something else Trade offs Tiger woods giving up school to go pro Risk How much harm suffering danger or loss you can take loss of money Men more likely to take risk Liquidity how quickly something can be turned into cash ex debit cards not real estate art etc Risk aversion avoidance of risk 3rd grade students become aware of risk 1602 first modern company issued stock certificates Dutch East India Company 1908 Harvard offers first MBA masters in business motleyfool com stocks Mortgage rate 4 6 One year ago 3 1 Gold prices are valuable gold is bought when market is down Step 2 Creating and activating action plans staying on course expanding cutting back embarking on a new course Step 3 Monitoring evaluating and revising plans Evaluate at least once a year 95 of retail owners only have one store 5 is chains Economics study of economy how wealth is created and distributed and the forces of supply and demand Wealth total value of all items owned Financial assets can t see retirement accounts Tangible assets real estate cars Interest rate risk Status risk clothing car houses Time risk deciding when to buy or save Goal time horizon time between now and goal achievement Aggressive Vs Conservative Aggressive maximize growth Conservative Preserve principal Consumers Level of living where and how you live Standard of living how you aspire to live Government Federal Reserve System the fed regulates US monetary system including maintain an adequate money supply Ben Bernanke running for chair 14th chairmen of federal reserve macroeconomist Janet Yeller vice chairwoman Larry Summers Former treasurer Election in January Business goods services employment Economy is 70 consumers Big companies vs start ups increased entreupenurship Media Expansion high employment building of houses Recession slow pullback Dec 07 June 09 2009 worst for housing Decline depression most recent was 1930s more than 10 unemployment Recovery going on today stock market has a pattern of increase Indicators of the Direction of the Economy Inflation Index of leading economic indicators Dept of Commerce watch components Consumer Price Index Gross Domestic Product Interest Rates Mortgage Rates 30 yr fixed 4 47 15 yr fixed 3 49 30 yr refinance 4 45 15 yr refinance 3 48 Time Value of Money Theory that the value derived from the use of money over time increases its total by investment and reinvestment Present Value Future Value Compound Interest savings earned interest good Age and Stage in the Lifecycle 45 60 have the most money Salary and employee benefits Cafeteria style benefits choose your benefits most expensive benefit is health insurance top benefit Only have to offer benefits if they re full time with over 50 employees perks child care center gym membership company care paid for school what the person wants Retirement Summary of Benefits Chapter 2 Microeconomics Deals with the smaller units within the economy such as understanding the decision making behavior of firms and households and how they interact in the marketplace 1977 1981 Jimmy Carter democrat interest rates such as home mortgage were high inflation was high 1981 1988 Ronald Reagan republican Supply side economics encouraging the growth of business through things such as tax incentives 1989 1993 George Bush republican Continued many of Reagan s policies 1993 2001 Bill Clinton democrat New economy emphasized growth economy influenced by proliferation of computers cell phones and internet innovation prosperity and expansion 2001 2009 George W Bush republican Corporate and personal responsibility 2009 Barack Obama democrat Recession economic stimulus package tax credits direct to employees through employer Why keep good financial records Records reflect consumption record inflow vs outflow Internet banking more popular except among elderly Organizing Records Safe deposit boxes in banks fireproof citizen divorce legal papers birth certificate personal possessions not supposed to keep money Home Storage of Records be careful when hiding it Tax considerations keep records for 3 years 6 years if audited Long term financial records to keep wills adoption marriage birth social security real estate Important numbers account numbers passwords American Dream 1 be debt free 2 retire at 65 3 own a house used to be number 1 Presidential election causes stock reaction Budgets Trace the flow of income and expense over a period of time In the black where you want to be in the red debt Focus on eliminating debt Balance sheets or net worth statements list the value of assets and liabilities Income can come from many sources wages alimony child support return on investments allowance or gift social security benefits public assistance gains or loses form sale of assets etc Fixed Expense rent car payment insurance and childcare Variable expense food tobacco gas alcohol Flexible expense luxuries travel Forecast forecast earnings and expenses as a planning tool Emergency fund 3 6 months worth of money set aside To get ahead spend less than you earn own things that go up in value house land stocks and bonds paintings antiques Budget making steps Setting goals Planning Implementing Evaluating Assets What is owned Liabilities what is owed Net worth assets minus liabilities Evaluating your net worth If negative you owe more than you own you should try and get out of debt Solvency Ability to pay debts Solvency ratio total net worth total assests Insolvent person owes more than he she owns Debt Total assets ratio total liabilities total assests Charges and Fees for financial advisors Fee only best Commission only want you to get other products they ll be paid for Fee and commission based most often Credentials and Regulations Over 500 000 call themselves financial planners Some are frauds with limited skills Securities and Exchange Commission Best Credential 1 CFP certified financial planner 2 RIA registered investment advisor 3 CHFC chartered financial consultant 4 AFC Recommendations When needing financial advice first ask
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