First Exam Study GuideChapter 1:Personal Finance-how people spend, save, invest and protect their financial resources-Children at the grocery store is number one place easiest to spendStep 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 haveInflation-rising prices (about 2%)Unemployment rate-7%Tallahassee-5%Opportunity costs: giving something up to do something elseTrade offs-Tiger woods giving up school to go proRisk: How much harm, suffering, danger or loss you can take*loss of moneyMen more likely to take riskLiquidity-how quickly something can be turned into cashex: debit cardsnot: real estate, art, etc.Risk aversion-avoidance of risk3rd grade students become aware of risk1602: first modern company issued stock certificates (Dutch East India Company)1908: Harvard offers first MBA (masters in business)motleyfool.com=stocksMortgage rate-4.6%One year ago-3.1%Gold prices are valuable; gold is bought when market is downStep 2:Creating and activating action plans-staying on course, expanding, cutting back, embarking on a new courseStep 3:Monitoring, evaluating, and revising plans-Evaluate at least once a year95% of retail owners only have one store5% is chainsEconomics-study of economy, how wealth is created and distributed and the forces of supply and demandWealth-total value of all items ownedFinancial assets-can’t see; retirement accountsTangible assets-real estate, carsInterest rate risk:Status risk-clothing, car, housesTime risk-deciding when to buy or saveGoal time horizon-time between now and goal achievementAggressive Vs. Conservative:-Aggressive-maximize growth-Conservative-Preserve principalConsumersLevel of living-where and how you liveStandard of living-how you aspire to liveGovernment:Federal Reserve System (the fed)-regulates US monetary system including maintain an adequate money supplyBen Bernanke-running for chair; 14th chairmen of federal reserve; macroeconomistJanet Yeller-vice chairwomanLarry Summers-Former treasurerElection in JanuaryBusiness-goods, services, employment,Economy is 70% consumersBig companies vs start ups; increased entreupenurship MediaExpansion-high employment, building of housesRecession-slow, pullback (Dec 07-June 09)2009 worst for housing Decline/depression-most recent was 1930s, more than 10% unemploymentRecovery-going on today, stock market has a pattern of increaseIndicators of the Direction of the Economy:- Inflation- Index of leading economic indicators-Dept of Commerce, watch components- Consumer Price Index- Interest Rates- Gross Domestic ProductMortgage 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 reinvestmentPresent ValueFuture ValueCompound Interest-savings earned interest (good!)Age and Stage in the Lifecycle45-60 have the most moneySalary and employee benefits-Cafeteria style benefits-choose your benefits-most expensive benefit is health insurance, top benefitOnly 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 wantsRetirementSummary of BenefitsChapter 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 marketplace1977-1981Jimmy Carter-democrat-interest rates such as home mortgage were high; inflation was high1981-1988Ronald Reagan-republican-Supply side economics-encouraging the growth of business through things such as tax incentives1989-1993George Bush-republican-Continued many of Reagan’s policies1993-2001Bill Clinton-democrat-New economy: emphasized growth, economy influenced by proliferation of computers, cell phones, and internet; innovation prosperity and expansion2001-2009George W. Bush-republican-Corporate and personal responsibility2009-Barack Obama-democrat-Recession, economic stimulus package, tax credits direct to employees through employerWhy keep good financial records?-Records reflect consumption; record inflow vs outflow-Internet banking-more popular, except among elderlyOrganizing 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 auditedLong term financial records to keep: wills, adoption, marriage, birth, social security, real estateImportant numbers: account numbers, passwordsAmerican Dream:1) be debt free2) retire at 653) own a house (used to be number 1)Presidential election causes stock reactionBudgets:-Trace the flow of income and expense over a period of time-In the black-where you want to be-in the red-debtFocus on eliminating debtBalance sheets or net worth statements-list the value of assets and liabilitiesIncome 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 childcareVariable expense-food, tobacco, gas, alcoholFlexible expense-luxuries, travelForecast-forecast earnings and expenses as a planning toolEmergency fund:3-6 months worth of money set asideTo get ahead-spend less than you earn-own things that go up in value-house/land, stocks and bonds, paintings, antiquesBudget making steps:-Setting goals-Planning-Implementing-EvaluatingAssets-What is ownedLiabilities-what is owedNet worth-assets minus liabilitiesEvaluating your net worth:-If negative (you owe more than you own), you should try and get out of debtSolvency-Ability to pay debtsSolvency ratio: total net worth/total assestsInsolvent-person owes more than he/she ownsDebt Total assets ratio: total liabilities/total assestsCharges 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 oftenCredentials and Regulations:-Over 500,000 call themselves financial planners-Some are frauds with limited skills-Securities and Exchange CommissionBest Credential:1. CFP-certified financial planner2. RIA-registered investment advisor3. CHFC-chartered financial consultant4.
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