Chapter 1: Personal Finance and Career Planning Personal Finance how people spend, save, invest, and protect (insurance) their financial resources (money) Financial Planning (steps – 3)1. Setting financial goals2. Create and activating action plan3. Monitoring, evaluating, and revising plansValue Principles that guide behavior• some people are thrifty, tight, etc.• many types of valuesAttitudes Likes and dislikesGoals End resultsNeeds What you must have• you NEED to eat, you WANT a lobster or steakWants What you would like to haveOpportunity cost The cost of what is given up• Trade-offsRisk The possibility of experiencing harm, suffering, danger, or loss• personal risk, status risk, etc.• more educated people become, the more likely people will be to take financial riskRisk aversion Avoidance of riskRisk tolerance Dealing with riskInflation 2% over the past two years• determined by the government through CPIConsumer Price Index (CPI)Widely used measure of average changes in pricesLiquidity How has you can turn something into cash• most liquid thing you own – cash • things that are harder to liquidate – house, antiques, art work, (don’t want to have too much of these)Four key players of the general economy:1. consumers2. government3. business4. mediaEconomics The study of the economy, how wealth is created and distributedWealth The total value of all items ownedTangible wealth Things you can seeIntangible wealth Things you can’t seeFinancial assets Intangible or paper assets such as savings and securitiesTangible assets Physical assets such as home or carsAverage propensity to consumePercentage of each dollar of income that an individual spends, on average, for current consumptionLevel of living Current state of livingStandard of living Quality of life one seeks, where you would like to beFederal Reserve System (The Fed)Regulates US monetary system including maintaining and adequate money supply• Central bank of the United States• Banks who need extra money go to The FedThe Treasury Prints the moneyBen Bernanke Chair man of The Fed• Doesn’t hold political side• Decides if interest rates goes up or down, loans money to banks, etc.The Economic Cycle ExpansionRecessionDepressionRecovery• Cycle that goes up and down, always changingExpansion Growing economic activity, low unemployment• When things are growing, wanted, everyone doing wellRecession Temporary slowing of the economy• 2009 was the most recentDepression Downward trend, high unemployment, growth at standstill• more than 10% unemployment• want to avoid• worst year = 1933Recovery Hopeful stage, unemployment lessening, economy moving upward• Coming out of a recession Inflation Rising pricesDeflation Dropping prices, very rareIndex of leading economic indicatorsComposite index averaging 11 components of growth• New building, manufacturing, unemployment Consumer Price Index (CPI)Widely used measure of average changes in price• Checked yearly and monthlyGross Domestic ProductMarket value of goods and services produced in one year • US GDP, World GDP• Want GDP to move upPurchasing power Amount of goods and services an individual’s money can buy Interest rate The cost of borrowing money Time value of money Theory that the value derived from the use of money over time increases its total by investment and reinvestment• a dollar today invested correctly will be more if inflation continues Present value An asset’s current valueFuture value The value in the future of a current amount of money or asset Compound interest Calculation of interest on interestSimple interest Interest on original sum of money Family household Two or more persons, one of whom owns or rents the living quartersNonFamily householdHouseholders who live either alone or wish others to whom they are not relatedCafeteria style benefitsA company will let you choose what type of benefits you want • health, dental, eye, etc. Perquisites (Perks) Job extras beyond usual benefits• company car, company cell phone, all paid for travel, gym membership, free lunch, etc.Jimmy Carter• 1977-1981 • Democrat• Interest rates such as home mortgages were very high• Inflation was high • AliveRonald Reagan• 1981-1988• Republican• Supply side economics – government will give money to business and it’ll trickle down to employees and consumers• Passed awayGeorge Bush• 1989-1993• Continued many of Regan’s policies• Oldest president alive – 88Bill Clinton• 1993-2001• “New Economy”• Emphasized growth• Economy influenced by proliferation of computers, cell phones and the internet• Innovation, prosperity and expansionGeorge W Bush• 2001-2009• Corporate and personal responsibility• Republican, AliveBarack Obama• 2009-• Came in during the recession• Economic stimulus package• Tax credits direct to employees through employers• Democrat • you should evaluate your financial plan at least once a year • college graduates will make double of high school graduates• people between the age of 45-54 have the highest median incomes• percentage of nonfamily households is growing• most sought after benefit: health insurance (most expensive)• women make 83 cents for every dollar a male makes• a good benefits package can increase your total compensation 30% or more • Best way to determine your financial status: salary/incomeChapter 2: Financial Statements and BudgetsRecord keeping The process of recording the sources and amounts of money earned, saved, spent, and invested over a specified time periodWhy keep good financial records?• Record reflects consumption• Development money management strategies• Retirement• Crisis Inventory Location list of financial and legal recordsSafe deposit boxes Deposit boxes in the bank, pay a monthly fee• passports, citizenship , divorce, child custody, adoption and military service papers, jewelryHome storage of recordsSafes at home, must be fire proofFinancial Statements Assessment of current status of finances Budgets Trace the flow of income and expenses over a period of time“In the black” Means they have good cash flow statement, budget is doing well“In the red” Trouble financially, review expenditures, reduce spending,Balance sheets or net work statementsList value of assets and liabilitiesFixed expenses The same amount each time period• rent, car payments, insurance, etc.Variable expenses
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