Chapter 1 Personal Finance How people spend save invest protect their financial resources Childrens observations are usually with the family protection is usually insurance but could be other things Resources time human energy relationships These are what individuals use to get what they want and to reach goals The primary goal of the study of personal finance is to make individuals more knowledgeable about their finances in order to increase their life satisfaction IMPORTANCE OF STUDYING PERSONAL FINANCE We have so many options and developing strategies to cope with these options is critical to one s sense of well being security Of the slow growth in personal income wages salaries In recent years people have sought other ways saving investing to make their money increase Job security is not what it once was and a rapidly rising stock market in the 1990 s caught the attention of potential investors Now over half of american households own mutual funds Personal Finance Planning The process of managing your finances to reach goals and increase personal financial satisfaction The 3 steps are setting financial goals creating activating plans and monitoring evaluating and revising plans STEP ONE Setting financial goals example millionaire by 30 Financial goals Values Principles that guide behavior Attitudes Likes Dislikes Goals end results the things worth striving for Needs what you must have Wants what you would like to have To be successful goals should 1 Flexible Change with times conditions events 2 Realistic based on your income life situation 3 Specific measurable for example a goal of saving 200 in the next 3 months is more specific than saying I m going to try to save more Or you don t want just any car you want a 30 000 car 4 Prioritized ranked according to importance For example you want a house more than a boat 5 Action oriented The achievement of goals requires action Most expensive part of budget at FSU is labor Easiest way to cut budget is cut people Job security is an issue Half of the nation has mutual funds Most people are investing they just aren t investing enough Social security number assigned to you at birth Opportunity Costs What you give up in order to do something else example Woman staying home to take care of kids example you go to law school after graduating college this puts off working full time for three years the initial tradeoffs in this decision involve opportunity costs Risk the possibility of experiencing harm suffering danger or loss Income Risk Losing a job or other source of income is always a possibility Inflation Risk Rising prices affect how far your dollars stretch If your investments are not earning more than the cost of living increases each year then you are losing purchasing power Inflation is defined as a rise in price levels example health care tuition Deflation when prices go down Example television sets Technology products tend to change alot in price than other things in the economy Some people are agressive when investing some are conservative More than anything investment insurance decisions come down to the ability to handle risk therefore it is important to explore risk further Men tend to be greater risk takers The higher educated the woman is the more likely for her to take risks but of a certain kind Inflation a rising in price levels Over the last 20 years the inflation has averaged about 3 per year Interest Rate risk Changing interest rates can have a negative effect on your investments The real value of your investments could erode due to rising cost of living Liquidity risk Some investments are more difficult than others to convert into cash Liquidity refers to how readily something can be converted to cash Cash is a liquid Example a savings account where you can get money out in a few minutes is more liquid than real estate investments coin collections art or business interests that are difficult to sell at short notice Iliquid Can t turn it into cash fast Example real estate Personal Risk Health safety and other risks are involved in money decisions Should you pay more to buy a new car with airbags or buy a used car without them Can you risk going without health insurance for a few months when you are between jobs Status Risk Clothing neighborhoods brands and cell phones convey messages Time Risk How long can you afford to put off saving for a child s college tuition or your retirement Should current needs be met before future savings are addressed Risk Averision Avoidance of risk Small amount soon is very smart when investing Real estate had to liquidate What type of investor are you The key factors that determine type are Risk Tolerance The ability to accept risk Goal Time Horizon The span of time between today Goal acheivement Regarding Risk tolerance an individual may have An agrressive approach Substancial volatility and short term financial setbacks are accepted as part of maximizing growth Conservative approach an inability to tolerate more than minimum volatility with the goal of preserving principal the basic amount invested exclusive of earnings STEP TWO Creating Activating Action plans Staying on course Example holding onto the checking and savings accounts you already have Expanding adding new pieces such as increasing rhe amount of life insurance coverage on an existing policy or increasing your contribution to an already established retirement plan Cutting back Spending less selling assets such as real estate or stocks Embarking on a new course Trying something for the first time such as having a regular savings plan or purchasing stocks bonds or mutual funds STEP THREE Monitoring evaluating revising plans Evaluate your financial plans atleast once a year THE GENERAL ECONOMY FOUR KEY PLAYER 1 Economics The study of the economy how wealth is created and distributed and the forces of supply and demand 2 Wealth The total value of items owned It includes both financial tangible assets 3 Financial Assests This category includes paper assets such as savings and securities such as stocks and bonds They are intangible 4 Tangible Assets physical assets such as homes computers or cars Consumers Spend save invest react to product and service information A constant dilemma consumers face is how much to spend on current needs and how much to save for future needs The Average propensity to consume refers to the percentage of each dollar of income that an individual spends on average for current consumption Consumption
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