COA4131 Exam 1 Study Guide Chapter 1 Personal Finance o How people spend save invest and protect their financial resources Protection of money insurance Threshold of spending in families depends on economic situation o Productive assets are ones that grow in value o Sustainability refers to a way of thinking and acting about what is long lasting what will endure To try and minimize the negative impacts of present consumption in order to preserve as much as possible for future generations o The Federal Reserve maximizes employment and provides price stability Step 1 o Setting financial goals Visuals ex taking a picture of what you want and posting it on the fridge Values principles that guide behavior o ex education saving Attitudes likes and dislikes Goals end results o Ex maximizing income and wealth Needs what you must have o ex water food Wants what you would like to have o ex brand names Problem flat salaries and an inflation rate of 2 resulting in the cost of living increasing so we must learn to save and invest To be successful goals should be Flexible change with times and conditions Realistic based on your income and life situation Specific and measurable o Ex a goal of saving 200 in 3 months is more specific than saying you are going to try to save more Prioritized ranked according to importance Action oriented the achievement of goals requires action o Opportunity costs What you give up in order to do something else ex woman staying home to take care of children ex Bill Gates dropping out o Risk Men take more risks than women but studies show educated women take many Potential return increase for increase in risks risks as well Aggressive short term financial setbacks are accepted vs Conservative o Inflation Rising prices Healthcare and tuition rates faster than others Based on CPI o Risk tolerance The ability to accept risk goal of preserving the principle amount There are potential hidden risks for playing it safe o Liquidity How readily something can be turned into cash First cash then checks then ATM s Illiquid real estate antiques are harder to turn into cash Step 2 o Creating and activating action plans Staying on course continuing to do the same things keeping the same checking and savings accounts moving to another state or increasing the amount of life insurance on a Expanding Cutting back current policy saving goes up Embarking on a new course trying something for the first time such as stocks and bonds Step 3 o Monitoring evaluating and revising plans Evaluate your financial plan at least once a year 80 of Americans go home not even knowing that they will be eating for dinner The General Economy and 4 Key Players Economics and demand o Study of the economy how wealth is created and distributed and the forces of supply o Wealth total value of all items owned o Financial assets intangible such as savings and securities stocks bonds o Tangible assets physical assets ex homes but they offer intangible benefits such as comfort and emotional feelings and a safe haven for inhabitants o Average propensity to consume the of each dollar of income that an individual 1 Consumers spends on average o Level of living o Standard of living quality of life this is why people save and invest Regulates the U S monetary system including maintaining an adequate money 2 Government o Largest single employer in the U S o Federal Reserve System supply o Ben Bernanke 14th Chairman of the Federal Reserve Assumed office Feb 1 2006 Nationality American Alma Mater Harvard University and MIT Profession Macroeconomist Princeton Professor o Provides goods services and employment o Prices are determined by supply and demand 3 Business 4 Media o 2 major categories Print newspapers magazines Broadcast radio television Informs the public through advertising The Economic Cycle Expansion Recession Decline depression o 10 unemployment o Great Depression 1933 President Hoover Recovery o Signs include new houses increase in manufacturing and decreased unemployment Indicators of the Direction of the Economy Inflation as inflation increases the buying power of the dollar decreases Index of leading economic indicators o Composite index averaging 11 components of growth from the economy Consumer price index o Measure of average changes in prices published by the Bureau of Labor Statistics o Fixed basket of 400 goods and services Interest rates o Cost of money Gross domestic product o Market value of goods and services produced in one year o Growth is measured by the real GDP 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 an assets current value Future value value in the future of a current amount of money or asset Compound interest calculation of interest on interest o Ex save 2 000 for 4 years 170 832 in 50 years with a 6 return per year Simple interest interest on original sum of money The Changing World of Work and the Importance of Education Age and stage in the lifecycle o People are working to make money o Education builds earning power any amount of education 20 25 Americans are getting degrees o If you control for education and social situations women and men are equivalent in risk taking o Disparity of wage differences between men and women is decreasing o Most people experience their highest income between 45 and 54 years old Salary and employee benefits o Cafeteria style benefits offers you many benefits and you pick what you want and they pay for it or you pay for it partly o Health insurance most expensive and most necessary o Life insurance where money goes after death o Disability insurance o Dental insurance very expensive o Perks or perquisites travel briefcases cars bonuses corner office more time off Ex free fruit for employees once a week or dress down Fridays Retirement o Medicare at age 65 o Social security at age 62 o Vesting how long you must work to be on retirement plan Ex you can be 10 years vested in 1 state and 5 years vested in another resulting in 2 pensions o 401K retirement plan is the most general Summary of benefits Extra book information Half of job seekers find jobs through personal referral A college graduate can expect to earn twice as much as a high school graduate over a lifetime The of nonfamily households is growing Today women earn 76 cents to every dollar that men earn A good benefits package can increase total compensation by 30 or more The U S economy has
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