Chapter 1 1 Personal finance How people spend save invest and protect their financial resources 2 Personal financial planning process of managing your finances to reach goals and to increase personal satisfaction a 3 steps i Step 1 Setting financial goals 1 Values principles that guide behavior 2 Attitudes likes and dislikes 3 Goals end results 4 Needs what you must have 5 Wants what you would like to have 3 Opportunity costs cost of what is given up go to med school you give up full time work Inflation rising in prices 4 Risk the possibility of experiencing harm suffering or loss 5 6 Liquidity how readily something can be turned into cash checking account vs car 7 Risk aversion avoidance of risk being too conservative risks earning more money a Step 2 Creating an activating action plans i Staying on course keeping checking account ii Expanding increase cover of insurance iii Cutting back spend less iv Embarking on a new course buying stocks b Step 3 Monitoring Evaluating and Revising plans i Evaluate your financial plan at least once a year 8 Economics study of the economy how wealth is created and distributed and the forces of supply and demand 9 Wealth total value of all items owned 10 Financial assets intangible or paper assets such as savings or securities stocks bonds 11 Tangible assets physical assets homes or cars 12 US Economy is influenced by 4 key players a Consumers b Government i Level of living current state of living ii Standard of living quality of life one seeks implies prosperity i Federal Reserve System The Fed Regulates US monetary and banking system including maintaining and adequate money supply ii Ben Bernanke 1 14th chairman of the federal reserve 2 Harvard MIT alumni 3 Macroeconomist Princeton Professor iii Business 70 consumer driven iv Media Advertising 13 Economic cycle Periodic expansions and contraction in the economy a 4 stages b Expansion low unemployment rate growing economy activity c Recession unemployment is higher than desired temporary slowing of the i Bill Clinton in 1990 s economy i December 2007 June2009 housing plummets d Depression unemployment is above 10 growth at standstill i Ben Bernanke keeps us out e Recovery unemployment lessening economy moving upward i Stock market is main indicator of how economy is ii Good time to invest 14 Indicators of the direction of the economy 5 a Inflation rising in prices b Index of leading economic indicators Composite index averaging 11 components of growth Done by Dept of Commerce c Consumer price index measure of average changes in prices consumers pay for a fixed basket of 400 goods and services Done by Bureau of Labor Statistics in the Department of labor d Gross Domestic Product market value of goods and services produced in one year 15 Time value of money theory that the value derived from the use of money over time increases its total by investment and reinvestment a Present Value an assets current value b Future Value value in the future of a current amount of money or asset c Compound interest calculation of interest on interest Popular in saving accounts and other forms of investing 16 Age and stage in lifecycle different financial need vary with age a 45 54 years highest median income 17 Salary and employee benefits health insurance life insurance retirement plans etc a Cafeteria style benefits Allow for employee choice of benefits i Health insurance is most expensive benefit ii Good benefits can increase your total compensation 30 b Perks company cars child care center gym office Chapter 2 1 Macroeconomics Deals with smaller units within the economy such as understanding the decision making behavior of firms and households and how they interact in the marketplace Jimmy Carter 2 a 1977 1981 b c Interest rates such as home mortgage were very high Inflation was high 3 Ronald Reagan a 1981 1988 b Supply side economics put money in suppliers and provide cheap product and more jobs c Encouraging the growth of business though tax incentives 4 George Bush 5 Bill Clinton a 1989 1993 b Continued Reagan s policies a 1993 2001 b New Economy c Economy influenced by proliferation of computers cell phones and internet d Emphasized growth e Innovation prosperity and expansion 6 George W Bush 7 Barack Obama a 2001 2009 b Corporate and personal responsibility not depend on government c Recession 2007 2009 a 2009 present b Recession c Economic stimulus package give money to car industries GM universities d Tax credits direct to employees through employer 8 Records reflect consumption a Record keeping process of recording sources and amounts of money earned save spent and invested over a period of time b Budget c Internet Banking 9 Organizing Records jewelry NO money a Safe deposit boxes banks fire proof passports divorce and adoption papers b Home storage of records home safes class 350 for fire resistance c Tax considerations keep tax records for 3 yrs d Long term financial records to keep birth certificate social security important numbers e Financial statements assessment of current status of finances i Budget trace of flow of income and expenses over a period of time Income expenses net income 1 2 Fixed expenses same amount each time period 3 Variable expenses individual has control over ii Balance sheets or net worth statements list the value of assets and liabilities iii Forecast forecast earnings and expenses as a planning tool iv Emergency funds how much is enough 3 6 month worth of income is safe f Budget making steps i Setting goals Desired end states own a house ii Planning Deciding the actions and strategies that need to be taken Implementing Putting plans into action save money and curb spending iii iv Evaluating judging or examining the cost value or worth of the budget plan have you met your goals g Assets what is owned i Monetary assets liquid assets such as cash checking and saving accounts ii Tangible assets things that can be sold for cash such as cars iii Investment assets items that will hopefully increase in value such as real estate stocks and bonds h Liabilities what is owed i Short term paid within a year such as utilities taxes rent ii Long term go beyond a year such as mortgage and cars i Net worth assets liability i Negative owe more than you own main goal is to get out of debt ii Less than half your annual income invest more and goal is to increase net iii More than half your annual income but less than 2 3 years annual income worth good shape iv Over 3 years worth of annual
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