CH 1 1 Importance of studying personal finance a Personal financial planning is the process of managing your finances to reach goals and to increase personal satisfaction b Personal finance how people spend save invest and protect resources 2 Steps to the process of managing the money a 1st setting financial goals i Financial goals should be based on values principles that guide behavior and attidtudes likes and dislikes ii Goals are end results and things worth striving for iii Goals should be 1 Flexible change w times and conditions events 2 Realistic based on your income and life situation 3 Specific and measurable saying you re going to save 200 in a month is more specific then im going to save money 4 Prioritized ranked according to importance You need a house more than a boat 5 Action oriented achievement of goals requires action iv Opportunity costs cost of what is given up 1 Go to law school after graduating puts off working full time for 3 years Initial trade offs are both time and v Risk possibility of experiencing harm suffering danger loss In personal finance this means lack of 1 2 Types of risk include a b c Income risk losing a job or other source of income Inflation risk rising prices affect how far your dollars stretch Inflation is the rise in prices Interest rate risk changing interest rates have a negative effect on your investments d Liquidity risk how readily something can be converted into cash e Personal risk health safety and other risks are involved in decisions i Buying a new airbag for car f Status risk clothing neighborhoods brands and cell phone convey messages g Time risk how long can you afford to put off saving for childs college tuition or your retirement vi Risk aversion avoidance of risk 1 People usually try and avoid risk if possible 2 Risk tolerance ability to accept risk a Aggressive approach substantial volatility and short term financial set backs are accepted as a part of financial growth b Conservative approach inability to tolerate more than minimum volatility w the goal of preserving principal 3 Goal time horizon span of time bw today and goal achievement a Young ppl have a long time horizon to retirement so they can afford to take more risks b Step 2 creating and activating action plans i Staying the course hold onto checking and savings accounts ii Expanding add new pieces of increasing amount of life iii Cutting back spending less selling assets houses stocks iv Embarking on new course try something new buy some insurance stocks bonds c Step 3 Monitoring evaluating and revising plans i Evaluate your finances at least once a year 1 Many review during tax time in the spring but another time may be when an employer offers an open enrollment period for adding more insurance or changing retirement options ii General economy and 4 key players 1 Economic theory assumes people seek to maximize satisfaction and avoid loss from choices made 2 Assumes people are rational and observe movements of the marketplace and make decisions whether to spend save invest or protect assets Also considering changes in economy such as inflation and interest rates iii Economics study of the economy how much wealth is created and distributed and the forces of supply and demand iv Wealth total value of all items owned v Financial assets are intangible paper assets savings stocks vi Tangible assets are physical assets such as homes computer vii Four key players consumers government business media cars 1 Consumers a Consumers participate in the economy whenever they spend invest save or react to info about products and services b Average propensity to consume refers to the percentage of each dollar of income that an individual spends on average for current consumption 2 Government exchange c Consumption refers to the using up of goods and services Includes present consumption and future consumption d Level of living current state of living e Standard of living quality of life one seeks Degree of prosperity including comforts luxuries and necessities one seeks a Mediates or regulated consumer business media b Federal govt is largest single employer in US c Federal reserve system the FED regulates US monetary system including maintaining adequate money supply Central bank Does this by influencing borrowing interest rates and the buying and selling of government securities d Ben Bernanke 14th chairman of fed since 2006 macroeconomist 3 Business provides goods services and employment competitive market regulated by the government a Plays important role in circulation of money as part of the free enterprise system 4 Media two types a Print newspapers magazines direct mail and outdoor b Broadcast radio tv cable internet c Primary goal is to attract attention 3 The economic cycle a Referred to as business cycle Refers to periodic expansions and contractions in economic activity b Affects how you should handle your money c Made up by four stages i Expansion growing economic activity low unemployment rate 1 Consumers buy cars homes and items due to interest rates and inflation being low and employment high ii Recession temporary slowing of the economy 1 Unemployment is higher than desired and economic activity is slow 2 Recurring period of decline in total output income employment and trade usually lasting six months to a year iii Decline depression downward trend high unemployment growth stopped 10 or more of working age population unemployed 1 Worst depression was in the 1930s which was known as great depression 2 Most recent bottom was in 2009 iv Recovery hopeful stage unemployment lessening economy moving up Consumers start buying more and more 4 Indicators of the direction of the economy a b Inflation rising prices as inflation increases the power of dollar decreases Devalues money and affects the elderly cause their incomes can not keep up w the rising prices In 1970 1980s inflation was 10 12 i ii Current inflation is 2 Index of leading economic indicators LEI composite index average 11 components of growth from different segments of economy i Falling index indicates slowing down decline while a climbing index is an indicator of prosperity c Consumer price index CPI widely used measure of average changes in prices Measure average change in prices consumers pay 400 goods and services Determines increase in social security i Important cause its used as a cost of living benchmark to determine tax brackets and increases social security payments and other government
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