chapter 1 section 1.1 personal finance anything that involves money and you. your allowance the...
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Personal Finance
Anything that involves money and you.Your allowanceThe money that you make at your jobThe money that you saveThe money that you spend
Personal Financial Planning
What is it?Is arranging to spend save and invest
money to live comfortably, have financial security and achieve goals.
Financial GoalsAre the things you want to accomplish.Going to college Buying a carSaving for your family
Write down on a sheet of paper at least 5 goals that you would like to accomplish financially in the next 20 years.
We will use these to direct ourselves through the rest of the discussion.
Steps to financial planning
1. Determine You current Financial Situation
2. Develop Your financial goals
3. Indentify Your Options
4. Evaluate your alternatives
5. Create and use your financial plan of action
6. Review and revise your plan
Determine your financial situation
Make a listHow much do you have in your savings,
checking, under your bed?How much money do you make a month
○ Job, gifts, allowance, interest incomeHow much do you spend a month on things
○ Lunch, Clothes, EntertainmentDebts
○ Who do you owe money to?
Mr . Prosser’s Current Financial Worth
Money Made Expenses
Teaching Salary - $90,000 per year
Coaching Salary - $5000 per year
Savings Account - $1000
Checking Accounts $3000
Interest per month - $100
Monthly Mortgage Payments $2000 per month
Car Payment $800 per month
Credit Card Payment $1000 per month
Rank Name Net Worth ($bil) Age Residence Source
1 William Gates III 57.0 52 Medina, WA Microsoft
2 Warren Buffett 50.0 78 Omaha, NE Berkshire Hathaway
3 Lawrence Ellison 27.0 64 Redwood City, CA Oracle
4 Jim Walton 23.4 60 Bentonville, AR Wal-Mart
5 S Robson Walton 23.3 64 Bentonville, AR Wal-Mart
6 Alice Walton 23.2 59 Fort Worth, TX Wal-Mart
6 Christy Walton & family
23.2 53 Jackson, WY Wal-Mart inheritance
8 Michael Bloomberg 20.0 66 New York, NY Bloomberg
9 Charles Koch 19.0 72 Wichita, KS manufacturing, energy
9 David Koch 19.0 68 New York, NY manufacturing, energy
11 Michael Dell 17.3 43 Austin, TX Dell
12 Paul Allen 16.0 55 Seattle, WA Microsoft, investments
13 Sergey Brin 15.9 35 Palo Alto, CA Google
14 Larry Page 15.8 35 San Francisco, CA Google
15 Sheldon Adelson 15.0 75 Las Vegas, NV casinos, hotels
15 Steven Ballmer 15.0 52 Hunts Point, WA Microsoft
15 Abigail Johnson 15.0 46 Boston, MA Fidelity
18 Jack Taylor & family 14.0 86 St Louis, MO Enterprise Rent-A-Car
19 Anne Cox Chambers 13.0 88 Atlanta, GA Cox Enterprises
20 Donald Bren 12.0 76 Newport Beach, CA real estate
Step 2 – Develop your Financial Plan
Think about your attitude toward money……Are you more likely to spend money right
now or save it?Would you rather go straight to work after
high school or are you wanting to go to college?
Your VALUES effect your financial decisions. (What do I mean by that?)
Values-
Are the beliefs and principles you consider important, correct and desirable. Different people value different things.Had friends go right to work after high
school, while others went to college. Both are successful and have families. They just believed that in order for them to be successful they had to travel their own path.
What else effects financial goals. Needs vs. Wants
Need – something you must have to survive. ○ Food, Water, Clothing (Does not that new
Versace purse either)Want – Something that you would like to
have but do not need.
You may need a new winter coat, but you may want the leather jacket……
Look back at your financial goals and determine which are needs and wants.
Lets list them on the board……
Step 3 – Identify your OptionsPretend that I gave you an extra $50.00
per week. What are your options?1. EXPAND YOUR CURRENT SITUATION -You could take
that extra $50 and put it into savings and even save more a month.
2. CHANGE YOUR CURRENT SITUATION - You could invest the money in the stock market to try to make more money.
3. START SOMETHING NEW - could pay off some debt the you may have acquired.
4. CONTINUE THE SAME COURSE OF ACTION – Chose not to do anything with the money.
Step 4 – Evaluate your alternatives. You need to look at your situation in life,
your present financial situation, and your personal values. For each situation that deals with money you need to consider the consequences and risks that come with each decision.
Step 4 – Evaluate your alternatives. What can help you make these decisions
Average Salary Financial Specialists
○ Accountants, bankers, financial planners Use the internet
○ Computer software can help you determine if you are getting in to deep into debt.Mortgage calculatorsIncome calculators
- http://www.disposableincome.net/ Books and magazines Financial Institutions Your education
Step 4 – Evaluate your alternatives. What are the consequences of your
choices…..Opportunity cost – a trade off, is what is
given up when making one choice instead of another. ○ Going to college instead of going right to work
and making money.
Step 4 – Evaluate your alternatives. What are the risks of making that decision. Though the risk may not be extremely dramatic there are
different types of risk to think about. Inflation risk – the cost of an item may increase next
year. Interest Rate Risk – may effect the cost of you borrowing
money Income Risk – you may loose your job, or may not get
that raise you hoped for. Personal Risk – The job you may do may be dangerous,
or the option of you driving a car to somewhere versus flying.
Liquidity Risk – How quickly can you convert this good into cash.
Step 5 – Create the plan of action. What are you going to do to achieve
your plan of action.Spend lessGet a second jobPay off debts
Look at your goals
Goals are set into three categoriesShort- Term – can be achieved in one yearIntermediate – 2 to 5 yearsLong-term – more than 5 years to achieve.
Go and categorize your goals on your sheet of paper.
Goals for different needs
Def – of need – something you need to survive.
Your financial goals are set on the types of things that you buy.Services – something that someone does
for you. Plumber, hair stylist provide services for you.
Goods – physical items that are produced and can be weighed or measured.
Types of goods Consumable goods – purchases that you make
often and use up quickly. Food, toothpaste etc. Thought the cost of these goods may not measure up to a cost of a car they do add up..
Durable Goods – are expensive items that you do not purchase often. Cars, appliances (refrigerators, stoves)
Intangible items – cannot be touched but are often important to our well-being and happiness. Happiness at your job, health, education, and free time,
and be very expensive.
Influences on Personal Financial Planning What types of things are going to
influence you personal finances in the future?Life SituationsPersonal SituationsEconomic Factors
Life Situations How long will you live? Going to College -
Starting a new career Getting married Having children Moving to a new city…
http://cgi.money.cnn.com/tools/costofliving/costofliving.html
Personal Situations
Choosing to move out of the house away from the parents.Average cost of rent in St. Louis $700 and
$800
Paying the bills that come with the move
Personal Situations
Choosing to move out of the house away from the parents.Average cost of rent in St. Louis $700 and
$800
Paying the bills that come with the move Do you want to be a millionaire?
Millionaire calculator
Economic Situations
EconomicsSomething you hear about everyday in the
news.The study of the decisions that go into
making, distributing, and using goods and services.
The Economy○ Is the actual “market” or ways in which we
make, distribute, and use goods and services.
Other Economic factors that effect personal decisions Supply vs. Demand
Supply – is the amount of goods and services you purchase
Demand – is the amount of goods and services people are willing to buy.
Three Final Economic Conditions that hit closer to home.1. Consumer Prices
2. Consumer Spending
3. Interest Rates
Consumer Prices
Most products increase in price over time.
This increase in price is called INFLATION.
During times of rapid inflation it takes more money to buy the same amount of good or service.
EX. A computer that cost $1000 a year ago may cost $1050 now.
Consumer Prices continued What causes inflation?
People have more money to spend on items without a increase in supply.
Remember the FED has something to do with this as well. When interest rates are low, people have a tendency to spend more money and inflation goes up…
When interest rates are high, people put money in the bank to save and interest rates go down.
2. Consumer Spending
You are a consumer and when you purchase and item. That company that produced the item makes money and hires more employees to make more products. This then increase our employment rate. More people work and spend more money. However the opposite can happen as well.
3. Interest Rates
Money has a price, that price is called interest…..
Interest – is the cost that people pay for to use other people money..
Here is how this all works….When you take grandmas birthday check and
deposit it into the bank, and the bank gives you an interest rate, they are paying you to let them use your money. The bank inturn takes your money and lends it to people who want to borrow money form the bank.
When the supply of money in the bank grows interest rates go down. People are saving more.
When consumers borrow more money, then interest rates go up.
Interest rates on loans also rise during inflation.
Opportunity Cost
When you give up something to do something else.
Different types of Opportunity CostsPersonalFinancial
Personal Opportunity CostHere is an example…..You have tickets to Hootie and the Blowfish
for Thursday night. Mr. Prosser decides to give one of his famous Personal Finance Pop quizzes on Friday. What do you do?
If you go to the concert (which if figure a lot of you would do anyway) you may get a lower score than you would of liked
If you stay home and study (good choice)then you may get a good grade on the exam but will miss going to the concert with your friends.
Financial Opportunity Cost Here is an example.
You see the new set of shoes at the mall for $150. You decide to buy those. You could of used that money on the car insurance that is due next month or put it into the bank and save it……
Financial Opportunity Cost If you would of put the money into the
bank it could gain INTEREST. Definition of Interest?
Is the extra money earned from the bank using your money.
How do we calculate interest?○ Principal X Rate X Time = Interest
Interest
PrincipalIs the original amount you deposited into the
bank for a savings account.You put $2000 into the bank at the end of
one year how much money do you have if the interest is 3%.
2000 x 3% = $60So at the end of the year you will have
$2060$2000 + $60 = $2060
Simple Interest practice problems
Principal Rate Interest
200 2%
300 3%
500 4%
1000 6%
1200 7%
For now we are assuming that it is just for one yearLets look at Part 4 of the handout
Future Value of a Single Deposit Future Value is the amount your original
deposit will be worth in the future based on earning a specific interest rate over a specific period of time.
Lets look at the handout Table A
Future Value of a Series of Deposits Sometimes instead of putting a large
amount in at the beginning of the year, you put smaller amounts throughout the year.
When you make a series of equal regular deposits is called an annuity.
Present Value of a Single Deposit Present value – If you want to have $1000 in 5 years
and the interest rate is 5%. How much will you need to deposit now to accumulate that $1000.
Remember that this is one lump sum and then you put it into an account and let it sit there.
Again using the table on page 23 will help us. Using the table and the information we have how
much do we need to deposit now. We want to have $1000 in 5 years with 5% interest. $1000 x .784 = $784 would need to be deposited
now.
Examples of Present Value of Single Deposit
Amount Desired
Interest Time Amount Now
500 7% 5 years
1200 8% 7 years
700 6% 8 years
1000 8% 10 years
Lets look at Table C Part 5 on the handout now.
Present Value having yearly withdraws from your account. You can also use present value to calculate how much
you would need to deposit so you can take a specific amount of money out of your savings account for a certain number of years.
If you want to take $400 out of your account each year for nine years, and your money is earning interest at 8% a year. How much money would you need to deposit now.
$400 x 6.247 = $2498.80 This would be how much you would have to put into
the bank if you wish to deposit 400 per year. Many people use this to determine how much they will
have for retirement.
Present Value with yearly withdrawals example
Withdrawal amount per
year
Interest No. of Years Amount Deposited
200 9% 5
500 6% 9
1000 5% 7
600 8% 8
800 7% 6
Lets look at Part6 or Table D
What did it cost then to now??
2007 Cost Gallon of Milk $3.12 Gallon of Gas $2.56 Tube of Toothpaste $5.00 Lawnmower $235 Alarm Clock $25 Loaf of Bread $1.00 Stapler $19.95 Pair of Shoes $85 Car $22,000 $225,000 Home
1980’s CostGallon of Milk $1.23
Gallon of Gas 1.01
Tube of Toothpaste $1.98
Lawnmower $92.96
Alarm Clock $9.89
Loaf of Bread $.40
Stapler $7.89
Pair of Shoes $33.62
Car $8.702.87
Home $89000.67
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