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Summary ReviewSummary Review

Part I: 5 lectures & Part I: 5 lectures & Guide to Personal Guide to Personal FinanceFinance

Part II: Ch’s 1-4, O’Sullivan & SheffrinPart II: Ch’s 1-4, O’Sullivan & Sheffrin

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Part IPart I

Buying a Car: CreditBuying a Car: Credit Buying a HouseBuying a House Financial PlanningFinancial Planning InvestmentInvestment

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Cost of Using a Car for Several YearsCost of Using a Car for Several Years Depreciation in car’s market valueDepreciation in car’s market value InterestInterest

opportunity cost of your moneyopportunity cost of your money

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Mortgage Loans/Fixed RateMortgage Loans/Fixed Rate

Pay back the loan with declining balance of Pay back the loan with declining balance of principal owedprincipal owed build equity(ownership) slowlybuild equity(ownership) slowly

Pay interest(price of credit)Pay interest(price of credit) frontloadedfrontloaded

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Financial Planning: Meeting Future Needs in LifeFinancial Planning: Meeting Future Needs in Life Family Formation(significant other)Family Formation(significant other)

term insurance(protection against unforeseen term insurance(protection against unforeseen death & loss of earnings)death & loss of earnings)

HousingHousing spacespace asset: building equity(ownership)asset: building equity(ownership)

RetirementRetirement

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Financial Planning: Meeting Future Needs in Life(continued)Financial Planning: Meeting Future Needs in Life(continued) RetirementRetirement

Old Way: Social Security/Pension PlanOld Way: Social Security/Pension Plan insufficient incomeinsufficient income

IRA’s/Employer Plans[401(k);403(b)]IRA’s/Employer Plans[401(k);403(b)] supplementary incomesupplementary income

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InvestmentInvestment Budget Your ExpendituresBudget Your Expenditures

Tool: income-expense statementTool: income-expense statement Earn money(income)Earn money(income)

Market value of your time: human capitalMarket value of your time: human capital Your value of your time: your taste for leisureYour value of your time: your taste for leisure

Pay yourself first(save)Pay yourself first(save) Invest: Strategies?(Seems Complex)Invest: Strategies?(Seems Complex)

FocusFocus Your Portfolio Choices: Your Portfolio Choices: cash: currency & checking account (SURVIVAL)cash: currency & checking account (SURVIVAL) money market funds(Treasury Bills: 13 wk-1 yr)money market funds(Treasury Bills: 13 wk-1 yr) bonds(Treasury Notes and Bonds: 2yr -30 yr)bonds(Treasury Notes and Bonds: 2yr -30 yr) stock(equity) index fundstock(equity) index fund

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Investment(continued)Investment(continued) Invest: Strategies (Simplify!)Invest: Strategies (Simplify!)

cash: little interest, but liquid(no waiting for $)cash: little interest, but liquid(no waiting for $) money market: more interest, relatively liquidmoney market: more interest, relatively liquid Treasury Notes (3 year or 5 year Note)Treasury Notes (3 year or 5 year Note)

more risk unless: buy and holdmore risk unless: buy and hold buy and hold(certain): get principal back plus buy and hold(certain): get principal back plus

interestinterest

Stock(equity) Index FundStock(equity) Index Fund market basket of stocks: diversifiedmarket basket of stocks: diversified buy and hold/ betting on growth of 11% per year on buy and hold/ betting on growth of 11% per year on

averageaverage

Track Your Wealth: Asset-Liabilities Stmt.Track Your Wealth: Asset-Liabilities Stmt.

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Part II: Chapter OnePart II: Chapter One

ScarcityScarcity Production Possibilities CurveProduction Possibilities Curve Economic way of thinking/ParadigmEconomic way of thinking/Paradigm

describe the alternatives to choose amongdescribe the alternatives to choose among value these alternativesvalue these alternatives choose the best alternativechoose the best alternative

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Part II: Chapter TwoPart II: Chapter Two

opportunity costopportunity cost marginal principalmarginal principal diminishing returnsdiminishing returns spillovers(externalities)spillovers(externalities) reality(real versus nominal value)reality(real versus nominal value)

purchasing powerpurchasing power example: a $ today is not the same as a $ example: a $ today is not the same as a $

tomorrow & tomorrow & vice versavice versa

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Part II: Chapter ThreePart II: Chapter Three Circular FlowCircular Flow

Firms

Households

Income Labor

Firms

Households

SupplyGoods

Demand Goods

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Chapter Three (continued)Chapter Three (continued) absolute advantageabsolute advantage comparative advantagecomparative advantage

Student Abby Student Bobby

1 hour per chapter1 hour per lab

3 hours per chapter1.5 hours per lab

Both Abby and Bobby are short of time

1 chapter per lab 1/2 chapter per lab

Form a study group and trade knowledge

Abby reads Bobby hacks

Each Specializes

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Ch. Three ( continued) Ch. Three ( continued)

Role of Government: federal-state-localRole of Government: federal-state-local provide security(safe skies to safe streets)provide security(safe skies to safe streets) enforce property rights and other lawsenforce property rights and other laws tax citizens to pay for these goods & sericestax citizens to pay for these goods & serices redistribute incomeredistribute income

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Chapter FourChapter Fourprice

quantity/year

price

quantity/year

demand/income, other prices

price

quantity/year

demand price

quantity/year

demand

supply