Garman/Forgue
Personal Finance
Ninth Edition
Chapter 1:
Understanding
Personal Finance
PPT slide program prepared by
Amy Forgue and Ray Forgue.
Learning Objectives
1. Use the building blocs to achieving
financial success.
2. Understand how the economy affects
your personal financial success.
3. Apply economic principles when
making financial decisions.
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Learning Objectives
1. Perform time value of money
calculations.
2. Make smart decisions about your
employee benefits.
3. Identify the professional qualifications
of providers of financial advice.
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Financial Literacy
• Financial literacy is knowledge of:
– Facts
– Concepts
– Principles
– Technological tools
…that are fundamental to being smart
about money.
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Financial Responsibility
• Financial responsibility means
– being accountable for your future financial
well being.
– that you strive to make good decisions in
personal finance.
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Financial Success
• Spend less to save and invest!
• Savings
• Investments
• Standard of Living
• Level of Living
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Financial Success
• Financial Happiness: Satisfaction
about money matters.
• Use the Building Blocks of financial
success
• Know how the economy affects your
personal financial success
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The Economy and Business Cycles
• Economy: System of managing the
resources of a country, state, or
community.
• Economic Growth: Increasing
production and consumption in the
economy.
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The Economy and Business Cycles
• The economy grows and contracts over
time:
– Expansion
– Peak
– Expansion
– Trough
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Future Direction of the Economy?
• Track the Gross Domestic Product
• Track the Employment Report
• Track the Index of Leading Economic
Indicators
• Track the Consumer Confidence Index
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Inflation
• Inflation: Steady rise in the general
level of prices.
• How does inflation affect income and
consumption?
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Inflation
• How inflation is measured:
– Consumer Price Index (or CPI)
– Personal Inflation Rate
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Track the Federal Funds Rate
• Federal Funds Rate:
– Rates banks charge each other
– Set by the FED
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Think Like an Economist
• Opportunity Cost: Cost of decision
measured by the value of the next best
alternative.
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Think Like an Economist
• Marginal Utility/Cost: Usefulness or
cost of the next increment of something.
• Marginal Tax Rate: Tax rate at which
your last dollar earned is taxed.
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FAQ in Personal Finance
• What will an investment (or a series of
investments) be worth after a period of
time?
• This question asks for a future value.
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FAQ in Personal Finance
• How much has to be put away today (or
as a series of investments) to provide
some dollar amount in the future?
• This question asks for a present value.
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Calculating Future Values
• Future Value (FV): Valuation of an
asset projected to the end of a particular
time period in the future.
• Compounding
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Calculating Future Values
• Future value of a lump sum
• Future value of an annuity
• Rule of 72: Reveals number of years
for principle to double
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Calculating Present Values
• Present value of a lump sum
• Present value of an annuity
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Smart Money Decisions at Work
• Flexible benefit plans offer tax-free
money
• Flexible Benefit (Cafeteria) Plan
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Smart Money Decisions at Work
• Making decisions about employersponsored health care plans
• High-Deductible Health Care Plan
• Health Savings Accounts (or HSAs)
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Smart Money Decisions at Work
• Making decisions about employer’s
Flexible Spending Accounts
• Pretax Dollars: Money income that has
not been taxed by the government.
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Smart Money Decisions at Work
• Making decisions about…
– Participating in employer life, disability, and
long-term care insurance plans
– Participating in your employer’s retirement
(or tax-sheltered retirement) plan
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Employer Retirement Plans
• First advantage: tax-deductible
contributions
• Second advantage: employer’s
matching contributions
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Employer Retirement Plans
• Third advantage: tax-deferred growth
• Fourth advantage: starting early really
pays off
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Professional Financial Planning Advice
• A true financial planner should be able
to analyze a family’s total needs in such
areas as:
– investments
– taxes
– insurance
– education goals
– retirement
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Professional Financial Planning Advice
• Appropriate professional designations
and credentials for planners:
– Certified Financial Planner (CFP)
– Chartered Financial Consultant (CFC)
– Certified Public Accountant (CPA)
– Accredited Financial Counselor (AFC)
– Mutual Fund Chartered Counselor (MFCC)
– Registered Investment Advisor (RIA)
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Professional Financial Planning Advice
• How financial planners are compensated:
– Commission-only financial planners/brokers
– Fee-based financial planner/brokers
– Fee-offset financial planners/brokers
– Fee-only financial planners
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Top 3 Financial Missteps in Personal
Finance
People slip up in building and maintaining
good credit when they do the following:
1. Think only about money matters when
faced with a financial problem.
2. Spend more than they earns.
3. Get financial advice from amateurs.
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Good Money Habits in
Personal Finance
•
Spend significantly less than you
make and save using pay-yourselffirst.
•
Stay up-to-date with current economic
conditions and the knowledge to
manage your personal finances.
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Good Money Habits in
Personal Finance
•
When making financial decisions, use
marginal and opportunity costs and
time value of money calculations.
•
Establish financial goals and take
actions to achieve them.
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Good Money Habits in
Personal Finance
•
Take advantage of tax sheltering
through your employer’s benefits
program.
•
Believe in compounding by allowing
your money to earn interest on top of
the principal and other accrued
interest.
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Good Money Habits in
Personal Finance
• Keep debt under control.
• Take responsibility for managing your
own financial success.
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