Slides by Pamela L. Hall
Western Washington University
An Overview of Personal
Finance
Chapter 1
Meaning and Importance of
Personal Finance
Can improve your standard of living
Today’s environment has impacted personal
finance over the years
Sluggish growth in personal income
After adjusting for inflation and taxes, personal income
growth has only been about 2% a year for the last 2
decades
Charges in the labor market
Most people starting jobs today will work at
numerous companies during their career(s)
More options
Many more options available today in investments,
retirement planning, banking, etc. 2
Personal Financial Planning—
A Lifelong Activity
No matter how old you are, you’ll have
financial goals
What works when you’re 20, won’t
necessarily work when you’re 40
In your 20s your goals may be paying off
student loans, buying your 1st house
In your 70s your goal may be making sure
your retirement funds last your lifetime
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Personal Financial Toolbox
Once you graduate from college (and
now have a ‘real’ job)
Figure out your current financial standing
How much do you owe?
What assets do you have?
Prepare an income statement and balance sheet
Put yourself on a budget
Insure yourself against financial ruin
Life, health, property
4
Personal Financial Toolbox
Get your debts under control (if they’re not
already)
Pay off high-rate loans (or roll over into lower-rate
loans)
Start saving for retirement
Set up a regular savings program (pay
yourself)
Have money automatically transferred from
checking to savings
Treat this like a fixed expense
5
Getting Professional Help
Many colleges & universities offer credit
counseling
May use services of a CPA or
professional investment advisor
Dozens of financial self-help books
Online financial information is available
If you use a financial planner make sure
they are qualified
6
Web Links
www.moneycentral.com
www.quicken.com
www.motleyfool.com
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A Personal Financial
Management Model
Financial plan is a guide to help you
reach your targeted future goals
Step 1: Develop short and long-term goals
Influenced by your personal values & current
financial situation
Step 2: Establish financial strategies
Step 3: Put plan in action & monitor
performance
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A Personal Financial
Management Model
All financial plans revolve around:
Maximizing income and wealth
The amount of money you earn is a vital past of any plan
Using money more effectively
Spend (and save) your money wisely
Little things add up
Monitoring expenditures
Use a budget to help control expenditures
The more you know about loans, investments, etc., the
more likely you are to make a good decision
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A Personal Financial
Management Model
Pitfalls of Poor Financial Planning
Missed or late payments will be noticed
Creditors may:
Repossess your property
Garnish your wages
Force you to file for personal bankruptcy
A bad credit record can last for years
10
Setting Personal Goals
Your values will influence your financial goals
What things in life are important to you?
Your financial goals are influenced by your current
financial situation
Prepare current financial statements
Review them to determine what you own, what you owe, &
where you’re spending your money
Prepare a budget
Prepare a list of short and long-term goals
Make sure they are realistic and obtainable
Write down your goals and periodically review them
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Your Personal Financial
Decisions
Career choice
Most of your income comes from salaries/wages–
determines your lifestyle
Basic money management
Prepare a budget
Select the right bank
Establish a regular savings plan
Credit management
Don’t bite off more than you can chew
Find a good credit card
Learn how to compute interest charges/monthly payments
Find out your credit history (report)
Learn what to do if you get into trouble
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Your Personal Financial
Decisions
Tax Planning
How can you reduce your taxes?
Effective Buying
Real estate, cars, etc.
Renting vs. owning
Insurance
How much insurance should you have (if any)?
Life
Health
Property
Disability
Liability
13
Your Personal Financial
Decisions
Investment Management
Invest to increase your future wealth
Difficult to substantially increase future wealth without
investing
Investments are risky, choices include:
Mutual funds
Stocks
Bonds
Options and futures
Real estate
Art
Coins
Metals (gold, silver, etc.)
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Your Personal Financial
Decisions
Financial Planning for Tomorrow
Planning for your children’s college education
Becoming more and more expensive
Retirement Planning
How do you want to live your retirement?
How much (if any) do you want to pass along to
your heirs?
How long remains until you retire?
Will Social Security be enough?
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External Factors
External Factors to consider
Government policy
Tax rates, credits, deductions, etc.
Will the capital gains rate increase?
Interest on student loans
Changes to Social Security
Will the retirement age be increased?
Will payroll taxes increase?
Will benefits to ‘wealthy’ retirees be reduced?
Health insurance reform
The cost of health insurance will probably rise over the
years
16
External Factors
Economic Conditions
The Business Cycle
Shorter-term sequences of expansions and contractions
(recession)
Typical business cycle has four stages: prosperity, decline,
recession, and recovery
Gross Domestic Product
Represents the total value of goods and services
produced by a nation’s economy
Important determinant of personal income
Disposable personal income—what remains after
income taxes
Discretionary personal income—what remains after all
necessary living expenses have been paid
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External Factors
Unemployment rate:
The percentage of workforce currently looking for a job
Inversely related to economic activity
Inflation
Inflation decreases the purchasing power of the dollar
Inflation has been about 3% in recent years
Income sources with cost-of-living increases are tied to inflation
Interest Rates
If you think interest rates are going to rise sharply, buy that
house/car now instead of waiting
Interest Rates are tied to inflation
Nominal interest rates are those that you pay or receive where
as real interest rates are nominal rates less the rate of inflation
For instance, if a six month CD pays a 5% nominal rate, but
inflation is 2%, then you are earning a real rate of 3%
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External Factors
Government Policy and Economic Activity
Government influences economy
If taxes increase and government spending remains
unchanged, economic growth will slow
Federal Reserve Board can increase or decrease the
supply of money
Impacts interest rates, inflation, and economic
growth
Recession/Expansion
If you think a recession is in the near future,
save more now (in case you get laid off)
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Real GDP ($ billions)
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1,000.0
2,000.0
3,000.0
4,000.0
5,000.0
6,000.0
7,000.0
69
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81
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19 .3
84
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91
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Figure 1.5: Real GDP
19 .2
over the past 30 years.
93
Notice generally that the
U.S. economy has grown
19 .3
94
19 .4
96
19 .1
97
19 .2
98
19 .3
99
20 .4
01
.1
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Figure 1.6: Breakdown of
Personal Income
11%
Wages & salaries
Transfer payments
15% Interest & dividends
Other
57%
The majority of
17%
personal income
comes from wages and
salaries.
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