Chapter 1 Personal Finance: An Overview
Section 1.1 Personal finance basics
Objectives • Explain financial competence. • Describe the personal side of consumer choices.
Terms • financial planning • financial security • financial literacy • management • goods • services • needs • wants • values • value system • ethics • goal • priority • standard • resources
Financial Competence • Financial planning helps you reach important goals and financial security over your lifetime • Financial security is the ability to meet essential needs without taking on more debt than you can repay • Financial literacy is possessing and applying financial knowledge to make informed and responsible financial choices
Financial Competence (Continued) • Management is using your resources to achieve predetermined objectives • Management involves: • Identifying resources • Setting goals • Making decisions • Solving problems • Evaluating the results
Choices • Goods are tangible items that can be purchased • Services are intangible activities that another person usually performs for a fee (haircut) • Needs are necessities • Physical needs (food, clothing, shelter) • Psychological needs (safety, security, love, acceptance, approval, and success) • Wants are things you would like but they are not essential
Values • Values are your beliefs about what is important and desirable • A value system is the overall structure of values and goals that guides your behavior
Ethics • Ethics are the moral principles or beliefs that direct a person’s behavior • Ethical behavior is important in personal relationships and in business and government • Honesty, fairness reliability, respect, courage, tolerance, civility, and compassion • Unethical behavior is usually considered wrong and is sometimes illegal
Goals • A goal is an objective you want to attain • “To be” goals are related to personality and character (smart, reliable, career goals, etc.) • “To do” goals are things you want to accomplish (play piano, go to college, clean your closet, etc.) • “To have” goals continually change (new clothes, new car, new phone, etc.)
Timing of Goals • Short-term goals take less than a year to achieve • Medium-term goals may take one to three years to achieve • Long-term goals may take several years to achieve
Did You Know? • Your goals today will probably be different from your goals in the next few years • It is important to have a plan to review your goals on a regular basis
Evaluating Goals • Is the goal realistic and possible? • Can you break big goals into smaller pieces? • Can you measure your progress? • What will the goal cost in time, money, and effort? • Will you still want the goal by the time you are able to reach it?
Interdependent and Conflicting Goals • Aninterdependent goal isone goal you have to achieve in order to reach another goal • Conflicting goals cannot all be achieved; you must decide which of the goals is more important to you • When your goals conflict, your priorities and values will help you choose wisely
Priorities • A priority is a value or goal that is given more importance than other values and goals • You set your priorities by ranking goals in their order of importance • Money and financial matters can have a major impact on the choices you make in the marketplace and in your financial life
Standards of Quality and Excellence • A standard is an established measure of quality, value, or quantity • You set standards for the way you want to live, what you want to do, and what you want to buy • Your standards depend on your values and goals
Resources • Resources are tools you can use to reach goals • Human resources are internal (knowledge, experience, skills, motivation, etc.) • Nonhuman resources are external (money, time, equipment) • Resources are scarce; by planning you can make the most of them • Resources are manageable • Resources are related to one another
In Your Opinion • Which of your resources are plentiful and which are scarce? • Can you combine several resources for more effective use of each? • How can you use your human resources to make up for what you are missing?
Review 1.1 • What is the process of organizing and using your resources to achieve predetermined objectives? • Management • What is the difference between goods and services? • Goods are tangible items • Services are intangible activities
Section 1.2 Managing Your Personal Finances
Objectives • Discuss the various factors that influence financial decisions. • Apply management principles to achieve your important goals.
Terms • cost-benefit analysis • marginal benefit • marginal cost • trade-off • opportunity cost • systematic decision-making
Making Financial Decisions • We make financial decisions: • Out of habit (shopping in the same stores) • On impulse (spending money without considering whether you can afford to) • By failing to act (being broke when you need money because you failed to save)
Cost-Benefit Analysis • A cost-benefit analysis is weighing the costs against the benefits of an action, purchase or financial decision • Example: you are taking a vacation and must decide whether to fly or drive to the destination • Flying costs $350 more than driving, but saves eight hours of driving time • Is the benefit of saving eight hours worth $350?
Marginal Analysis • Marginal analysis measures the added benefit, versus the added cost, of one more unit of a product • Marginal benefit is the change in total benefit of using one additional unit • Marginal cost is the change in total cost of using one more unit
In Your Opinion Suppose you buy a banana for $1. It tastes so good, you buy a second, and a third. • Will the second banana bring as much satisfaction as the first? • Will the third banana be even less satisfying? • Would you be willing to pay more for the first banana than the second, and more for the second than the third? • Eventually there is no marginal benefit and you stop eating because you are full.
Trade-Offs and Opportunity Costs • A trade-off is the choice you give up when you make one choice over another • If you buy a new cell phone, the tradeoff is the other ways you could have used that money • The opportunity cost is the value of the option you gave up • It can be measured in dollars, time, or enjoyment
Common Sense Rule • Do not spend more than you can afford • Your financial future is in your hands • Spend less than you make • Borrow no more than you can repay • Live within your means
Systematic Decision-Making • Systematic decision-making is a process of choosing a course of action after evaluating information and the costs and benefits of alternative actions • Define the decision to be made • Explore all alternatives • Choose the best alternative • Act on your decision • Evaluate your solution or decision
Systematic Decision-Making (Continued) Goodheart-Willcox Publisher
Managing Resources to Reach Goals • Management involves more than making decisions • Management is a three part process: • Planning • Acting • Evaluating
Planning • The planning phase of management involves: • What goals do you want to achieve? • What obstacles stand between you and your goals? What must you overcome? • What resources can you use to overcome the obstacles and reach your goals?
Action • The success of putting your resources to work to overcome obstacles that stand between you and your goals depends on determination and flexibility • Determination keeps you focused on the final goal • Flexibility helps you adjust to new and unexpected situations
Evaluation • Evaluation is a continuous process used to assess your progress through all stages of the management process: • Evaluating plans • Evaluating actions • Evaluating results
Evaluation(Continued) Goodheart-Willcox Publisher
Review 1.2 • What is the value of something that you give up when you choose to do something else? • Opportunity cost • What is the Common Sense Rule? • Don’t spend more than you can afford
Section 1.3 Financial influencers
Objectives • Identify and explain factors that impact your financial future. • Describe how the government influences the economy. • Explain how globalization influences your finances.
Terms • economic conditions • recession • inflation • demographics • culture • technology • globalization
Career Corner • The average high school graduate can expect to earn just over one million dollars in a lifetime • College graduates can expect to earn more than two million dollars in a lifetime
Your Financial Future • Important factors that will influence your financial life now and in the future include: • Economic conditions • Social forces • Technological forces • Government action • Globalization
Did You Know? Did you know that economics is a science? • It deals with examining how goods and services are produced, sold, and used • Economics focuses on how people, governments, and businesses make choices about how to use their limited resources to satisfy their unlimited needs and wants
Economic Conditions • Economic conditions – the state of the economy at a given time • Recession – period of slow or no economic growth (consumers spend less, businesses cut back leading to rising unemployment) • Inflation – period of rising prices (buying power is reduced, consumers cannot buy or save as much)
Did You Know? • When interest rates rise, consumers tend to spend less money. Why? • When interest rates go down, people tend to spend more. Why?
Demographics • Demographics is the statistical characteristics of the population such as: • Vital statistics of records of births, deaths, marriages • Social statistics of age, sex, race, geographic distributions and growth rates • Social-economic statistics of education levels, income levels, employment, religion, etc.
Demographic Trends • Couples are marrying and having children later • The percentage of single-parent families is growing • The average age of the population is growing • Skilled workers are in greater demand • More young adults are living at home with their parents • The number of unmarried adults is increasing
Culture • Culture is the beliefs, behaviors, and other characteristics common among members of a group or society • Culture and ethnic traditions affect many everyday choices and routines in a family: • Role each partner plays in the family • Who makes financial/spending/management decisions • Whether both partners work • How the family uses credit
Technology • Technology is the application of science and research to human life and environment • Buying goods online • Latest information about products, services, and issues from around the world • Money management software to perform financial tasks (banking, bill paying, investing, etc.) • Brings more and cheaper goods/services to consumers and creates jobs in many new fields
Government • The fiscal and monetary policies of a governmentaffect: • Prices and wages • Availability and cost of credit • Job opportunities and employment trends • Growth • International trade