BMAN 342 Personal Finance - Ch 1 Understanding Personal Finance

Personal Finance

the study of personal and family resources considered important in achieving financial success; it involves how people spend, save, protect and invest their financial resources

Financial Literacy

Knowledge of facts, concepts, principles, and technological tools that are fundamental to being smart about money.

Financial Well-being

A state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and make choices that allow them to enjoy life.

How can one achieve financial well-being?

By being financially responsible.

Financially Responsible

Means that you are accountable for your future financial well-being and that you strive to make wise personal financial decisions

1st out of 5 Fundamental Steps in the Financial Planning Process

Evaluate your financial condition relative to your education and career choice

2nd out of 5 Fundamental Steps in the Financial Planning Process

Define your financial Goals

3rd out of 5 Fundamental Steps in the Financial Planning Process

Develop a plan of action to achieve your goals

4th out of 5 Fundamental Steps in the Financial Planning Process

Periodically develop and implement spending plans to monitor and control progress towards goal

5th out of 5 Fundamental Steps in the Financial Planning Process

Review your financial progress and make changes as appropriate

Financial Success

The achievement of financial aspirations that are desired, planned, or attempted, as defined by a person who seeks it.

Financial Security

The comfortable feeling that your financial resources will be adequate to fulfill any needs you have as well as most of your wants

Financial Happiness

The experience you have when you are satisfied with your money matters, which is inn part a result of practicing good financial behaviors

Savings

Income not spent on current consumption

Investments

Assets purchased with the goal of providing additional future income from the asset itself

Standard of Living

Material well-being and peace of mind that individuals or groups earnestly desire and seek to attain, to maintain if attained, to preserve if threatened, and to regain if lost

Level of Living

Refers to the level of wealth, comfort, material goods and necessities one is currently living

Obsolete Knowledge

That which we may believe may have been valid at one time, if it ever was true in the first place

Capitalism

A country’s economy, its trade and industry, are controlled by private owners who see profit

Economic Growth

A condition of increasing production (business spending) and consumption (consumer spending) in the economy and hence increasing national income.

The U.S. federal government attempts to regulate the country’s overall company to maintain…

stable prices (low inflation) and stable levels of employment (low unemployment)

Business Cycle (or Economic Cycle)

Depicted as a wave-like pattern of rising and falling economic activity; the phases include expansion, peak, contraction, and trough

Deleveraging

A time period when credit use shrinks in an economy instead of expanding as during normal economic times, usually from paying down debts

Recession

A recurring period of decline in total output, income, employment, and trade, usually lasting for six months to a year and marked by widespread contractions in many sectors of the economy

Double Dip Recession

When the economy has a recession, has a small period of growth, then falling into a recession again

During the expansion phase of the business cycle, the demand for use of credit use because more borrowers want money with low interest rates. What could this lead too?

Consumers and businesses purchasing more goods, putting upward pressures on prices, and choking off expansion

Typical length of a business cycle

6 years

Keynesian Economic Theory

To increase demand with stimulus spending even if it creates large temporary government deficits

Every year since 1970, Congress has authorized more spending than projected revenue, except…

for Bill Clinton presidency (1999, 2000) that had budget surpluses

Economic Indicator

Any economic statistic, such as the unemployment rate, GDP, or the inflation rate, that suggests how well the economy is doing now and how well it might be doing in the future

Procyclical Economic Indicator

Moves in the same direct as the economy, if this is increasing, economy is doing well (ex. retail sales, employment, GDP)

Countercyclical Economic Indicator

Moves in the opposite direction of the economy, if its increasing economy is doing worse (ex. Unemployment, gold prices)

Gross Domestic Product (GDP)

Nations broadest measure of economic health; it reports how much economic activity (all goods and services) has occurred within the U.S. borders during a given period. Tracks market value of all goods and services produced in the country

Leading Economic Indicators

Changes before the economy changes, helps predict how the economy will do in the future (ex. Stock market, jobless claims, home sales)

Consumer Confidence Index

Gauges how consumers feel about the economy and their personal finances, increased suggests increased consumer spending

Leading Economic Indicators Index

averages ten components of growth from different segments of the economy, such as building permits, factory orders, and new private housing starts

Inflation

The process by which the cost of goods and services rise over time, usually by rise in credit/ decrease in available goods, or excessive demand and increased production prices

What is a high % of inflation?

5 or 6%

Benefits of Inflation

Encourages job creation and economic growth

Stagflation

Stagnant economic growth, with high unemployment and rising prices

Consumer Price Index (cost of living index)

A broad measure of changes in the prices of all goods and services purchased for consumption by urban households.

Real Income

Income measured in constant prices relative to some base time period. It reflects the actual buying power of the money you have as measured in constant dollars.

Nominal Income

Also called money income; income that has not been adjusted for inflation and decreasing purchasing power.

Purchasing Power

Measure of goods and services that ones income will buy

Rule of 70

A formula to determine how long it will take for the value of a dollar to decline by one-half.

Personal Inflation Rate

The rate of increase in prices of items purchased by a particular person; if market basket of goods differs from that used to calculate the CPI

Deflation

Broad, prolonged decline in prices. The government will enact spending strategies to stimulate the economy, that can be paid off later with a stronger economy.

Interest

Price of borrowing money.

Interest rates increasing do not provide “real” gains if…

the inflation rate is higher than the interest rate on savings accounts

The Fed

The Federal Reserve Board, an agency of the federal government

Federal Funds Rate

Short-term rate at which banks lend funds to other banks overnight so that the borrowing bank has sufficient reserves as mandated by the Fed

Sharing Economy (or collaborative consumption)

Refers to person-to-person (P2P) sharing of access to goods and services where owners rent out something they are not using, such as a car, house, or bicycle to a stranger

Opportunity Cost

The cost of any decision is the value of the next best alternative that must be forgone

Marginal Utility

The extra satisfaction derived from gaining one more incremental unit of a product or service

Marginal Cost

The additional cost of one more incremental unit of some item

Marginal Tax Rate

The tax rate at which your last dollar earned is taxed (not all income), and it refers to the highest tax bracket that your taxable income puts you in

Tax-exempt Income

Income from an investment whose earnings are free, or exempt, from taxation (interest on municipal, state, local government bonds)

Tax Sheltered Income

Income that is legitimately exempt from income taxes and may or may not be subject to taxation in a later tax year

Tax Deferred Income

When the payment of tax on the earnings from an investment can be postponed for a period of time

Compound Interest

Earning of interest on interest and arise when interest is added to the principal do that, from then on, the interest that has been added also earns interest

Compounding

The addition of interest to principal; the effect of compounding depends on the frequency with which interest is compounded and the periodic interest rate that is applied

Cafeteria Plan

A type of employee benefit plan where employees are offered a choice between cash (which is taxable) and at least one other nontaxable benefit, which are qualified as nontaxable or tax-sheltered benefits

Flexible Spending Account (FSA)

An employer-sponsored account that allows employee-paid expenses for medical or dependent care to be paid with employees pretax dollars rather than after-tax income

High-deductible Health Plan

A plan that requires individuals to pay a higher deductible to cover medical expenses before insurance plan payments begin; chosen to save money on premiums

Health Savings Accounts (HSAs)

For employees who have high deductibles, employees make tax-deductible contributions to the account for eligible expenses, and he money grows tax free

Tax-sheltered Retirement plan

Employer-sponsored, defined-contribution retirement plans including 401(k) plans and similar 403(b) and 457 plans

Financial Planner

An investment professional who evaluates the personal finances of an individual or family and recommends strategies to set and achieve long-term financial goals (CFP)

Suitability Standard

Financial advisors who are held to a standard for advice giving where they are free to sell securities generating the heftiest profits and commissions, as long as they are judged suitable for a client based on factors like age or risk tolerance

Fiduciary Standard

A financial advisor must always act in the best interest of the client at all times regardless of how it might affect the advisor