Chapter 1 Flashcards
Personal Finance
financial issues that affect an individual
Personal Financial Planning
the process of planning every aspect of your personal finances.
What is personal financial planning?
- become knowledgeable about financial issues that affect you
- make a plan for you spending, borrowing, and financing, and saving and investing.
- learn to manage your cash wisely.
Liquid Assits
things you might have that can be rapidly converted to cash without a risk of significant loss.
Steps to Personal Financial Planning
- create a budget for yourself
- manage your liquid assets.
- manage your borrowing
- plan to have enough insurance to protect your assets
- develop a plan for investing
6 develop a plan for retirement.
Bankruptcy
a legal process in which a court takes over some of the finances of a person who is unable to pay his or her bills.
The need for personal financial planning
- over 30% of high school students and more than 80% of undergraduate students use a credit card.
- 1.3 million people filed for bankruptcy in 2012
- 25% of consumers have more credit card debt than emergency savings.
- about half of all people surveyed in the US are working full-time tell us that they are living pay check to pay check.
- about 40% of people that work full-time do not save money for retirement.
Opportunity Costs
cost of pursuing one option instead of another expressed as the value of the activity you gave up.
The benefits of good financials decision making
- understanding personal finance helps you to make informed financial decisions
- every purchase you make incurs an opportunity cost
- viewing purchases in terms of its opportunity costs might help you change your spending habits.
What are you planning for
- goals can be reduced to 3 categories: short-term, medium-term, and long-term
Short-term goals
buying a car
Medium-term goals
education, emergencies, buying a home (down payment)
Long-term goals
having a family, retirement
Education
- decide what kind of higher education is right for you
- research various career options
- determine the education required to pursue each option.
- understand the relationship between education and annual salary
Emergencies/Rainy day fund
- save money to prepare for unexpected events such as: car breakdowns, job changes, medial emergencies
- financial planning forces you to think about and plan for those unexpected expenses.
Buying a Car
- when do you want to own a car by?
- will your parents or you pay for it?
- what type of car do you want?
- keep in mind other types of car expenses: gas, car insurance, car maintenance
Buying a Home
- what kind of house do you want?
- where do you want to live?
- what type of neighborhood do you want to live in.
- these are the types of questions to ask yourself while thinking of owning a home. Start saving now and you could have a down payment ready for when you buy your first house.
Retirement
- what age would you like to be when you retire?
- do you know anyone who retired young and now does what they want to do?
- financial planning can allow you to build your wealth at an early age, although it may be difficult to think of now, it may be a good idea to save for retirement.
Charitable giving
- an important component of many financial plans, some people give a large sum to one charity, while others give smaller amounts on a regular basis.
- knowledge of financial planning can have you achieve whatever goals you may have in this area.
Sources of financial planning information
- there are many resources available to help you make good financial choices
- some examples include the internet and financial advisors
- time is on your side when it comes to financial planning.
The Internet (pros)
- research prices of major purchases
- look up investments performance data
- there are many websites that can provide payment calculators or information on wealth building.
The Internet (cons)
- be cautious about advice from sources that are selling a service
- can be a source of people trying to defraud you and increase their wealth at your expense.
Judging the advice of financial planners/advisors and financial information
financial advisors understand tax laws and can monitor investments closely, this job requires training, education, and certification.
