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Personal Finance – An Introduction
Dr. Steven M. Hays
Personal Finance
BKHS – Fall 2011
Why Is Money Important?• Pay Bills
• Make Purchases
• Retirement
• Housing
• Vacations
• Education
Three Techniques for Understanding the Importance of Money
1. Budget
2. Rate of Return
3. Risk
BUDGETS
• What is a budget?
• Why is a budget important?
• How is a budget used?
Budgets and Expenses
• Define expense:
• Definition of EXPENSE
• 1 archaic : the act or an instance of expending : expenditure
• 2 a : something expended to secure a benefit or bring about a result b : financial burden or outlay : cost <built the monument at their own expense> c : an item of business outlay chargeable against revenue for a specific period
Budget to Save – You Can Create Personal Wealth
1. Budget
2. Save and Invest
3. Pay off Debt
4. Avoid Credit Cards
5. Save for Retirement
The Millionaire’s Quiz – True or False
• Most millionaires inherited their wealth
• Most millionaires earn more than $500,000 a year
• College graduates earn about twice what high school graduates earn over a 40 year work life.
• People who are self-employed rarely become millionaires.
• All millionaires wear expensive clothing.
• Millionaires usually drive new cars.
• Many millionaires drop out of college to start work.
• It is impossible to save enough to be a millionaire.
“Wealth Is…”“Wealth is…”
Building Net Worth
• What is net worth?
• The Financial Equation– Assets – Liabilities = Net Worth
• Assets– Anything an individual or business owns that has commercial
or exchange value
• Liabilities– Money an individual or organization owes; same as debt
• Is a person’s assets the same as a person’s net worth?
Balance Sheets of the Rich and Famous activity
Following the Money Map
• Destination 1
• Emergency Savings Begin using a spending
plan Save $1,000
Destination 2
• Credit Cards Paid Off Pay off credit cards Increase savings to one month’s
living expense
Destination 3
• Consumer debt paid off Pay off all consumer debt
Auto loans
Student loans
Increase savings to 3 months living expense
Destination 4
Save for Major PurchasesBegin saving for major purchases
Home Auto
Begin saving for retirementBegin saving for children’s college educationIf you want to start own business, start saving
Save for Major PurchasesBegin saving for major purchases
Home
Auto
Begin saving for retirementBegin saving for children’s college
educationIf you want to start own business, start
saving
Destination 5
• Buy Home, Begin Investing Buy affordable home Begin prepaying home
mortgage Begin investing wisely
Destination 6
• Home Mortgage Paid Off Pay off mortgage Children’s education funded Confirm estate plan is in order
Destination 7
• Final Destination Retirement is funded I am free to volunteer my time working for the Lord
What Does It Mean to be Wealthy?
• Name two assets that are likely to depreciate in value over time.
• What happens to wealth if debt is used to purchase consumable items?
• What conditions would allow a house to considered a wealth-creating asset?
• Why might a U.S. Treasury security be called a wealth creating asset?
Homework
• Sandra’s Balance Sheet –
complete and turn in on Tuesday, September 13, 2011