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