Chapter 1Introduction to Personal Finance
What is personal finance?
• Financial issues that can affect an individual• Knowledge is a key to making good financial decisions• Varies from person to person, and situation to situation
The financial plan
Record KeepingRetirement/Estate
Planning
Personal InvestingProtecting Assets and
income
Personal FinancingLiquidity ManagementBudgeting and Taxes
Ways to acquire assets!
• Work- salary or commissions• Investing• Inheritance/Gifts• Credit• Others?
Why do people work?
American Credit Industry
• Began in the 19th century but borrowing was reserved for:• Needs or things that increased productivity or value• Borrowing for nonessentials was seen as immoral• Borrowing was much more local
• Industrial Revolution changed the magnitude of production• Reduced costs and increased inventory• Borrowing for fun or frivolous items began
American Credit Industry cont.
• 1940’s-1960’s: disposable income and spare time increased• Central banks are established due to the Great
Depression• First credit cards are introduced
• 1990’s and beyond• Average household debt is between $10,000-$15,000• Average number of cards per user 3.7
• WHY????
Type of earning statements• Pay stub• W-4• W-2
The W’s
W-4
• Used to withhold the correct federal income tax from your pay• Complete a new one
when your personal or financial situations change
W-2
• Wage and tax statement• Used to file your federal
and state taxes• Reports the amount of
taxes withheld from your pay• Must be sent to you no
later than Jan. 31 of the following year
Gross vs. Net Income• Gross- An individual’s total personal income before taking out
deductions and taxes• Net- gross income minus taxes and all deductions• Common Deductions can add up to (20-40% of gross income)• Medicare tax• Social Security tax• Federal Income tax• State Income tax• State disability tax• Health care contributions• Retirement
Setting Smart Goals
• 3 ranges of goals• Short term- within 1
year• Intermediate- 1 to 5
years• Long term- will take
more than 5 years to accomplish
• Must be achievable, realistic, and specific
Needs vs. Wants• Need- something you have to have or can’t do without• Want- something you would like to have, not absolutely
necessary• Needs can fall under 2 categories• Fixed expenses- a set amount that must be paid each budget
period (monthly, quarterly)• Variable expenses- a cost that changes in amount or time it must
be paid, or both• Wants are purchased with discretionary income:• Discretionary expenses offer best opportunities for adjusting
spending
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