Transcript Chapter 1 Introduction to Personal Finance

Chapter 1
Introduction 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 Keeping
Retirement/Estate
Planning
Personal Investing
Protecting Assets and
income
Personal Financing
Liquidity Management
Budgeting 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)
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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