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1. To describe the family life cycle. 2. To formulate a personal budget.3. To describe the various tools available to

invest extra money.4. To associate risks involved with various

types of investments.5. To compare Traditional IRAs with Roth

IRAs. 6. To examine how economic conditions

effect personal finances.

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• Are the focal point of developing your personal financial plan

• Can be either – short term (<1 year) such as a vacation or

piece of furniture– long term such as a house, education or

retirement

• Need to have a set of priorities and a target date for achievement

• Require constant updating as a result of the changing family life cycle

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• Explains how a person changes financial position, earnings, consumption and savings throughout the life cycle

• Was introduced by marketers, for example

– a single male of 30 will purchase no diapers, meanwhile a married male of 30 with an infant will purchase many diapers

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• Was extended to the realm of personal finance in 2000

• Is categorized into eight stages

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Younger single Older couple, children independent

Younger couple, no children

Older single

Couple, dependent children

Couple, retired

Single, dependent children

Single, retired

• Provides a framework to examine issues that are most likely important for a variety of family units

• Allows personal finance professionals to argue that the first four stages involve a greater need for budgeting

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• Differentiates the various financial planning issues between groups;– in other words, a single person with

children is going to have different financial needs (e.g., preparing for college, putting food on the table) than a single person who is retired (e.g., traveling, investing in expensive hobbies such as hunting)

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• Recommend the life cycle as the initial tool when evaluating a family unit

• Argue that financial behavior does conform to the eight stages within the family life cycle

• Recognize faults in the family life cycle model, for instance

– goal-planning is not strongly emphasized, focuses more on the “here and now”

– utility, fails to incorporate an empirical way to measure consumption and satisfaction

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• Begins with budgeting your finances– Calculate income sources (fixed and variable )

• salary • savings account• benefits (Social Security, alimony)

– Calculate expenses (fixed and variable)• rent• utilities• insurance• food

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• Assist in planning your financial situation throughout the year

• Identify shortages before they happen

• Act as a control mechanism in regards to the way you spend money

• Allow you to see the larger picture and assist in reorganizing finances to reduce debt or increase savings

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Personal budget

                   Jan Feb March April May June July Aug

INCOME

Wages 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Interest/dividends 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Income totals 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

EXPENSES

Home

Mortgage/rent 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Cellular telephone 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Home totals 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

                 

Daily living

Groceries 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Dining out 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Daily living totals 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

                 

Transportation

Gas/fuel 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Insurance 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Transportation totals 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

                 

Entertainment

Cable TV 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Movies 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Entertainment totals 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

                 

Personal

Clothing 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Salon/barber 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Personal totals 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

                 

Financial obligations

Long-term savings 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Credit card payments 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Financial obligation totals 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

                 

Total expenses #REF! #REF! #REF! #REF! #REF! #REF! #REF! #REF!

Cash short/extra #REF! #REF! #REF! #REF! #REF! #REF! #REF! #REF!

• My expenses exceed my income?– cut down– do you need to eat out so much? – did you call nine different insurance companies

for the best quote? – increase your income sources

• invest in certificates of deposit  (CD’s)• donate plasma

– consolidate your debt• consumer loan• home equity loan

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• My income exceeds my expenses

– food for you

– research investment and savings options

• certificates of deposit

• 401k/IRA plans

• mutual funds

• stock market13

• Are similar to a savings account, with the following exceptions:– CDs have higher interest rates– CDs have fixed terms, in other words

you intend to invest an amount of cash for 6 months, 12 months, 18 months, etc.

– CDs have a fixed interest rate, for instance the interest rate of savings accounts fluctuate depending on the market; meanwhile CD interest rates cannot change as a result of poor or strong market performance 14

• Provide periodic income, for instance–at the end of the month, the

interest accrued can be mailed to you in the form of a check

–at the end of the month, the interest accrued can be transferred to your bank account

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•  Vary according to the – size of the bank– length of maturity

• Can secure a new loan with a lower interest rate, for example,– securing a car loan may have an interest rate of

9.75 percent; however if you pledge your CD as collateral  and your CD rate is 5.75 percent your loan rate will also be 5.75 percent

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 Collateral: property of value that can be transferred to a creditor in the event a person fails to repay their debt

• Are employee sponsored benefit plans• Provide individuals with the chance to put

a portion of their earnings in a financial portfolio

• Exempt you from paying income taxes on the portion of earnings you place in a financial portfolio

• Can be rolled over into an Individual Retirement Account or to your future employers 401k plan, in the event you leave employment

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• Can contribute a portion of profit into employees 401k plans based on a formula* 

• Have the right to enforce a vesting policy, for example, – the employee may accrue profit sharing earnings,

however the employee is not entitled to the earnings until five years of service  

• Have to sponsor a 401k plan, in other words an individual cannot start  a 401k plan on their own

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*Formulas vary in the variables that are included, such as: executive, years of service, age, department, geographic location

• Allows individuals to open an account and begin saving cash towards retirement, with tax benefits

• Come in two different types– Traditional IRA– Roth IRA

• Restricts the amount of cash you can contribute to the account

• Are generally risk-free

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• Reduces your tax-liability, in other words contributions are tax-deductible

• Requires you to pay taxes on interest • Gives you the option to withdraw at the

age of 59.5• Requires you to withdraw at the age of

70.5• Penalizes you with a 10 percent tax on

any withdrawals made before the age of 59.5

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• Does not provide a tax shelter on contributions, in other words you cannot reduce your tax-liability

• Does not require you to pay taxes on the interest

• You can withdrawal at any time• Excludes certain individuals, in order to open a

Roth IRA you must be– single and making up to $95,000 per year– married and making a combined $150,000

per year

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• Consists of a portfolio of securities (e.g., common stock, bonds, money-market accounts)

• Are professionally managed

• Carry high-risk

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• Are an investment in publicly traded companies

• Provide ownership in a company• Consist of two types:

– common: voting rights in a company, last to receive dividends

– preferred: no voting rights in a company, first to receive dividends

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• Are associated with every investment• Effect the rate of return on your investment

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Investment Risk Return401k Varies – Can select high

risk, low risk, moderate risk portfolio

Volatile – Higher risk, greater returns or loss in investment

IRAs Low Risk Lower return on investment

Mutual Funds Varies – Can select high risk, low risk, moderate risk portfolio

Volatile – Higher risk, greater returns or loss in investment

Stocks High Risk Volatile – Higher risk, greater returns or loss in investment

Savings Low Risk Lower return on investmentMoney Market Accounts

Low Risk Lower return on investment, but higher than a savings

• Serves a critical purpose in personal finance• Provides a cushion for your financial condition in the

event of an emergency• Should be developed through a type of savings, for

instance a– savings account– money market account

• Rewards you by earning interest• Should be easily accessible

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Savings Money Market

Lower return rate Higher return rate

Lower minimum balance required

Higher minimum balance required

No check writing authority

Check writing authority

Limited withdrawals per

month

Limited withdrawals per

month

• Effects personal finance planning, for example– when the unemployment rate is low, monetary

supply is increased, which leads to an increase in savings

• Is only one example of the economic shifts in a national economy that effect monetary supply, thus an individuals ability to save

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$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

1% 2% 3% 4% 5% 6% 7%

Unemployment Rate

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1. Short term goals cover a time period of 1-2 years. If false correct the statement. 

a. true

b. false

2. List five financial goals your family has right now.

3. _________________________ explains how a person changes financial position, earnings, consumption and savings throughout the life cycle.

a. financial Evolution

b. life Cycle

c. portfolio growth

d. family life cycle

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4. Which of the following would NOT be considered a fixed source of income?

a. income from work

b. donating plasma

c. alimony

d. child support

5.  __________ banks offer _________ interest rates when you invest certificates of deposits for a long time.

a. larger, higher

b. smaller, higher

c. larger, lower

d. smaller, lower 29

6. Anyone can open a 401k plan. If false correct the statement.

a. true

b. false

7. An advantage of a Roth IRA is

a. the reduction of tax-liability

b. requires payment of taxes upon withdrawal

c. does not require payment of taxes upon withdrawal

d. its high risk factor  30

8. Common stock differs from preferred stock in a. voting rightsb. exchange ratesc. callable featuresd. liquidity

9. Would you invest your emergency fund monies in a savings account or a mutual savings account? Explain.

10. Explain how the unemployment rate affects families. Graph this relationship.

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• Brooks, R. (1996). Computing Yields on Enhanced CDs. Financial Services Review, 5(1), 31-42. 

• Davis, E.P. & Car, R.A. (1992). Budgeting Practices Over the Life Cycle. Financial Counseling and Planning, 3, 12-18.  

• Robinson Chris (1998). Conceptual Frameworks for Personal Finance. Unpublished Manuscript.

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