MGT 12: Personal Financial Management

Tuesday and Thursday

2:00 3:20PM
3:30 4:50PM

Wells Fargo Hall, Room 1N108

Professor: Joe Pecore

Winter 2017

http://www.bloomberg.com/live
Welcome MGT12 Students !
Agenda 1/10/17

Course Introduction

Lecture
Chapter 1
 Personal Financial Management
Course Description & Objectives
This course is intended to give students a foundation in personal financial
planning, budgeting and money management.

Upon completion of the course, students should have an understanding of

associated terminology and possess basic skills in personal finance and
money management.

Specifically, the course is intended to be foundational and introductory to

help prepare students for financial independence after graduation. Key
learning areas will be the following:

Basics of Personal Finance

Time Value of Money
Budgeting and Tracking Spending
Banking
Consumer Credit
Investing
Retirement
Housing
 Instructor
Joe Pecore

Teaching at Rady since 2010

Worked as a Finance Professional in Life Sciences industry with

over 20 years of combined Corporate Financial Planning, Business
Analysis, Cost Accounting and General Accounting experience

BS Industrial Engineering, Lehigh University

MBA, Finance, SDSU

Hobbies Running, Golf

 Contact Information/Office Hours
PROFESSOR : Joe Pecore

EMAIL : jpecore@ucsd.edu
OFFICE : Otterson Hall 3W124
OFFICE HOURS : Tuesday & Thursday 5:30PM-6:30PM in Otterson
Hall 2d Floor Conference Room

TAs/TUTORS

Kim Phan, kiphan@ucsd.edu

Sabrina Lin, sabrina841208@gmail.com

Students are encouraged to attend any of our

office hours which will be posted on TritonEd
 Materials
Text Book - Personal Finance, 10th Edition, Kapoor, Dlabay,
Hughes, McGraw-Hill/ Irwin, Inc., 2012.

Clicker for in class exercises, questions and short quizzes

Recommended - Staying current with Personal Finance world

through many of readily available media outlets such as CNBC,
Personal Finance Experts, (Suze Orman, Dave Ramsey, Stacy
Johnson), Wall Street Journal Personal Finance Section, Money
magazine, Personal Finance webpage of Yahoo Finance, etc

3 copies of the Text are on reserve at Geisel Library

 Class Time/Attendance
It is important to attend class. The goal is to have an interactive experience.
This topic is action-oriented and will be best learned by doing, not just
listening and studying

Class Time
Lecture and discuss subject matter
Discuss articles, answer questions & solve problems
Possible Guest speakers
Quizzes/Exams

Attendance
Highly encouraged and integral to participation grade
Participation is highly encouraged, name cards will be used and points
will be given based on quality of contributions and engagement
We will measure participation through use of the Clicker.
Computers only for note taking, in-class assignments
Goal is to stimulate rich discussion and constructive learning experience
 Class Participation

Students are expected to be prepared for class by reading material

assigned from text, reading assigned articles and completing
assignments.

Students are responsible for content of syllabus and lecture notes

Additional participation points will be earned based on answering

questions, engagement level and overall contributions

We will have clickers

 Articles

For each article, read article before class

We answer questions for each article

Article discussions will be another opportunity to participate

There will be clicker questions relating to the articles

 Assignments/Opportunities
Classwork/Homework
Certain assignments may start in class and be finished at home

There is a project to track personal spending for approximately

one month (The Personal Spending Tracker).

There is an Investment Portfolio Analysis (IPA) project which will

entail selecting, tracking and analyzing a collection of investments.

If assignments are handed in late, points will be deducted.

If you think you will be late, email myself and the TA before the
deadline and bring a hardcopy to class. Only hardcopies will be
graded. Think of the class as a business meeting.
 The Personal Spending Tracker

Will compare your initial impression of your spending with a

months worth of data

Will track daily spending for approximately one month

Will collect the daily tracker, a summarized report and a

comparison to the original estimate.

10 points of Final grade; there could be interim checks along

the way as part of the grade

Use cash for a week if you really want a full experience!

 Investment Portfolio Analysis (IPA)
Students will :
Be given $1,000,000 to invest

Select investments from a given list

Apportion investments based on directions

Track Investments

Analyze portfolio

10 points of final grade

Students can earn an extra 2 course points if they win and

complete all interim work
 Class Website
Will post the following:

Syllabus. Students are responsible for reading and

understanding content.

Current week lecture notes before class (usually 24 hours

before class). Students are responsible for reading and
understanding content

Articles

Any other relevant information or notifications

Monitor website throughout quarter especially before doing

work for the class (could be extra credit opportunities)
 Grading

Grading Category Points [or

percentage]
Class Participation/Classwork/Quizzes 25
Personal Spending Tracker (The Tracker) 13
Investment Portfolio Analysis (The IPA) 12
Midterm 25
Final Exam 25
Total 100

Spring 2016

3.3 class average

43% A, 38% B, 11% C, 4% D, 4% F

 Schedule
Class Date Class Topic & Activities Chapter Assignments

Jan 10 Introduction to Course 1 Read Chapter 1

Jan 12 Basics of Personal Finance 1 Read Chapter 1
Basics of Personal Finance

Jan 17 Time Value of Money 1 Read Chapter 1

Jan 19 Money Management 3 Read Chapter 3

Jan 24 Assign The Tracker 3 Read Chapter 3

Jan 26 Money Management 5 Read Chapter 5
Financial Services/Banking

Jan 31 Financial Services/Banking 5 Read Chapter 5

Feb 2 Consumer Credit 6 Read Chapter 6

Feb 7 Consumer Credit 6 Read Chapter 6 and Article 2

Feb 9 Cost of Credit/Review for Midterm 7 Read Chapter 7

Feb 14 Midterm 1,3,5,6 Covers Chapters 1,3,5 & 6

Feb 16 Cost of Credit 7 Read Chapter 7

Feb 21 Time Value of Money/Investing 13 Read Chapter 13

Feb 23 Assign Investment Portfolio Analysis 13 Read Chapter 13 and Article 3
Investing
Personal Spending Tracker Due Feb 28
Feb 28 Investing/Retirement 13/18 Read Chapter 13/18
Mar 2 Retirement 18 Read Chapter 18
Mar 7 Retirement 18 Read Chapter 18
Mar 9 Housing 9 Read Chapter 9
Investment Portfolio Analysis Due Mar 14
Mar 14 Housing 9 Read Chapter 9 and Article 4
Mar 16 Housing/Review for Final 9 Read Chapter 9

Tue Mar 21 FINAL EXAM Covers Chapters 7,13,18,9

Thu Mar 23 3:30PM Section- 3:00PM-5:00PM
2:00PM Section- 3:00PM-5:00PM
 Tips for success
Read Syllabus and understand expectations

Attend class and participate!

Read lecture notes and understand content.

Pay attention, ask questions and be engaged, you may be called on at

random

Check your work

On exams or assignments, ask yourself

What does this answer mean?
Does this answer make sense?

Have fun and learn as much as you can as this course is very relevant for life
on the outside. Even now.

Better to get a B and learn the skill than get an A and not know it
 Other

Housekeeping

Please No Food, No Drinks, These are very nice facilities, lets

work together to keep them that way and keep our costs down.

Dont want unfriendly visits from Facilities

Questions about the course?
 My Personal thoughts on Personal Finance
1. Live below your means (spend less than you make)

2. Have a plan for financial independence and stick to it

3. Have a budget and track spending

4. Save systematically 10% of gross salary idea

Gross is before taxes
Net is after taxes
5. Understand the power of compounding (time value of money)

6. Be careful with Debt. Its a four letter word. Just like fire.

7. Pay off credit card balances right away, dont carry a balance

8. Watch investment fees and keep them as low as possible.

9. Know what is happening in the financial markets

10. Always have something for a rainy day

Money Talks News
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Please subscribe to this newsletter as class

material may be derived from it.
 Chapter 1

Personal Finance Basics and the

Time Value of Money

McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

1-22
Chapter 1
Learning Objectives.. We will learn about

1. Process for making personal financial decisions

2. Developing personal financial goals

3. Personal and economic factors influencing financial planning

4. Strategies for achieving personal financial goals for different life

situations

5. Time value of money associated with personal finance

1-23
Chapter 1 Personal Finance Basics and the Time
Value of Money
Pecores Planning Principles

1. Best time of your life to learn about Personal Financial Planning

2. Achieving a Financial Plan means Financial Independence

3. Most people fail to plan, not plan to fail

4. Take advantage of the power of compounding or the Time Value of

Money

1-24
Who likes coffee?

Or fancy hot beverages?

Lets assume $10/day spending for 40 years

1-25
 Retirement Planning
THE IMPORTANCE OF STARTING EARLY CANT BE OVEREMPHASIZED

To take advantage of the exponential power of the time value of money

If from age 25 to 65 you invest $300 a month (10% annual return

compounded monthly), at age 65 youll have approximately :
$1.9 million

Wait ten years until age 35 to start, at age 65 youll have

approximately :
$684,000 or ~65% less than starting at 25

Wait twenty years until age 45 to start, at age 65 youll have

approximately :
$230,000 or ~88% less than starting at 25

By the way, if you stop at 35 after saving for 10 years, youll have
approximately :
$1.2 million

Key message : Money grows exponentially, get started early 1-26

It can really add up!

or
$$ $$

1-27
Personal thoughts on Personal Finance

Assets and Liabilities

Asset are things you own

Liabilities are things you owe
Retirement Planning
THE IMPORTANCE OF STARTING EARLY CANT BE
OVEREMPHASIZED

To take advantage of the time value of money

You want to build assets and let them grow

exponentially

You dont want to build liabilities and let them grow

exponentially

1-29
The Financial Planning Process

Objective 1: Process for making personal financial

decisions

What is Personal Financial Planning? ..

Managing your money to achieve personal economic

satisfaction.

Being proactive and prepared for the future. Be planning

focused..

1-30
The Financial Planning Process

Advantages of Personal Financial Planning are:

1. Increased effectiveness in obtaining, using, protecting and

growing financial resources.

2. Increased control of ones financial affairs

3. Sense of freedom from financial worries

4. Potential for improved personal relationships

1-31
Six-step Procedure for Financial Planning

1. Determine your current financial situation

2. Develop your financial goals

3. Identify alternative courses of action

4. Evaluate alternatives

5. Create and Implement financial action plan

6. Review and revise financial plan as needed

1-32
Six-step Procedure for Financial Planning

Step 1:
DETERMINE YOUR CURRENT FINANCIAL SITUATION
WHERE ARE YOU?

Evaluate income, living expenses, debts, savings and, in general, day

to day finances and money matters.

Prepare a list of your assets and debt balances and know the
amount spent for various items. In essence, what do you own and
what do you owe.

Match potential financial goals to current income and potential

earning power.

Financial goals should be realistic and in line with your

resources or potential resources

1-33
Six-step Procedure for Financial Planning

Step 2: DEVELOP YOUR FINANCIAL GOALS

Analyze your financial values and life goals to set a course for action.
How much do you think youll need and how important is it to
achieve the goals?

Determine the effects of the economy on your goals and priorities

Interest rates
Various markets (stock, housing, job, etc)

Make sure that your goals are yours, are specific to your situation and
are realistic, for example
not just Grad School
perhaps MBA in Grad School
3.5 not just good grades

1-34
Six-step Procedure for Financial Planning
Step 3: IDENTIFY ALTERNATIVE COURSES OF ACTION

Possible financial courses of action can be:

Continue the same course of action

Expand the current situation, do more of the same

Change the current situation, do

something differently

Take a new course of action, new approach

1-35
Six-step Procedure for Financial Planning

Step 3: IDENTIFY ALTERNATIVE COURSES OF ACTION

(continued)

Creativity in decision making is vital to effective choices

Do nothing can be a dangerous alternative

100% of shots not taken dont score

Can waste valuable time

Time is a very important element in achieving financial goals

Try to avoid expensive naps

1-36
Six-step Procedure for Financial Planning

Step 4: EVALUATE YOUR ALTERNATIVES

CONSEQUENCES OF CHOICES

Opportunity cost - What you give up when you make a choice

The cost or trade-off of a decision cannot always be measured

in dollars.

Sometimes the benefit is happiness or piece of mind not

every choice is a financial decision

Old car vs safe car decision

1-37
Six-step Procedure for Financial Planning

Step 4: EVALUATE YOUR ALTERNATIVES

CONSEQUENCES OF CHOICES

Examples of trade-offs and potential consequences of

decisions

Buying vs renting a home

Paying off debt

Buying a nice car vs a functional car

1-38
Six-step Procedure for Financial Planning

Step 4: EVALUATE YOUR ALTERNATIVES

EVALUATING RISK

Uncertainty is a part of every decision.

Best way to analyze and minimize risk is to gather information

from financial planning sources.

Have some contingencies in mind when things do not go as

planned

1-39
Six-step Procedure for Financial Planning
Step 5: CREATE AND IMPLEMENT YOUR FINANCIAL
ACTION PLAN

Develop an action plan that identifies ways to achieve financial

goals

Possible action plans can be increasing savings, reducing

spending, or minimize taxes

To implement action plans you may need assistance from

others

Be specific, focused but not overly rigid

Financial plan should be time bound, measurable and have

check points, interim goals

1-40
Six-step Procedure for Financial Planning

Step 6: REVIEW AND REVISE YOUR PLAN

Financial planning decisions need to be assessed regularly

Complete review should be done at least once a year

More frequent reviews may be required for changing personal,

social, and economic factors

Regular reviews of the decision-making process can help in

making priority adjustments to achieve financial goals

1-41
Objectives 2 & 3 :

Developing Personal Financial Goals & Personal and

economic factors influencing personal financial planning

Now that we have discussed the financial planning

framework, lets spend more time discussing financial
goal setting

1-42
Developing Personal Financial Goals

Goals should be SMART:

Specific: know what your goals are to create a plan

Measurable: with a specific amount

Action-oriented: identify the personal financial activities

Realistic: utilizing your income and life situation

Time-based: identify the time frame to achieve the goal

1-43
Developing Personal Financial Goals

Example actionable, measurable and time-bound plans

I want to go to Grad School in 3 years and save up $30K, $10K

per year

I want to buy a home in 5 years and save for a $75K

downpayment, $15K per year

1-44
Developing Personal Financial Goals

TIMING OF GOALS

Short-term, intermediate and long-term goals

One can have concurrent financial goals

Long term goals should be planned in coordination with short-

term and intermediate goals

Goal Timeframes

Short Term : 0-1 years

Shorter Intermediate : 1-5 years
Longer Intermediate : 5-10 years
Long Term : 10+ years

1-45
Influences on Personal Financial Planning

LIFE STAGE, PERSONAL SITUATION AND PERSONAL VALUES

ARE KEY INFLUENCES IN PERSONAL FINANCIAL PLANNING

Stage of Life - each stage and demographic will usually have different
goals

Personal Situation and Events

Marital status, household size, and employment

Major events
Graduation, marriage, career change, children, college, weddings,
retirement, etc

Personal values influence spending and saving decisions

1-46
Influences on Personal Financial Planning

ECONOMIC FORCES and INSTITUTIONS

Market Forces- Supply and Demand and impact on prices and

markets. These forces have an impact on the strength of the
economy.

Key Global Players- The economic environment is global and includes

many different institutions (corporations, governments, financial
system)

Key US Player- Federal Reserve Bank and its role in the economy and
regulating interest rates in the US. Interest rates have an impact on
large financial decisions.

Who is Janet Yellen?

1-47
Influences on Personal Financial Planning

IMPORTANT ECONOMIC FACTORS

Consumer prices
Consumer spending
Interest rates
Unemployment
Housing Starts
Gross domestic product (GDP)
Trade balance
Stock market indexes

1-48
Developing Personal Financial Goals

TIMING OF GOALS/Stages of Life

Each stage of life will have different short-term, intermediate

and long-term goals and different financial focus due to lifestyle

What are some general demographic characteristics goals for

the following age groups?

20s
30s
40s
50s
60s
70s +

1-49
Developing Personal Financial Goals
In class Exercise

TIMING OF GOALS/Stages of Life

1-50
Agenda 1/12/17

Announcements

30 things to know about money by age 30

Lecture
Continue Chapter 1 Personal Financial Planning material
Start Time Value of Money calculations

1-51
Announcements

1. 3 copies of the Text are on reserve at Geisel Library

2. Check website periodically probably be wise to check each time

you are doing work for the course

3. Lecture notes change. Will post final notes after chapter/unit is

done.

4. Clicker should start next week Register your clicker

5. Extra Credit

1-52
Personal Finance Advice from USAA

30 things you should know about

Money by age 30

1-53
Developing Personal Financial Goals
In class Exercise

TIMING OF GOALS/Stages of Life

Presume you are now 25, have a job and are supporting
yourself

Identify 2 short term, short intermediate, long intermdiate

and long term goals

Take 5 minutes and write them down

1-54
Achieving Financial Goals

Objective 4: Identify strategies for achieving

personal financial goals for different life situations

1-55
Achieving Financial Goals

Start with a plan.

A financial plan is a formalized report that...

Summarizes your current financial situation
Analyzes your financial needs
Recommends future financial activities

Your financial plan can be created by you, with assistance from a

financial planner, or made using a money management software
package

1-56
Achieving Financial Goals

Throughout life, our needs usually can be satisfied with the intelligent
use and management of financial resources.

Financial planning involves deciding how to obtain, protect, and use

those resources.

By using the eight major areas of personal financial planning to

organize your financial activities, you can avoid many common money
mistakes.

1-57
Achieving Financial Goals

COMPONENTS OF PERSONAL FINANCIAL PLANNING

There are 8 eight major personal financial planning areas. To achieve a

successful financial situation, you must coordinate these components
through an organized plan and wise decision making.

1-58
Achieving Financial Goals

COMPONENTS OF PERSONAL FINANCIAL PLANNING

1. Obtaining (chapter 2)
2. Planning (chapters 3, 4)
3. Saving (chapter 5)
4. Borrowing (chapters 6, 7)
5. Spending (chapters 8, 9)
6. Managing risk (chapters 10-12)
7. Investing (chapters 13-17)
8. Retirement and estate planning (chapters 18, 19)

1-59
Achieving Financial Goals

COMPONENTS OF PERSONAL FINANCIAL PLANNING

1. Obtaining

You obtain financial resources from employment, investments, or

ownership of a business.

Obtaining financial resources is the foundation of financial planning,

since these resources are used for all financial activities

1-60
Achieving Financial Goals

COMPONENTS OF PERSONAL FINANCIAL PLANNING

2. Planning

Planned spending through budgeting is the key to achieving goals

and future financial security.

Efforts to anticipate expenses and financial decisions can also help

reduce taxes.

The ability to pay your fair share of taxesno more, no lessis vital to
increasing your financial resources. Expect to pay about 25% -30% on a
salary of $50K if you live in CA.

1-61
Achieving Financial Goals

COMPONENTS OF PERSONAL FINANCIAL PLANNING

3. Saving

Long-term financial security starts with a regular savings plan for

emergencies, unexpected bills, replacement of major items, and a plan
for the purchase of special goods and services, such as a college
education, a boat, or a vacation home and retirement

An amount of savings must be available to meet emergencies and

current household needs given the timing of various expenditures

Once you have established a regular savings plan, you may use the
additional money for investments that offer greater financial growth
for longer term needs

1-62
Achieving Financial Goals

COMPONENTS OF PERSONAL FINANCIAL PLANNING

3. Saving (Continued)

Liquidity - The ability to readily convert financial resources into cash

without a loss in value.

The need for liquidity will vary based on a person's age, health, and
family situation.

1-63
Achieving Financial Goals

COMPONENTS OF PERSONAL FINANCIAL PLANNING

4. Borrowing

Maintaining control over your credit-buying habits will contribute to

your financial goals.

The overuse and misuse of credit may cause a situation in which a

person's debts far exceed the resources available to pay those debts.

Problems occur when borrowers overextend

Debt is normally necessary for real estate transactions

1-64
Achieving Financial Goals

COMPONENTS OF PERSONAL FINANCIAL PLANNING

5. Spending

You should detail your living expenses and your other financial
obligations in a spending plan.

Spending less than you earn is the only controllable way to achieve
long-term financial security.

Financial planning is designed not to prevent your enjoyment of life

but to help you obtain the things you want methodically.

Too often, however, people make purchases without considering the

financial consequences.

1-65
Achieving Financial Goals
COMPONENTS OF PERSONAL FINANCIAL PLANNING
6. Managing Risk or Insurance Coverage

Adequate insurance coverage is another component of personal

financial planning.

Certain types of insurance are commonly overlooked in financial plans.

Surveys reveal that most people have adequate life insurance but few
have disability insurance.

Many households have excessive or overlapping insurance coverage.

Insuring property for more than it is worth may be a waste of money,

as may both a husband and a wife having similar health insurance
coverage. 1-66
Achieving Financial Goals

COMPONENTS OF PERSONAL FINANCIAL PLANNING

7. Investing

While many types of investment vehicles are available, people invest

for two primary reasons.

Investors who desire long-term growth choose stocks, mutual

funds, real estate, and other investments with potential for
increased value in the future or gains.

Those interested in current income select investments that pay

regular dividends or interest. Use a sum of money or capital to
buy a payment stream.

Getting both is best

1-67
Achieving Financial Goals

COMPONENTS OF PERSONAL FINANCIAL PLANNING

7. Investing (Continued)

You can achieve investment diversification by including a variety of

assets in your portfoliofor example, stocks, bond mutual funds,
real estate, and collectibles such as rare coins.

Obtaining general investment advice is easy; however, it is more

difficult to obtain specific investment advice to meet your individual
needs and goals. Buy low, sell high.

1-68
Achieving Financial Goals

COMPONENTS OF PERSONAL FINANCIAL PLANNING

8. Retirement & Estate Planning

Most people desire financial security upon completion of full-time

employment.

Retirement planning also involves thinking about your housing

situation, your recreational activities, possible part-time or volunteer
work and access to healthcare.

Transfers of money or property to others should be timed, if

possible, to minimize the tax burden and maximize the benefits for
those receiving the financial resources.

1-69
Achieving Financial Goals

IMPLEMENTING YOUR FINANCIAL PLAN

Develop good financial habits
Use a well conceived spending plan to help you stay within your
income, while allowing you to save and invest for the future

Track Spending

Live below your means

Have appropriate insurance protection and savings to prevent

financial disasters and downturns

Become informed about tax and investment alternatives

1-70
Time Value of Money

Objective 5: Calculate time value associated with

personal finance

1-71
Time Value of Money
THE IMPORTANCE OF STARTING EARLY

What is worth more at the end of 40 years?

A. Saving $2,000 per year for 10 years starting in year 1?

or

B. Saving $2,000 per year for 30 years starting in year 11?

Assume 9% rate of return on investment for both options

18-72
Time Value of Money
THE IMPORTANCE OF STARTING EARLY

What is worth more in 40 years?

A. Saving $2,000 per year for 10 years starting in year 1?

or

B. Saving $2,000 per year for 30 years starting in year 11?

Assume 9% rate of return on investment for both options.

18-73
Rule of 72

Abe $ grew ~16

fold in 31 years

$34K to $545K

Doubled 4 times or
once per 8 years at
9%.

72/9 = 8

18-74
Time Value of Money

Rule of 72

72/x% = Y years for $ to double in value, where x% rate of

return is a whole number.

Example : at 10% rate of return, money will double in

approximately 7 years.

72/10 = ~7.

18-75
Time Value of Money

Compound Interest is the 8th wonder of the world

Compound
Interest
%%

#8
1-76
Time Value of Money

Money increases and grows as a result of interest

earned. The continual effect of this is compounding.

Compound interest means Interest on Interest!

$100 earning 10% compounded over 7 years =
$100*(1+10%)^7 or $100*(1.1)^7 or $200
Not $100+10%*7*$100 or $170

Saving today means exponentially more money

tomorrow. Spending means lost interest and lost
interest on interest. Huge lost opportunity

Saving and spending decisions involve considering

the trade-offs between now and later and much
later.
1-77
Time Value of Money

INTEREST CALCULATIONS
Three amounts are required to calculate the time value of
money

Principal or Amount invested

Interest rate

Time

1-78
Time Value of Money

Time Element

Can calculate FUTURE values, in other words, how much will

money be worth x years from now

Can calculate PRESENT values, in other words, given a future

amount, what is it worth today?

1-79
 Time Value of Money
1) FUTURE VALUE OF A SINGLE AMOUNT

Future value is the amount to which current savings will increase based
on a certain interest rate and a certain time period

Future value benefits from compounding - earning interest on

previously earned interest

How much is todays Starbucks worth X years from now assuming one
invested the money instead?

2) FUTURE VALUE OF A SERIES OF DEPOSITS

Future value can be computed for a single amount or for a series of
deposits called an annuity (even payment stream over time)

How much money is a Starbucks per day for 5 years worth, assuming
one invested the money instead?

1-80
Time Value of Money

3) PRESENT VALUE OF A SINGLE AMOUNT

Present Value is the current value of a future amount based on a
certain interest rate and a certain time period
Present value calculations are also called discounting
This is the opposite of compounding
The present value of the amount you want in the future will always be
less than the future value
One Starbucks x years in the future is worth how much money today?

4) PRESENT VALUE OF A SERIES OF DEPOSITS

Present value can be computed for a single amount or for a series of
deposits
Many Starbucks over a period of time is worth what amount of money
today?
1-81
Methods for computing Time Value of Money

Formulas

Time value of money tables

Financial calculators

Spreadsheet software

Time value of money web sites

1-82
Methods for computing Time Value of Money
Formulas Appendix A

Future Value (FV) of a single amount Where :

FV=PV*(1+i)^n
i = interest rate

Future Value of a series n = number of

FV=Annuity amount*(((1+i)^n-1)/i) periods

^ = raise to
Present Value (PV) of a single amount power
PV=FV/((1+i)^n)

Present Value of a series

PV=Annuity amount*((1-(1/(1+i)^n))/i)

1-83
Personal Finance Advice from USAA

30 tips - assignment

1-84
Agenda 1/17/17

Announcements

Lecture
Finish Chapter 1 from Text and Time Value of
Money calculations

Suzy Orman
Announcements
1. Register your Clicker on TritonEd

2. 3 copies of the Text are on reserve at Geisel Library

3. Check website periodically probably be wise to check each time

you are doing work for the course

4. Lecture notes change. Will post final notes after chapter/unit is

done.

5. Article 1 posted on Ted. This relates to Chapter 3 material and

supplements text. Read Article 1 in addition to chapter. We
could have a quiz on article 1 either Thursday 4/7 or Tues 4/12

6. We will sit alphabetically starting next week

Money Talks News
4/3/16

How to Quit 10 Bad Money Habits That Rob You Blind

http://www.moneytalksnews.com/10-bad-money-
habits-that-rob-you-blind-and-how-quit-them/
Time Value of Money

Rule of 72

72/x% = Y years for $ to double in value, where x% rate of

return is a whole number.

Example : at 10% rate of return, money will double in

approximately 7 years.

72/10 = ~7.

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Time Value of Money
4 calculations

1. FUTURE VALUE OF A SINGLE AMOUNT

2. FUTURE VALUE OF A SERIES OF DEPOSITS

3. PRESENT VALUE OF A SINGLE AMOUNT

4. PRESENT VALUE OF A SERIES OF DEPOSITS

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 Time Value of Money
1) FUTURE VALUE OF A SINGLE AMOUNT
Future Value of a single amount
$800

$700

$600

$500

$400

$300

$200

$100

$-
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Present Value Future Value

Future value is the amount to which current savings will increase

based on a certain interest rate and a certain time period

Future value benefits from compounding - earning interest on

previously earned interest

How much is todays Starbucks worth X years from now assuming one
invested the money instead?

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Methods for computing Time Value of Money
If you start with a dollar, how much will you have at the
end of N periods?
Table Method - Future Value (single amount)
Year 5% 6% 7% 8% 9%
1 1.050 1.060 1.070 1.080 1.090
2 1.103 1.124 1.145 1.166 1.188
3 1.158 1.191 1.225 1.260 1.295
4 1.216 1.262 1.311 1.360 1.412
5 1.276 1.338 1.403 1.469 1.539
6 1.340 1.419 1.501 1.587 1.677
7 1.407 1.504 1.606 1.714 1.828
8 1.477 1.594 1.718 1.851 1.993
9 1.551 1.689 1.838 1.999 2.172
10 1.629 1.791 1.967 2.159 2.367
11 1.710 1.898 2.105 2.332 2.580
12 1.796 2.012 2.252 2.518 2.813
13 1.886 2.133 2.410 2.720 3.066
14 1.980 2.261 2.579 2.937 3.342
15 2.079 2.397 2.759 3.172 3.642
16 2.183 2.540 2.952 3.426 3.970
17 2.292 2.693 3.159 3.700 4.328
18 2.407 2.854 3.380 3.996 4.717
19 2.527 3.026 3.617 4.316 5.142
20 2.653 3.207 3.870 4.661 5.604

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Future Value of a single amount
Assuming a Starbucks is $5, and instead of buying one, you invest
the $5 and earn 6% interest or rate of return, how much would it
be worth in 5 years?

Answer: $6.69 or $5 X 1.338

Year 5% 6% 7% 8% 9%
1 1.050 1.060 1.070 1.080 1.090
2 1.103 1.124 1.145 1.166 1.188
3 1.158 1.191 1.225 1.260 1.295
4 1.216 1.262 1.311 1.360 1.412
5 1.276 1.338 1.403 1.469 1.539
6 1.340 1.419 1.501 1.587 1.677
7 1.407 1.504 1.606 1.714 1.828
8 1.477 1.594 1.718 1.851 1.993
9 1.551 1.689 1.838 1.999 2.172
10 1.629 1.791 1.967 2.159 2.367
 Time Value of Money

2) FUTURE VALUE OF A SERIES OF DEPOSITS

Future Value of a series of deposits
$14,000

$12,000

$10,000

$8,000

$6,000

$4,000

$2,000

$-
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Annual Deposit Future Value

Future value can be computed for a single amount or for a series of

deposits called an annuity (even payment stream over time)

How much money is a Starbucks per day for 5 years worth, assuming
one invested the money instead?

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Methods for computing Time Value of Money
If you invest a dollar each period, how much will you have
at the end of N periods?
Table Method - Future Value of a series of deposits
Year 5% 6% 7% 8% 9%
1 1.000 1.000 1.000 1.000 1.000
2 2.050 2.060 2.070 2.080 2.090
3 3.153 3.184 3.215 3.246 3.278
4 4.310 4.375 4.440 4.506 4.573
5 5.526 5.637 5.751 5.867 5.985
6 6.802 6.975 7.153 7.336 7.523
7 8.142 8.394 8.654 8.923 9.200
8 9.549 9.897 10.260 10.637 11.028
9 11.027 11.491 11.978 12.488 13.021
10 12.578 13.181 13.816 14.487 15.193
11 14.207 14.972 15.784 16.645 17.560
12 15.917 16.870 17.888 18.977 20.141
13 17.713 18.882 20.141 21.495 22.953
14 19.599 21.015 22.550 24.215 26.019
15 21.579 23.276 25.129 27.152 29.361
16 23.657 25.673 27.888 30.324 33.003
17 25.840 20.213 30.840 33.750 36.974
18 28.132 30.906 33.999 37.450 41.301
19 30.539 33.760 47.379 41.446 46.018
20 33.066 36.786 40.995 45.762 51.160

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Future Value of a Series of Deposits
Assuming a Starbucks visit is $5 and instead of doing 200 visits per
year, one will save $1,000 per year for 5 years, and earn 6%
interest, how much would it be worth in 5 years?

Answer: $5,637 or $1,000 X 5.637

Year 5% 6% 7% 8% 9%
1 1.000 1.000 1.000 1.000 1.000
2 2.050 2.060 2.070 2.080 2.090
3 3.153 3.184 3.215 3.246 3.278
4 4.310 4.375 4.440 4.506 4.573
5 5.526 5.637 5.751 5.867 5.985
6 6.802 6.975 7.153 7.336 7.523
7 8.142 8.394 8.654 8.923 9.200
8 9.549 9.897 10.260 10.637 11.028
9 11.027 11.491 11.978 12.488 13.021
10 12.578 13.181 13.816 14.487 15.193
Time Value of Money
PRESENT VALUE OF A SINGLE AMOUNT

Present Value of a single amount

$1,200

$1,000

$800

$600

$400

$200

$-
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Present Value Future Value

Present Value is the current value of a future amount based on a certain interest
rate and a certain time period
Present value calculations are also called discounting
The present value of the amount you want in the future will always be less than the
future value assuming there is a positive interest rate
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Methods for computing Time Value of Money
How much do you need to start with to have a dollar at
the end of N periods?
Table Method Present Value (single amount)
Year 5% 6% 7% 8% 9%
1 0.952 0.943 0.935 0.926 0.917
2 0.907 0.890 0.873 0.857 0.842
3 0.864 0.840 0.816 0.794 0.772
4 0.823 0.792 0.763 0.735 0.708
5 0.784 0.747 0.713 0.681 0.650
6 0.746 0.705 0.666 0.630 0.596
7 0.711 0.665 0.623 0.583 0.547
8 0.677 0.627 0.582 0.540 0.502
9 0.645 0.592 0.544 0.500 0.460
10 0.614 0.558 0.508 0.463 0.422
11 0.585 0.527 0.475 0.429 0.388
12 0.557 0.497 0.444 0.397 0.356
13 0.530 0.469 0.415 0.368 0.326
14 0.505 0.442 0.388 0.340 0.299
15 0.481 0.417 0.362 0.315 0.275
16 0.458 0.394 0.339 0.292 0.252
17 0.436 0.371 0.317 0.270 0.231
18 0.416 0.350 0.296 0.250 0.212
19 0.396 0.331 0.277 0.232 0.194
20 0.377 0.312 0.258 0.215 0.178

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Present Value of a Single Amount

Assuming one wants $5 in 5 years and invests the original amount

at 6% interest, how much would one have to invest today?

Answer: $3.74 or $5 X 0.747

Year 5% 6% 7% 8% 9%
1 0.952 0.943 0.935 0.926 0.917
2 0.907 0.890 0.873 0.857 0.842
3 0.864 0.840 0.816 0.794 0.772
4 0.823 0.792 0.763 0.735 0.708
5 0.784 0.747 0.713 0.681 0.650
6 0.746 0.705 0.666 0.630 0.596
7 0.711 0.665 0.623 0.583 0.547
8 0.677 0.627 0.582 0.540 0.502
9 0.645 0.592 0.544 0.500 0.460
10 0.614 0.558 0.508 0.463 0.422
 Time Value of Money
PRESENT VALUE OF A SERIES OF DEPOSITS
The amount a person would have to deposit today fund an annual payout of $500 at the end
of each year for 10 years from an account earning 8 percent. $500 x 6.710 = $3,355

Present Value of a series of withdrawals

$4,000

$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

$500

$-
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Present Value Annual Withdrawal

Present value can be computed for a single amount or for a series of

deposits
Also known as an annuity
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Methods for computing Time Value of Money
How much do you need to start with to generate a dollar for
N periods?
Table Method Present Value of a series of deposits
Year 5% 6% 7% 8% 9%
1 0.952 0.943 0.935 0.926 0.917
2 1.859 1.833 1.808 1.783 1.759
3 2.723 2.673 2.624 2.577 2.531
4 3.546 3.465 3.387 3.312 3.240
5 4.329 4.212 4.100 3.993 3.890
6 5.076 4.917 4.767 4.623 4.486
7 5.786 5.582 5.389 5.206 5.033
8 6.463 6.210 5.971 5.747 5.535
9 7.108 6.802 6.515 6.247 5.995
10 7.722 7.360 7.024 6.710 6.418
11 8.306 7.887 7.499 7.139 6.805
12 8.863 8.384 7.943 7.536 7.161
13 9.394 8.853 8.358 7.904 7.487
14 9.899 9.295 8.745 8.244 7.786
15 10.380 9.712 9.108 8.559 8.061
16 10.838 10.106 9.447 8.851 8.313
17 11.274 10.477 9.763 9.122 8.544
18 11.690 10.828 10.059 9.372 8.756
19 12.085 11.158 10.336 9.604 8.950
20 12.462 11.470 10.594 9.818 9.129

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Present Value of a series of Deposits

Assuming one wanted to have $5 over 5 years or the

equivalent of $1 per year for 5 years earning 6% interest, how
much would one need to invest today?

Answer: $4.21 or $1 X 4.212

Year 5% 6% 7% 8% 9%
1 0.952 0.943 0.935 0.926 0.917
2 1.859 1.833 1.808 1.783 1.759
3 2.723 2.673 2.624 2.577 2.531
4 3.546 3.465 3.387 3.312 3.240
5 4.329 4.212 4.100 3.993 3.890
6 5.076 4.917 4.767 4.623 4.486
7 5.786 5.582 5.389 5.206 5.033
8 6.463 6.210 5.971 5.747 5.535
9 7.108 6.802 6.515 6.247 5.995
10 7.722 7.360 7.024 6.710 6.418
Time Value of Money Brief Examples
Work with your neighbor using time value of money tables

a. The future value of $450 six years from now at 7 percent.

b. The future value of $800 saved each year for 10 years at 8 percent.

c. The amount a person would have to deposit today (present value) at

a 6 percent interest rate to have $1,000 five years from now.

d. The amount a person would have to deposit today to be able to

take out $500 a year for 10 years from an account earning 8
percent.

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Time Value of Money Tables
Future Value of a Single Amount Present Value of a Future Amount
Year 5% 6% 7% 8% Year 5% 6% 7% 8%
1 1.050 1.060 1.070 1.080 1 0.952 0.943 0.935 0.926
2 1.103 1.124 1.145 1.166 2 0.907 0.890 0.873 0.857
3 1.158 1.191 1.225 1.260 3 0.864 0.840 0.816 0.794
4 1.216 1.262 1.311 1.360 4 0.823 0.792 0.763 0.735
5 1.276 1.338 1.403 1.469 5 0.784 0.747 0.713 0.681
6 1.340 1.419 1.501 1.587 6 0.746 0.705 0.666 0.630
7 1.407 1.504 1.606 1.714 7 0.711 0.665 0.623 0.583

Future Value of a Series Present Value of a Future Series

Year 5% 6% 7% 8% Year 5% 6% 7% 8%
1 1.000 1.000 1.000 1.000 1 0.952 0.943 0.935 0.926
2 2.050 2.060 2.070 2.080 2 1.859 1.833 1.808 1.783
3 3.153 3.184 3.215 3.246 3 2.723 2.673 2.624 2.577
4 4.310 4.375 4.440 4.506 4 3.546 3.465 3.387 3.312
5 5.526 5.637 5.751 5.867 5 4.329 4.212 4.100 3.993
6 6.802 6.975 7.153 7.336 6 5.076 4.917 4.767 4.623
7 8.142 8.394 8.654 8.923 7 5.786 5.582 5.389 5.206
8 9.549 9.897 10.260 10.637 8 6.463 6.210 5.971 5.747
9 11.027 11.491 11.978 12.488 9 7.108 6.802 6.515 6.247
10 12.578 13.181 13.816 14.487 10 7.722 7.360 7.024 6.710

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Personal Finance Videos from Suze Orman
Suze Orman is an American financial advisor, author,
motivational speaker, and television host. She hosts the Suze
Orman show on CNBC and offers personal financial advice.

Video 1 Life after College

Question posed in 2010, ~2min
http://www.youtube.com/watch?v=wo7mwcyH844

Video 2 Suze Ormans 3 mistakes you cant afford to make

Aired in 2011, ~3 min
http://www.youtube.com/watch?v=pQ08FT_4dXk
Clicker Opportunity

18-105
Chapter 1
Chapter Summary We learned about
1. Analysis around the process for making personal financial
decisions

2. Developing personal financial goals

3. Assessing personal and economic factors that influence

personal financial planning

4. Calculating time value of money situations associated with

personal financial decisions

5. Identifying strategies for achieving personal financial goals

for different life situations
1-106
Personal Finance Quiz
Christian Science Monitor 25 questions

http://www.csmonitor.com/Business/2013/0531/Can-
you-manage-your-money-A-personal-finance-
quiz/Index-fund
Personal Finance Quiz
Bankrate.com 12 questions
Administered to High School Students
More than 5,000 high school seniors in 37 states
participated in the JumpStart Coalition for Personal
Financial Literacy 2006 survey. The survey tested their
ability to manage financial resources such as credit
cards, insurance, retirement funds and savings
accounts. The average score was 52.4 percent, which
was a slight improvement since the last biennial
survey in 2004.

http://www.bankrate.com/brm/news/pf/20060421c1.
asp