This text was adapted by The Saylor Foundation under a Creative
Commons Attribution-NonCommercial-ShareAlike 3.0 License without
attribution as requested by the work’s original creator or licensee.
Saylor URL: http://www.saylor.org/books Saylor.org
1
,Preface
This text has an attitude: that in addition to providing sources of practical information,
it should introduce you to a way of thinking about your personal financial decisions.
This should lead you to thinking harder and farther about the larger and longer
consequences of your decisions. Many of the more practical aspects of personal finance
will change over time, as practices, technologies, intermediaries, customs, and laws
change, but a fundamental awareness of ways to think well about solving financial
questions can always be useful. Some of the more practical ideas may be obviously and
immediately relevant—and some not—but decision-making and research skills are
lasting.
You may be enrolled in a traditional two- or four-year degree program or may just be
taking the course for personal growth. You may be of any age and may have already
done more or less academic and experiential learning. You may be a business major,
with some prerequisite knowledge of economics or level of accounting or math skills, or
you may be filling in an elective and have no such skills. In fact, although they enhance
personal finance decisions, such skills are not necessary. Software, downloadable
applications, and calculators perform ever more sophisticated functions with ever more
approachable interfaces. The emphasis in this text is on understanding the fundamental
relationships behind the math and being able to use that understanding to make better
decisions about your personal finances.
Entire tomes, both academic texts and trade books, have been and will be written about
any of the subjects featured in each chapter of this text. The idea here is to introduce you
to the practical and conceptual framework for making personal financial decisions in the
larger context of your life, and in the even larger context of your individual life as part of
a greater economy of financial participants.
Structure
The text may be divided into five sections:
1. Learning Basic Skills, Knowledge, and Context (Chapter 1 "Personal Financial
Planning"–Chapter 6 "Taxes and Tax Planning")
2. Getting What You Want (Chapter 7 "Financial Management"–Chapter 9 "Buying
a Home")
3. Protecting What You’ve Got (Chapter 10 "Personal Risk Management:
Insurance"–Chapter 11 "Personal Risk Management: Retirement and Estate
Planning")
4. Building Wealth (Chapter 12 "Investing"–Chapter 17 "Investing in Mutual Funds,
Commodities, Real Estate, and Collectibles")
5. How to Get Started (Chapter 18 "Career Planning")
Saylor URL: http://www.saylor.org/books Saylor.org
2
,This structure is based on the typical life cycle of personal financial decisions, which in
turn is based on the premise that in a market economy, an individual participates by
trading something of value: labor or capital. Most of us start with nothing to trade but
labor. We hope to sustain our desired lifestyle on the earnings from labor and to
gradually (or quickly) amass capital that will then provide additional earnings.
Learning Basic Skills, Knowledge, and Context (Chapter 1 "Personal
Financial Planning"–Chapter 6 "Taxes and Tax Planning")
Chapter 1 "Personal Financial Planning" introduces four of its major themes:
• Financial decisions are individual-specific (Section 1.1 "Individual or “Micro”
Factors That Affect Financial Thinking").
• Financial decisions are economic decisions (Section 1.2 "Systemic or “Macro”
Factors That Affect Financial Thinking").
• Financial decision making is a continuous process (Section 1.3 "The Planning
Process").
• Professional advisors work for financial decision makers (Section 1.4 "Financial
Planning Professionals").
These themes emphasize the idiosyncratic, systemic, and continuous nature of personal
finance, putting decisions within the larger contexts of an entire lifetime and an
economy.
Chapter 2 "Basic Ideas of Finance" introduces the basic financial and accounting
categories of revenues, expenses, assets, liabilities, and net worth as tools to understand
the relationships between them as a way, in turn, of organizing financial thinking. It also
introduces the concepts of opportunity costs and sunk costs as implicit but critical
considerations in financial thinking.
Chapter 3 "Financial Statements" continues with the discussion of organizing financial
data to help in decision making and introduces basic analytical tools that can be used to
clarify the situation portrayed in financial statements.
Chapter 4 "Evaluating Choices: Time, Risk, and Value" introduces the critical
relationships of time and risk to value. It demonstrates the math but focuses on the role
that those relationships play in financial thinking, especially in comparing and
evaluating choices in making financial decisions.
Chapter 5 "Financial Plans: Budgets" demonstrates how organized financial data can be
used to create a plan, monitor progress, and adjust goals.
Chapter 6 "Taxes and Tax Planning" discusses the role of taxation in personal finance
and its effects on earnings and on accumulating wealth. The chapter emphasizes the
Saylor URL: http://www.saylor.org/books Saylor.org
3
, types, purposes, and impacts of taxes; the organization of resources for information; and
the areas of controversy that lead to changes in the tax rules.
Getting What You Want (Chapter 7 "Financial Management"–Chapter 9
"Buying a Home")
Chapter 7 "Financial Management" focuses on financing consumption using current
earnings and/or credit, and financing longer-term assets with debt.
Chapter 8 "Consumer Strategies" discusses purchasing decisions, starting with recurring
consumption, and then goes into detail on the purchase of a car, a more significant and
longer-term purchase both in terms of its use and financing.
Chapter 9 "Buying a Home" applies the ideas developed in the previous chapter to what,
for most people, will be the major purchase: a home. The chapter discusses its role both
as a living expense and an investment, as well as the financing and financial
consequences of the purchase.
Protecting What You’ve Got (Chapter 10 "Personal Risk Management:
Insurance"–Chapter 11 "Personal Risk Management: Retirement and Estate
Planning")
Chapter 10 "Personal Risk Management: Insurance" introduces the idea of
incorporating risk management into financial planning. An awareness of the need for
risk management often comes with age and experience. This chapter focuses on
planning for the unexpected. It progresses from the more obvious risks to property to
the less obvious risks, such as the possible inability to earn due to temporary ill health,
permanent disability, or death.
Chapter 11 "Personal Risk Management: Retirement and Estate Planning" focuses on
planning for the expected: retirement, loss of income from wages, and the subsequent
distribution of assets after death. Retirement planning discusses ways to develop
alternative sources of income from capital that can eventually substitute for wages.
Estate planning also touches on the considerations and mechanics of distributing
accumulated wealth.
Building Wealth (Chapter 12 "Investing"–Chapter 17 "Investing in Mutual
Funds, Commodities, Real Estate, and Collectibles")
Saylor URL: http://www.saylor.org/books Saylor.org
4
Commons Attribution-NonCommercial-ShareAlike 3.0 License without
attribution as requested by the work’s original creator or licensee.
Saylor URL: http://www.saylor.org/books Saylor.org
1
,Preface
This text has an attitude: that in addition to providing sources of practical information,
it should introduce you to a way of thinking about your personal financial decisions.
This should lead you to thinking harder and farther about the larger and longer
consequences of your decisions. Many of the more practical aspects of personal finance
will change over time, as practices, technologies, intermediaries, customs, and laws
change, but a fundamental awareness of ways to think well about solving financial
questions can always be useful. Some of the more practical ideas may be obviously and
immediately relevant—and some not—but decision-making and research skills are
lasting.
You may be enrolled in a traditional two- or four-year degree program or may just be
taking the course for personal growth. You may be of any age and may have already
done more or less academic and experiential learning. You may be a business major,
with some prerequisite knowledge of economics or level of accounting or math skills, or
you may be filling in an elective and have no such skills. In fact, although they enhance
personal finance decisions, such skills are not necessary. Software, downloadable
applications, and calculators perform ever more sophisticated functions with ever more
approachable interfaces. The emphasis in this text is on understanding the fundamental
relationships behind the math and being able to use that understanding to make better
decisions about your personal finances.
Entire tomes, both academic texts and trade books, have been and will be written about
any of the subjects featured in each chapter of this text. The idea here is to introduce you
to the practical and conceptual framework for making personal financial decisions in the
larger context of your life, and in the even larger context of your individual life as part of
a greater economy of financial participants.
Structure
The text may be divided into five sections:
1. Learning Basic Skills, Knowledge, and Context (Chapter 1 "Personal Financial
Planning"–Chapter 6 "Taxes and Tax Planning")
2. Getting What You Want (Chapter 7 "Financial Management"–Chapter 9 "Buying
a Home")
3. Protecting What You’ve Got (Chapter 10 "Personal Risk Management:
Insurance"–Chapter 11 "Personal Risk Management: Retirement and Estate
Planning")
4. Building Wealth (Chapter 12 "Investing"–Chapter 17 "Investing in Mutual Funds,
Commodities, Real Estate, and Collectibles")
5. How to Get Started (Chapter 18 "Career Planning")
Saylor URL: http://www.saylor.org/books Saylor.org
2
,This structure is based on the typical life cycle of personal financial decisions, which in
turn is based on the premise that in a market economy, an individual participates by
trading something of value: labor or capital. Most of us start with nothing to trade but
labor. We hope to sustain our desired lifestyle on the earnings from labor and to
gradually (or quickly) amass capital that will then provide additional earnings.
Learning Basic Skills, Knowledge, and Context (Chapter 1 "Personal
Financial Planning"–Chapter 6 "Taxes and Tax Planning")
Chapter 1 "Personal Financial Planning" introduces four of its major themes:
• Financial decisions are individual-specific (Section 1.1 "Individual or “Micro”
Factors That Affect Financial Thinking").
• Financial decisions are economic decisions (Section 1.2 "Systemic or “Macro”
Factors That Affect Financial Thinking").
• Financial decision making is a continuous process (Section 1.3 "The Planning
Process").
• Professional advisors work for financial decision makers (Section 1.4 "Financial
Planning Professionals").
These themes emphasize the idiosyncratic, systemic, and continuous nature of personal
finance, putting decisions within the larger contexts of an entire lifetime and an
economy.
Chapter 2 "Basic Ideas of Finance" introduces the basic financial and accounting
categories of revenues, expenses, assets, liabilities, and net worth as tools to understand
the relationships between them as a way, in turn, of organizing financial thinking. It also
introduces the concepts of opportunity costs and sunk costs as implicit but critical
considerations in financial thinking.
Chapter 3 "Financial Statements" continues with the discussion of organizing financial
data to help in decision making and introduces basic analytical tools that can be used to
clarify the situation portrayed in financial statements.
Chapter 4 "Evaluating Choices: Time, Risk, and Value" introduces the critical
relationships of time and risk to value. It demonstrates the math but focuses on the role
that those relationships play in financial thinking, especially in comparing and
evaluating choices in making financial decisions.
Chapter 5 "Financial Plans: Budgets" demonstrates how organized financial data can be
used to create a plan, monitor progress, and adjust goals.
Chapter 6 "Taxes and Tax Planning" discusses the role of taxation in personal finance
and its effects on earnings and on accumulating wealth. The chapter emphasizes the
Saylor URL: http://www.saylor.org/books Saylor.org
3
, types, purposes, and impacts of taxes; the organization of resources for information; and
the areas of controversy that lead to changes in the tax rules.
Getting What You Want (Chapter 7 "Financial Management"–Chapter 9
"Buying a Home")
Chapter 7 "Financial Management" focuses on financing consumption using current
earnings and/or credit, and financing longer-term assets with debt.
Chapter 8 "Consumer Strategies" discusses purchasing decisions, starting with recurring
consumption, and then goes into detail on the purchase of a car, a more significant and
longer-term purchase both in terms of its use and financing.
Chapter 9 "Buying a Home" applies the ideas developed in the previous chapter to what,
for most people, will be the major purchase: a home. The chapter discusses its role both
as a living expense and an investment, as well as the financing and financial
consequences of the purchase.
Protecting What You’ve Got (Chapter 10 "Personal Risk Management:
Insurance"–Chapter 11 "Personal Risk Management: Retirement and Estate
Planning")
Chapter 10 "Personal Risk Management: Insurance" introduces the idea of
incorporating risk management into financial planning. An awareness of the need for
risk management often comes with age and experience. This chapter focuses on
planning for the unexpected. It progresses from the more obvious risks to property to
the less obvious risks, such as the possible inability to earn due to temporary ill health,
permanent disability, or death.
Chapter 11 "Personal Risk Management: Retirement and Estate Planning" focuses on
planning for the expected: retirement, loss of income from wages, and the subsequent
distribution of assets after death. Retirement planning discusses ways to develop
alternative sources of income from capital that can eventually substitute for wages.
Estate planning also touches on the considerations and mechanics of distributing
accumulated wealth.
Building Wealth (Chapter 12 "Investing"–Chapter 17 "Investing in Mutual
Funds, Commodities, Real Estate, and Collectibles")
Saylor URL: http://www.saylor.org/books Saylor.org
4
