Chapter 1 Study Guide
Beginning Your Financial Journey
Learning Objectives
After studying this chapter, you will be able to:
• Describe how financial knowledge, experience, risk tolerance, and feelings of control influence your financial w
• Explain how human and social capital relate to financial well-being
• Discuss how financial risk tolerance relates to goal achievement
• Use your time perspective to create SMART financial goals
• Describe strategies to overcome mental biases and improve financial decision making
,1.1 Introduction: Beginning Your Financial Journey
Financial literacy encompasses understanding how personal and economic factors impact your household's
financial situation. It includes applying time value of money concepts, creating balance sheets and budgets,
calculating taxes, understanding borrowing costs, making saving and investment choices, managing insurance,
and navigating the financial marketplace effectively.
KEY TERM: Interior finance refers to factors that make you who you are, such as willingness to take risks,
perceptions, preferences, decision-making style, and human capital.
1.2 Your Journey to Financial Well-being
Your Internal View of the Financial World
Your internal view of the financial world combines three key elements:
1. Financial Knowledge: The ability to understand personal finance information. As you gain financial
knowledge, your confidence and financial well-being increase.
2. Financial Risk Tolerance: Your willingness to engage in financial endeavors with uncertain outcomes. This
varies by individual—some are natural risk-takers while others prefer detailed planning.
3. Feelings of Control: The amount of control you feel when making financial decisions. Some believe
outcomes are based on luck or fate, while others believe their efforts shape their future.
KEY TERM: Financial well-being is your confidence and peace of mind regarding your financial situation.
KEY CONCEPT: Gross Domestic Product (GDP) measures a country's economic size by adding up all
goods and services produced in a year. In 2017, U.S. GDP was $19.42 trillion, with consumer spending
accounting for 66% of GDP.
Key Personal Behaviors for Financial Success
• Self-control
• Desire to apply financial information to household management
• Continuing to learn about personal finance topics
, 1.3 Human Capital: An Essential Element
KEY TERM: Human capital is your ability and willingness to work, learn, earn, and make wise decisions
about saving and investing money. It is your most valuable asset.
KEY TERM: Social capital is how well you form connections with others, affecting your earning potential
over your working life span.
Factors That Increase Human Capital
Education and Earnings: Higher education correlates with higher earnings. Those with bachelor's degrees
earn approximately $59,000 annually vs. $35,000 for high school diplomas. Professional degrees lead to even
higher income.
Health: Healthy people work more hours and longer lifespans, earning more over their lifetime. Maintaining
good health through diet, exercise, avoiding substance abuse, and preventing accidents is a valuable
investment.
Willingness to Relocate: Moving to where your skills are more valued increases earning potential.
Continuing Education: On-the-job training and professional development help you adapt to changing markets
and preserve earning potential.
Social Capital: Networks Matter
Informal Networks: Interpersonal relationships with family and close friends that provide encouragement,
support, help finding work, housing, or financial assistance.
Formal Networks: Professional, recreational, leisure, and social communities including clubs, organizations,
and professional associations that help advance your career.
Investment Payback Period
FORMULA: Payback Period = Total Costs ÷ Increase in Annual Income
Example: Jamal wants to complete his bachelor's degree. Lost income ($70,000) + Household expenses
($14,000) + Tuition ($26,000) = $110,000 total costs. Expected income increase: $12,000/year. Payback
period: $110,000 ÷ $12,000 = 9.17 years.
Beginning Your Financial Journey
Learning Objectives
After studying this chapter, you will be able to:
• Describe how financial knowledge, experience, risk tolerance, and feelings of control influence your financial w
• Explain how human and social capital relate to financial well-being
• Discuss how financial risk tolerance relates to goal achievement
• Use your time perspective to create SMART financial goals
• Describe strategies to overcome mental biases and improve financial decision making
,1.1 Introduction: Beginning Your Financial Journey
Financial literacy encompasses understanding how personal and economic factors impact your household's
financial situation. It includes applying time value of money concepts, creating balance sheets and budgets,
calculating taxes, understanding borrowing costs, making saving and investment choices, managing insurance,
and navigating the financial marketplace effectively.
KEY TERM: Interior finance refers to factors that make you who you are, such as willingness to take risks,
perceptions, preferences, decision-making style, and human capital.
1.2 Your Journey to Financial Well-being
Your Internal View of the Financial World
Your internal view of the financial world combines three key elements:
1. Financial Knowledge: The ability to understand personal finance information. As you gain financial
knowledge, your confidence and financial well-being increase.
2. Financial Risk Tolerance: Your willingness to engage in financial endeavors with uncertain outcomes. This
varies by individual—some are natural risk-takers while others prefer detailed planning.
3. Feelings of Control: The amount of control you feel when making financial decisions. Some believe
outcomes are based on luck or fate, while others believe their efforts shape their future.
KEY TERM: Financial well-being is your confidence and peace of mind regarding your financial situation.
KEY CONCEPT: Gross Domestic Product (GDP) measures a country's economic size by adding up all
goods and services produced in a year. In 2017, U.S. GDP was $19.42 trillion, with consumer spending
accounting for 66% of GDP.
Key Personal Behaviors for Financial Success
• Self-control
• Desire to apply financial information to household management
• Continuing to learn about personal finance topics
, 1.3 Human Capital: An Essential Element
KEY TERM: Human capital is your ability and willingness to work, learn, earn, and make wise decisions
about saving and investing money. It is your most valuable asset.
KEY TERM: Social capital is how well you form connections with others, affecting your earning potential
over your working life span.
Factors That Increase Human Capital
Education and Earnings: Higher education correlates with higher earnings. Those with bachelor's degrees
earn approximately $59,000 annually vs. $35,000 for high school diplomas. Professional degrees lead to even
higher income.
Health: Healthy people work more hours and longer lifespans, earning more over their lifetime. Maintaining
good health through diet, exercise, avoiding substance abuse, and preventing accidents is a valuable
investment.
Willingness to Relocate: Moving to where your skills are more valued increases earning potential.
Continuing Education: On-the-job training and professional development help you adapt to changing markets
and preserve earning potential.
Social Capital: Networks Matter
Informal Networks: Interpersonal relationships with family and close friends that provide encouragement,
support, help finding work, housing, or financial assistance.
Formal Networks: Professional, recreational, leisure, and social communities including clubs, organizations,
and professional associations that help advance your career.
Investment Payback Period
FORMULA: Payback Period = Total Costs ÷ Increase in Annual Income
Example: Jamal wants to complete his bachelor's degree. Lost income ($70,000) + Household expenses
($14,000) + Tuition ($26,000) = $110,000 total costs. Expected income increase: $12,000/year. Payback
period: $110,000 ÷ $12,000 = 9.17 years.
