Preface
- Page ID
- 112034
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)This text has an attitude: In addition to providing sources of practical information, it introduces you to a way of thinking about your personal financial decisions. This will lead you to think harder and farther about the consequences of your decisions. Many of the more practical aspects of personal finance will change over time. Practices, technologies, intermediaries, customs, and laws change, but a fundamental awareness of ways to solve financial questions is always useful. Some of the more practical ideas may be obvious and immediately relevant - and some not - but the decision-making and research skills you learn will have a lasting impact.
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 a level of accounting, or math skills, or you may be filling in an elective and have no such skills. 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 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 is divided into four basic sections:
- Learning Basic Skills, Knowledge, and Context (Chapter 1 - Chapter 6)
- Getting What You Want (Chapter 7 - Chapter 9)
- Protecting What You've Got (Chapter 10 - Chapter 11)
- Building Wealth (Chapter 12 - Chapter 14)
This structure is based on the typical life cycle of personal financial decisions. These decisions, in turn, are 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 - Chapter 6)
Chapter 1 defines and introduces themes related to making financial decisions. Personal finance involves individual-specific economic decisions made progressively over a lifetime, frequently with the advice of a professional advisor. The idiosyncratic, systemic, and ongoing nature of personal finance is demonstrated, situating decisions within the broader context of a lifetime and the economy.
Chapter 2 introduces the basic financial and accounting categories of revenues, expenses, assets, liabilities, and net worth as tools to understand their relationships, which in turn helps organize financial thinking. It also introduces the concepts of opportunity costs and sunk costs as implicit but critical considerations in financial thinking.
Chapter 3 continues the discussion of organizing financial data to inform decision-making. It introduces basic analytical tools that can be used to clarify personal financial statements.
Chapter 4 introduces the cornerstone concept that a dollar today is not the same as a dollar tomorrow. It demonstrates how interest, compounding, and discounting underpin every major financial decision, from loans to retirement planning. More than just formulas, the article presents TVM as a way of evaluating value across time and enabling informed tradeoffs.
Chapter 5 demonstrates how organized financial data can be used to create a plan, monitor progress, and adjust personal financial goals.
Chapter 6 discusses the role of taxation in personal finance and its effect on earning and accumulating wealth. Emphasis is placed on the 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 - Chapter 9)
Chapter 7 offers a comprehensive framework for understanding and managing personal finances, grounded in six interrelated components. Beginning with the core functions of money, it traces how funds move through institutions and accounts, then examines how individuals interact with financial systems through credit, savings, and debt. The final section emphasizes forward-looking strategies that align financial behavior with long-term goals.
Chapter 8 examines the overlooked yet consequential moments that precede and follow a purchasing decision. We explore how consumer behavior is shaped by psychological, environmental, and design factors, often outside conscious awareness. By tracing the arc from impulse to intention, this chapter provides critical tools to analyze, interrupt, and reshape spending patterns toward greater agency and alignment.
Chapter 9 applies the ideas developed in the previous chapter to what, for most people, will be their most significant purchase: a home. The chapter discusses home ownership 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 - Chapter 11)
Chapter 10 incorporates 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 focuses on planning for the expected: retirement, loss of income from wages, and the eventual distribution of assets after death. Retirement planning explores the development of alternative sources of income from capital that can eventually substitute for wages. Estate planning touches on the considerations and mechanics of distributing accumulated wealth.
Building Wealth (Chapter 12 - Chapter 14)
Chapter 12 introduces the complex forces that drive markets, contrasting rational models like efficient market theory with real-world behavioral tendencies. By examining psychological biases, social influence, and historical anomalies, it reframes the market not as a perfect machine but as a dynamic human system.
Chapter 13 answers the essential question: Why invest at all? It explores the tension between saving and investing, the relationship between risk and return, and how personal goals shape financial strategies.
Chapter 14 builds on foundational concepts, surveying the major instruments - especially stocks, bonds, mutual funds, real estate, and collectibles - available to investors. The focus is not just on definitions but also on matching tools to objectives, risk profiles, and time horizons.