IT training guidebook

Topic
Business
& Economics

Money
Management Skills
Course Guidebook
Professor Michael Finke
Texas Tech University

Subtopic
Economics


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Michael Finke, Ph.D.
Professor of Personal Financial Planning
Director of the Retirement Planning
and Living Consortium
Texas Tech University

P

rofessor Michael Finke is a Professor of
Personal Financial Planning and Director
of the Retirement Planning and Living
Consortium at Texas Tech University, where he
leads the doctoral program—considered the premier academic program in
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Finance and is currently a contributing editor to Research PDJD]LQH $
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Professor Finke has authored a number of award-winning research articles
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Professor Finke also has received numerous awards as an instructor of a

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he was named to the InvestmentNews Power 20 list for his research on the
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the national press, including The Wall Street Journal, The New York Times,
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Disclaimer

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of such risk may involve but are not limited to federal/state/municipal
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iii


Table of Contents

INTRODUCTION
Professor Biography ............................................................................i
Course Scope .....................................................................................1
LECTURE GUIDES
LECTURE 1
Understanding Your Financial Brain ...................................................3
LECTURE 2
Managing Money with Life Cycle Theory..........................................10
LECTURE 3

Basic Investing—Keep It Simple ......................................................16
LECTURE 4
The Key Financial Instruments .........................................................23
LECTURE 5
How to Use Credit Optimally ............................................................30
LECTURE 6
Investing in Education ......................................................................37
LECTURE 7
The Economics of Home Ownership ................................................44
LECTURE 8
Managing Risk with Insurance..........................................................51
LECTURE 9
Essential Tax Principles ....................................................................59
LECTURE 10
Saving for Retirement .......................................................................66
iv


Table of Contents

LECTURE 11
Fundamentals of Estate Planning.....................................................73
LECTURE 12
Putting Your Financial Plan Together................................................80
SUPPLEMENTAL MATERIAL
Bibliography ......................................................................................88

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vi


Money Management Skills

Scope:

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surprisingly fascinating world of how we manage money throughout our
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Within this framework, you will be given the information you need to know
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different accounts to give you the highest possible return for the amount of
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Following a life cycle plan involves understanding our choices for borrowing
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and you will determine whether it makes sense to go into debt to pay for
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The science of risk management explains how we should choose insurance
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will demystify the investment advising business by reviewing the types of
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Understanding Your Financial Brain
Lecture 1

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Financial Decisions and the Brain
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saving for retirement—but not enough to actually do something
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The truth is that the prefrontal cortex we use in conscious decision
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much older part of the brain and takes up much more real estate



Lecture 1: Understanding Your Financial Brain



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we use most often in
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lights up when you engage in planning for the future, but the limbic
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a few days to transfer assets to a checking account before you can
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Loss Aversion
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we dwell on losses? Our best guess is that loss aversion gave our
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many people underperform the market, buy the wrong insurance,
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know that stock prices tend to go through cycles and that the worst
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saw their stock investment climb more than double, to about
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Lecture 1: Understanding Your Financial Brain

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small losses are a normal part of taking risk, and we get rewarded
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providing annual statements, which are less likely to show a loss
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averse tendencies, you can achieve a long-term bonus by accepting
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aversion, the prefrontal cortex is also slow and gets tired easily
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tactic—for car salesmen, for example—is to overwhelm the
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This cyclical optimism and pessimism also impacts the expected
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Lecture 1: Understanding Your Financial Brain

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resistance, and we often overestimate our future willingness to
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Most advisors know that the single best way to get a client to save
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Managing Money with Life Cycle Theory
Lecture 2

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this lecture, you might have a completely different perspective about your
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marginal utility assumption says that we get a little less happiness
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of happiness you get from spending in all of your life cycle
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Education is an investment. It costs you money, but more education means a
steeper earnings path.

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look a lot different than the earnings path of someone who never
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earnings over their lifetime and divide it by their life expectancy,
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much less than their permanent income—for example, while they
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time and money in the present in order to increase our earnings in


Lecture 2: Managing Money with Life Cycle Theory

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off: The wealthy retiree has all that money in the bank now because
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to being emotionally traumatic, life cycle theory says that a sharp
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buying insurance if it can prevent a large drop in spending from an
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Suggested Reading
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still be recommended that a young family save?

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the future?