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Lecture Personal financial planning – Chapter 4: Household finance

Lecture Personal financial planning – Chapter 4: Household finance. Household finance and PFP theory reflect the basic thought that a household can be perceived as a business and include all resources in making its decisions. | Lecture Personal financial planning Chapter 4 Household finance Chapter 4 Household Finance 1 Chapter Goals Understand household finance and its economic and financial underpinnings. View the household as a functioning enterprise. Recognize the many similarities between a household and a business. Start to apply business thinking to PFP. Put into use in personal financial decision making cost of time and life cycle theory principles. Differentiate various types of household outlays. Begin to understand personal financial planning theory and Total Portfolio Management TPM . 2 The Household Structure Household an organization of one or more people who live in the same dwelling and share financial and other resources intended for the well-being of its members. The household is the principal organization intended to handle the financial and other personal activities of one or more people and to foster achievement of their goals. 3 The Household Structure cont. The household comes in many organizational forms which influence its financial legal and tax situation. For example financial efficiencies can result from a multiperson household through Reduction in income fluctuation Specialization of task and Economies of scale. A breakdown of alternative household structures and their effect on financial legal and tax matters is shown on the next slide. 4 The Household Structure cont. 5 The Household Structure cont. Household formation has changed since 1950 6 Theory An Introduction Theory underlies the personal financial planning process. However theories don t usually give a complete representation of how people act. In many cases the assumptions made seem unrealistic. Theory leaves out parts of reality in order to simplify key points that will help us understand deeper aspects of behavior. With theory we can attempt to explain why people do what they do. 7 The Theory of Consumer Choice The theory of consumer choice describes the method by which people select goods and .