The Actuarial Foundation

Money Math Learning Series
Personal Finance & Investments
James A. Tilley

Introduction
News Articles
Scope
Table of Contents

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Introduction
So much (maybe even too much!) of the everyday world is about making and managing money. Underpinning most decisions made by private and public companies is an analysis of whether certain actions will increase or decrease their chances of making money. Many of the dealings between countries and their governments, including matters of trade and the coordination of economic policy, can be understood only if you have a grasp of the basics of the mathematics of finance and investments ÷ that is, only if you become familiar with MoneyMath concepts.

All major newspapers have "Business Sections" that carry many stories and other information about finance and investments. The Wall Street Journal , a daily newspaper published throughout the U.S. and the world, is dedicated to business topics. Indeed, The Wall Street Journal has an entire section called "Money & Investing." When watching TV today, you are bombarded with commercials about how and where to invest your money, how and where to borrow money to buy a new house or car, and which credit card to use for purchasing just about anything. Many magazines and billboards are splashed with ads on the same topics. According to the theme song for an old musical called Cabaret: "Money makes the world go around..."

This book will help you figure out what to do with money so that it doesn't "burn a hole in your pocket"! You will learn a little about financial institutions such as banks, financing companies, and securities firms. Most importantly, you will learn things that will help you answer the following (and other similar) questions:

If I lend my friend $20, should she pay me back only the $20, or the $20 plus a little "interest," because I can't use my money while she has it?
If I put my weekly allowance in a savings account at a bank, how much money will I have in a year? What does it mean that my account will "earn interest"? How much interest can I earn? Can I take money out of my savings account whenever I need it?
Why do my parents keep a checking account at a bank? What happens if they temporarily run out of money in their checking account after writing a lot of checks?
How does a credit card work? Is it different from a debit card? Which one should I get? Do I need both?
Why do some people get into financial trouble by using credit cards? How can they avoid these troubles?
How could my parents afford to purchase our home? Where did they get all the money? When do they have to pay it back?
When I get my driver's license, and I borrow money to buy a new or used car, how much of the loan will I have to repay each month?
What are bonds and stocks? Why do people invest in them? In what ways are bonds and stocks different from each other?
Why do my parents look in the "Business Section" of the newspaper almost every day at the pages and pages of information about stocks?
Why are my parents and their friends always so interested about whether the stock market goes up or down?
Is there a risk that my parents will lose money if they invest in bonds and stocks? Are stocks riskier than bonds? Why does buying several different stocks make sense?
What are mutual funds? Why do people buy stock mutual funds rather than invest in various stocks directly themselves?
Why do the federal and state governments tax people? How much will I have to pay in taxes on the amounts that my bank accounts and other investments earn?
If the prices of things that I want keep going up every year, how can I make sure that I have enough money to buy them?

In this textbook, you will learn the basic mathematics of money management by building computer spreadsheets. As you read material describing a particular spreadsheet, it is essential that you use a computer at the same time so that you can try to build the spreadsheet yourself . Making and correcting your own mistakes, and then experimenting with the spreadsheet that you build yourself, is by far the best way to learn MoneyMath concepts. Chapter 1 has been included in the text only as a short introduction for review of the spreadsheet concepts that are needed in the remainder of the book, not as a comprehensive instruction manual on spreadsheets. There are no problems at the end of Chapter 1 because the practical, real-world examples and problems included in later chapters provide a much better way both to develop your spreadsheet skills and to learn MoneyMath concepts. Students who are used to building spreadsheets may prefer to skip Chapter 1.

Several important MoneyMath terms are introduced in each chapter. All the words and terms that appear both in bold face and underlined are defined carefully in the Glossary that appears near the end of the text. The Glossary has been arranged by chapter, and the terms within a chapter have been arranged alphabetically.