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Personal Finance. CREDIT CARDS. A typical credit card payment of $41.00 would be divided like this:. INTEREST. PRINCIPAL. $11.00 29% of your payment. $30.00 71% of your payment. Based on $2,000 balance, 18% IR and minimum payment equal to 2% of balance.
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A typical credit card payment of $41.00 would be divided like this: INTEREST PRINCIPAL $11.00 29% of your payment $30.00 71% of your payment Based on $2,000 balance, 18% IR and minimum payment equal to 2% of balance.
Let’s suppose you have 3 credit card accounts: Bank Balance Int. Rate Min.Paymt. $ in Interest One Bank $1,300.00 15% $52.00 $16.25 Two Bank 1,700.00 18% 68.00 25.50 Three Bank 1,200.00 16% 48.00 16.00 TOTAL $4,200.00 $168.00 $57.75 **the average American has 15 credit cards in their wallet.
Let’s look at it another way: Bank Balance Int. Rate Min.Paymt. $ in Interest One Bank $10,350.00 15% $259.00 $129.38 Two Bank 4,300.00 18% 108.00 64.50 Three Bank 7,000.00 16% 176.00 93.33 TOTAL $21,650.00 $543.00 $287.21 **for most people, $287.00 is a monthly car payment.
If you only paid the minimum payment AND you never charged another item, here is what it actually costs you to pay the accounts off: Bank Repayment Amount Cost in Interest to You One Bank $20,101.00 $9,751.00 Two Bank 9,836.00 5,536.00 Three Bank 14,344.00 7,344.00 TOTAL $44,281.00 $22,631.00 **AND if you’re a little late with the payment, the bank will add a $35.00 late charge to the balance.
SAVING Compound Interest
INTEREST RATE:the amount paid for borrowing someone else’s money. It is usually expressed as anAnnual Percentage Rate (APR)
A one-time $1,000 investment with a 6%, 9%, and 12% rate of return How interest rates affect your Return on Investment (ROI)
Mary and John graduate from high school in the same year. Starting at age 18, Mary invests $2000 per year for 7 years and stops. John sees that Mary has saved a lot of money and begins investing $2000 per year at age 25 and continues for the next 40 years. Who will have the most money with which to retire at age 65?
Mary John Mary’s investment of $14,000 resulted in $628,329 when she reached age 62. John’s investment of $66,000 resulted in $600,082 when he reached age 62.
SAVING Rule of 72
The Rule of 72 ……states that 72 divided by the interest rate will result in the number of years it will take your investment to double…...
SAVING Diversification
Diversification -- not putting all financial “eggs” in one basket.
Highest Risk/ Highest Earnings FINANCIAL PLANNING PYRAMID PENNY STOCK COMMODITIES SPECULATIVESTOCKS/BONDS/ MUTUAL FUNDS COLLECT-IBLES GROWTH MUTUAL FUNDS BLUE CHIP COMMON STOCK REALESTATE HIGH-GRADE PREFERRED STOCK HIGH-GRADE CONVERTIBLE BONDS BALANCED MUTUA L FUNDS HIGH-GRADE MUNICIPAL BONDS or MUTUAL FUNDS MONEY MARKET ACCOUNTS or MUTAL FUNDS HIGH-GRADE CORPORATE BONDS or MUTUAL FUNDS INSURED SAVINGS/ CHECKING ACCOUNTS U.S. SAVINGS BONDS CERTIFICATES OF DEPOSIT TREASURY ISSUES Lowest Risk/ Lowest Earnings HOMEOWNERS OR RENTERS INSURANCE MEDICAL/ DISABILITY INSURANCE LIFE INSURANCE LIABILITY INSURANCE AUTOMOBILE INSURANCE
SAVING Taxes & Inflation
INFLATION-- increase in the prices of goods and services caused by rapid expansion of the money supply.
RECESSION -- extended downturn in economic activity in excess of 3 months. DEPRESSION -- extended downturn in economic activity in excess of 6 months.
One way the government measures inflation is theConsumer Price Index (CPI)
CPI -- prime indicator of inflation and recession • Comprised of a market basket of goods and services. • Measures current cost of living against base year (1996)
The Impact of Inflation • 1973 $ 4,012 • 1993 $ 18,924 • 2013 $ 40,084 • 1973 $ 32,900 • 1993 $133,500 • 2013 $292,515
The Threat of Inflation & Taxes $10,000 invested for a year 4% $10,400 $10,288 $(300) $9,988 8% $10,800 $10,576 $(300) $10,276 10% $11,000 $10,720 $(300) $10,420 Gross Return After Tax (28% bracket) Less Inflation (3%) Net Return
SAVING CDs
CD -- a time deposit that gains interest. There is typically a penalty for early withdrawal. Jumbo CD -- a time deposit of $100,000 or more.
Brokered CD • Sold by a stock broker to a client. • Stock broker shops for best interest rate before selling to a client. • Can be sold without penalty on the secondary market (similar to a bond)
SAVING Bonds
BONDS NOTE: Junk Bonds have been known to have interest rates as high as 12% at a time when government bonds were only 8%.
BUYING BONDS AT A DISCOUNT Suppose Al buys a $1000 bond with a coupon rate of 5 percent. The person who buys the bond (Al) is called the “holder,” while the seller of the bond is called the “issuer.” Interest rates go up to 6 percent, and Al needs to sell the bond. (noone wants to buy a 5 percent bond when the interest rate is 6 percent) Al offers to sell the bond to Patsy “at a discount” for $950--taking $50 off the $1000 value of the bond. Patsy now owns a par value $1000 bond for $950.
FINANCIAL MARKETS Markets in which money is lent for periods longer than one year are called CAPITAL MARKETS. When money is lent for less than one year, it is called a MONEY MARKET. Money market investments are NOT insured by FDIC (Federal Deposit Insurance Corporation).
FINANCIAL MARKETS Financial assets that can only be redeemed by the original holder are sold on a PRIMARY MARKET. (ex: savings bonds, small CDs) Financial assets that can be resold are sold on SECONDARY MARKET. This option for resale provides liquidity to investors. **For example: if the mortgage on a house does not meet the banks’ criteria for sale on the secondary market, the borrower may have to pay a higher interest rate for their mortgage.
SAVING Mutual Funds
Company “A” $ $ Company “B” Company “C” What Is A Mutual Fund? A mutual fund is a professionally managed pool of money.
Mutual Funds– A collection of stocks, bonds, or other securities bought by a group of investors and managed by a professional investment company.
Why Own One? • Money is Professionally Managed. • Diversified. • Flexible. • Marketable. • You Have Control.
Open-end funds–(most common) the fund will sell as many shares as investors want. Cannot trade in stock market, only buy or sell through mutual fund company. Closed-end funds -- have a limited number of shares for trading on an exchange or OTC.
Load funds -- includes a sales charge (usually 5%), + fees. Purchased through a broker. No-load funds -- charge a management fee, not a commission.
Net Asset Value (NAV) – The total value of the fund’s holdings divided by the number of shares. (= price per share)
$100 Investment Per Month A Hypothetical Example $1,188,240 Investing $100 per month with different rates of return $637,680 $351,430 $200,140 Assumed Rates 10 Years 20 Years 30 Years 40 Years $16,470 $18,420 $20,660 $23,230 6% 8% 10% 12% $46,440 $59,290 $76,570 $99,910 $100,950 $150,030 $227,930 $352,990 $200,140 $351,430 $637,680 $1,188,240 The hypothetical illustration and the 6%, 8%, 10% and 12% nominal rates compounded monthly, are not guaranteed or intended to demonstrate the performance of any actual investment and assumes $100/month investment. Assumes payments are made at the beginning of the compounding period and are rounded to the nearest $10.
Saving $100 per month at 10% return Begin Saving Now In One Year In Five Years Total in 40 Years $637,680 $576,090 $382,830 Cost to Wait $ 61,590 $254,850 The High Cost of Waiting Don’t Procrastinate! Cost to wait includes monthly contributions. This hypothetical example demonstrates compounding at specified rate and not the performance of any actual program. No allowance for taxes, applicable fees or inflation. Rate of return is nominal, compounded monthly.
The Best IRA Option for you Traditional IRA Roth IRA Up to $4,000Tax Deductible Up to $4,000Non-deductible Contributions Contribution/Distribution age limit No age limit 70 1/2 Tax-deferred Earnings Tax-deferred Taxes before 59 1/2 Earnings tax-free if Roth IRA account has been open at least 5 years Money taken will be taxable w/10% penalty TAX FREE MONEY no matter how much is withdrawn! Withdrawalsafter age 591/2 All of the money will be taxable upon withdrawal
Traditional IRA Full eligibility income limits for retirement plan participants Roth IRA Full eligibility income limits (regardless of retirement plan participation) 2006 $80,000 $50,000 Married Single Comparing IRA Income Participation Limits Full Eligibility 2006 and on Married $150,000 Single $95,000
SAVING Stocks