Personal Finance

1. Personal Finance Spending, Saving and Investment Using Credit Types of Insurance

2. Rational Decisions and Financial Planning Our economy bombards us with information as to how to satisfy our wants NOW. • How much of your income can you spend now? How much should you set aside for savings to achieve short-term goals? How much income do you invest to achieve long-term goals. • Cost -benefit analysis - weighing marginal benefits one receives for each additional unit of money spent. • Delayed gratification - delaying a small benefit now for a greater benefit later.

3. How do I manage my personal finances (my money)? • What are your priorities? • School or College? • Rent or own? • Family? • Saving or Spending? • You need to create a budget to balance your spending and saving….so you can be INDEPENDENT! • Make rational decisions by planning your finances for today and your future!

4. Rational Decisions and Financial Planning • Creating a budget or financial plan generally requires three steps: • Identify how you’re spending money now. • Evaluate your current spending and set goals that take into account your short and long-term financial objectives • Track your spending over time to make sure it stays within those guidelines • Don't drive yourself nuts. Budgeting is a skill that comes with time. • BeDISCIPLINEDin your practice of budgeting and you will live a richer and more rewarding life.

5. Rational Decisions and Financial Planning Financial plan/ budget - a set of goals, a process of achieving those goals, putting your plan into action and setting priorities and making choices

6. Rational Decisions and Financial Planning There is HELP! Clark and Dave to the rescue! http://www.clarkhoward.com www.nerdwallet.com www.creditcardtuneup.com http://www.daveramsey.com/home/

7. Financial Institutions for managing your money #1 Banks #2 Credit Unions #3 Savings and Loan These institutions can help with your: • Checking and Savings- money deposits placed securely in a bank or financial institution, for later use. • Loans Banks make money by charging customers that borrow money a higher interest rate than the interest that they pay on bonds. (Interest – money paid or the cost of for borrowing money.) • Investments - money paid into a business with the expectation, (NOT GUARANTEE) of future rewards.

8. #1 Banks & their services #1 Bank: a corporation that stores deposits and makes loans to earn a profit. • Banking Services: • Savings& Checking(small loans) gets most of its deposits from consumers, rather than business, and lends most of its money to home buyers. • Investments: Banks sell CD’s or Certificates of Deposit:a deposit you promise to leave in the bank for a specific time - in exchange for a higher interest rate. • Loans: Guranteed by the FDIC. All deposits (money belonging to customers are insured up to $250,000 by the Federal Deposit Insurance Company (FDIC). Banks have reserve requirements – A certain amount of money needed to be kept on hand in order to serve it’s customers.

9. #1 Banks: Who gurantees them? FDIC (Federal Deposit Insurance Corporation) • An independent deposit insurance agency created by Congress in 1933 to maintain stability and public confidencein the nation's banking system. • It insures consumer deposits in a bank for up to $250,000 per account. • Deposits include checking and savings accounts and certificates of deposit (CD).

10. #1 Banks & their services: Loans When you borrow money it is required that you have some collateral. • Collateral is an asset that the bank has some EQUITY in (they could sell it and get some of their money back) • It is required just in case you DEFAULTon your loan (can’t pay loan back). • The bank will repossess the collateral that you put on the loan. If you can’t repay it… EXAMPLE: = + …you are going to be walking. LOAN BANK Collateral

11. Financial Institutions for Savings: #2 Credit Union • Anot for profit financial institution that is owned and controlled by its members – usually people who work in the same company. • Deposits earn interest, and depositors are eligible to borrow money from the credit Union sometimes at lower rates than banks can charge. • NOT BACKED BY FDIC.

12. #3 Savings and loans • A banking institution that gets most of its deposits from consumers, rather than business, and lends most of its money to home buyers.

13. How do you make your money grow? #1 Stocks #2 Bonds #3 Mutual Funds #4 Investment Accounts

14. Who regulates investing in the us? Securities and Exchange Commission (SEC) • The SEC regulates trading of all securitiesin America. • They help ensure that the Stocks, Bonds, & Mutual Funds that are for sale arelegitimateand from a company that shows (or could show) a profit. • They also establish ethics for stock brokers, which reduces the amount of unethical and illegal activities in the business of trading securities. (Such as insider trading.))

15. Investments: Stocks • Stocks – individual ownership shares in a corporation. • Pay the highest rewards because they are the riskiest. All monies paid on stocks are called dividends – portions of the corporations profits. • There is no guarantee of a return on your investment. • Capital Gains – money earned from the sale of assets (stock) when they are sold for a profit. • At least the company has been reviewed by the Securities and Exchange Commission (SEC).

16. Investments: Bonds Bonds – when you purchase a bond from a corporation, you become the lender. • When a bond is issued the corporation or government is borrowing money from a bondholder with the promise that it will repay the debt + interest. • Generally you only make money on a bond after a long period of time (5 years, 10 years, 30 years….maturity date) • Maturity Date – when loan comes due • Only slightly more risky than savings accounts because they are backed by company.

17. Government Savings Bonds: Not the best for investing, unless you hate risk. Series I: $50, $75, $100, $200, $500, $1,000, and $5,000. $5,000 is the maximum purchase in one calendar year. If you redeem I Bonds within the first 5 years, you'll forfeit the 3 most recent months' interest; however after 5 years, you won't be penalized, but will pay tax. Series EE: $50, $75, $100, $200, $500, $1,000, $5,000, $10,000. Only difference is that you can withdraw these early for educational expenses without a penalty or tax.

18. HOW DO BONDS WORK? INVESTOR After 5 years, the company has to repay bond (+ interest) Estimated return of $635 Buys a $500, 5 year Bond at 5% interest (You can buy it directly from the company or you can go through a bank) (Compounded monthly over 60 months) COMPANY / GOV PROBLEM:Is $635going to be worth the same in 5 years? NO INFLATION:the steady rise of prices for goods and services. Purchase Capital Improve factories

19. Investments: mutual funds Mutual Funds –A mutual fund is a combination of hundreds of pieces of different stocks from many different corporations. It is called a portfolio. • Mutual funds pool together low risk, low return stocks and bonds with high risk high return stocks and bonds so investors can spread their risk and maximize their earning potential. • The benefit of a mutual fund is that it is a diversified investment(not all your eggs are in one basket)... • Not sold by the corporation directly. They are sold & controlled by banks and investment firms. • Which means when you buy a mutual fund you benefit from professional managementof the investment.

20. Mutual Funds(Key Word: Diversity)

21. Mutual Funds: The Process Investment Providers INVESTOR You have the power to pick your own funds. MUTUAL FUND COMPANY Medical Stock Diversify Team of professional advisors looks over each fund Tech Stock Automotive Stock

22. The Investor’s Relationship Between Risk & Return Stocks Real Estate Stock-based Mutual Funds Bond-based Mutual Funds $$$$$ Rate of Return Corporate Bonds Certificates of Deposit U.S. Savings Bonds SavingsAccounts Risk to Investor

23. Other Ways of Investing in YOUR FUTURE! I.R.A.Individual Retirement Account(Setup by your individual)401K or 403 (b)(Setup by your employer)529 Plan(Setup by your individual) For Government Employees For Corporate Employees

24. Various Investment Accounts • 401K – Retirement account setup through your employer where deposits are made by the employee and employer. Invests heavily in mutual funds403B Basically a 401K, but only for government and non-profit employees. • Individual Retirement Account (IRA)Basically a 401K, but setup by an individual and deposits are made only by that individual. • 529 Plan– State-specific plan setup for kids to fund their education. Caregiver’s deposits are tax free and withdraws are tax free IF used for educational expenses (tuition, fees, books, meal plan, other..) Invests heavily in mutual funds.

25. Insurance Safeguarding Your Future! Types of Insurance: HEALTH, LIFE & LIABILITY

26. Insurance: General Concepts Insurance – financial protection against different kinds of risks we take in life. Insurance Policy – a written agreement between a person and an insurance company. Coverage Limits – the maximum amount the company will pay you for your loss Deductible – amount of loss that you must pay yourself before the company will step in and pay the rest. Claim – a request for payment of your losses Premium – the amount of money you pay per month, quarter or year in order to guarantee you r coverage.

27. Life Insurance • Life Insurance: designed to provide loved-ones with a source of income to pay for funeral, housing, and children’s education expenses. • Becomes more expensive as you get older. • Beneficiary – the person who you want to receive the money. • WHOLE LIFE: More expensive monthly premiums, but the money in the policy gains an amount of interest and you can take out money as a loan if needed. • TERM LIFE: Much less expensive premiums. Bought in lengths of 10, 20, 30 year terms. Price is fixed for length of term. • Money in the policy does NOT gain interest and you can NOT take out money as a loan. There are 2 types:

28. Car insurance Car insurance – states require drivers to carry car insurance. You pay a premium based on your coverage & if something happens, the There are two types: • Liability Insurance – pays for personal injuries and property damages caused by an accident. • Collision Insurance – pays for any damage to your own car.

29. Health Insurance Health Insurance – Insurance that pays your medical bills when you are sick or injured. • Cheapest way to receive health insurance is thorough your job, if you are lucky enough to find an employer who offers it. • Or www.healthcare.gov • provides payments for regular and emergency healthcare procedures. Without this one can find that a single trip to the doctor can cost $600 to $2000. Emergency services can run $10,000 - $120,000. • Becomes more expense as you get older

30. Other types of Insurance Disability Insurance – • if you suffer an illness or injury that keeps you from working for an extended period, this insurance will pay you 75% of your monthly income until you recover. Property Insurance – • Renters’ or homeowner’s insurance helps you replace your belongings in case they are stolen or destroyed. • Homeowners insurance helps protect the value of your belongings as well as the value of your house.

31. Credit cards & your credit score Be Responsible!!!!

32. Using Credit • Credit – the ability to obtain goods and services now, based on an agreement to pay for them later. • Positives – convenience, allow people to enjoy goods and services before they pay for them • Negatives – increases total costs of things, can lead to spiraling debt that can destroy an individual or family’s financial health and future.

33. Your Credit History….ITS LIKE SOCIAL MEDIA…. Your credit history will follow you your whole life. It determines: • If you can get a loan • What interest will you have to pay on the loan • The level of your insurance premiums. • Wether or not your can get that job or not.

34. Becoming Creditworthy Creditworthy – the ability and likelihood to pay back on a loan. Credit history – how well you have managed your bills and credit in the past. • Shows every bill you have paid and whether it was paid on time or not • Loan balances • Based on this information you are given a credit score – the higher the score the more creditworthiness you have. Again….scores average between 300 and 850, the higher the better)

35. Becoming Creditworthy How do I earn good credit? • Pay all bills on time • Establish a steady work history • Open a checking account and do not bounce any checks • Buy an item on an Installment Plan – pay a fixed amount over a specified number of months – and make all payments on time

36. Making wise credit decisions • Understand your fixed expenses (expenses that do not change on a monthly basis) – rent utilities, transportation. • Understand your variable expenses (expenses that change on a monthly basis) how much you usually spend on food entertainment clothes, etc. • Deduct these expenses from your income and see if you have enough left over every month to make your credit payment.

37. Shopping for Credit cards • Shopping for credit cards is the same as shopping for a car or picking the college you want to go to. • Some CC’s charge an annual fee – a fee for using the card. • Credit cards charge compound interest – compounded on a monthly basis. • Credit cards charge a finance charge – a fraction of the annual interest rate on your monthly balance. • You are NOT charged interest if you pay off the balance within 25 days of making the purchase. • You must shop for the lowest interest rate, and the LEAST FEES (annual fees, late fees, over-credit limit fees) • Find the card that gives rewards, such as cash-back or miles for plane tickets. • By having a credit card and paying the balance on a regular basis, you will improve your credit history. Access this site for your free credit check

38. Interest Rates Interest – the cost of using credit. Interest Rate – a percentage of the total amount owed. To compare the cost of different credit options, you need to know the following: • Is the interest rate quoted as an annual rate? (the amount of interest charged per year rather than per month) • Is the interest rate fixed or variable? A fixed rate never changes, a variable rate can go up at any time. • Is the interest calculated as simple interest or compound interest.

39. Simple Interest versus Compound Interest • 1.)Simple interest • With a simple interest rate, the interest is determined with the original loan amount(principal). • Note: Simple interest is always calculated semi-annually or yearly. The math would look like this: • If you receive 5% interest on the original $100 amount, over ten years the growth in their investment would look like this: • Year 1:  5% of $100 = $5 + $100 = $105Year 2:  5% of $100 = $5 + $105 = $110Year 3:  5% of $100 = $5 + $110 = $115Year 4:  5% of $100 = $5 + $115 = $120 ..... • Year 10:$150

40. Simple Interest versus Compound Interest • 2.)Compound interest • With a compound interest rate, future interest is determined with the existing amount in the account (not the original amount). • Note: Compound interest is usually calculated per month or per day. • EXAMPLE: Compounding per year would be as follows: Year 1:  5% of $100 = $5 + $100 = $105Year 2:  5% of $105 = $5.25 + $105 = $110.25Year 3:  5% of $110.25 = $5.52 + $110.25 = $115.76Year 4:  5% of $115.76 = $5.79 + $115.76 = $121.54 ... Year 10:$162.89

41. Credit Card Charges Additional Rate set by your bank Prime Rate set by Federal Reserve Example: 15% APR ÷ 365 = .0004 DPR (.0004 x 30) x $1000 = $12.32 Card Balance

42. Example of Credit Card Offer This is the promotional info; the stuff to get your attention. Though it maybe attractive you must always read the fine print.

43. Read the Fine Print in a Credit Card Offer This is not a great example of most cards. Most have much better terms. This is an example of one of the worst.

44. Read the Fine Print in a Credit Card Offer This one is not that bad.

45. FICO Score/Credit Ratings FICO scores are developed by… Credit Reporting Agencies Access this site for your free credit check

46. Study for the Quiz on Friday!