PERSONAL FINANCE

PERSONAL FINANCE What do I do with mypersonalresources?

I respond predictably to incentives • Engage in activities that benefit me economically (increased income, profit, revenue) • Avoid activities that hurt me economically (decreased income, profit, revenue)

Rational Decision Making • I respond to incentives • Positive – a reward for making good choices/behavior (get a 10% raise for selling 80 pairs of shoes) – try to achieve these • Negative – punishment/consequence for making poor choices (getting fired for failing to sell 80 pairs of shoes) – try to avoid these

RATIONAL DECISION MAKING MODEL • Define the problem – resource are scarce, I can’t have everything I want • List the alternatives– what are my REALISTIC choices • State the criteria – what is most important to you (or what is necessary) • Evaluate the alternatives– what comes closest to what you want the most or will help you get what you want the most? • Make a Decision – rationally choose the best alternative

Worker’s Earnings • Worker’s earnings: pay received from an employer • Determine how much a person will have to spend or save/invest for the future • Earning potential: how much a person is likely to receive in pay • Influenced by skills, education, training, • Highly successful people invest as much time/money on education and training as possible

Effect of Taxes on Personal Finance • Progressive tax – increases as income increases best example is Federal Income Tax: • Tax Bracket Married (FJ) Single • 10% Bracket $0 – $17,400 $0 – $8,700 • 15% Bracket $17,400 – $70,700 $8,700 - 35,350 • 25% Bracket $70,700 – $142,700 $35,350 – $85,650 • 28% Bracket $142,700 – $217,450 $85,650 – $178,650 • 33% Bracket $217,450 – $388,350 $178,650 – $388,350 • 35% Bracket Over $388,350 Over $388,350

Taxes Continued • Regressive Tax • Percentage paid in tax increases as income decreases • Sales tax - most common regressive tax • (7% in Effingham County) • 7% of $300 = $21 • Income of $10K 7% sales tax of $21 = .02 % of salary • Income of $50K – 7% sales tax of $21 = .004% of salary • Affect people of lower incomes more severly

Taxes Continued • Proportional Tax – everyone pays the same amountproportional to their income (also known as flat tax) • 10% no matter your income… • $100K = $10K tax • $50K = $5K tax • $25K = $2.5K tax

Taxes Continued • Property Taxes • Taxes paid on real estate (land, houses, etc.) people own. • Based on appraised value of property • Increases in property values, and thus taxes, are beneficial for people wanting to sell; but hurt people who may no longer be able to afford the taxes on their homes (think Hilton Head Island) • Delinquent (unpaid) taxes accrue interest and fees and can lead to foreclosure and loss of property

WHAT DO I DO WITH WHAT’S LEFT AFTER TAXES? • Banking, Saving, Borrowing • Financial Institutions • Commercial Banks – receive deposits of money, extend credit and provide loans • Owned and managed by stockholders • Make money by granting loans and charging interest – interest charged (amount charged to customers for borrowing money) • Pays interest to customers who deposit money in savings accounts - interest earned (amount paid to customers for the use of their money) • Interest charged is usually MORE than interest earned (“the spread”)

Financial Institutions Continued • Credit Unions • Cooperative associations that serve only their members (only certain people can join) • Offer checking and savings accounts and grant loans • Technically “non-profit” do not have to pay the same taxes as commercial banks • Offer higher interest earned rates than banks

Financial Institutions Continued • Payday Loan Lenders • Quick short terms loans • High interest rates • Borrow $50 on Wednesday because you do not get paid until Friday – on Friday, you pay $60 back when you get your check (20% interest rate • Use in EMERGENCY situations

Financial Institutions Continued • Title Pawn Lender • Short term loans for people with salary gap between income and expenses • Loan is based on collateral (car) • VERY high interest rates • Failure to pay back results in loss of vehicle

InvestingHigh Risk Low RiskHigh Return Low Return • INVESTING – • Looking for a RETURN (eventual payoff) on my investment • RISK (chance of losing investment) in hope for the payoff • Correlation between risk and return… • KEY: MAKE SURE I WILL STILL BE OK IF I LOSE THE MONEY

INVESTING CONTINUED • STOCKS – shares in a company – high risk, chance of high return. • MUTUAL FUNDS – pool of money from many investors that are used to buy a range of stocks- moderate risk, moderate return • RETIREMENT ACCOUNTS – 401K, 403B – Pre-tax, some companies match a percentage of contribution • U.S. TREASURY BONDS – loans to a company or the government - low risk, low return • SAVINGS ACCOUNT – place to “store” money – minimal risk, minimal return Why invest or save??? To have a good retirement

How do I get credit??? • Based on Credit Worthiness which is determined by the 3 C’s • Character as indicated in Credit Report from Experian, Equifax or Transunion that details a person’s borrowing and repayment history • Capacity – includes one’s income as well a existing debt. If debt to income ratio is too high, he may not be able to handle more debt • Collateral – something of value a borrower can use to back the loan if he fails to repay the debt

CREDIT: GOOD, BAD & UGLY GOOD • Allows me to have goods or services now and pay later (Student loans, House, Furniture, Car) • Difficult to save entire amount to pay in lump sum

Credit Continued • Bad • Interest charged makes me pay more in the long run • Simple interest – applied only to the value of the principle • $10K @ 5% annually for 10 years = $10,000 X 5% X 10 = 5K in interest = total paid to bank of $15K for loan • Compound Interest – applied to principle and the accrued interest • A = P X [1 + r/n]nt • A – amount to be paid back • P – principle • R – interest rate • N – number of compounding periods per year • T – number of years of the loan

Credit Continued • Ugly • Failure to pay on time leads to • poor credit score • Increased interest rates • Increased insurance rates • Limited employability

Insurance • Provides opportunity to share the risk (shared liability) with insurance company (consumer is not responsible for 100% of loss/damage/debt) • Consumer pays a premium • Usually includes a deductible (amount paid by consumer before insurer pays anything) • Insurer pays amount up to policy limits after deductible and co-pays are met

Types of Insurance • Life – pays beneficiary upon insured’s death • Whole-life • Term-life (limited number of years) • Medical (health) – pays for covered medical care • Auto – pays for damage to auto and injuries in a covered accident • Property- (homeowner’s) pays for covered damages to home • Liability – pays for damages for which insured is held legally liable (comprehensive liability usually applies to businesses) • Disability – pays part of insured’s wages while they are unable to work

PERSONAL FINANCE