Financial Management and Understanding Your Money How to Build Home Equity and Retirement.

1. Financial Management and Understanding Your Money?How to Build Home Equity and Retirement.

2. “The Power of Compounding”

3. EXAMPLE…Investments

4. Compound Interest Formula: Paid n Times Per Year...

5. EXAMPLE …Monthly Compounding

6. “Savings Plans and Investments”

7. Savings Plan Formula (Regular Payments)

8. Retirement Example You are planning on retiring in 40 years and you put $250.00 a month into an IRA that has an average annual return of 9.7%. How much money will you have invested over the 40 years? How much money will you have in your IRA when you retire?

10. Example(College Savings Plan at 6%)

12. “Loan Payments, Credit Cards, and Mortgages”

13. Introduction Soon after you graduate high school, you will have many new loans and payments that we will be responsible for. Such as credit card debts, and student loans. With these types of loans and credit you will have to pay back the initial amount and interest added to this amount. #1: Because most of us are not able to pay for college all at once, we will probably take out loans and with this we’ll have to pay them back. But there are many different ways of paying off the loan. #2: Basically you owe a monthly interest rate, and the principal, you have to take care of both.#1: Because most of us are not able to pay for college all at once, we will probably take out loans and with this we’ll have to pay them back. But there are many different ways of paying off the loan. #2: Basically you owe a monthly interest rate, and the principal, you have to take care of both.

14. Principal… #1 You would need to pay part of your principal because the bank keeps adding interest onto you principle, and if the principle does go, then the interest will always be the same and you’ll never pay off the debt.#1 You would need to pay part of your principal because the bank keeps adding interest onto you principle, and if the principle does go, then the interest will always be the same and you’ll never pay off the debt.

15. Installment Loan Formula PMT: Payment p:principal APR: interest rate n: is number of payment periods per a year, and Y: is the number of years of the loan term.PMT: Payment p:principal APR: interest rate n: is number of payment periods per a year, and Y: is the number of years of the loan term.

16. Example Suppose that you wanted to pay off a loan of $1,400, with an interest of 14%, with 6 equal monthly payments. What would be your monthly payment amount?

18. Principal and Interest for  Installment Loans At the beginning of your monthly payments, much of the payment goes toward the interest and not much to the principal. But because you are paying off the principal as well as the interest, you interest payment goes down, and you end up paying more to the principal of the loan as time goes on. At the beginning of your loan, most of your monthly payment goes toward the interest added, but as time goes on, the interest amount decreases and you pay more toward you principal, so the last few months of your loan term, your principal will go down in larger portions.At the beginning of your loan, most of your monthly payment goes toward the interest added, but as time goes on, the interest amount decreases and you pay more toward you principal, so the last few months of your loan term, your principal will go down in larger portions.

19. Example Suppose you have student loans totaling $8,500 when you graduate from college. The interest rate if APR=8% and the loan term is 9 years. What are your monthly payments? How much will you pay over the lifetime of the loan? What is the total interest you will pay on the loan?

21. More on the Example Your monthly payments are $110.66. Over a 9-year-term, your total payments will be: $4,736 is toward the interest payments only, that’s more than half of your principal.$4,736 is toward the interest payments only, that’s more than half of your principal.

22. Choices of Rate and Term Because business worry mainly about the bottom line, to cater to their customers, they might offer different term and rate plans. For example you could get a 3-year loan with at 8%, or a 4-year loan at 9% and so. The thing you have to consider is that with a shorter loan the monthly payment will be higher. You need to find out what you can afford.

23. Example You need a $5,000 loan to buy a used car. You bank offers a 3-year loan at 8% and a 4-year loan at 9%. Calculate your monthly payments and total interest over the loan term with each option.

24. 3-year Term

25. 4-year Term

26. Credit Cards Credit cards are different from installment loans because you do not have to pay off your balance in any set period of time. Instead, they credit card company required you to pay only a minimum monthly payment, that pays off little of the principal however. Credit Cards are a continuing loan, whenever you buy something, you get a new loan, that’s why there isn’t a set time period, but also because the credit card company is making more money of the time you spend paying of the debt. #2 it pays little of the principal so that still a large amount of interest is posted onto your principal, thus the more money they make.Credit Cards are a continuing loan, whenever you buy something, you get a new loan, that’s why there isn’t a set time period, but also because the credit card company is making more money of the time you spend paying of the debt. #2 it pays little of the principal so that still a large amount of interest is posted onto your principal, thus the more money they make.

27. More on Credit Cards With such minimum monthly payments it would take you very long to pay off a credit card debt. If you wanted to pay off the debt in a set period of time you would have to use the loan payment formula.

28. Credit Card Caution Because every business bottom line is to make money, a credit card companies interest rates are very high, so it is easy to get into debt. If you don’t pay your monthly payment on time, you could wind up in a never ending hole of credit card debt! Pay your monthly payments on time so that you don’t have to pay more interest on a higher balance because you didn’t pay you monthly payment on time.

29. Example You have a credit card debt of $3,300 with an annual interest rate of 23%. You decide to pay off your balance over 1 year. How much will you need to pay each month? Assume you make no further credit card purchases.

31. Example Vesta Jean has gotten into credit card trouble. She has a balance of $10,500 and just lost her job. Her credit card company charges interest APR = 22%, compounded daily. Suppose the credit card company allows her to suspend her payments until she finds a new job-but continues to charge interest. If it takes her a year to find a new job, how much will she owe when she starts her new job?

33. Mortgages Today one of the most popular installment loans are mortgages, these loans help you buy a house. The lender will ask for a down payment, usually 10% to 20% of the purchase price. Then the lender will loan you the rest of the money to buy the house.

34. More on Mortgages. Lenders often have closing costs. There are two types of closing cost:(1) Direct fees, such as fees for getting the home appraised and checking you credit history, for which the lender charges a fixed dollar amount.(2) Fees charged as points where each point is 1% of the loan amount. Many lenders divide points into two categories: an “origination fee” that is charged on all loans and “discount points” that vary for loans with different rates.

35. Mortgage Basics When you are seeking a home mortgage, be sure to keep the following considerations in mind as you compare lenders:(1) What interest rate and down payment are required for the loan?(2) What closing costs will be charged? Be sure you identify all closing costs, including origination fees and discount points, since different lenders may quote their fees differently.(3) Watch out for fine print, such as prepayment penalties, that may make the loan more expensive than it seems on the surface.

36. Fixed Rate Mortgage The simplest type of home loan is a fixed rate mortgage, in which you are guaranteed that the interest rate will not change over the life of the loan. Most fixed rate loans have a term of either 15, 20 or 30 years, with lower interest rates on the shorter-term loans.

37. Example You need a loan of $150,000 to buy your new home. The bank offers a choice of a 30-year loan at an APR of 8% or a 15-year loan at 7.5%. Compare your monthly payments and total loan costs under the two options. Assume that the closing costs are the same in both cases and therefore do not affect the choice.

38. 30-year Term

39. 15-year Term

40. Wow, look how much I saved? Although it looks as though from first glance that the 30-year term saves you more money. Looking at the big picture will show that the 15-year term saves you $145,940.40.

41. Example Great Bank offers a 25 year loan of $150,000 at 7.5% with closing costs of $700 plus 1 point. Big Bank offers a lower rate of 6% for the 25 year loan at $150,000, but with closing costs of $1,200 plus 1 point. Evaluate the two options.

42. Great Bank?

44. Now let’s see how much a Byron Center house costs? And how much it will be worth in 30 years?