Financial Planning

1. Financial Planning Chapter 4

2. Choosing a Bank & Bank Account • A bank is a financial institution. In other words, it is a business that stores and manages money for individuals and other businesses. Reasons to put your money in a bank: • Keep it safe • Earn interest. 4

3. Types of Banks • Most of the banks that offer basic banking services to individuals are called retail banks. • Checking & Savings accounts • Credit cards • Car loans • Mortgages

4. Types of Banks • Credit unions also offer basic banking services. • Nonprofit – goal is not to earn money for the business, but to earn money for the customers. • Owned by members

5. Types of Banks • Online banks are retail banks that operate only on the internet. • No buildings • Electronic funds ONLY

6. Which Bank Should I Use? • Branch – local office where you can go in and talk to the manager to learn more about the bank. • Convenience • ATMs • Evening & Saturday hours • Services • Types of accounts • Online banking • Age limits on debit cards • Interest Rates

7. Types of Bank Accounts • A bank account is a record of the transactions between you and the bank. • When you deposit money, your account balance is given a credit, and the balance increases. • When you withdraw money, your account balance is given a debit, and the balance decreases.

8. Types of Bank Accounts • Checking accounts are set up so that you can access your money by writing checks or using a debit card. • Debit/ATM card • Checks • Savings accounts are not linked to checks or debit cards. • Earns interest – bank pays you a percentage of your balance – the amount of money you have in the account.

9. Opening an Account • Things to Bring: • Driver’s license, Passport, or Student I.D. • Birth certificate or Social Security Card • Signature Card • Checks • PIN

10. Open an Account: Am I Old Enough? • Adults can co-sign the account • Joint account – has your name and the adult’s name on it. Both parties can make transactions. • Open savings instead of checking account • Link your account to your parent’s • Overdraft protection • Choose another bank with different age requirements.

11. Using a Checking Account • A check tells the bank how much money to take from your account and put in someone else’s. • A debit card authorizes an electronic transfer from your account to someone else’s. • You must keep enough money in the account to cover the amounts of every transaction you make. Otherwise, you will be overdrawn.

12. Mastering Money Checks are written orders to a bank to transfer funds from our account to someone else’s account. Check Number Recipient of the check Date Payment Amount in Words and Numbers Memo Account and Routing Number Signature Line

13. Personal Check Activity • Write neatly so the bank can read it. • Use a PEN so the information cannot be erased and/or changed. • Don’t cross out mistakes. • Write VOID in your checkbook account register and shred the check. • Fill in ALL the blanks, including the date • Be sure to SIGN the check

14. Sample Check

15. Using a Checking Account • Each time you make a deposit, write a check, or use a debit card, record the transaction details in your account register.

16. Using an ATM • ATMs – automated teller machines – allow you to perform bank transactions without going to a branch office and working with a teller. • You can use an ATM to: • Deposit cash or checks • Withdraw cash • Transfer money • Check your account balance

17. Debit or Credit? To use a debit card, you run it through a machine at the bank or store. You then punch in your PIN (Personal Identification Number) to authorize the transaction. The money is immediately transferred out of your account. Point-of-sale transaction: a sales transaction in which money is immediately deducted from your account. WARNING: If you choose the “credit” option while using a debit card, you are opting for a signature-based transaction instead of entering your PIN. The money is still immediately deducted from your checking account.

18. Managing a Bank Account Steps for Managing Your Bank Account • Keeping records of every transaction • Save your receipts! • Deposit/withdrawal slips • Maintain an account register • By hand or on the computer • Balance your account – comparing your records (check register) to the bank’s records (bank statement) to make sure they match.

19. Checkbook Register • Running balance: an up-to-the minute account of all your banking transactions. • Withdrawals • Purchases • Check payments • Deposits (including electronic debits & credits) • Overdraft protection: an agreement that the bank will loan you money when your account balance falls short. • Overdraft fees • Interest on loan

20. BB&T Activity Checkbook Register

21. Save the slips

22. Balancing Your Account Every month, the bank sends you a bank statement, which is a list of all the transactions for your bank account.

23. Balancing Your Account The process of comparing your checkbook register with your bank statement is called a bank reconciliation. Michael’s Checkbook Register Michael’s Bank Statement

24. My Account Doesn’t Balance • Forgot to record a transaction • Forgot to record bank fees or credits • Recorded an incorrect amount • Made a math error • Add deposits (credits) • Subtract withdrawals (debits) • Bank made a mistake • Didn’t account for electronic debits (withdrawls)

25. Reconciling Your Bank Statement • Step 1: Compare your check register with your bank statement. • Step 2: Bring your check register up to date. • Find the items on your statement that do not have tick marks beside them (transactions not entered in your check register). • Service charges, fees, etc. • Step 3: Total your outstanding checks • List your outstanding checks on the worksheet. • Step 4: Reconcile your statement with your register • Balance your account register with your bank statement

26. BB&T Activity (continued) • Reconcile your bank statement using the check register you completed during the prior activity.

27. Saving and Investing • Saving money is one of the most important steps toward financial security and financial freedom. • Three basic types of savings accounts: • Passbook accounts earn a small amount of interest but are flexible, so you can withdraw your money at any time. • Time accounts require you to leave the money untouched for a set amount of time, or term—the longer the term, the higher the interest rate. • Money markets offer a higher interest rate than a passbook account. They usually have a minimum balance requirement and may limit the number of withdrawals each month. 4

28. Saving and Investing PAY YOURSELF FIRST! I will give extra credit to every student that reads the book, The Automatic Millionaire, by David Bach. • To receive the extra credit, you will need to: • Highlight important information in the book & show it to me. • Take handwritten notes on the book (handwritten so I know you did it and didn’t find it online).

29. Saving vs. Investing Saving – putting money aside on a regular basis. Government Agencies: • Federal Deposit Insurance Corporation (FDIC) • National Credit Union Administration (NCUA) • The FDIC and NCUA insure bank deposits. Investing – taking a portion of savings and purchasing a product such as stocks, bonds or mutual funds. • Dividend - payment made by a company to a stockholder. • Capital gains – Profit you make when you sell the product (stocks, bonds, etc.) • Return on investment (ROI) – the amount of money you earn compared to the amount you invested.

30. Understanding Interest

31. Understanding Interest • Simple Interest – calculated based on the principle balance only. • Compound Interest – calculated based on the principle balance PLUS interest that has already been earned! I – Interest A – amount of money accumulated after n years, including interest P – Principle amount r – annual rate of interest (decimal) t – number of years the amount is borrowed for n – number of times the interest is compounded per year.

32. Understanding Interest You begin with $100 and don’t invest any additional money. The money is invested at 10% annual interest.

33. Activity • Moneychimp.com – Compound interest calculator

34. Understanding Investments • There are two basic types of investments: • Equity investments, in which you purchase stock – or ownership – in a company. Your ROI depends on the stock price. If it goes up, you gain. If it goes down, you lose. • Fixed income investments, in which you lend money to a business or government agency in exchange for a bond. • A bond is a security that provides fixed interest payments for a set period of time. • Safer investment than equity investments; insured. 4

35. Understanding Investments • A mutual fund is a pool of money collected from many investors, and then used to buy stocks, bonds, and other securities. If you buy shares of a mutual fund, you become a part owner of all the securities owned by the fund. • Benefits to investing in a mutual fund include diversity, liquidity, which means you can sell your shares for cash at any time, and the fact that a professional manager makes the decisions about the assets to buy.

36. Micro Loan Companies • Micro-creditors are an overlooked source of capital • Funded by the Small Business Adminstration • Association for Enterprise Opportunity: a trade assoc. representing 450+ micro-enterprise organizations. • Micro-loans are $25,000 or less • Made to companies with 5 or less employees • Average loan is $12,000 • Source: http://www.bankrate.com/brm/news/biz/Capital_borrowing/20001013.asp

37. Teamwork Activity • In teams of three, brainstorm ideas for a business you would like to start. Once you’ve decided on a business, prepare a proposal to present to a micro loan company. The proposal should address the following: • Name of the company • Product or service to be sold • Description of customers who will buy it • Explanation of how it will be produced, sold, and delivered. • Estimation of the cost to produce, sell, and deliver the product/service. • Your proposal will be read to the class. The class will vote on whether or not they would grant a loan to each team.

38. It is important to start saving for retirement as soon as you enter the workforce, so you will be able to afford the things that you enjoy when you stop earning a paycheck. Planning for Retirement Retirement is the stage of life after you stop working. 4

39. An individual retirement account (IRA) is a tax-deferred personal savings plan that allows you to set aside money for retirement, usually up to $2,000 per year. A 401(k) or 403(b) plan is a tax-deferred savings plan offered by an employer to an employee. The employee contributes a percentage of his or her earnings to the plan each pay period. Planning for Retirement Tax-deferred savings plans, designed specifically for retirement savings. • Deductions are made BEFORE your income is taxed!

40. Planning for Retirement • Social Security is a government program that pays monthly benefits to workers in the United States who pay the Social Security tax, know as FICA. • Additional Benefits • Disability • Premature death • Approx. 40% of annual income

41. Analyzing Estate Planning • Estate planning is the process of anticipating and arranging for the disposal of your assets – your estate – after your death. • Will • Health care proxy • Living will • Trust

42. Wills • A will is a legal document that: • Names the individuals (or charities) who will receive your assets when you die. • Nominates an executor • Manage your estate • Pay your debts, expenses, and taxes • Distribute your estate. • Nominates guardians for minor children • When people die without a will, the government decides who will get the assets or inheritance.

43. A living will is a legal document that lets others know your wishes regarding medical procedures that prolong your life. Proxies and Living Wills • A health care proxy is a form that allows you to appoint someone you trust to make health care decisions for you if you can’t.

44. Trusts • A trust is a legal arrangement that gives a person – or a group of people – the right to hold and manage specific assets. • Need a trust if: • Property worth $1 million or more • Wants control over what happens to property • Has a child with special needs or disabilities • Has children from a previous relationship that conflict with the current spouse. • Afraid someone may say the will is invalid due to fraud, stress, or mental incompetence.

45. To Rent or Buy? • When you rent, you (the “tenant”) are making monthly payments to the owner (“landlord”). • Lease: a legal contract that describes the responsibilities of you and the landlord. • Rent & payment due date • Pet provisions • Procedures for moving out • Security deposit • Utilities – water, electric, gas, etc. • Maintenance – upkeep & repair of the home.

46. Homes are considered investments because they usually increase in value. Tax deductions on mortgage interest and local property taxes. To Rent or Buy? • Homeowner’s equity is the amount of money left after subtracting the unpaid debt (mortgage) from the property’s current market value.

47. Finding a Home • Realtors are real estate professionals that help people pick out appropriate homes and take them through the home buying process. • Showing homes • Making an offer • Closing the deal • The seller pays the realtor a percentage of the sales price called a commission.

48. Can I Afford to Buy? • Before you can make an offer on a home, you need to calculate what you can afford. • You will have to make a down payment – usually 3 to 20% of the home’s price – and then make monthly mortgage payments.

49. The bank owns your home until you pay off your loan. If you don’t pay your mortgage, the bank can foreclose the property – reclaim their property – and sell the home to someone else. Calculating Down Payments • Principal is the money you have to borrow from a bank or mortgage company. $220,000 Initial value x 10% Percentage for DP $ 20,000 Down payment $220,000 Initial value - 20,000 Down payment $200,000 Loan amount

50. Components of a Mortgage Payment • The principal is the amount of the loan, divided into equal payments. • Interest is the percentage you pay to get the loan. • Fixed mortgage – the interest payments are the same over the course of the loan. • Variable mortgage – the interest payments go up and down with changes in interest rates.