WHAT IS MANAGEMENT - McGraw-Hill
Personal Finance
Other Teaching Tools 14.2
Video Notes 14.3
Brief Chapter Outline and Learning Goals 14.4
Lecture Outline and Lecture Notes 14.6
Career and Study Skills Notes 14.25
Career Development: Writing Résumés … It’s all about you! 14.25
study skills: Keep a Journal 14.27
Lecture Links 14.28
lecture link 14-1 Millionaire Women Next Door 14.28
lecture link 14-2 Preventing Identity Theft 14.29
LectURE LINK 14-3 Discredit Report 14.30
LectURE LINK 14-4 Know Your Credit Score 14.33
LectURE LINK 14-5 Flood Insurance: A Good Investment 14.34
LectURE LINK 14-6 How Much to Save for Retirement? 14.35
Bonus Internet Exercises 14.36
Bonus INternet Exercise 14-1 Finding the Best Car Loan 14.36
Bonus INternet Exercise 14-2 Choosing the Right Mortgage Loan 14.38
Critical Thinking Exercises 14.40
critical thinking exercise 14-1 Preparing a Personal Balance Sheet 14.40
Critical thinking Exercise 14-2 Developing a Spending Plan 14.45
Bonus Cases 14.49
Bonus case 14-1 Becoming Financially Secure 14.49
Bonus case 14-2 The McFarlane Companies: It’s My Money 14.51
(Video Case)
Other Teaching Tools
FOR A DESCRIPTION OF EACH OF THESE VALUABLE TEACHING TOOLS, PLEASE SEE THE PREFACE IN THIS MANUAL.
Student Learning Tools
Student Online Learning Center (OLC) diasbusiness
Student Study Guide
Spanish Translation Glossary (OLC)
Spanish Translation Quizzes (OLC)
Instructor Teaching Tools
Annotated Instructor’s Resource Manual
IRCD (Instructor’s Resource Manual, Test Bank, PowerPoints, EZtest)
Asset Map
Online Learning Center (OLC) diasbusiness
PageOut
PowerPoint Presentations (on IRCD and OLC)
Test Bank
Business Videos on DVD
Enhanced Cartridge option
Spanish Translation Glossary (OLC)
video NOTES
TWENTY VIDEOS ARE AVAILABLE, GEARED TO INDIVIDUAL CHAPTER TOPICS. THE TEACHING NOTES FOR THESE VIDEOS ARE ALSO INCLUDED IN THE VIDEO NOTES SECTION OF THIS INSTRUCTOR’S RESOURCE MANUAL, BEGINNING ON PAGE V.1.
Video 14: “The McFarlane Companies: It’s My Money”
This video follows Todd McFarlane’s journey to success as an entrepreneur. The McFarlane Company is one of the most successful toy companies in the world. The video discusses the methods used by McFarlane to finance expansion.
(Bonus Case 14-0, “The McFarlane Companies: It’s My Money “on page 14.51 of this manual relates to this video.)
BRIEF CHAPTER OUTLINE AND LEARNING GOALS
CHAPTER 14
Personal Finance
I. Introduction to Personal Finance
II. WHY PLAN PERSONAL FINANCES?
LEARNING OBJECTIVE 1
Describe the six steps to successful financial management.
A. Steps to Controlling Your Assets
1. Step 1: Take an Inventory of Your Financial Assets
2. Step 2: Keep Track of All Your Expenses
3. Step 3: Prepare a Budget
4. Step 4: Pay Off Your Debts
5. Step 5: Start a Savings Plan
6. Step 6: Borrow Money Only to Buy Assets That Have the Potential to Increase in Value or Generate Income
III. Managing Credit and Building a FInancial Base
LEARNING OBJECTIVE 2
Explain strategies for building a financial base.
A. Real Estate: A Relatively Secure Investment
B. Where to Put Savings
C. Learning to Manage Credit
IV. Buying INsurance
LEARNING OBJECTIVE 3
Define the different types of insurance and how they can protect your financial base.
A. Auto Insurance
B. Life Insurance
C. Health Insurance
D. Homeowner’s or Renter’s Insurance
V. Planning for Retirement
LEARNING OBJECTIVE 4
Describe strategies for effective retirement planning .
A. Social Security
B. Individual Retirement Accounts (IRAs)
C. 401(k) Plans
D. Keogh Plans
E. Financial Planners
F. Estate Planning
VI. SUMMARY
LECTURE OUTLINE AND LECTURE NOTES
CHAPTER OPENING PROFILE
THE FORBES 400 (TEXT PAGES 450-451)
The collective net worth of the nation’s richest individuals is $1.54 trillion. Thomas Stanley and William Danko co-authored a study of these individuals, The Millionaire Next Door: The Surprising Secrets of America’s Wealthy. They found that the majority of millionaires are entrepreneurs who own one or more small businesses. Self-employed people are four times as likely to be millionaires as people who worked for a paycheck. Stanley and Danko also found that these individuals became millionaires because they saved their money, owned modest homes, and bought used cars.
|Lecture outline lecture notes |
| I. Introduction to Personal FInance |PowerPoint 14-1 |
|A. To become rich, you need to get an education, work hard, save your money, and make purchases |Chapter Title |
|carefully. |(Refers to text page 450) |
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| |PowerPoint 14-2 |
| |Learning Objectives |
| |(Refers to text page 451) |
| II. Why Plan Personal Finances? |Lecture link 14-1 |
|A. The secret to success in a capitalist country is to have capital. |Millionaire Women Next Door |
|1. Money management is not easy. |Thomas J. Stanley and William D. |
|2. You have to earn the money, then save, spend, and invest it wisely. |Danko, the authors of the book, The |
|3. Financial planning begins with making money. |Millionaire Next Door, undertook a |
|a. The first step is to find and keep a good job. |three-year study of wealthy women with|
|b. Having a good education is one of the best assets in finding a well-paying job. |some interesting findings. (See |
|4. Lifetime income: |complete lecture link on page 14.28 of|
|a. For people with no high school degree: $630,000 |this manual.) |
|b. With a bachelor’s degree: $1,667,700 | |
|5. Unless you save and invest, you could reach retirement with little money. | |
|6. Less than 10% of the U.S. population has accumulated enough money by retirement age to live | |
|comfortably. |PowerPoint 14-3 |
|a. Getting rich means savings and investing properly. |Why Plan Personal Finances? (Refers to|
|b. Less than half of all households have a retirement account. |text pages 452-453) |
|B. Steps to Controlling Your Assets | |
|Learning objective 1 | |
|DESCRIBE THE SIX STEPS TO SUCCESSFUL FINANCIAL MANAGEMENT. (TEXT PAGES 453-458) | |
|1. The key to saving is to make more than you spend. | |
|2. Step 1: Take an inventory of your financial assets | |
|a. First, develop a balance sheet for yourself. | |
|b. A balance sheet starts with the formula: | |
|Assets - Liabilities = Owners’ Equity | |
|c. Assets include anything you own, and should be evaluated based on their current value, not |Bonus Case 14-1 |
|purchase price. |Becoming Financially |
|d. If the value of your liabilities exceeds the value of your assets, you need more financial |Secure |
|discipline in your life. |This case focuses on a married couple |
|3. Step 2: Keep track of all your expenses |who have used the money management |
|a. If you often run out of cash, write down every single penny you spend each day. |concepts discussed in this chapter to |
|b. The only way to trace where the money goes is to keep track of what you spend by keeping a |become financially secure. (See |
|journal. |complete case, discussion questions, |
|c. Develop categories for expenditures, based on what is important to you. |and suggested answers on page 14.49 of|
|d. You need to monitor the “miscellaneous” category, which can add up quickly. |this manual.) |
|4. Step 3: Prepare a budget | |
|a. Your personal budget (revenue and expenses) is your financial plan—you will have to make choices | |
|on how to allocate your resources. | |
|b. What you spend now reduces what you can save later. | |
|c. Running a household is similar to running a small business—it takes careful record keeping, | |
|budgeting, control, and the need to borrow funds. | |
|5. Step 4: Pay off your debts | |
|a. Use any extra money to pay off your debts. | |
|b. Start with the debts that carry the highest interest rates. | |
|c. The savings rate in the U.S. is at an all-time low. | |
|d. Americans are avoiding saving any money and are also getting into debt. | |
|6. Step 5: Start a savings plan | |
|a. Each month save some for large purchases in a separate account. | |
|b. Accumulating savings for a significant down payment can reduce loan financial charges and lower | |
|your interest rate. | |
|c. The best way to save money is to pay yourself first—take money out of your paycheck for savings, | |
|and then plan what to do with the rest. |PowerPoint 14-4 |
|7. Step 6: Borrow money only to buy assets that have the potential to increase in value or generate |Steps to Controlling Your Assets |
|income. |(Refers to text pages 453-455) |
|a. Don’t borrow for ordinary expenses. | |
|b. Ideally, you should save six months of earnings for contingency purposes in highly liquid | |
|accounts. | |
|c. You should only borrow for very unexpected expenses. | |
|d. Instead, you can try to produce more income. |TEXT REFERENCE |
|e. However, borrowing money for education expenses or to purchase a home is a good type of borrowing.|Real World Business Apps |
|f. Borrowing money to buy a car may be necessary, but it is a bad investment because cars depreciate |Margie Keen is working or earning her |
|in value. |Associates’ degree in business. She is|
|8. Never charge more on a credit card than you can pay off at the end of the month. |worried that even after she finishes |
|a. The only way to prevent yourself from overspending is by resisting the urge to spend. |school, she won’t have enough money to|
|b. The key is to cut down on wants and focus only on needs. |pay for her kids’ education and her |
|SELF Check Questions (Text page 458) |retirement. (Box in text on page 453) |
|What is the role education plays in your lifetime income? | |
|Write down the six steps to controlling your assets. Which ones are you good at? Which may need | |
|improvement? | |
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| |critical thinking |
| |exercise 14-1 |
| |Preparing a Personal |
| |Balance Sheet |
| |This exercise asks students to |
| |calculate the assets, liabilities, and|
| |owners’ equity for a couple. (See |
| |complete exercise on page 14.40 of |
| |this manual.) |
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| |PowerPoint 14-5 |
| |Steps to Controlling Your Assets |
| |(Refers to text pages 456-458) |
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| |critical thinking |
| |exercise 14-2 |
| |Developing a Spending Plan |
| |This exercise asks students to develop|
| |a monthly budget and judge the impact |
| |of an increase in monthly rent. (See |
| |complete exercise on page 14.45 of |
| |this manual.) |
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| |lecture link 14-2 |
| |Preventing Identity Theft |
| |How to reduce identity theft and what |
| |to do when it happens. (See complete |
| |lecture link on page 14.29 of this |
| |manual.) |
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| |TEXT FIGURE 14.1 |
| |Possible Cost-Saving Choices (Box in |
| |text on page 459) |
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| |TEXT FIGURE 14.2 |
| |How Money Grows (Box in text on page |
| |456) |
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| |TEXT FIGURE 14.3 |
| |How Money Grows with Monthly Deposits |
| |(Box in text on page 457) |
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| |FIGURE 14.4 |
| |Who says College Doesn’t Pay? (Box in |
| |text on page 457) |
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| |bonus internet |
| |exercise 14-1 |
| |Finding the Best Car Loan |
| |This Internet exercise asks students |
| |to use online financial sites to find |
| |the latest interest rates for car |
| |loans and calculate the monthly |
| |payment. (See complete exercise on |
| |page 14.36 of this manual.) |
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| III. Managing Credit and BUilding a Financial Base | |
|Learning objective 2 |PowerPoint 14-6 |
|EXPLAIN STRATEGIES FOR BUILDING A FINANCIAL BASE. (TEXT PAGES 458-464) |Managing Credit and Building a |
|A. Accumulating capital takes discipline and careful planning. |Financial Base |
|1. Savings can help you to become an entrepreneur, one of the fastest ways to wealth. |(Refers to text pages 458-461) |
|2. A capital-generating strategy may require a frugal life style. | |
|3. Couples need to discuss financial goals to reduce future conflict. | |
|4. Ideally, the couple should live on one income and save the other. | |
|5. The first investment might be a low-priced home. | |
|6. Through the years, homeownership has been a wise investment. | |
|B. Real Estate: A Relatively Secure Investment | |
|1. Home ownership is a good investment. | |
|a. It is the only investment that you can live in. | |
|b. The payments are also relatively fixed. | |
|c. Paying for a home is a good way of forcing yourself to save. | |
|d. As capital accumulates, people can sell their first home and then buy different homes or purchase | |
|investment properties. | |
|2. The ownership-vs.-rental analysis also applies to other large purchases. | |
|3. Tax deduction and home ownership | |
|a. Interest on home mortgage payments is tax-deductible, as are real estate taxes. | |
|b. Almost all of the mortgage payments in the first few years goes toward tax-deductible interest. | |
|4. Amortization is the gradual elimination of a liability. | |
|C. Where to Put Savings | |
|1. One of the worst places to keep your long-term investments is in a bank or savings and loan, even | |
|online banks. | |
|2. However, it is important to have about six months of savings in the bank for emergencies. | |
|3. One of the best places to invest over time has been the stock market. | |
|4. The stock market will rise and fall, but over time has been a good investment. | |
|5. Times of financial crisis may be the time to invest. | |
|a. The greater the risk, the greater the return. | |
|b. Low stock prices may be an opportunity to invest in the stock market. | |
|c. The average investor buys when the market is high and sells when prices are low. | |
|d. The CONTRARIAN approach, purchasing stock when others are selling, lets you invest in the stock | |
|market when stocks are low. | |
|6. Bonds have traditionally lagged behind stock as a long-term investment. |TEXT FIGURE 14.5 |
|D. Learning to Manage Credit |Types of Home Mortgages (Box in text |
|1. The finance charges on credit cards (plastic) are 12-20% annually. |on page 460) |
|a. Credit card purchases are much more expensive than those paid in cash. | |
|b. It is good financial management to pay on time and save the money. | |
|2. Even if they are rarely used, having credit cards is important. | |
|a. Some merchants require credit cards as a form of identification. |TEXT FIGURE 14.6 |
|b. Credit cards help keep track of purchases. |How Much House Can You Afford? (Box in|
|c. It is easier to write one check at the end of the month than to carry cash. |text on page 460) |
|d. Credit cards are safer than cash–you can cancel a stolen credit card. | |
|e. Using a credit card is more convenient than cash or checks. | |
|3. If you do use a credit card, pay the balance in full each month during the period when no interest| |
|is charged. | |
|4. Choose a card, like Discover, that pays you cash back or gives you purchase credits or frequent |bonus internet |
|flier miles. |exercise 14-2 |
|a. The value of these givebacks can be from 1-5%. |Choosing the Right Mortgage Loan |
|b. Some cards charge an annual fee–others do not. |How much would the monthly payment be |
|5. The dangers of credit cards are: |to purchase a $95,000 house? It |
|a. You may buy goods and services you normally would not buy. |depends on the interest rate, type of |
|b. You can pile up more than you can repay. |loan, and down payment. (See complete |
|c. If you have trouble sticking to a budget, it may be better not to have a credit card at all. |exercise on page 14.38 of this |
|d. Credit cards are convenient, but they can be a financial disaster if you don’ have fiscal |manual.) |
|restraint. | |
|e. More than half of the debtors seeking help at the National Consumer Counseling Service are between| |
|18 and 32 years of age. |TEXT FIGURE 14.7 |
|E. Credit Reports |Sample Amortization Schedule (Box in |
|1. Every person should get a credit report at least once a year. |text on page 461) |
|2. An amendment to the Fair Credit Reporting Act requires these credit companies to provide credit | |
|reports at no cost, once a year. | |
|3. Information on a credit report includes: | |
|a. The names of the companies that have checked your credit score; | |
|b. The names of the companies to whom you owe money; | |
|c. A FICO score, a credit score assigned by the three major credit reporting bureaus. | |
|4. FICO is an acronym for Fair Isaac Corporation, a company that provides the most well-known credit |PowerPoint 14-7 |
|model in the U.S. |Where to Put Savings |
|5. The FICO score—the information that predicts how likely you are to default on a loan—determines |(Refers to text pages 461-463) |
|how much interest you pay. | |
|SELF Check Questions (Text page 465) | |
|Why is investing in real estate a good way to invest? | |
|What are the advantages to staying out of credit card debt? What are the short-term payoffs? | |
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| |Bonus Case 14-2 |
| |The McFarlane Companies: It’s My Money|
| |(Video Case) |
| |Todd McFarlane is an entrepreneur who |
| |has used his own money to expand the |
| |business, instead of borrowing or |
| |issuing stock. (See complete case, |
| |discussion questions, and suggested |
| |answers on page 14.51 of this manual.)|
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| |TEXT REFERENCE |
| |Ethical Challenge: Credit Card Offers |
| |(Box in text on page 464) |
| |Credit card companies are targeting |
| |college students for free credit card |
| |offers. If your job is to urge |
| |students to sign up for credit they |
| |can’t handle, what would you do? |
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| |PowerPoint 14-8 |
| |Credit Reports (Refers to text pages |
| |463-464) |
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| |lecture link 14-3 |
| |Discredit Report |
| |Maybe you’ve never seen your credit |
| |report, but dozens of strangers have. |
| |(See complete lecture link on page |
| |14.29 of this manual.) |
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| |lecture link 14-4 |
| |Know Your Credit Score |
| |Your credit score determines the |
| |interest rate you are changed for |
| |credit. This Lecture Link gives some |
| |practical tips for improving your |
| |score. (See complete lecture link on |
| |page 14.33 of this manual.) |
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| IV. Buying Insurance | |
|Learning objective 3 |PowerPoint 14-9 |
|DEFINE THE DIFFERENT TYPES OF INSURANCE AND HOW THEY CAN PROTECT YOUR FINANCIAL BASE. (TEXT PAGES |Buying Insurance |
|465-469) |(Refers to text pages 465-467) |
|A. Purchasing insurance helps deal with the financial havoc of unexpected losses. | |
|1. INSURANCE is a written contract between the party being insured and the insurer where the | |
|financial responsibility for losses transfers to the insurer up to a specified limit. | |
|B. Auto Insurance | |
|1. Most states require auto insurance. | |
|2. Liability insurance means that if you hit someone else with your car, your insurance would pay for| |
|the repair to the other vehicle, not your vehicle. | |
|3. Full coverage means the insurance would pay for both your car and the other person’s car. | |
|4. Uninsured motorist coverage pays for damages to your car if you are hit by someone who does not | |
|have insurance. | |
|C. Life Insurance |TEXT FIGURE 14.8 |
|1. The death of one spouse can mean a sudden drop in income for the survivor. |Reasons for Buying Insurance (Box in |
|2. To provide protection from the loss of a spouse or business partner, you should buy life |text on page 465) |
|insurance. | |
|3. TERM INSURANCE is pure insurance protection with no savings feature for a given number of years | |
|that typically costs less the younger you buy it. | |
|a. The costs increase as your age does. | |
|b. With term insurance, the price is fixed for the term of the policy. | |
|c. Before buying, check out the insurance company through a rating service. | |
|4. Calculating how much insurance you need is complicated. | |
|5. WHOLE LIFE INSURANCE is life insurance where some part of the money you pay goes toward pure | |
|insurance and another part goes toward savings, so you are buying both insurance and a savings plan. | |
|a. This type may be right for people who have trouble saving. | |
|b. A universal life policy is a permanent insurance plan that allows flexibility in your insurance | |
|and savings amounts. | |
|6. VARIABLE LIFE INSURANCE is form of insurance that invests the cash value of the policy in stocks | |
|or higher-yielding securities; it is vulnerable to stock market dips. | |
|7. An ANNUITY is a contract to make regular payments to a person for life or for a fixed period. | |
|a. You are guaranteed to have an income until you die. | |
|b. Fixed annuities are investments that pay the policyholder a specified interest rate. | |
|c. Variable annuities provide investment choices identical to mutual funds; they are becoming more | |
|popular. | |
|d. Variable annuities are more risky–be careful choosing the insurer. | |
|8. Before buying any insurance, it is wise to consult a financial adviser. | |
|D. Health Insurance | |
|1. Individuals need to consider protecting themselves from losses due to health problems. | |
|a. Many have health insurance coverage through their employer. | |
|b. If not, you can buy insurance from a health insurance provider, a health maintenance organization | |
|(HMO), or a preferred provider organization (PPO). | |
|2. Deductibles and co-insurance | |
|a. Some insurance requires you to meet a deductible, the amount that must be spent on health care | |
|before insurance companies will cover the remaining expenses. | |
|b. A co-payment is an amount paid when medical services are rendered. |TEXT REFERENCE |
|c. Another consideration is whether or not doctors will accept your health plan. |Study Skills: Keep a |
|3. It is financially dangerous not to have health insurance. |Journal |
|a. You should also have disability insurance because the chances of becoming disabled at an early age|(Box in text on page 467) |
|are higher than your chances of dying from an accident. |An additional exercise and discussion |
|b. Disability insurance is insurance that pays part of the cost of a long-term sickness or an |is on page 14.27 of this manual. |
|accident. | |
|E. Homeowner’s or Renter’s Insurance | |
|1. As you accumulate possessions, you need insurance to protect against their loss. | |
|2. Apartment insurance or homeowners insurance covers loss of your possessions. | |
|a. It is best to get guaranteed replacement cost insurance, which means the insurance company will | |
|give you whatever it costs to buy things new. | |
|b. Another option is to buy insurance that covers only the depreciated cost of the items. | |
|3. Most policies do not cover expensive items, such as jewelry and silver. | |
|4. You need to buy a rider, supplemental insurance; this also means an amendment to a contract. | |
|SELF Check Questions (Text page 469) | |
|What types of insurance should you consider purchasing now? What insurance might you need in the | |
|future? | |
|What is the difference between a variable life insurance policy and a term policy? | |
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| |PowerPoint 14-10 |
| |Buying Insurance |
| |(Refers to text pages 467-469) |
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| |lecture link 14-5 |
| |Flood Insurance: A Good Investment |
| |A federal program exists to provide |
| |low-cost flood insurance, but few |
| |vulnerable homeowners use it. (See |
| |complete lecture link on page 14.34 of|
| |this manual.) |
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| V. Planning for Retirement | |
|Learning objective 4 | |
|DESCRIBE STRATEGIES FOR EFFECTIVE RETIREMENT PLANNING. (TEXT PAGES 469-477) | |
|A. Successful financial planning requires long-range planning, including retirement. | |
|B. Social Security | |
|1. SOCIAL SECURITY is the common name for the Old-Age, Survivors, and Disability Insurance program | |
|established by the Social Security Act of 1935. | |
|2. By the time students retire, there will huge changes in the Social Security system. | |
|3. Part of the system may also be made private. | |
|4. The number of people retiring and living longer is increasing while the number of workers paying | |
|into the fund is declining. | |
|5. The result is likely to be cuts in benefits, later retirement age, or higher Social Security |PowerPoint 14-11 |
|taxes. |Planning for Retirement |
|6. Don’t count on Social Security to provide you with all your funds for retirement–save funds now. |(Refers to text pages 469-473) |
|C. Individual Retirement Accounts (IRAs) | |
|1. An INDIVIDUAL RETIREMENT ACCOUNT (IRA) allows a person to save a percentage of income tax-free. | |
|a. A traditional IRA allows people who qualify to deduct from their reported income the money they | |
|put into an account. | |
|b. Tax-deferred contributions are retirement account deposits for which you pay no current taxes, but| |
|the earnings gained are taxed as regular income when they are withdrawn at retirement. | |
|c. A traditional IRA is a good deal for an investor because the invested money is not taxed. | |
|2. The earlier you start saving the better, because your money has the chance to double and double | |
|again. | |
|a. Saving the maximum IRA contribution at 11% interest will yield $1 million in 35 years. | |
|b. The actual rate of return depends on the type of investments you choose and can vary widely over | |
|time. | |
|c. The earlier you start, the faster you will accumulate retirement funds. | |
|3. Savings basics: | |
|a. Future value is the value of an investment at some future point in time. | |
|b. Present value is the worth of an investment right now. | |
|4. A ROTH IRA is an investment that does not get up-front deductions on taxes, but the earnings grow |lecture link 14-6 |
|tax-free and are tax-free when they are withdrawn. |How Much to Save for Retirement? |
|a. Traditional IRAs offer tax savings when they are deposited. |Most people have only a vague idea of |
|b. Roth IRAs offer tax savings when they are withdrawn. |how much they need to save for |
|5. You cannot take the money out of an IRA until you are 59½ years old without paying a 10% penalty |retirement. The bad news? It could be |
|and paying taxes on the income. |up to 12 times your salary. (See |
|a. You cannot tap the fund for impulse purchases. |complete lecture link on page 14.35 of|
|b. All IRAs are different, and the IRS rules change often. |this manual.) |
|6. A wide range of IRA investment choices is available. | |
|a. Banks, savings and loan, credit unions, and insurance companies all have IRA savings plans. | |
|b. If you can accept more risk, put your IRA funds into stocks, bonds, mutual funds, or precious | |
|metals. | |
|c. Mutual funds have multiple options and allow you to switch from fund to fund. | |
|7. Opening an IRA account may be one of the wisest investments you make. | |
|D. 401(k) Plans | |
|1. A 401(k) plan is a saving plan that allows you to deposit pretax dollars and whose earnings | |
|compound tax free until withdrawal, when the money is taxed at ordinary income tax rates. | |
|a. 401(k) plans now account for 49% of America’s private pension savings. | |
|b. Only 72% of eligible employees make any contribution–a huge mistake. | |
|2. 401(k) plans have three benefits: | |
|a. The money you put in reduces your present taxable income. | |
|b. Tax is deferred on the earnings. | |
|c. Employers often match part of your deposit. | |
|3. More than 80% of 401(k) plans match your contribution–often 50¢ on a dollar. | |
|4. You should take advantage of your 401(k) by depositing at least as much as your employer matches. | |
|5. You can usually select how the money is invested (stocks, bonds, and real estate). | |
|a. Don’t invest all your money in the company where you work–it could collapse as Enron did. | |
|b. As with any investment, it is best to diversify your 401(k) funds. | |
|E. Keogh Plans | |
|1. There are retirement plans for small-business people who do not have the benefit of a corporate | |
|retirement system. | |
|2. A Keogh plan is similar to an IRA but designed for entrepreneurs with higher maximum | |
|contributions. | |
|3. The maximum amount you can invest in Keogh plans, $40,000 per year, is higher than for an IRA. | |
|4. Like IRAs, Keogh funds are not taxed until withdrawn, nor are the returns the funds earn. | |
|5. As with IRAs, there is a 10% penalty for early withdrawal. | |
|F. Financial Planners | |
|1. Financial planners are people who assist in developing a comprehensive program that covers | |
|investments, taxes, insurance, and other financial matters. | |
|2. Many people claim to be financial planners; find one who is a Certified Financial Planner (CFP) a | |
|licensed person who manages investments. | |
|3. One-stop financial centers, or financial supermarkets, provide a variety of financial services in | |
|one place. | |
|4. Most financial planners begin with life insurance, usually term insurance, and add health | |
|insurance plans. | |
|5. Financial planning covers all aspects of investing, all the way to retirement and death. | |
|G. Estate Planning | |
|1. The first step is to select a guardian for your minor children, someone with a genuine concern for| |
|your children. | |
|a. You should leave sufficient resources to raise your children, often through life insurance. | |
|b. Choose a contingent guardian in case the first choice is unable to perform the functions. | |
|2. The second step is to prepare a will. | |
|a. A will is a document that names the guardian for your children, states how you want your assets | |
|distributed, and names the executor for your estate. |TEXT FIGURE 14.9 |
|b. The executor is a person who assembles and values your estate, files income and other taxes, and |Traditional Versus Roth IRAs (Box in |
|distributes assets. |text on page 472) |
|3. A third step is to prepare a durable power of attorney. | |
|a. This power of attorney is a contract that gives signing power from one person to another to make | |
|decisions. | |
|b. A durable power of attorney for health care delegates power to make health decisions for you. | |
|4. A financial planner can help you do the planning needed to preserve and protect your investments | |
|and your children and spouse. | |
|5. There are many paths to wealth, but the most common ones are entrepreneurship and wise money | |
|management. | |
|SELF Check Questions (Text page 477) | |
|What is the difference between a Roth and a traditional IRA? | |
|What is a 401(k) plan and why is it a good idea to participate in one? | |
|What tasks do financial planners perform? | |
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| |401(k) Plans (Refers to text pages |
| |473-474) |
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| |TEXT REFERENCE |
| |Career Spotlight: So, You Want to Be …|
| |Financially Secure for Your Future |
| |(Box in text on page 476) |
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| |TEXT REFERENCE |
| |Career Development: |
| |Winning Résumés … It’s All about You! |
| |(Box in text on page 474) |
| |An additional exercise and discussion |
| |is available on page 14.25 of this |
| |manual. |
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| |TEXT REFERENCE |
| |Thinking Critically: |
| |Credit Card Debt |
| |Students today use only 42% of their |
| |purchases. Over 60% of college seniors|
| |have their own credit cards. But |
| |college students are also three times |
| |as likely to be delinquent on their |
| |credit cards. (Box in text on page |
| |475) |
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| |PowerPoint 14-13 |
| |Financial Planners |
| |(Refers to text pages 474-478) |
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| |TEXT REFERENCE |
| |Career Spotlight: So, You Want to Be …|
| |Financially Secure for Your Future. |
| |(Box in text on page 476) |
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| |TEXT REFERENCE |
| |Real World Business Apps |
| |Margie Keen and her partner have |
| |decided to cut down on expenses and |
| |invest in a traditional IRA. She has |
| |also begun developing budgets and |
| |spending scenarios for when she |
| |finishes school. (Box in text on page |
| |477) |
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| VI. SUMMARY | |
career and study skills notes
Career Development Box:
WRITING RÉSUMÉS … IT’S ALL ABOUT YOU! (TEXT PAGE 474)
Instructor’s Notes for Text Box Fourteen:(Objectives to consider and implement to increase students’ knowledge, usage, and understanding of the concepts).
Have you analyzed the POTENTIAL of your career, considering the overall skills necessary to contribute to a job/company as you see below? This analysis is important to both you and the company who may hire you. Your ability to put this into some usable format is important and something you will need to become experienced at doing. Let’s look more at this concept.
Student Exercises:
1. IT IS IMPORTANT TO HAVE STUDENTS DO AN HONEST ASSESSMENT OF THEIR SKILLS AND KNOWLEDGE; AND IT IS ALSO IMPORTANT FOR THEM TO KNOW HOW TO COMMUNICATE THIS INFORMATION TO A POTENTIAL EMPLOYER. A WELL-CRAFTED RÉSUMÉ IS THE BEST WAY TO CATCH THE EYE OF A POTENTIAL EMPLOYER. HAVE STUDENTS LOOK AT A “SKILLS” LIST THAT MIGHT HELP DEFINE THE STRENGTHS THEY MAY POSSESS. HAVE THE STUDENTS CHOOSE SKILLS WHICH THEY FEEL THEY HAVE; HAVE THEM EXPAND UPON WHY THEY FEEL THESE SKILLS ARE THEIR BEST. FROM THE FOLLOWING LIST, HAVE EACH STUDENT PICK AT LEAST THREE SKILLS AS THEIR PRIMARY STRENGTHS, FOLLOWED BY THREE MORE THAT WOULD BE SECONDARY STRENGTHS. THIS EXERCISE WILL HELP THEM REALLY LOOK AT ALL THE WAYS TO DESCRIBE THEMSELVES WITH AN EMPHASIS ON KNOWING THEIR REAL STRENGTHS RATHER THAN ASSUMING THEY ARE GOOD IN ALL AREAS.
What skills describe you?
Leadership skills Management skills
Team building skills Problem solving skills
Analytical skills Planning skills
Marketing skills Research skills
Technology skills Hands on skills
2. Break down the elements or ingredients of a basic résumé. Show examples of several résumés and describe the various ways they are written and constructed. Discuss the good elements of the résumé samples and the mistakes that are also made. Draw some conclusions about what you think constitutes a good résumé and summarize this with the class. Finally, let students bring in samples of their own résumés and help them analyze the good elements of their own work and point out where they can make improvements.
3. Have students do research on résumé writing. Have them go to various websites to get tips, samples, and expert opinions on what constitutes good résumé writing. Use some of the following websites to help in this exercise:
resumes
hotjobs.resumes
letters.html
Have students bring in their information and have a discussion about what they found. Ask for what was new and interesting about their research; find out what they think they have learned that is “new” information since doing this extra research. Emphasize the value of research and what it can do to make them better prepared and more knowledgeable about subjects of interest.
Study Skills Box:
Keep a Journal! (Text page 467)
Instructor’s Notes for Text Box Fourteen:(Objectives to consider and implement to increase students’ knowledge, usage, and understanding of the concepts).
Introduction of journal use for students can be life changing. Getting students to record their activities can be eye opening in many ways. Journal use can help students manage their time, plan their goals, and manage their feelings. Journaling can become a lifelong habit. Many adults who keep journals have been keeping them since their youth.
Student Exercises:
1. INTRODUCE SAMPLES OF JOURNALS THAT STUDENTS CAN STUDENTS CAN USE. DISCUSS THE FORMATTING OPTIONS THEY MIGHT CONSIDER FOR BEST RESULTS. MAKE SURE STUDENTS ARE KEEPING A LOG OF WEEKLY ASSIGNMENTS AND A PLACE FOR LARGER PROJECTS. ASK THEM TO GAUGE THEIR PROGRESS INCLUDING SUCCESSES AND SETBACKS AND ASK THEM TO ANALYZE WHY EACH OUTCOME OCCURRED. ASK THEM TO ALSO KEEP A SECTION ON PERSONAL MATTERS, SUCH AS:
a) money difficulties
b) relationship issues
c) job issues
d) life changing decisions (relocation, new career, marriage, etc.)
e) learning difficulties
f) miscellaneous other “issues” that might occur
2. Ask students to go to the internet and research the topic “keeping a journal.” Try the following websites for extensive help on how and why to keep a journal:
research/keeping_a_journal.htm
html/journal.html
node/1604
ids.od/1/a/les_journal.htm
*Allow for extensive discussion about the information students have found regarding keeping a journal and the insight they will discover in this process.
lecture links
lecture link 14-1
MILLIONAIRE WOMEN NEXT DOOR
Thomas J. Stanley and William D. Danko’s 1996 book, The Millionaire Next Door, examined today’s millionaires, who turned out to be small-business owners that drove old cars, shopped in warehouses, and pinched pennies. But years later, Stanley realized that he was getting a lot of mail from wealthy women who complained that this portrait of the millionaire didn’t fit them at all. Stanley noted that 92% of the people in the original study were men, who have different experiences and outlooks than women do. Stanley then started a new project—a three-year study of wealthy women, Millionaire Women Next Door, published in 2003.
The typical millionaire woman is 49 years old, a wife, and a mother. Her workweek averages about 49 hours doing work she enjoys. Her income—$414,000—represents 71% of her household’s income. She is college-educated and owns her own home. It is important for her to give to significant causes.
“Most millionaire women zeroed in on a skill or hobby that interests them, then stuck with it until they reaped financial rewards,” says Stanley. Research bears this out—people who enjoy what they are doing are worth 50% more than the average person their age.
Stanley found several common characteristics. Women millionaires:
1) Set goals, not limits. Most women millionaires have specific daily, weekly, monthly, and annual goals; and they believe that all their goals are possible. They also have several possible endgames planned—as opposed to men who tend to be more single-minded.
2) Sweat the small stuff. These wealthy women keep a detailed record of household expenses. Most are responsible for family financial planning and budgeting.
3) Sell themselves. Although running an antiques store or clothes boutique may seem attractive, the study found that these are among the hardest ways to make a living. Women do much better if they promote themselves as the product.
4) Don’t look back. Four out of five millionaire women say they never look back. Instead, they use experience to look forward. They believe it is up to them to turn their situations around.
5) Think long quality. Rather than going on regular payday spending sprees, women millionaires stash a percentage of their wages in a bank account. Typically, they save 12% of their income in a 401(k) or an IRA.
Stanley’s findings are echoed by findings in a 2005 British study. That study found that there were more 16 to 44-year-old women worth seven-figures than men. The BBC program “Filthy Rich and Female” claims that the number of millionaire women is on the rise, and that within twenty years, 60% of the world’s wealth will be controlled by women.[i]
lecture link 14-2
PREVENTING IDENTITY THEFT
Every day, some 27,000 Americans fall prey to identity theft—and the majority of them have never met the culprit. In about a third of those cases, crooks use the information to open new accounts in their victim’s name.
Your identity is not just your unique DNA and fingerprints. It is also your Social Security number, credit card numbers, driver’s license number, telephone calling records, date of birth, home address, phone numbers, and passwords. Armed with just your name and Social Security number, a thief can open fraudulent accounts and take over your credit rating, bank account, and credit card accounts.
How identity is stolen
Thieves often rely on hacking vulnerable computer systems to harvest information. In 2005, the credit card processing agency, CardSystems, revealed that it improperly kept information on credit-card customers for research. When hackers breached the system, over 40 million customers were exposed. In 2007, over 94 million records were compromised when thieves hacked into the wireless network for TJX, parent of TJ Maxx.
Thieves can also harvest your individual information in a number of creative ways. “Dumpster diving” involves sorting through trash bins for loan applications, credit-card documents, or anything printed with Social Security numbers. Crooks can lurk at ATM machines or phone booths and sneak a peak over your shoulder, picking off PINs, credit card numbers, and passwords. Some talented con artists have even attached data storage devices to ATM machines to steal credit and debit card numbers. “Phishing,” posing by e-mail or phone as a legitimate company and claiming that there is a problem with a customer’s account, regularly takes in gullible consumers. Finally, there is the low-tech technique of stealing credit cards, tax info, and financial correspondence by rifling through unprotected mailboxes.
How you can protect yourself
1) PLACE THE CONTENTS OF YOUR WALLET ON A PHOTOCOPY MACHINE. DO BOTH SIDES OF EACH LICENSE, CREDIT CARD, ETC. THAT WAY, IF YOUR WALLET IS STOLEN, YOU WILL KNOW WHAT YOU HAD IN YOUR WALLET AND ALL OF THE ACCOUNT NUMBERS AND PHONE NUMBERS TO CALL AND CANCEL. KEEP THE PHOTOCOPY IN A SAFE PLACE.
2) Don’t use the last four digits of your Social Security number, mom’s maiden name, birth date, or pet’s name as your password or PIN.
3) Review your bills each month for misuse; shred preapproved credit offers before throwing them away; in fact, shred every piece of trash containing your credit card number, bank account number, Social Security number, or tax information.
4) The next time you order checks, have your checks printed with only your initials (instead of first name) and last name. If someone takes your checkbook, they will not know if you sign your checks with just your initials or your first name, but your bank will know how you sign your checks.
5) Do not sign the back of your credit cards. Instead, put “PHOTO ID REQUIRED.”
6) When you are writing checks to pay on your credit card accounts, do not put the complete account number on the “For” or “Memo” line. Instead, just put the last four numbers. The credit card company knows the rest of the number. That way the full number is not available to everyone who might be handling your check as it passes through the entire check-processing channel.
7) Put your work phone number on your checks instead of your home phone. If you have a Post Office box, use that instead of your home address. If you do not have a P.O. Box, use your work address. Never have your Social Security number printed on your checks. You can add it at the checkout if it is necessary. But if you have it printed, anyone can get it.
8) Most states are now moving away from using Social Security numbers on drivers’ licenses. When you renew your license, ask about using a substitute random number.
9) Review your credit reports. The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies—Equifax, Experian, and TransUnion—to provide you with a free copy of your credit report, at your request, once every 12 months. The FTC created the free annual credit report program to make the process easier to use. You can access your credit reports through or by following the link at the FTC website (.)
What to do if your identify is stolen
1) IMMEDIATELY CANCEL YOUR CREDIT CARDS. THE KEY HERE IS HAVING THE TOLL FREE NUMBERS AND YOUR CARD NUMBERS HAND SO YOU KNOW WHOM TO CALL. KEEP THOSE WHERE YOU CAN FIND THEM. FOLLOW UP IN WRITING WITH COPIES OF SUPPORTING DOCUMENTS. CHOOSE NEW PASSWORDS FOR NEW ACCOUNTS.
2) File a police report immediately in the jurisdiction where your credit cards were stolen. This proves to credit providers that you were diligent, and this is the first step toward an investigation.
3) Call the three national credit reporting organizations immediately to place a fraud alert on your name and Social Security number. The alert means any company that checks your credit knows your information was stolen, and they have to contact you by phone to authorize new credit.
4) File a complaint with the Federal Trade Commission (), and report the fraud to the Social Security Administration (.)
5) Have a security freeze put on your credit records. Most states have authorized a new tool to stymie thieves: security-freeze laws that allow consumers to protect their credit record from predators. A freeze essentially locks up the information needed to conduct a credit check, and creditors won’t open new accounts without that check. An imposter will be unable to use your credit, and you can lift the freeze using a PIN if you decide to open new accounts. Most states make a security freeze free to identity-theft victims, and some provide it at no charge to seniors. Other consumers can pay a small fee to freeze their records.[ii]
lecture link 14-3
DISCREDIT REPORT
Maybe you’ve never seen your credit report, but dozens of strangers have. Among those who’ve looked to see how much debt you have and whether you pay your bills on time are banks and mortgage companies, credit card companies, retailers, insurance companies, maybe even a landlord or prospective employer. You should add your name to that list.
Consumer advocates strongly recommend you review your credit report at least once a year if you use a credit card or make installment payments. The incidence of identity theft is exploding. Credit reporting agencies that compile the reports have been under fire from federal and state regulators who’ve heard nightmarish stories about reports riddled with errors and consumers struggling to get them corrected.
Companies called consumer reporting agencies (CRAs), or credit bureaus, compile and sell your credit report to businesses.
Our nation’s credit reporting system includes a handful of major national reporting agencies as well as hundreds of smaller bureaus that operate in only a single state or county. Millions of bits of information are fed daily into their computers and into individual consumer credit files. Because businesses use this information to evaluate your application for credit, insurance, employment, and other purposes allowed by the Fair Credit Reporting Act (FRCRA), it is important that the information in your report be complete and accurate.
According to a survey by the Public Interest Research Group, one in four credit reports has errors serious enough to disqualify consumers from buying a home, opening a bank account, or getting a job. Of the 197 credit reports surveyed from people in 30 states, 79% had some error. Fifty-four percent of the reports included personal identifying information that was misspelled, outdated, belonged to someone else, or was otherwise incorrect. Thirty percent contained credit accounts that consumers had closed but that remained listed as open. A common error is confusion over names—somebody else’s credit woes get scrambled with your file.
Your credit report contains information about where you work and live and how you pay your bills. It also may show whether you’ve been sued or arrested or have filed for bankruptcy.
You should review your credit reports once a year, or several months before applying for a loan. Check for errors, negative data, or any suspicious activity that may signal identity theft. The government has made it easier to review your credit rating. Under the Fair and Accurate Credit Transactions Act of 2003, all consumers are entitled to free annual credit reports from the three major credit bureaus. If you find any errors, there are appeal procedures available to clear up credit report mistakes. (You can access your free credit reports through , a Website sponsored by the three credit reporting agencies.)
By staggering your credit report requests for the three companies every four months, you can view your credit status throughout the year. Report any inaccuracies to the credit reporting agency.
What’s in your credit report?
YOUR CREDIT REPORT WILL INCLUDE THE FOLLOWING BASIC INFORMATION:
Identifying information. Your name, address, phone number, and Social Security number appears on your credit report. The report may also include a list of your current and previous employers, even your previous home addresses.
Your credit history, including
• Late payments
• Outstanding debt
• Total amount of credit currently available to you
Any public records. This section includes any filings of personal bankruptcy or court judgments against you. These items remain on your credit report for seven years, except bankruptcies, which remain on your credit report for ten years.
Inquiries into your credit. Whenever you or someone else checks your credit report, it shows up in your file as an “inquiry.” There are two types of inquiries: hard and soft. Hard inquiries come mainly from lenders from whom you are seeking a loan. Lenders look at your report to see what kind of credit risk you pose. A “soft” inquiry will show up when you request a copy of your credit report or when your existing creditors routinely review your credit. These do not count against you.
In reviewing your information ask yourself questions:
• Is the identifying information correct, including middle initials, and Social Security numbers?
• Are the accounts accurate? Check the account numbers, credit limit and payment record.
• Is the information current? By law, negative information can remain in your file for seven years; bankruptcies, for 10 years.
• Are old, closed accounts included? If they’re listed as current accounts, a creditor might assume you have access to too much credit.
When negative information in your report is accurate, only the passage of time can assure its removal. Accurate negative information can generally stay on your report for seven years. There are certain exceptions:
• Information about criminal convictions may be reported without any time limitation.
• Bankruptcy information may be reported for 10 years.
• Credit information reported in response to an application for a job with a salary of more than $75,000 has no time limit.
• Credit information reported because of an application for more than $150,000 worth of credit or life insurance has no time limit.
• Information about a lawsuit or an unpaid judgment against you can be reported for seven years or until the statue of limitations runs out, whichever is longer.
Disputing a credit report error
IF YOU WISH TO DISPUTE AN ITEM ON YOUR CREDIT REPORT THAT YOU FEEL IS WRONG, YOU CAN DO SO FOR FREE. WHEN YOU CONTACT THE CREDIT REPORTING COMPANY, THEY WILL INVESTIGATE THE DISPUTE AND ISSUE YOU A REVISED CREDIT REPORT FOR FREE.
• Start a record. Every step of the way, be sure to keep good records of all your conversations and copies of each letter you send. Send all letters via certified mail and be sure to include copies of any documentation that supports your claim. Also, be sure to tell the credit bureau exactly what you want them to do.
• Inform the credit reporting agency and tell them what information you believe is inaccurate. The Federal Consumer Information Center provides a sample dispute letter (pueblo.). Within 30 days, the credit reporting agency will reinvestigate the items in question. They will forward all relevant data you provide about the dispute to the “information provider” (lender, creditor, etc.). The creditor is then required by law to investigate your complaint and report its findings. If the disputed information turns out to be inaccurate, the creditor must notify all nationwide credit reporting agencies, so they all can correct the information in our file.
• Inform the business that sent the erroneous information of your dispute. Let the creditor know in writing that you are disputing an item it put on your report. Include copies of the communication you have had with the credit bureaus.
• Get positive information put into your file. If you have accounts with creditors that don’t appear in your credit file, you can ask the credit agencies to add this information to future reports.
If your dispute results in a change to your credit report, the credit bureau will give you the written results and a free copy of your report.
But if you are unsuccessful in removing information from your credit file and reach an impasse, you always have the legal right to attach a letter of explanation to your credit file. Make sure all three credit bureaus receive the letter, as well as the business that provided the negative report. The business is obligated to include your letter in any future input to the credit bureaus.
Repairing your credit
IF YOU FIND THAT YOU HAVE LESS THAN STELLAR CREDIT, THERE ARE TWO KEY INGREDIENTS TO IMPROVING OUR CREDITWORTHINESS: TIME AND THE RESPONSIBLE USE OF CREDIT. NOTHING ELSE WILL IMPROVE YOUR CREDIT IMAGE IN THE EYES OF THE LENDING WORLD. WHEN SOMEONE TELLS YOU THEY CAN WIPE YOUR CREDIT RECORD CLEAN, THEY ARE LYING. WORSE, THEY COULD BE TELLING THE TRUTH BUT USING AN ILLEGAL METHOD TO “CLEAN” YOUR RECORD—CREATING FRAUDULENT IDENTITIES, PRODUCING FALSE DOCUMENTS, OR MAKING FALSE CLAIMS.
To heal your past credit abuses, you simply have to pay your bills on time and demonstrate responsible credit management consistently over time. Nothing else will work.[iii]
lecture link 14-4
KNOW YOUR CREDIT SCORE
Lenders have long used credit scores and reports to determine whether or not to lend you money and how much interest to charge. But other stakeholders are also interested in your credit report—auto insurers, employers, landlords, even utility companies.
A company called Fair Isaac developed the present credit scoring system in 1989 to give lenders a shortcut for judging applicants’ credit worthiness. Based on the data they collect about you from banks, credit-card companies, and public records, the three major credit bureaus calculate a so-called FICO score. Fair Isaac says its formula involves 22 pieces of data and that the final figure, from 300 to 850, is based on mathematical models that forecast behavior. (See the Lecture Link 14-3 above for details about your credit report.)
The credit score can be compared to the letter grade system familiar from childhood. It reduces the complexity of credit information and provides a quick way to separate the good credit performers from the bad. The median U.S. credit score is about 720. More than a quarter of consumers fall into the 750 to 788 score range.
You’re being judged upon five major areas:
1) Past payment history. Your payment punctuality weighs heavily (about 35%) on your credit score. The more recent your tardiness, the more points you sacrifice.
2) Amounts owed. All of the account balances are added up and compared with your credit limits. As you near your credit limits, your credit score will go down. This part of your credit makes up about 30% of your credit score.
3) Length of credit history. Fifteen percent of your credit score is determined by how long you’ve been using credit. The longer your credit history, the better your score. But don’t open up a lot of new accounts at once to establish a credit history. That will lower the “average account age” on your score.
4) Amount of new credit. Each time you apply for new credit, an inquiry shows up on your report. Red flags start waving when you take on more credit, or even just apply for new credit, in a short period of time.
5) Types of credit. These include credit cards, retail accounts, and installment loans (like car loans and mortgages). Your use, or over-use, of these has a 10% impact on your overall score. If you have had no credit, lenders will consider you a higher risk than someone who has managed credit cards responsibility.
Your credit report influences lenders and can affect your finances in significant ways. A consumer with a credit score of 730 applying for a $150,000 30-year mortgage, for example, may be charged a 5.5% interest rate. For those with a score of 620 to 684, the rate rises to about 7.4%. The 5.5% interest rate equals a monthly mortgage payment of $856. The 7.4% loan translates to $1,034 per month. (These interest rates are used as examples. The actual percent interest charged will be based on current economic conditions.)
Your credit score is not part of the free credit reports guaranteed by the Fair and Accurate Credit Transactions Act of 2003. However, for a small fee, you can purchase this information from one or all of the credit bureaus.
After reviewing your credit report, there are several steps you can take to improve your credit score.
1) Sign up for automatic bill payment. If you accidentally miss a bill payment, your credit score can drop as much as 100 points.
2) Watch the timing of your spending. If you plan to apply for a loan in the next few months, cut down on your spending and try to reduce your debt. The lower the balance, the better your credit rating.
3) Limit credit-card applications. Each time you apply for credit, a lender’s inquiry to view your report is noted, which can reduce your score.
4) Think twice before cancelling cards. The more companies you owe money to, the worse your credit score will be. But closing accounts may not improve your score. This is because you gain points if you only use a small percentage of the total credit available on your cards. Eliminating accounts can reduce that ratio.
5) Make sure credit limits are posted. When creditors don’t report your available credit, the credit scoring system may assume that those cards are maxed out no matter how much you’ve borrowed. Ask lenders to report your credit limit if it is not included.
lecture link 14-5
FLOOD INSURANCE: A GOOD INVESTMENT
After Hurricane Katrina devastated the Gulf Coast in 2005, shocked residents and business people began calling their insurance companies. Many found out—too late to do anything about it—that their losses weren’t covered by insurance.
Nature can be cruel, and disasters occur with alarming frequency. Floods are more confined and predictable that other disasters, but their scale is sometimes so huge that private insurers have been scared away. That’s why Congress created the National Flood Insurance Program four decades ago.
Since then, the federal government has made flood insurance available to property owners, filling a gap left by private carriers, which generally decline to write the coverage. The program has grown controversial over the years. Critics have argued that it encourages Americans to build on beaches, flood plains, barrier islands, and other sites that shouldn’t be built on—and wouldn’t be if the government wasn’t willing to compensate owners when such homes and vacation spots are washed away.
The insurance can be immensely valuable. Policies under the National Flood Insurance Program (NFIP) will pay up to $250,000 for residential buildings, plus another $100,000 for contents that are lost. It will also pay up to $500,000 for nonresidential buildings and $500,000 for their contents.
The premiums average around $400 a year for $100,000 of coverage—higher in very flood-prone areas. That’s very reasonable, considering the risks. Many mortgage lenders require it, at least for property located within a flood-prone area. Fannie Mae, for example, requires coverage of 80% of the replacement cost of the home, or the program limit of $250,000, whichever is less.
The federal flood insurance program has about 4.6 million policies in place, covering more than $743 billion in assets. Annual premium collections run about $2 billion. Still, the program is not as popular as you might expect. On the Mississippi Gulf coast devastated by Katrina, just one in four homes were covered. The national average is 10% to 20%. It is much higher in New Orleans, where it covers about half the homes.[iv]
lecture link 14-6
HOW MUCH TO SAVE FOR RETIREMENT?
How much do you need to save for your retirement? Most people have no idea. One group, the Retirement Solutions Foundation, says you have to put away 10 to 12 times your salary at retirement to have financial security after your working days are over. But this depends on how much you spend, how long you live, and how much you have.
As 401(k)s have taken off, the number of private-sector U.S. workers who can count on monthly checks from pension plans after retirement has dropped to 18% in 2005 from 39% in 1980, according to the Employee Benefit Research Institute. That’s why it’s critical for all of us to save enough to fund our daily lives after our paychecks disappear.
The grimmest fact, however, is that most of us are a long way away from having enough set aside for a secure retirement. As many as 35% of all workers have less than $10,000 in total savings and investments, excluding the value of their homes and any traditional pension, and 48% have less than $25,000 socked away, according to most recent assessment from the Employee Benefit Research Institute.
The numbers are worse for young workers—50% of those age 25 to 34 have less than $10,000 put aside. At least they still have time to catch up.
Only 7% of workers have more than $500,000 saved—among workers 55 and older the figure was 17%. At the other end of the spectrum, 4% of workers aged 25 to 34 had more than half a million dollars in savings.
Calculating how much you have to save for retirement can be complex. It depends on how old you are, what type of retirement plan you have, how much you have already saved, and so on. One rule of thumb that is often quoted is to save at least 10% of your salary.
If you are 25, earn $40,000 a year, and start saving 10% of your salary to earn 8% return, by age 65 you will have over $1.5 million. But if you waited until age 35, you would only have $900,000 at retirement.
There are many retirement savings calculators online that can help you calculate how much you need to save. Try or .[v]
Bonus Internet exercises[vi]
Bonus Internet Exercise 14-1
FINDING THE BEST CAR LOAN
Finding information about automobile loans is easier that ever using the Internet. Use one of the online loan calculators (example: ) to calculate the following information. Use the local rate function to find your zip code. (Sometimes the web address for a location changes. You might need to search to find the exact location mentioned.)
1. In your zip code, find the following information for a 30-month car loan.
(a) What is the highest interest rate quoted?
(b) What is the lowest interest rate quoted?
(c) Using the lowest rate quoted, calculate the monthly payment for a $20,000 car loan.
(d) What is the total amount you will repay (monthly payments x 30 months)?
2. In your zip code, find the following information for a 48-month car loan.
(a) What is the highest interest rate quoted?
(b) What is the lowest interest rate quoted?
(c) Using the lowest rate quoted, calculate the monthly payment for a $20,000 car loan.
(d) What is the total amount you will repay (monthly payments x 48 months)?
Bonus Internet Exercise 14-2 (continued)
3. IN YOUR ZIP CODE, FIND THE FOLLOWING INFORMATION FOR A 72-MONTH CAR LOAN.
(a) What is the highest interest rate quoted?
(b) What is the lowest interest rate quoted?
(c) Using the lowest rate quoted, calculate the monthly payment for a $20,000 car loan.
(d) What is the total amount you will repay (monthly payments x 72 months)?
4. Next, explore the cost of car loans in other areas of the country. Choose one of the zip codes below and find information for a 36-month car loan using the lowest interest rate quoted.
New York 10013
Chicago 60601
Los Angeles 90230
New Orleans 70130
(a) What is the interest rate for a 36-month loan?
(b) What is the monthly payment for a $20,000 36-month loan?
(c) Is this less/more/the same as the rates quoted for your zip code? What do you think are the reasons?
Bonus Internet Exercise 14-2
CHOOSING THE RIGHT MORTGAGE LOAN
What would the monthly mortgage payment be for your dream house? It is easier than ever to find this information by using one of the mortgage calculators available online. Try the website for your local bank, or use one of the national news or finance sites such as: , , . (Search for “Mortgage Calculator.”) (Sometimes the web address for a location changes. You might need to search to find the exact location mentioned.)
You have found a great little house in an older section of town. Because it needs lots of renovation, the offering price is $85,000. You have saved $5,000 to use as a down payment.
1. What would be the monthly mortgage payment for a 30-year fixed-rate loan if the interest rate is:
(a) 5.5%
(b) 7.0%
(c) 9.5%
2. What would be the monthly mortgage payment for a 15-year fixed-rate loan if the interest rate is:
(a) 5.5%
(b) 7.0%
(c) 9.5%
3. If you can only afford a monthly payment of $400, or less, what is the most expensive house you could buy (assuming 30-year fixed-rate loan) at:
(a) 5.5%
(b) 7.0%
(c) 9.5%
4. If your parents offer to lend you another $5,000 for the down payment ($10,000 total) for your $85,000 dream house, what would be the monthly mortgage payment on a 30-year fixed-rate loan if the interest rate is:
(a) 5.5%
(b) 7.0%
(c) 9.5%
5. Use the “local rate” function and enter your zip code. In your area, what is the current rate for an $85,000:
(a) 30-year fixed
(b) 15-year fixed
6. Adjustable rate mortgages (ARMs) offer a low initial rate and then recalculate (“reset”) at intervals to reflect the current market interest rates. Use the “local rate” function on the website and enter your zip code. This time choose one of the adjustable rate mortgage offers (ARM). ARM quotes give “caps,” or the maximum percentage points that can be added to your loan.
(a) What is the initial interest rate (APR) for an $85,000 ARM mortgage in your zip code?
(b) What is the estimated monthly payment?
(c) What is the maximum amount percent interest that can be added to this loan when it resets?
Critical thinking exercises
critical thinking exercise 14-1
PREPARING A PERSONAL BALANCE SHEET
Angela and Chris North are recent college graduates. They own a three-year-old car valued at $5,400, have $700 in a savings account, and $200 in their checking account. They owe $2,200 on their car loan. The Norths also have personal items valued at $1,800, plus a CD collection worth $300. They owe $4,800 on student loans and $150 on credit cards. Chris owns mutual fund shares worth $660, and Angela owns computer equipment worth $1,000.
1. Prepare a simple balance sheet for the Norths.
Assets:
Liabilities:
Net worth
Critical thinking exercise 14-1 (continued)
2. THE NORTHS DECIDE TO BUY A $5,000 MOTORCYCLE, USING $500 FROM THEIR SAVINGS ACCOUNT AS THE DOWN PAYMENT AND BORROWING THE REST FROM THE BANK. MODIFY THEIR BALANCE SHEET TO REFLECT THESE CHANGES.
Assets:
Liabilities:
Net worth
Has their net worth changed?
Critical thinking exercise 14-1 (continued)
3. INSTEAD, THE NORTHS DECIDE TO USE $200 FROM THEIR SAVINGS ACCOUNT TO BUY MORE SHARES OF THEIR MUTUAL FUND. SIX MONTHS LATER, THEIR MUTUAL FUND SHARES HAVE INCREASED IN VALUE BY $70. (ASSUME, ALBEIT UNREALISTICALLY, THAT OTHER ASSETS AND LIABILITIES REMAIN UNCHANGED.) MODIFY THEIR BALANCE SHEET TO REFLECT THESE CHANGES.
Assets:
Liabilities:
Net worth
Has their net worth changed?
NOTES ON critical thinking exercise 14-1
1. PREPARE A SIMPLE BALANCE SHEET FOR THE NORTHS.
ASSETS:
Car $5,400
Savings Account 700
Checking Account 200
Personal Items 1,800
CD Collection 300
Mutual fund shares 660
Computer equipment 1,000
TOTAL ASSETS $10,060
LIABILITIES:
Car Loan $2,200
Student Loan 4,800
Credit Cards 150
TOTAL LIABILITIES $7,150
NET WORTH:
10,060 - 7,150 = $2,910
2. The Norths decide to buy a $5,000 motorcycle, using $500 from their savings account as the down payment and borrowing the rest from the bank. Modify their balance sheet to reflect these changes. Has their net worth changed?
ASSETS:
Car $5,400
Motorcycle 5,000
Savings Account (700-500) 200
Checking Account 200
Personal Items 1,800
CD Collection 300
Mutual fund shares 660
Computer equipment 1,000
TOTAL ASSETS $14,560
LIABILITIES:
Car Loan $2,200
Motor Cycle Loan 4,500
Student Loan 4,800
Credit Cards 150
TOTAL LIABILITIES $11,650
NET WORTH:
14,560 – 11,650 = $2,910
Their net worth has not changed. Assets have been increased, but so have liabilities.
3. Instead, the Norths decide to use $200 from their savings account to buy more shares of their mutual fund. Six months later, their mutual fund shares have increased in value by $70. Modify their balance sheet to reflect these changes.
ASSETS:
Car $5,400
Savings Account (700-200) 500
Checking Account 200
Personal Items 1,800
CD Collection 300
Mutual fund shares (660 + 200 + 70) 930
Computer equipment 1,000
TOTAL ASSETS $10,130
LIABILITIES:
Car Loan $2,200
Student Loan 4,800
Credit Cards 150
TOTAL LIABILITIES $7,150
NET WORTH:
10,130 – 7,150 = $2,980
Their net worth has increased by $70.
critical thinking exercise 14-2
DEVELOPING A SPENDING PLAN
Pam Washburn earns $19,080 a year as a file clerk. She also earns $200 a month selling homemade cakes. Her monthly rent is $420, monthly groceries run $200, and monthly utility bills are about $275. Auto and renter’s insurance runs about $600 a year. Health insurance costs $210 a month. Her car payment is $315 per month. Annual medical expenses are $900, and she spends $150 a month on entertainment and recreation. Miscellaneous personal expenses run $30 a month.
1. Develop a monthly budget (income – expenses) for Pam and determine her surplus or deficit.
Income:
Expenses:
Surplus (deficit)
Critical thinking exercise 14-2 (continued)
2. HER LANDLORD HAS TOLD PAM THAT THE RENT WILL BE RAISED $50 PER MONTH BEGINNING NEXT MONTH. CAN PAM AFFORD THE SAME APARTMENT?
Income:
Expenses:
Surplus (deficit)
3. What advice would you give Pam about her finances?
NOTES ON critical thinking exercise 14-2
1. Develop a monthly budget (income – expenses) or Pam and determine her surplus or deficit.
INCOME
Salary (19,080 ÷12) $1,590
Sales Income 200
TOTAL INCOME $1,790
EXPENSES
Rent $420
Groceries 200
Utilities 275
Auto/Renters Insurance (600 ÷12) 50
Health insurance 210
Car Payment 315
Medical Expenses (900 ÷12) 75
Entertainment 150
Miscellaneous 30
TOTAL EXPENSES $1,725
SURPLUS $65
2. Her landlord has told Pam that the rent will be raised $50 per month beginning next month. Can Pam afford the same apartment?
INCOME
Salary (19,080 ÷12) $1,590
Sales Income 200
TOTAL INCOME $1,790
EXPENSES
Rent $470
Groceries 200
Utilities 275
Auto/Renters Insurance (600 ÷12) 50
Health insurance 210
Car Payment 315
Medical Expenses (900 ÷12) 75
Entertainment 150
Miscellaneous 30
TOTAL EXPENSES $1,775
SURPLUS $15
Pam could just barely afford the new rent, but it will cut her monthly surplus to only $15. For a monthly payment of $470, Pam could probably afford the mortgage for a townhouse or condominium and begin building equity.
3. What advice would you give Pam about her finances?
Pam’s budget shows no savings. Almost all of her income is being spent with nothing permanent to show for it. A savings program would be the first step in her financial planning. Next, if she is going to be staying in this location for a few years, she should look into buying her own housing. Part of her expenses may be deductible as business expenses should her cake baking business grow.
Bonus cases
Bonus case 14-1
BECOMING FINANCIALLY SECURE
Mike and Priscilla Thomas are a married couple with two incomes and no children. Their cars are both paid for. They’ve saved enough money to buy a new house without selling their old one. (Real estate is typically a sound investment.) Now they’re renting out their town house for added income. They hope to buy more rental property to use as an income producer so that they can both retire at age 50!
Priscilla runs a company called Cost Reduction Services and Associates. It advises small firms on ways to cut overhead expenses. The couple also owned a window-washing business when they were in college. Priscilla loves being in business for herself because, she says, “when you own your own business, you can work hard and you get paid for your hard work.” Mike is a pharmaceutical salesperson.
How did the Thomases get the money to start their own businesses and buy a couple of homes? They committed themselves from the beginning of their marriage to live on Mike’s income and to save Priscilla’s income. Furthermore, they decided to live frugally. The goal of early retirement was their incentive. They “lived like college kids” for five years, cutting out coupons and saving every cent they could. They don’t often go out to eat, and they rent movies for their VCR instead of going to the movie theater. Their first investment was a town house. They used the tax deductions to help offset their income.
Mike puts the maximum amount into his company’s 401(k) plan. It’s invested in a very aggressive growth fund: half U.S. stocks and half international stocks. Now that the couple is financially secure, they’re planning to have children.
discussion questions for BONUS case 14-1
1. WHAT STEPS WOULD THE AVERAGE YOUNG COUPLE HAVE TO FOLLOW TO BE LIKE MIKE AND PRISCILLA AND BECOME FINANCIALLY SECURE ALL THEIR LIVES?
2. What kind of goals could you establish to make it worthwhile to scrimp and save your money rather than spend it on today’s pleasures?
3. How much money would one person have to earn to support two people living in an apartment in your area?
4. Can you see now why money management is one of the keys to both entrepreneurship and personal financial security?
answers to discussion questions for BONUS case 14-1
1. WHAT STEPS WOULD THE AVERAGE YOUNG COUPLE HAVE TO FOLLOW TO BE LIKE MIKE AND PRISCILLA AND BECOME FINANCIALLY SECURE ALL THEIR LIVES?
They would have to agree before marriage (or soon after) to save their money, spend frugally, and agree on cost-cutting measures such as taking the bus, watching videos instead of going to the movies, carrying lunch instead of buying it, and so forth. Students may enjoy talking about their own cost-cutting measures.
2. What kind of goals could you establish to make it worthwhile to scrimp and save your money rather than spend it on today’s pleasures?
Goals might include investing in a franchise or saving money for a large trip or retirement. Students may have ideas of their own. They might include buying sound equipment, a large-screen TV, or a fancy car.
3. How much money would one person have to earn to support two people living in an apartment in your area?
The answer depends on where and how you live. It is great fun to go through a family budget and learn how much it would take to support two people. That includes rent, car expenses, furniture, clothes, entertainment, utilities, and so on. My class really enjoys this process.
4. Can you see now why money management is one of the keys to both entrepreneurship and personal financial security?
Students may or may not understand money management yet. This question enables you to bring up the topic and make a pitch for sound financial planning, budgeting, and so on.
Bonus case 14-2
THE MCFARLANE COMPANIES: IT’S MY MONEY (VIDEO CASE)
(NOTE: This case can be used with the Video on DVD for this chapter.)
Entrepreneurs tend to be an independent bunch of people, but few are as independently minded as Todd McFarlane. He started out working for others as a cartoonist and eventually started his own firm. Now he focuses more on making toys; that is, collectibles of sports personalities, musicians, movie heroes, and the like. McFarlane takes a rather casual approach to business. That doesn’t mean, however, that he is not constantly aware of his need for financing. Nor does it mean that he doesn’t know everything he needs to know about financing options.
Of course, the number one financing option is to put up your own money. The advantage of doing that is that no one can tell you what to do. And that means a lot to McFarlane. But usually your own money won’t pay for everything that you need. In that case, you have to go out to the banks and other sources to get funding. It helps to have a financial expert on board to help determine what funds are needed, to budget those funds, and to keep track of spending. Steve Peterson is that guy at McFarlane. Nonetheless, McFarlane has trained himself to be able to read the reports and keep track of everything that’s going on in the finance area. All entrepreneurs could learn from that.
McFarlane knows that it is easy to spend too much money on something—and to lose lots of money in the bargain. That means being wise in both long-term and short-term financing. Usually McFarlane stays away from investors, but that isn’t possible when funding a major project like a movie. Furthermore, when you get into ownership financing, you also lose some control over the project. Normally, McFarlane doesn’t like to lose such control, but in some cases, like making a cartoon movie, that is necessary.
One way to keep loan costs down is to be a good customer of the bank. If you pay your loans back in time, you can get lower interest rates. But McFarlane also knows the benefit of having a budget and sticking to it. That’s as true in your personal finances as it is in business. If you make $25,000, you need to spend less than $25,000. And if you make a million dollars, you have to spend less than a million dollars. It’s the same principle.
Sometimes people spend money for a passion. In McFarlane’s case, that means baseball. He once paid several million dollars for a home-run ball hit by one of the home-run leaders. The problem was that he didn’t remain the leader very long, and the ball was not worth nearly as much money. So? The publicity that McFarlane got for buying the ball—and losing millions—made up for the loss. It earned him licensing agreements with many ball clubs, and the right to make the images he sells. He expects to make millions from the investment in the long run.
So, what do you do with your money when you have millions more than you need? For McFarlane, it means giving money to the ALS Association, the one that fights Lou Gherig’s disease. Again, the publicity that McFarlane gets from investing in home-run balls attracts more donors to the cause.
So, what can we learn from this case? You learn that every entrepreneur needs to understand finance to be successful in the long run. You can be as casual as you want about business, but, when it comes to finance, you’d better know what you’re doing. And the money you make is yours to spend. You can have a good time buying what you want, but you can also make a difference in the world by helping some cause to raise money.
discussion questions for BONUS case 14-2
1. WHY DO YOU SUPPOSE A FREE THINKER LIKE MCFARLANE TRIES TO AVOID GETTING OTHER INVESTORS INVOLVED IN HIS BUSINESS? WHAT IS THE ADVANTAGE, IN THIS INSTANCE, OF DEBT FINANCING?
2. Review the opening profile, “The Forbes 400.” Does McFarlane match the profile of Stanley and Danko’s millionaires? Why or why not?
3. Do businesspeople have a special obligation to give some of their money to charity? What famous businesspeople have been in the news because of their giving? Should others follow their example?
answers to discussion questions for BONUS case 14-2
1. WHY DO YOU SUPPOSE A FREE THINKER LIKE MCFARLANE TRIES TO AVOID GETTING OTHER INVESTORS INVOLVED IN HIS BUSINESS? WHAT IS THE ADVANTAGE, IN THIS INSTANCE, OF DEBT FINANCING?
When you get investors involved in the business, they can dictate what you do and how you do it. When you get involved with debt financing, you avoid such intrusions on your decision making. McFarlane was much too independent to want people looking over his shoulder when he was making decisions.
2. Review the opening profile, “The Forbes 400.” Does McFarlane match the profile of Stanley and Danko’s millionaires? Why or why not?
Stanley and Danko’s profile of the nation’s millionaire paints a picture of self-made entrepreneurs, personally frugal and fiercely independent. McFarlane fits this profile in many ways.
3. Do businesspeople have a special obligation to give some of their money to charity? What famous businesspeople have been in the news because of their giving? Should others follow their example?
A businessperson has no more, nor no less, an obligation to support charities than anyone else. It just so happens that entrepreneurs tend to have more money than others and are often very generous, as you have seen with Bill Gates and Warren Buffett. Everyone should be generous with others if they can afford to be. Businesspeople are no exception.
Endnotes
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[i] Sources: Dana Hudepohl, “Could You Ever Be a Millionaire? More and More Women Are Ending Up With Fat Bank Accounts,” Cosmopolitan, December 1, 2004 and Alexa Baracaia, “Money, Money, Money, It’s A Rich Woman’s World,” The Evening Standard, January 20, 2006
[ii] Sources: “Laws Have a Chilling Effect on Identity Theft,” Consumer Reports, August 2007; “CR Investigates: Your Privacy for Sale,” Consumer Reports, June 2006; and Identity Theft Center, , February 14, 2007.
[iii] Sources: “One in Four Credit Reports Contain Serious Mistakes,” The Daily Leader, June 20, 2004; Dayana Yochim, “Anatomy of a Credit Report,” The Motley Fool, ; and
[iv] Sources: Albert B. Crenshaw, “Under-Bought’ Flood Insurance Proves Its Value,” The Washington Post, September 4, 2005; Jeff Gelles, “Buying National Flood Insurance,” The Philadelphia Inquirer, July 3, 2006; and Becky Yerak, “Plaintiffs Lose on Katrina: Policy Excludes Water Damage, Judge Rules,” Chicago Tribune, August 16, 2006.
[v] Martha M. Hamilton, “It Might Take 10 to 12 Times Salary for Retirement,” , January 13, 2008; Walter Updegrave, “Retirement: How Much to Save,” , January 8, 2007; ; and
[vi] The Internet is a dynamic, changing information source. Web links noted in this manual were checked at the time of publication, but content may change over time. Please review the website before recommending it to your students.
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