COURSE: - Quia



|COURSE |Personal Finance 8726 |UNIT: D |Managing and Protecting Resources |

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|ESSENTIAL STANDARD: |8.00 |C3 |11% |Apply procedures for managing personal finances. |

|OBJECTIVE: |8.01 |B2 |4% |Understand options for saving and investing. |

|ESSENTIAL QUESTIONS: |

|How are saving and investing similar, and how are they different? |

|Why do some people find it so difficult to save and invest? |

|What “rules” can help build smart saving and investing habits? |

|What factors should be considered when selecting saving and investing options? |

|UNPACKED CONTENT |

|Saving and investing |

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|Saving |

|Investing |

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|Definition |

|Saving is setting aside present income for future use. |

|Savings is the portion of income not spent on consumption. |

|Investing is purchasing assets that earn interest over time. |

|Investments are assets purchased with the goal of increasing income. |

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|Primary purpose |

|To make money available for future needs |

|To make a profit over time |

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|Reasons for saving and investing |

|To prepare for emergencies * To pay recurring expenses |

|To prepare for major purchases * To prepare for future purchases |

|To achieve financial goals * To prepare for retirement |

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|Interest earnings |

|A bonus or side-benefit |

|The main focus |

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|Return |

|Usually earns lower rates of interest |

|Usually earns higher rates of interest |

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|Liquidity |

|Money may be withdrawn at any time |

|Money may not be easily accessible |

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|Volatility |

|Usually not volatile; rates are fixed |

|Rate of return and value may change suddenly and significantly |

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|Risk |

|Usually little risk of losing money |

|Usually more risk, but risks may be necessary to make a profit |

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|Reasons individuals may fail to save/invest |

|Not being able to meet current needs and wants |

|Not being aware of how much needs to be saved for future goals |

|Over-relying on credit for emergencies |

|Over-relying on job security and insurance |

|OBJECTIVE: |8.01 |B2 |4% |Understand options for saving and investing. |

|UNPACKED CONTENT |

|“Rules” for saving and investing |

|View saving and investing as a fixed expense |

|Rule of Saving: Pay yourself first; take a portion of earnings for saving/investing before spending any of your paycheck |

|70-20-10 Saving and Investing Rule: For any money earned, spend 70%, save 20%, and invest 10% |

|Saving and Investing Plan: For those whose values or lifestyle make saving 30% unrealistic, start a saving and investing plan in order to |

|continually save a fixed amount |

|Rule of 72: Divide 72 by the rate of interest earned on an investment to find the number of years needed to double an amount of money invested |

|Factors to consider when choosing saving and investing options |

|Liquidity |

|Minimum deposit/balance |

|Interest rates/rate of return |

|Risk factors |

|Transactions |

|Security |

|Saving and investing options |

|Savings accounts |

|Money market accounts |

|Certificates of deposit |

|Savings bonds |

|Individual retirement accounts (IRAs) |

|Stocks |

|Bonds |

|Mutual funds |

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Comparison: Saving and Investing

|Criteria for Comparison |Saving |Investing |

|Definition |Saving is setting aside present income for |Investing is putting money to work so that it |

| |future use. |earns interest over time. |

| |Savings is the portion of income not spent on |Investments are assets purchased with the goal |

| |consumption. |of increasing income. |

|Primary purpose |To make money available for future needs |To make a profit over time |

|Reasons for . . . |To prepare for emergencies | |

| |* To pay recurring expenses | |

| |To prepare for major purchases | |

| |* To prepare for future purchases | |

| |To achieve financial goals | |

| |* To prepare for retirement | |

|Interest earnings |A bonus or side-benefit |The main focus |

| | | |

|Return |Usually earns lower rates of interest |Usually earns higher rates of interest |

| | | |

|Liquidity |Money may be withdrawn at any time |Money may not be easily accessible |

| | | |

|Volatility |Usually not volatile; rates are fixed |Rate of return and value may change suddenly and|

| | |significantly |

|Risk |Usually little risk of losing money |Usually more risk; risks may be necessary to |

| | |make a profit |

Options for Saving and Investing

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|Savings Accounts |

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|Money Market |

|Certificates |

|of Deposit |

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|Savings Bonds |

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|Definition |

|An account in a bank/financial institution that allows one to make deposits and withdrawals |

|A type of savings account in which deposits are invested by the bank/financial institution to yield additional earnings |

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|A certificate issued by a bank/other institution to show that money has been deposited for a certain term |

|Nontransferable debt |

|certificates issued by |

|the U.S. Treasury |

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|Minimums |

|Minimum deposits |

|usually lower than other savings options |

|Minimum opening deposit usually higher than with savings accounts |

|Minimum opening deposit varies |

|Smallest denomination |

|purchased is generally |

|$50 or $500, |

|depending on series |

|of bond |

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|Withdrawals and liquidity |

|Usually the most liquid savings option |

|Usually allows person to write a limited number of checks per month |

|Usually must pay a substantial penalty to withdraw money early |

|Most can be cashed after |

|6 months; some may |

|carry penalties if |

|cashed before 5 years |

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|Interest rates |

|and rates of return |

|Usually lower interest rates than other savings options, but may vary |

|Usually higher interest rate than savings accounts, but may vary |

|Interest rate is usually fixed until the end of the term |

|Fixed and variable rates; |

|interest earnings subject |

|to state, but not federal, |

|taxes. Federal taxes can |

|be deferred until cashed |

|or stops earning interest. |

|Interest paid when bond |

|is cashed, or every 6 |

|months by direct |

|deposit to checking or |

|savings account |

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|Transactions |

|Use bank teller, ATM, phone, online; no checks; get monthly statement |

|Withdrawals and transfers limited |

|Usually cannot make additional deposits during the term, but can add to it when you renew |

|Usually can be cashed after |

|6 months. Some carry a |

|penalty if cashed |

|before 5 years, but pay |

|current value (higher than |

|face value) after 5 years. |

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|Security and risk factors |

|Protected by FDIC or NCUA insurance |

|Generally protected by FDIC or NCUA insurance |

|Generally protected by FDIC or NCUA insurance |

|Since generally backed by |

|the federal government, |

|these are relatively safe. |

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Options for Saving and Investing

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|IRA |

|Stocks |

|Bonds |

|Mutual Funds |

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|Definition |

|Personal savings plan used to set aside money for retirement |

|Shares of ownership and interest in assets and earnings of a company |

|Debt issued by a government or company for a specified time |

|A group of investments (stocks |

|and bonds) held in common |

|with shares owned by many |

|investors |

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|Minimums |

|Vary |

|Vary |

|Vary |

|Vary |

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|Withdrawals and liquidity |

|Traditional IRAs-contributions tax-deductible; taxed when withdrawn |

|Roth IRA- not tax-deductible; earnings tax-free |

|Tax-deferred plans: *Keogh Plan- retirement plan for the self-employed |

|401k-employer-sponsored retirement plan |

|Stockholders may buy and sell stocks when they wish |

|Liquidate when mature; vary from short-term (days, weeks) to long-term (years) |

|Interest on municipal bonds exempt from federal income tax |

|Management fees must be paid |

|when you sell or redeem shares, |

|even if earnings are low |

|Can be liquidated at any time; |

|no term or maturity dates |

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|Interest rates |

|and rates of return |

|Vary with type and status |

|When directors approve, dividends paid from net profits; interest rates vary |

|Interest earnings vary according to type of bond and level of risk |

|Fixed and variable rates; |

|interest earnings subject to |

|state, but not federal, taxes |

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|Transactions |

|Purchased through |

|financial institution |

|Bought on securities exchanges (stock markets), over-the-counter markets, initial public offerings, or directly from company |

|Corporate and municipal, usually bought/sold through brokers; US government, issued by Treasury |

|Bought and sold through |

|investment brokers |

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|Security and risk factors |

|A reasonably safe investment when the economy is stable |

|Earnings based on how well company does |

|Common or preferred? |

|*Common-more risk, more potential for gains |

|*Preferred-paid first, fixed earnings, low risk |

|Type of company? |

|*Blue chip-from big companies, less risk |

|*Growth-from growing companies, more risk |

|*Penny-from high-risk companies, less than $1 per share, very risky |

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|Generally protected by FDIC or NCUA insurance; generally considered safe and reliable |

|Funds are diversified in various |

|investments so losses in one |

|fund may be offset by |

|gains in another |

|A reasonably secure investment |

|when the economy is stable |

|Money markets are not FDIC- |

|insured |

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|Term |Definition |

|General Terms |

|save |To set aside present income for future use |

|invest |To put money to work earning interest over time |

|profit |Money remaining in a business after expenses are paid |

|interest |Money paid for the use of someone else’s money over a period of time |

|return |The income that can be made on an investment |

|liquidity |How easily an asset can be converted into cash |

|volatility |How easily the interest or cash value of an investment can change |

|risk |The possibility of earning or losing money from an investment |

|transaction |A saving/investing activity---e.g., deposits, withdrawals, and transfers |

|Saving and Investing Options |

|savings account |An account in a bank/financial institution for saving, making deposits/withdrawals |

|money market |A savings account in which deposits are invested to yield additional earnings |

|CD |A certificate of deposit stating money has been deposited for a specific time |

|savings bond |A debt certificate issued by the U. S. Treasury that is not transferable |

|IRA |An Individual Retirement Account used to save money for retirement |

|Koegh plan |A tax-deferred retirement plan for self-employed people |

|Roth IRA |A personal savings plan; contributions are not tax-deductible; earnings are tax-free |

|stock |A share of ownership and interest in the assets and earnings of a company |

|common stock |Stock in a public corporation; returns vary, but higher risk |

|preferred stock |Stock with fixed dividends, less risk |

|blue chip stock |Stock from large companies, less risk |

|growth stock |Stock from growing companies, more risk |

|penny stock |Stock that costs less than $1 per share; extremely high risk |

|bond |A certificate of debt given by a company or government that entitles the |

| |bondholder to the original amount plus interest paid by a set date |

|mutual fund |A group of investments held in common with shares owned by individual investors |

|COURSE |Personal Finance 8726 |UNIT D |Protecting and Managing Resources |

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|ESSENTIAL STANDARD: |8.00 |C3 |12% |Apply procedures for managing personal finances. |

|OBJECTIVE: |8.02 |B2 |3% |Understand personal financial planning. |

|ESSENTIAL QUESTIONS: |

|What are the steps in financial planning? |

|What are the benefits of financial planning? |

|What are the basic types of financial statements, and how is each used? |

|How do income and expense statements compare with spending plans? |

|UNPACKED CONTENT |

|Financial Planning |

|Used for planning ways to reach financial goals |

|A continual, cyclical process of tracking, then anticipating, income and expenses |

|Steps in the process of financial planning |

|Identify financial goals |

|Prepare a balance sheet showing what you own and what you owe |

|Track income and expenditures for a set time period, usually a month, and record in an income and expense statement |

|Analyze amount of money earned and how it was spent |

|Prepare a spending plan with anticipated income and expenses to meet financial goals during the next time period |

|At the end of the time period, revise financial goals, if needed, and use the actual income and expenses to again analyze income and how it was spent|

|Prepare your next spending plan |

|Note that three types of financial statements, shown above in bold font, are needed for financial planning. |

|Benefits |

|Learn to live within one’s means |

|Helps avoid financial difficulties |

|Have resources for one’s desired standard of living |

|Reduces the need to use credit |

|Increases sense of security |

|Lessens anxiety about money matters |

|Stay in control of finances |

|Become financially independent |

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|Financial Statements |

|Balance sheet |

|Shows assets, liabilities, and net worth of an individual or family |

|Reason needed: need to know financial status in order to plan finances |

|OBJECTIVE: |8.02 |B2 |3% |Understand personal financial planning. |

|UNPACKED CONTENT |

|Financial Statements, continued |

|Income and expense statement |

|Also known as cash flow statement |

|A list of all income and expenses for a specified time period |

|A historical type of record that serves as the basis for a spending plan |

|Shows whether individual/family was able to live within his/her/their means |

|Shows where income was spent |

|Shows when expenses exceed income and areas of excess expense |

|Shows if income was sufficient to meet expenditures |

|Spending plan |

|Also known as a budget or a financial plan |

|A tool used to plan income and expenses for a future time period |

|Used to track income and expenditures |

|Used to evaluate spending at the end of a time period |

|Comparison of income and expense statement with spending plan |

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|Criteria |

|Income and expense statement |

|Spending plan |

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|Time orientation |

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|Past---a historical record of what was earned and spent |

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|Future ---a projection of anticipated earnings and expenditures |

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|Basic use |

|Used as a foundation for planning one’s finances |

|Used to estimate finances for a future time period |

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|Specific uses |

|Shows if living within means |

|Shows where money was spent |

|Shows when too much is being spent on a certain category of expenses |

|Shows if additional income is needed to meet necessary expenses |

|Helps one live within means |

|Helps plan where to spend money |

|Helps track income and expenditures |

|Reduces the likelihood of having to use credit and go into debt |

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|Where fits in financial planning |

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|Is used to develop a spending plan |

|Becomes the income and expense statement at end of specified time period |

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Balance Sheet

Balance Sheet for Jessica Dalton as of _____________________________________ (Date)

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|Assets |Liabilities |

|Wages and tips |$450 |Apartment rent | $ 300.00 |

|Checking account |$1200 |Gas & upkeep |$90 |

|Savings account |$400 |Food, clothing, entertainment, and |$625 |

| | |student expenses) | |

|Stock |$500 |Current bills due |$200 |

|Car |$5000 |Credit card |$650 |

|Other assets |$800 |Car |$2000 |

| | |Owes brother |$500 |

| | | | |

| | | | |

| |$8350 | |$4065 |

|TOTAL ASSETS> | |TOTAL LIABILITIES> | |

|NET WORTH = Total Assets minus Total Liabilities = $4285 |

Jessica has been invited to move to a larger apartment where she would only share space with one person. Her monthly cost for rent would be $750 and she would have to pay a security deposit of one month’s rent when she moves in. What advice would you give Jessica and why?

|No, liquid assets are less than current bills. She does not have enough to pay the deposit and |

|insufficient monthly income to cover her current rent (which is less than ½ the new)and expenses |

Appendix 8.02D

Key Terms: Financial Planning

|Term |Definition |

|Financial Planning |

|financial planning |A process of tracking and anticipating income and expenditures |

|financial goal |A specific aim to be accomplished with the use of financial planning |

|continual |Ongoing, without ending |

|cyclical |Occurring in a cycle, with steps repeated in sequence over and over |

|wealth |Having a large amount of money or property |

|living within one’s means |Being able to pay all expenses with available income |

|Financial Statements |

|financial statement |A document or tool that shows personal financial information/data |

|balance sheet |A financial statement that shows the assets, liabilities, and net worth of an individual or family on a set date |

|asset |Anything with monetary value that a person owns |

|liability |Anything that is owed to someone else; a debt |

|net worth |The amount of money remaining when total liabilities are subtracted from total assets |

|income and expense statement |A financial statement that shows all income and expenses of an individual or family during a specific time period, |

| |usually a month or a year |

|cash flow |The income and expenses of an individual or family during a time period |

|income |Total earnings received |

|expense |Any expenditure; anything that costs money |

|net gain |The amount of money one has after subtracting expenses from income |

|net loss |The amount of additional money needed when expenses are greater than income |

|spending plan |A financial statement used to plan income and expenses for a future time period; also known as a budget or financial |

| |plan |

|COURSE |Personal Finance 8726 |UNIT D |Protecting and Managing Resources |

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|ESSENTIAL STANDARD: |8.00 |C3 |12% |Apply procedures for managing personal finances. |

|OBJECTIVE: |8.03 |C3 |5% |Apply procedures to manage personal income and expenses. |

|ESSENTIAL QUESTIONS: |

|What are the principles of financial planning? |

|What are the elements of spending plans? |

|What are the steps in the spending plan process, and how is each used? |

|UNPACKED CONTENT |

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|Principles of financial planning (JumpStart Coalition) |

|Money doubles by the “Rule of 72” |

|Your credit past is your credit future |

|Start saving young |

|Stay insured |

|Budget your money |

|Don’t borrow what you can’t repay |

|Map your financial future |

|Don’t expect something for nothing |

|High returns equal high risks |

|Know your take-home pay |

|Compare interest rates |

|Pay yourself first |

|(The JumpStart Coalition, $_Calendar.pdf) |

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|Elements of spending plans |

|Income---money earned from wages, salaries, tips, withdrawals from savings and investments, interest earnings, scholarships, sales of properties, and|

|gifts |

|Expenses |

|Fixed expenses---due by a specified date, often agreed upon in a contract; difficult to change in a short time |

|Flexible expenses---not due by a specified date; usually these are easier than fixed expenses to reduce or eliminate |

|Net gain---when one has more income than expenses, the difference between the two |

|Net loss---when one has more expenses than income, the difference between the two |

|OBJECTIVE: |8.03 |C3 |5% |Apply procedures to manage personal income and expenses. |

|UNPACKED CONTENT |

|The spending plan process |

|Set SMART financial goals |

|Specific |

|Measurable |

|Attainable |

|Realistic |

|Time-bound |

|Organize |

|Determine format to use |

|Select categories for the spending plan |

|Select a time period |

|Decide |

|Make realistic decisions and estimates for categories of spending. |

|If income is less than expenses, decide whether to earn more income, decrease expenses, or a combination of these. |

|Implement---put the spending plan into action |

|Note: Implement and control are to be done at the same time. |

|Control |

|Records kept as the spending plan is implemented reveal potential problems early, such as overspending in one category. |

|Use a computer or calculator to check records for accuracy. |

|Keep a credit spreadsheet to log all credit transactions, including both charges and payments. |

|Types of control systems |

|Envelope system |

|Spending plan |

|Check register system |

|Evaluate |

|Determine if the spending plan process has worked |

|Compare estimated income and expenses to actual |

|Assess progress toward financial goals |

|Revise the spending plan (including financial goals) as needed and recycle to beginning of process |

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Key Terms: Managing Income and Expenses

|Term |Definition |

|Elements of Spending Plans |

|income |Money earned---from wages, salaries, tips, withdrawals from savings, interest earnings, scholarships, sales of |

| |properties or possessions, gifts, etc. |

|expense |Money spent---for both fixed and flexible expenses; an expenditure |

|anticipated |An amount of income or expense that is expected, planned, or projected |

|actual |An amount of income or expense that was really earned or spent |

|fixed expense |An expense that is due by a certain date, often agreed upon in a contract, and difficult to change in a short time |

|flexible expense |An expense that is not due by a certain date and is easy to reduce or eliminate |

|The Spending Plan Process |

|specific financial goal |A financial goal that states exactly what is to be done with money |

|measurable financial goal |A financial goal that gives an exact dollar amount |

|attainable financial goal |A financial goal for which one can determine how to reach it |

|realistic financial goal |A financial goal that is affordable and doable |

|time-bound financial goal |A financial goal that states exactly WHEN the goal needs to be reached |

|organize spending plan |Determine appropriate recordkeeping format, select categories and time period |

|decide |Make realistic decisions and estimates for categories of the spending plan |

|implement |Put the spending plan into effect |

|control |Keep accurate records while the spending plan is being implemented |

|evaluate |Determine how well the spending plan process has worked |

|envelope system |Placing exact amount of cash for an expense in a labeled envelope |

|spending plan |A financial statement used to track expenses from day to day |

|check register system |Tracking expenses in a checkbook register divided into spending plan categories |

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Scenario:

Jessica Dalton is a full-time student at State University. She rents an apartment near campus with three other students; her share of the monthly rent is $300. When the weather is good, she enjoys walking to class, which saves on her gasoline expenses. She spent $90 this month on gas and auto upkeep. She spent $625 this month on food, clothing, entertainment, and student expenses. She currently has $200 in current bills due and owes her credit card company $650. She still owes $2,000 on her car and owes her older brother $500.

Jessica works weekends as a server at a nearby restaurant and earned $450 this month in wages and tips. Jessica has $1,200 in her checking account and $400 in savings. Her grandfather gave her stock valued at $500 for her birthday. The value of her car is $5,000. She has other assets totaling $800.

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