Henry County Public Schools



Personal Finance Certification ReviewPart 1: InvestingWhat does “Don’t put all your eggs in one basket” mean? Diversify your money to reduce the risk of losing money; if one investment goes bad you still have other investments to fall back on.But Low, Sell High: Buy stocks low, sell high to receive a capital gain or profit.If it sounds too good to be true, then it probably is: There is no return without risk, know the risks and terms of the investment.Relationship between risk and return: The higher the risk the greater the return.What is investing? Using money to make more money (profit), usually there is some degree of risk involved.Purpose of investing: increase assets, produce wealth, meet long term goals. What type of financial institution handles investments? Brokerage/securities firms, investment banks. What is the difference between saving and investing: Savings: liquid, quick access to money, available for emergencies, future goals and purchases. Investing: long term growth, more risked involved, want to profit.What is the long term value of investing? Increase assetsLow risk investments:* Savings accounts: earn small amount of interest, liquid, FDIC insured.* Money market account: more interest than savings, limit to # of transactions that can be made per month, insured, require higher min. balance.* Certificate of deposit: earns more interest than mma or savings, set amount of money is left in an account for a set period of time while accruing interest, if money is withdrawn early there is a penalty* U.S. Savings Bonds: loan to the government in return you earn interest. Higher rate of interest than regular savings. Safe because backed by government.7. Medium-High Risk investments: Long term gains* Stocks: Share of ownership in a corporation. Riskiest investment but have historically outperformed other investments over an extended period of time. Usually can sell stocks back anytime. Largely based on how well the company is doing.* Mutual Funds: pool of different stocks, bonds, money market funds. Diversified* Bonds: Debt securities (loan to major corporation) usually get a return if the company does not fail.* Real Estate: property such as land or buildings (houses, malls, apartment buildings). Investors buy to sell at a higher price or make continuous profits.* Collectibles: Items that are rare paintings or other art, comic books that increase in value over time. Money is not made if the item is not sold. Small market, high risk.8. Role of Securities Exchange Commission: Federal government agency that works to protect investors (monitor), uphold fair markets, and promote the build up of capital, administers and enforces federal laws on securities (stocks and bonds)9. What does a broker do? Financial consultant or wealth advisor on investments gives advice to investors, licensed professional that connects buyers to sellers.10. What is e-trading? Trading stocks online.11. What is the difference between a broker and a financial planner? Broker: licensed, bring buyers and sellers together, charge commission fee, usually deal with stocks, securities, equities. Financial Planner: develop strategy to help customer meet financial goals, plan include savings, investing, insurance, taxes, retirement, and estate planning.12. Stocks: share of ownership in a corporation, also known as securities, equities, common stock.13: Why do companies issue stocks? To raise money instead of getting a loan. Gain more capital to grow and expand, make more profits, buy equipment, hire employees.14. Stock classification or types of stock:* Blue Chips: well established companies* Growth stocks: mostly technology companies whose earnings are expected to grow above average.* Income stocks: pay steady dividends (real estate, utilities, energy companies)* Speculative: High risk stocks* Common Stocks:* Preferred Stocks:15. Capital gains: selling stock for more than you originally paid for it.16. Capital loss: selling stock for less than you paid.17. Taxes on stocks: Fee you pay when you sell stocks. Taxes are lower if the stock has been held for at least a year.18: Dividends: payments to stockholder, receive money based on # of shares of stock they own when the company makes a profit. Usually get quarterly.19. Buying on the margin: investor borrows money from the brokerage firm to buy a stock, can borrow against stocks they already own. Must pay a fee.20. Initial Public Offering: First public offering to everyone when a company first decides to issue stocks, called “going public”21. Stock Markets: (also known as securities markets)22. Primary market: investment bank sells a company’s stocks to investors and transfers the money to the company. When companies need funds to expand, they sell stocks in this market.23. Secondary market: When shares of a company’s stocks are traded between buyers and sellers. Corporation does not receive any money from the sale of these stocks. This occurs on the stock market.24. Stock exchange stock market, regulated financial market where securities are bought and sold. Supply and demand controls the prices in the stock market.25. What are the two main stock exchanges in the U.S? NYSE: largest located on Wall St, mostly big corporations such as Walmart, General Electric. NASDAQ: First electronic stock exchange in the world, focused on ta.ch and start up companies such as Apple, Microsoft26. What are stock indexes: These are used to measure the ups and downs of the overall market.27. Purpose of stocks: to make a profit; businesses: reinvest in their businesses, investors: to increase wealth, ownership to receive profits, dividends, capital gain.28. Be able to read a stock table: You can find these in newspapers, news, internet, cellphones.Know the following terms:Stock Symbol: helps find company’s stock information quickerHigh: highest price sold for a day/weekLow: lowest price sold for a day/weekOpen price: price at start of day Closing Price: price at end of dayNet Change: how much stock changes from last saleDividends: cost share of stockVolume of trading: share volume, amount of shares tradedPE ratio: price/earning price of a share of stock divided by company’s earnings (profit) per share over last 12 months.29. What factors have an influence on stock prices? When should you avoid investing? Interest rates, inflation, economic conditions, news, new products, supply and demand. When should you avoid: need for cash, can’t afford to lose capital, retired and need low risk investments.30. Bonds are: loans or debt investments purchased by investors, receive interest plus principal after specific period of time.Types of bonds:* Treasury Bill or T-bill: short term few days to year to reach maturity, secure, low risk, guaranteed return.* U.S. Government: issued by U.S. Department of Treasury safest bond because it’s backed by government,Series 1 bonds:* Municipal: tax free, issued by city or local gov. used to fund schools, highways, libraries, etc, lower interest rate than corporate bonds and less risky* Corporate bonds: issued by corporations when the business needs to purchase equipment or expand.Why do people buy bonds? Safe and secure, guaranteed return, make great gifts, higher rate of return than banking products such as money markets, cd’s, and savings.31. Mutual funds: pool stocks and bonds, money markets, diversification, moderate risk, managed by professionals.Purpose: Spread investments over many different securities.Why do people purchase mutual funds? Diversifications – if one stock does poorly, the others make up the loss, keep the investment stable, professionally managed, moderate risk, affordable, convenient.32. Investment portfolio (also known as stock or equity portfolio): Collection of different types of investments that belong to you, stocks, bonds, cash investments, mma, savings, checking, mutual funds.May change over time, what causes this change? Portfolio restructuring, Goals changing.33. Risk tolerance (determines the types of investors)Conservative: low riskModerate: medium riskAggressive: high risk34. Diversification: don’t put all your eggs in one basket.What is the purpose? Reduces the risk of losing your money is something were to occur.35. Why should an individual invest? To increase and diversify portfolio to meet changing and long term financial goals.36. Investment in stocks, bonds, mutual funds are affected by interest rates, inflation, economic conditions, news, new product. Investors may choose to: buy or sell if they change their goals, spending needs, change, start new business, college education, retirement.Part 2 Insurance:The lower the premium the higher the deductible37. Type of financial institution: insurance company38. People who sell insurance are called: insurance brokers, agents, or saleperson39. How does insurance work? Purchase from an insurance agent, shared risk between you and the insurance company, insurer places all money into a pool that is used to cover expenses and pay claims. You pay the insurance to assume financial risk on your behalf.Purpose of insurance: protect people against financial losses caused by unexpected events.Interesting/weird insurance coverage people may buy: Singer insuring voice, dancer insuring legs, hand models insure hands, coffee tasters insure tongue, surgeon insure hands.Insurance is a form of risk management why? To protect against risk of lossHow does the degree of risk influence the cost of insurance premiums? The more of a risk you are, the higher the premium.What insurance(s) should you always have or if you are young and single with no dependents? Health, auto, and disabilityWhen comparison shopping for insurance you should choose insurance based on your needs and what is affordable.40. Deductible: the amount of money you pay out of pocket before the insurer will pay a claim (100-1000 or more) affects the price of premium.Premium: regular payment to provide coverage of your insurance.Policy: detailed legal contract that outlines the term of the insurance coverage includes what it will cover and cost.Coverage: amount of protection the insurer will provide when you file a claim.Claim: requests by policyholders for the insurer to pay for a loss. Must be submitted by the policyholder if an accident or loss occurs.41. Purpose of life insurance and who needs it? Covers funeral expenses, debts, and dependents when someone passes away.How much do you need? Typical family with kids – 70% of policyholder’s income for 7 years; married no kids – 50%, single parent - $10,000 for each year until the youngest reaches 18.Types of life insurance:Term life insurance – held for short period of time 1-30 years during key periods such as when you have young kids, mortgage, or other large debt. No cash value, only pays death benefits, and only pays during term coverage.Whole life – Fixed premium, builds cash value allows insured to get some money back if you drop the policy or withdraw as loan.How do you determine how much life insurance you need? Cost of mortgage/other debts and dependents.Value upon cancellation of policy: whole life – cash value: amount of money you get back if you decide to give up the policy, based on premiums paid plus interest earned, term life: nothing gained42. What does health insurance cover? Regular doctor visits and routine tests, short hospital stays, and some surgery. (Does not cover ling term illness, serious injuries, or vision and dental.)Co-pay: flat fee the patient pays for covered medical services when you go to the doctor.HMO: health maintenance organization, emphasize preventive care, no deductibles to pay, must go to the doctor under contract, co-pay at time of service.PPO: preferred provider organization, networks created by doctors and hospitals; make deals with insurers, premiums are higher, not required to go to doctor in network.Annual deductible – how does it work? Must meet deductible, by paying up to a certain amount, before insurance begins to pay claims. Starts over each year.How does the amount of the deductible influence the cost of the premium? Higher the deductible, the lower the premium. Vice.versa. If you rarely get sick, you may benefit from a high deductible and low premium.Pre-existing conditions (insurance must cover) Insurance cost less for people with: Good health43. Property insurance covers: home and possessions inside, liability protection, cost of repairing/replacing damaged, lost, stolen property.Types of property insurance: Renters- Covers damage, loss of use, only covers property.Homeowners insurance- Covers physical structure and things inside, sheds, garages, liability coverage, damage you cause to neighbor’s property.Mortgage insurance: When financing the home, coverage protects lenders against default by borrower. If borrower stops paying on mortgage, insurance company insures lender will be paid in full.How is coverage needed determined for property insurance? Take inventory of all your possessions and valuables, decide what you want to insure, insure as replacement value or actual cash value, take pictures, store safely outside of the home to use to file claim.Replacement value: insurer pays you the cost of replacing damaged or lost property, depreciation has no part. Check based on what the items costs today to replace or rebuild.Actual cash value: covers what you paid for the property minus depreciation, costs less, lower premiums because insurer pays less over time.Additional property insurance/personal property floater: extra coverage for high valued items.44. Disability insurance: covers you if you were to become disabled. You can purchase short term or long term. Covers loss of wages.Long term care insurance: 45. Purpose of auto insurance: protects you against liability in an accident, financial losses caused by wrecks, medical treatment, car repairs, and lawsuits.Factors that affect cost (premium): age, gender, marital status, type of car, cost of repairs, mileage, location, law enforcement, driving record, claims you make, credit history.How to reduce the cost of auto insurance: increase the deductible, cancel collision insurance, garage the car, install security alarm, maintain good driving record, avoid submitting small claims, drivers ed course, Assigned risk pool: drivers with bade driving records and many insurance claims end up here after they lose their auto insurance and cannot get a new policy with another insurer. They are randomly selected by an insurer and are charged premiums that are three times higher than normal rates.Bodily injury liability: protects you from paying the full legal or medical expenses of someone who is injured or protects you against claims that an injured person who was not in your vehicle could make against you, required by the state.Property damage liability: When you damage another person’s property with your car, buildings, signs, streetlights, claims others can make against prehensive: covers financial loss due to weather, fire, theft, vandalism, falling objects, coverage without considering who was at fault, towing, emergency roadside, car rentals.46. Collision coverage: usually terminated when vehicle is paid in full, covers the cost of getting your car repaired after an accident, your insurance covers the cost even if the other driver was at fault. Your insurance may seek reimbursement.47. Why is it important to comparison shop for auto insurance periodically? You may be paying too much or what you are paying may not cover your assets if there were to be a loss.Underinsured: Not enough, underestimate the value of your propertyOverinsured: too much48. Insurance premiums can be paid: once a year, semi-annually, quarterly, or monthly.Part 3 Banking and MoneyA penny saved is a penny earned: When you save you earn more because of interest. If you save consistently, your savings will grow. It is good to save money..$1 today is worth more than $1 tomorrow: It is more valuable to save money rather than spend it right away. Time value of money: the money you receive today can earn interest and gain value overtime. Make your money grow by putting it into an interest bearing account.Time value of money:49. Types of financial institutions: banks (profit); retail, commercial, savings, and loans, credit union (non-profit)Opening a bank account: may require a deposit and a minimum balance, way to save, protect, and manage your money.Advantages: insured, interest, access by atm, debit cards, etc.Factors to consider when shopping for a bank: interest rates and fees on checking, savings, cd’s, loans, availability of products and services such as free checking, savings without minimum balance or low balance, online banking, ATM availability, bank hours.Questions to ask: What type of accounts pay interest? How long does it take for a deposit to clear so that you have access to money?Information and identification needed to open an account: Driver’s license, military ID, alien registration number, utility bill, apartment lease, social security number, valid photo id, proof of age and identity is needed for the bank to report interest earned to the IRS and prove true identity.50. Services banks provide: purpose, function, and uses Deposit accounts:Checking: unlimited withdrawals (liquid), using a check, debit card, or withdrawal slip from bank, insuredSavings: safe, provide easy access to money (liquid), insured, only allowed 6 withdrawals per month, often used for short term goals and emergency funds.Money market account: require a greater minimum balance, limited number of transactions per month, higher interest rate, insuredCD: requires money to be saved in account for a certain amount of fixed time, while it earns interest. Insured, the longer the time period the greater the return; the greater the initial amount deposited the greater the interest earned, penalty if withdrawn early.Financing:Loans: money borrowed and paid back with interest. Principal is the amount you started with, car loans, mortgages, personal loans, secured (collateral loans), lines of credit.Retirement options:Ira’s: Savings for retirement. Tax benefits and exemptions.Other services:Money orders: most businesses ask for instead of checks, high rate of counterfeits, can be purchased at banks, post office, or stores.Cashiers’ checks: Guaranteed by the bank (good as cash), debited from your account, settled quickly, usually best for large purchases for real estate or important sells.Debit cards or checkcard: Automatic withdrawal from checking, savings, or money market accounts requires PIN, may be liable for up to $500 if lost or stolen and reported within 2 business days.ATM cards: allows withdrawals with savings accounts, may function as a debit card if you have a checking account, accessed a fee if used at nonbank ATM. Gift cards and prepaid debit cards: Can be used to make purchases, prepaid cards have a fee to purchase, but you cannot overdraw on these cards.Overdraft protection: Opt in service, no longer automatically given to the account holder, bank covers your purchases if you overdraw on your account usually charging a fee. Provided to customers when there is not enough money in the account, works as a loan with an interest charge.Safe deposit box: Safe place to keep valuables and important documents.Check 21: When checks are processed electronically. Makes checking handling and processing more efficient and quick.Electronic check conversion: automatic transfer from checking to savings or vice versa, online bill payments, deposits of checks using cell phone, direct deposit of paycheck.51. Checks: written to make purchases, pay bills, etc. Avoid writing checks to cash because anyone can cash them.Check features include: payee, your signature, amount in numbers and words, check number, account number, routing number, memo, and personal address.Stop payment orders: person may request, check may be lost or stolen, there is a fee.Endorsement: Signature on the back of the check, stating how the check should be cashed. Blank endorsement: signature only to cash, Restrictive endorsement: for deposit only.52: Reconciling check account: balancing your checkbook. You compare what you have in your check register to what the banks show on your bank statements.Bank statement: Monthly record of your transactions sent by the bank. Deposits, withdrawals, transfers, interest earned and fees.Check register: A booklet used to keep track of your spending in your checking account: deposits, withdrawals, etc.Why should you reconcile? Make sure you are right, make sure the bank is right, identity theft, budget tracking.Consequences of not reconciling: Bounced checks, insufficient funds.What are some reasons why you may not balance? Calculating errors, fees and or interest not added, deposits and withdrawals may not immediately show up.53. Loans: Banks, credit unions, pawnshops, finance companies, payday lenders, tax preparers, other: family/friends, government loans, retailers- furniture stores, mortgages lenders, auto finance companies, credit card companies.Which institution charges the highest interest rates on loans? Pawnshops, payday lenders, tax preparers, finance companies.How banks are able to provide loans: Banks are able to provide loans by savings accounts or deposits accounts.54. Credit Union: Are member owned, not for profit insured by NCUA, higher interest rates on savings, cd, and money markets, lower interest rates on loans.55. Compound interest: interest paid on the principal plus any previously earned interest.56. Time value of money: Is a way of thinking about how much money changes in value over time. The value of a dollar is greater today than the value of any dollar you make in the future. This is because of inflation. The value of that money is greater today because the dollar you have right now can earn interest over the time it takes to earn or acquire that other dollar.The more money you save/invest the more you will earnThe higher the rate of interest, the more money you are likely to haveThe sooner you invest, the more time your money has to grow and make more money57. Rule of 72: Time it takes for a savings or investment to double provided the interest remains the same 72/interest rate = number of years will take for your money to double.58. Safety in Banking: Insures money up to $250,000FDIC: Federal Deposit Insurance Fund, covers checking, savings, money markets, and cd’s if a bank should fail and close up, backed by the full faith and credit of the U.S. government.NCUA: National Credit Union AssociationRole of the Federal Reserve Bank: Supervise and regulates banks.Monetary Policy: Protects depositors and setting reserve requirements and stimulating the economy, regulates money supply, influences interest rates, clears checks.59. Value of US currency: based on how well the economy is doing, political stability, stable government, steady work.Fiat money: Currency, and has value because the government has backed it and declared it have a specific value.60. Role of Treasury Department: Must be notified when person’s makes a cash deposit or withdrawal, over $10,000 to prevent tax evasion and money laundering avoid paying taxes, illegal gains. Print, mints currency through the Bureau of engraving and the US Mint Federal taxes collected by or paid to the Internal Revenue Service.Abuses: Money order scams, check fraud, identity theft.Ways to pay yourself: Be careful in giving ATM card, credit card, or debit cards to friends, loans to friends or relatives without a signed agreement, store info in secure places, shred documents with your account number on it, notify the bank or credit card co. asap upon losing your debit or credit card, get receipts, going to check cashing stores.Cashless society: methods for receiving or earning money or paying for goods and services other than cash includes gift cards, debit cards, prepaid debit cards, checks, cashiers checks/bank checks, money orders, credit cards, electronic transfers, earning interst and dividends.Part 4: Credit/cost of moneyRobbing Peter to pay Paul: To take or borrow from one debt to pay another.Nothing is Free, everything has a price:Credit is not free. Before borrowing money, you need to determine what the cost are and whether the benefits are greater than the cost.Types of financial institutions that approve and give credit: Banks, credit unions, investment firms, finance companies61. Types of credit or loans include: Credit cards, student loans, mortgages, cash loans, auto loans, personal loans.Loan classifications:Secured loan – requires collateral, interest rates may be lower (mortgage or car loan) title loans, payday advance: keep your personal check.Unsecured loan – does not require collateral: personal loans, credit cards, installment loans.Closed end – loans for a set period of time. You know the monthly payments, number of payments, and total cost of the loan.Open end – line of borrowing to use as you want and pay back when you want as long as you make the minimum payment each month.Revolving credit – Balance does not have to be paid in ful each month just as long as the minimum payment is made.62. Purpose of credit: Access to money in order to buy now and pay later, ability to borrow to buy a large item such as a house.Loan applications: compare interest rates and fees and different institutions, avoid pawn shops, payday loans, tax-refund loans due to high fees and interest.Loans should be paid back with interest plus principal.Variable vs fixed interest rateTotal cost of loan: The amount borrowed plus the interest and the total cost of the loan is the interest.Finance charges: Total cost of a loan including interest and transaction fees (annual fees, late fees, fees for awards programs)When do you begin repaying student loans? Need to repay after graduating from college with a 6 month grace period, if you quit must begin repaying immediately.When do you begin paying back other loans? Immediately after taking out the loan, usually 25-45 days.Length of payment: Varies on the type of loan, Auto 3-6 years, House 15-30 years, other depends on bankThe shorter the loan, the cheaper the price of the product purchased on credit, why? Because less interest is being paid.Down payment and impact on monthly payments: The higher the down payment the lower the cost of monthly payments63. What is a tax anticipation loans? Loans offered by tax preparers against your income tax return. These are no longer permitted since 2012, banks are now giving shot-term loans gains tax refunds and charging very high fees.64. Credit cardTypes: revolving credit – Visa, Mastercard, etc; Pay in full at the end of the month.Features –Cash advance: Obtaining cash from your card, higher interest rate than credit purchases.APR: Interest rate compounded over a year.Late fee: Fee added to your credit card when payment is not made by the due date, record of late payments trigger higher interest rate.Grace period: Time period you have to pay your credit card before additional interest accrues or added, time between date on the credit card and the date payment is due.Finance charges: Total cost of creditCredit limit: amount of credit available on card, amount card holder is allowed to charge.Annual Fee: Yearly fee for having a credit card.Lost/stolen credit cards: You may be liable for $50, if you report fraudulent news.Advantages of credit cards:* Don’t have to carry cash* Make purchases online* Emergencies* Used as ID for hotels and car rentals* Can improve your credit score* Discounts through awards programsDisadvantages:* Thinking it is free* Hidden fee and surcharges* Potential damage to credit rating* High interest rates* Can create overwhelming debtGood practices: Pay in full each month, do not lend to friends, avoid finance charges and late fees, avoid being a cosigner, watch the APR being charged, Understand terms and conditions.65. What is the purpose of consumer protection laws? Protect buyers when sellers try to deceive or mislead.Characteristics of predatory loans: UNFAIR, DECEPTIVE, ABUSIVE LENDING PRACTICES. Takes advantage of the borrower’s lack of understanding about loans, and finance charges. Targets minorities, poor, elderly, less educated people who need cash, who have credit problems, etc. These are payday loans, tax refund anticipation loans, and car loans.Truth in Lending: requires that lenders provide detailed information about the terms and cost of credit and loans. Credit Card Accountability Act (CARD): 2009, Disclosure act; even more simpler terms on credit cards.What is the Consumer Financial Protection Bureau?* Promotes fair lending practices* Protects privacy* Informs public about consumer rights* Encourages honest advertising* Prevents fraud and identity theft and unfair business activities.What is usury? When lenders charge higher interest on a loan than the law permits.What is redlining? To be denied mortgage, loans/home insurance because of the area in which you live in.66. What are the consequences of paying the minimum payment only on credit cards? It will take longer to pay off the credit card, resulting in greater total cost and price of the product.What are the consequences of paying credit card payments late? Late fees will add up, causing higher interest rates, and paying more for a product than what its worth.How does the degree of risk influence the interest rate charged for credit? The greater the risk you are, the higher the interest rates, which means you will pay more over the life of the loan.67. Debt to credit ratio should – Be under 30% Example: $10,000 credit limit. You should have a $400 Balance68. Credit reports: A record of an individual’s credit history. Includes: previous and current address, social security number, date of birth, credit history, inquiries, public record information.Credit score range: 300-850Factors that affect credit; 5c’s: Character (integrity), Capacity (sufficient money to pay for obligations), Collateral (assets to secure the debt), Capital (net worth), Conditions (of the borrower and the overall economy)The lender has the right to deny a loan based on: Credit history, credit score, inadequate income, or inadequate assets.The lender cannot deny a loan based on: Age, gender, race, handicap, sexual orientation, or where you live.Credit report agencies: Equifax, Transunion, ExperianFactors that have a negative impact on your credit score:* Applying for credit or credit card*Opening a new loan* Paying bills late* Filing for bankruptcy* Having high debt balance* Having high debt to credit ratioConsiderations when applying for credit:* Can you afford the monthly payments* Needs vs. wants* Fees, costs, lender reliability* Debt to credit ratioWays to improve credit history:* Pay more than monthly minimum balance* Pay debts off early* Pay bills on time* Don’t max out credit cards* Don’t have too many credit cards69. Identity theft: When someone uses your personal information, without your permission to commit fraud or other crimes.Ways to avoid identity theft:* Keep your credit cards/debit card, etc. in a secure place* Shred documents* Check your billing statements carefully* Get your receipts when you buy something* Never give out your credit card number* Online: use secure browser, keep passwords safe, know the policies on the internet sites you visit70. Common debt problems: Bankruptcy: Chapter 7 (liquidation of nonexempt property) and 13 ( adjustment of debt pay debts over period of 3-5 years), stay on credit report 10 years, student loans and taxes still must be paid.Ways to resolve credit problems:* Call creditors when faced with payment problems* Credit repair through credit counseling: consumer crdit counseling services* Consolidation loans* Know your rights* Stick to your budgetPart 5 Personal Finance/Money Management/BudgetingPay Yourself first: Set money aside in a savings account before spending on entertainment.Your financial plan is influenced by: your goals, priorities, stages in life, and your personal values.Financial Planning Key Concepts: * Comparison shopping* Budgeting* Being credit wise* Setting and working towards goals* Long term planning for college and retirementMoney is a medium of exchange, used for generating income, saving, spending. The more financially literate you are about money the better you will be at managing your money.71. Sources of income: Earned – salary, tips, commissions, bonus, overtime; unearned – interest, return on investment, inheritance, gifts;Income is influenced by: capacity to earn, knowledge, skills , level of education, job opportunities available.72. Net worth: How much you are worth, value of what you own minus the value of what you oweWhy is it valuable to know your net worth? Helps you make a plan for your future and know the value of your assetsWhen does a person have wealth? When their assets are greater than their debts.73. Retirement: You need additional funds to live on beyond social security. Social security is meant to supplement.Social security: Provided by the government through FICA, portion of your check is withheld and placed in FICA account to pay benefits to current retirees.Eligibility requirements for collecting: Based on the amount you contributed to the system during your working years, age when you retire the longer you wait the more you will earn.How the amount is determined? Average 35 ears earned the mostIndividual Retirement Account: Bank, life insurance, mutual fund investor or investment firm, penalty for early withdrawal before 59 ? unless for educational purposes.Traditional: Taxes paid when withdrawal is made, amount contributed can be deducted from taxable income which means you pay less taxes in year you use contributions as a deduction, cannot contribute after 70 ? years of ageRoth IRA: Taxes paid annually, can pay more money into than traditional IRA, can pay into account no matter how old you are.Employer Provided Retirement Account: 401K: Employees make a contribution to the plan and employers may make contributions, tax deferred savings, reduces taxable income, deducted from paycheck. Can be transferred to IRA or another 401K, if leave company, If withdrawn money will be taxed and penalty fees assessedPensions: Provided for people employed by federal, state, or local government taxes are due on pensions when received or withdrawnAnnuities: Insurance policy that guarantees steady income for rest of life during retirement, tax deferred growth.Investing on your own: Stocks, mutual funds, etc.74. Housing: renting vs owning Renting: Fewer responsibilities, doesn’t build equity, learn about the community, cost: real estate agent fee, rent, security deposit, insurance, repairs, utilities oil and heat, moving right to security deposit: when rental left in good shape, no major damages.Owning: Investment, offers stability, you may change it as you wish, mortgage interest is tax deductible.75. Life cycles/stages of life and inflation influence money management:Inflation: Price increases cause decrease in purchasing power/same amount of money will buy fewer things.Deflation: Price of things decrease and purchasing power of money increases. With deflation comes increasing unemployment.Recessions and depression cause high rates of unemployment and impacts income76. TaxesTypes of taxes: Sales, government charges income tax, real estateIncome that must be reported to the government for tax purposes: Wages, rental income, interest, dividends, lottery, gambling, capital gains and profits, real estate property taxes.What is a tax exemption? Amount that taxpayers can claim for themselves, their spouses and eligible dependentsThe more exemptions you claim, less will be deducted from paycheckThe less exemptions you claim, more will be deducted from paycheck.Income tax returns should be filed with the IRS annually if you worked that yearTax forms: W-4 you complete to inform employer of how much taxes to take out of paycheck, W-2 employer gives you to show amount of taxes taken out during the year, 1040EZ simplest tax form to complete.77. Budget: Purpose of a budget, helps you reach short term and long term goals, ensures you have enough money, help you plan your financial needs, helps prepare for inflation and deflation.Create a budget: Track income and expenses for one or two months, define short and long term goalsBudget spending plan should include: Income, fixed expenses, investments, and savings, budgeting for expenses paid once a year.Emergency funds: 3-6 months of income in a savings account (goal of full time employee) Pay yourself first in order to develop a habit of saving and building savings into your budget. Have an emergency fund before starting to invest.Factors that affect budget: Inflation, unemployment, natural disastersGoalsSmart goals: Strategies to achieve each goal- specific, measurable, action, realistic, time frame.Short up to – 2 yearsMedium up to – 2-5 yearsLong term over – over 5 yearsBalancing a budget3 r’s: Reality, responsibility, and restraintStrategies to reduce budget: Spend less than earn, needs vs. wants. Discretionary income and budget surplus: money available for spending and savingDebt to oncome ratio: Total amount you owe compared to your total income.Creating wealth: Start early, earn capital gains, make profits on the sale of goods and services, invest in stocks, bonds, and property, spend less than you earn, borrow to invest.78. Payroll Check: Wages determined by hours worked x hourly wage or salary of annual wages. Gross pay- before taxes, net pay – after taxesExemptions or allowances: Number of dependents a person will claim on payroll, an increase in exemptions means you will be taxed less on your payroll check, so you will pay more in taxes at end of year.Employee benefits: Given by employer-tuition reimbursement, matching pension contributions, health insurance, vacation and sick time.79. Long term college planning: Plan for tuition and college related expensesFactors that influence choosing a college: Coast of local state or city college vs. private college, out of town or local, large or small, interests and concentration.Paying for college: Scholarships/Grants, College savings plans – 529 plans, government loans, work study, and other loans.80. Wills: Documents that tells how an individual wants his/her possessions to be dispersed after his or her deathWho can be beneficiary and why they are chosen? People you choose that are 21 and in good healthHow do you get a will? Make your own by listing your assets and who you want to have those assetsEstate planning: Websites, attorney, financial advisorsWhat is a living will? Durable power of attorney for health care in which you select a person that can make decisions for you in the event you are incapacitated due to accident or illness81. Purchase strategies: Being a smart consumer* Comparison shopping* Negotiation* Coupons* Catalog* Internet* Evaluating product warranties or product insurance* Financial advice from financial advisors, books, internet, accountants* Lowest price is not always the best factor, avoid impulse buying or shopping, influence of advertising, role models, and peer pressureAdditional information about taxes: w-2, w-4, income tax form, types of taxesTerms to know:Annual –Semi-annually -Bi weekly –Quarterly –Yearly –Monthly –Bi-monthly –12 months in a year52 weeks in a year365 days Over UnderIncomeExpensesVariableFixedMaturityVoluntaryInvoluntaryAppreciationDepreciationDeficitSurplusGood debtBad debtAnticipateBeneficiary ................
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