Personal Finance Powerpoint WSJ
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Transcript Personal Finance Powerpoint WSJ
Personal Finance
Banking
Loans/Borrowing Money
Budgeting
Investing
Planning
Insurance
Taxes
Banking
Many different types of banks:
National
State
Commercial
Community
Federal
Thrifts
Savings and Loans
Trusts
Credit Unions
Banking
Banks take in your deposits and in return pay you interest.
They takes deposits and make loans at a higher rate of
interest. The difference is known as the spread.
Largest banks have 100s of billions and some over $1 trillion
in assets.
Retail banks have provide many services
FDIC – Federal Deposit Insurance Corporation – govt.
agency that insures consumers against bank failures
Prevents a run on banks
Each depositor is insured up to $250,000 for an account at each
bank.
Banking
The Rule of 72 – divide any interest rate by 72 and that’s
how many years it will take to double your money (6% 72/6=12 years)
Savings Accounts – most basic account to deposit cash and
collect interest (rates are low)
Good place for money if you will need it soon or if you cannot
afford riskier investments
Other savings accounts are CDs and money markets
Best rates can be found online at www.bankrate.com
Banking
Money Market Accounts – vast market of ultra-short-term,
highly rated debt obligations issued by the govt., corporations
and financial institutions that are traded
Money markets are very safe, FDIC protected, and have low
rates a little higher than savings accounts
Need to keep a minimum balance
Withdrawals are limited
Banking
Certificates of Deposit – CDs – time deposits kept for a
certain period of time in exchange for a better interest rate
3,6, & 9 months as well as 1,2, & 5 years
CD matures when period ends
The longer the maturity, the higher the interest (typically)
Early withdrawal penalties
Banking
Checking Accounts – demand deposits that give you the right
to “demand” money upon presenting a check
Checks are tracked by numbers and are processed through the
national banking system
Generally checking accounts pay no interest
Balance a checkbook to have good financial management
Fee if you are overdrawn of $25 or more
Record all withdrawals for accuracy
Banking
Banking
ATM Cards – automated teller machines
Save banks $ and they can collect fees
ETF law limits losses if your card is stolen
Debit Cards – look and can act as credit cards, but take
money directly from your account
Must have enough money in your account for it to go through
Works like electronic cash with no interest charges
Merchants typically like them because of no fees
Banking
Other Banking Services
Vacation and Christmas Clubs
Safety Deposit Boxes
Credit Cards
Mortgages
Car Loans
Personal Loans
Trusts
Business Services – credit cards, loans, leases, line of credit,
checking
Banking
Online Banking
You can download account info., pay bills, transfer money,
order checks, stop payment on a check, open a CD, find an
ATM, get a home or auto quote, apply for loans, etc.
Can either access a regular bank or one that only exists
electronically
Internet based banks have lower costs and can give you better
interest rates
Banking
Things to consider when choosing a bank
Depends on how you bank and what services you need
(Affinity)
Relationship with a bank – examples
When is it open – late & weekends?
What are the minimum balances and associated fees?
How is their internet banking and/or ATM service?
Many banks are competing to have you as a customer.
Banking
Breaking up with your bank
Moving, fees, getting married or for whatever reason
Open new account before you close the old account
Balance your checkbook so you do not overdraw
Notify companies where you automatically deposit or pay as this
may take a few weeks
Make sure your old bank has your contact information for tax
purposes or any other problems
Don’t forget your safety deposit box if you have one.
Borrowing Money
Borrowing Money
Credit can be easy to come by and when used prudently for
purchases with long-term value, can be wise if you are smart
about it.
Debt can tear your life apart, destroy friendships and
marriages, ruin your retirement, and cause you to lose your
home.
Millions each year file for bankruptcy or default on their
loans
Examples – student loans and upside down mortgages
Borrowing Money
Debt –You borrow money you don’t have to but something
you otherwise can’t afford to pay for now. The purchase may
be small (McD’s) or large (house).
Borrower = you
Lender = person or company that lent you the money
Principal = money borrowed
Interest = the charge the lender imposes for the principal
Repay over month (credit card) or decades (mortgage)
There is good debt and bad debt
Borrowing Money
Good Debt – improves your life for a long time
An affordable home – most valuable asset of most Americans
Education – future earning power can be worth investment
Rental or investment real estate – real estate has typically been
a good investment (they aren’t making any more land)
Get paid rent which should make you money
Automobile
Some say car is a bad investment because it depreciates
A car is a necessity that improves standard of living and gives access to
better schools and neighborhoods
Can commute to a better paying job
Borrowing Money
Bad Debt – if you consume it, if it loses value over time, or if
you have to feed it, it’s bad debt
All random daily purchases (meals, gas, groceries, electronics,
etc.)
Small purchases should be made with cash instead of credit
because they add up over time and can be 1,000s of dollars.
Debt can grow and control your life with excessive interest
Paying off credit cards each month is a possibility
Borrowing Money
Credit Cards
Allows you to purchase goods and services when you don’t have
the cash
Society increasingly going cashless
CC company fronts you money which is interest free if paid
within 30 days (there may be a fee)
American Express, Visa, MasterCard and Discover are the
largest
Thousands of other cards from banks and stores
Many cards have rewards – airlines, college, cars etc.
Borrowing Money
Credit Cards
Go astray when you rely on cards to live a life you cannot afford
Keep track of all monthly expenses
Monitor your accounts for fraud or identity theft
Charge Cards – different than a credit card in that you can
charge what you want and it is paid off each month.
American Express is the best example.
You pay an annual fee and can receive rewards
CREDIT CARDS
Credit Card Act of 2009
Developed by:
Federal Reserve Board
Office of Thrift Supervision
National Credit Union Administration
Credit Card
$874 billion in CC debt
Average rate %14.62
Average college student almost $3,000 in CC debt
CREDIT CARDS
No Double Cycle Billing
Pay interest on previously paid balances
No Interest Rate Increases in 1st 12 months
Promotional rates must last 6 months
No Interest Rate Increases on pre-existing balances
Increased rate only applies to new balances
Exception – more than 60 days late
Credit Cards
Must give 45 days notice before increasing your interest rate
Previously 15 day notice
Interest rate could increase if you don’t make the minimum
payment within 30 days
Must receive 45 day notice
Increased rate must be reviewed and lowered if review shows
improved payment habits
Credit Cards
Payments above the minimum must be applied to highest
interest rate
No fees to pay bill by phone, mail or online unless it is on the
due date
Payments are due on the same day each month
Sundays?
Credit Cards
No over-the-limit fees unless you opt in (transaction would
be denied)
Only one over the-limit-fee is allowed per billing cycle &
transaction
Credit Cards
Statements must be sent 21 days before the due date
Payments received by 5:00 p.m. on the due date are on time
Payments are on time when received the next business day
after a holiday or weekend
Removal of new accounts from your credit report
Credit Cards
Must disclose how long to pay off card making minimum
payment
Must include what the savings would be if paid off early
Credit Cards
Under 21 must show proof of ability to make payments
Co-signer needed if cannot pay
Could push students to payday lenders and pawn shops
Must stay 1000 feet from college campuses
Credit Cards
No rate cap
Does not apply to business and corporate cards
New fees
Lack of use
Not using enough
Annual Fee
Paper statement
Customer service calls
Increase credit limit request
Cash advances
Second card
Credit Cards
Average family over $8500 in CC debt
Minimum is usually 2% of your balance
At 14% it would take 36 years to pay off this balance
Borrowing Money
Bad debt should be no more than 15% to 20% of your
income.
Debt ratio is your total monthly or yearly payments divided
by your total monthly or yearly salary
Example $787.00 in monthly debt payments on a $40,000
annual salary or $3,333 monthly salary = 24% debt ratio
Banks want a total debt ratio of no more than 40% for a
mortgage
Using the above example a limit of $546.00 a month for a
mortgage would be 40% or 30 years on $115,000 at 4%
Borrowing Money
Maintaining a good credit report and credit score is vital
Interest rate you are charged and loan amount depends on income
and credit score
Equifax, Experian and Trans Union provide credit scores
FICO or credit score is based on a mathematical formula
Scores range from 300 to 850.
The higher your score the better.
The lower the more of a risk and the higher interest rate
Median score is 723 with 750 and higher being a good score
You get 1 free report a year at www.myfico.com or within 60 days
if you are denied financing
Borrowing Money
Ways to keep or improve your credit score
Pay bills on time
Keep outstanding balances low
Closing cards can hurt your score
Many cards may hurt your score
The longer you keep credit cards the better for your score
You may contest discrepancies in your report
Borrowing Money
Rent vs. Borrow
Rent
Don’t expect to live in one place for long
Not interested in property upkeep
Large debt concerns you
Want the amenities of apt. complexes
Don’t mind that rent will increase
Borrow
Expect to settle down and establish self in community
Don’t mind upkeep or paying for it
Don’t want to pay landlord 1,000s of dollars
Want tax breaks and possibility of profiting
House payment will be fixed
Borrowing Money
A number of factors go in to buying a house
Once you qualify for a mortgage you have closing costs which are
put on a settlement sheet
Closing costs
Points or origination fees
Property taxes
Escrow fees
Homeowners insurance
Title Insurance
Notary fees
Water and sewer
Transfer taxes
Borrowing Money
Can refinance your house to a lower rate and or to use equity
Can borrow against the equity in your home
Can make an extra payment to reduce interest payment
Borrowing Money
Car buying (average new price $30,000)
What do you need in a car?
A car will only decrease in value
Negotiate the best price and use the internet
Car loans are competitive and you should know what you can
afford
Leasing lets you get more car as you rent the portion of the car
that you use with interest
Residual value is the value of the car at the end of the lease
Extra mileage and wear and tear can cost $$$
You either turn the car in or you can buy it
Borrowing Money
Bankruptcy – complete or partial inability to repay all or part of your
debt (creditors)
Federal Bankruptcy Court protects you from losing home, creditors and
wage garnishment
Reasons for bankruptcy – overextended, unemployment, medical expenses,
and marital problems
Bankruptcy should be last resort as it limits you in many ways and is on your
credit report for 10 years
Chapter 7 Bankruptcy is a liquidation where assets are sold and creditors
paid
Chapter 13 Bankruptcy is a reorganization where you can keep property and
have a plan to pay all or part of your debt as approved by a judge
Home (usually), furnishings, clothes retirement accounts and pensions are
exempt
New law forces most people in Ch. 13 meaning you need to pay more and
have to see a credit counselor
Budgeting
People don’t like to budget because it is confining, but they
need to do it.
Shows you what and where you are spending your $.
Call it a spending plan instead of a budget
Matches your income with your fixed expenses and lets you
decide on discretionary expenditures and savings.
It takes a few months to develop and use a plan.
Emergency fund of 3 months to a year’s salary should be a
target.
Budget worksheet sample- online
Investing
Investing should not be gambling
NYSE has buyers and sellers exchanging over a billion shares
or more per day
There are many other stock exchanges (NASDAQ and
AMEX) along with brokerage houses like Merrill Lynch and
Morgan Stanley.
Online investing like E-Trade along with various mutual
funds and banks use the stock markets
Investing
Brokerage firms – analyze companies, pick stocks and
execute trades for many types of customers
People have different investing philosophies depending on
several items
Indexes measure groups of stocks
Russell 2000 = small companies
Wilshire 5000 = all U.S. companies
Certain geographical indexes
NASDAQ
Dow Jones Industrials – DOW 30 large cos. picked by WSJ
S & P 500 – 500 largest U.S. companies
Investing
Stocks – partial ownership of a company
Over time profits and growth should increase the share price
and lead to a dividend or share of the profits
$3000 of Microsoft in 1986 worth $800,000 today
Vote on company issues with your shares
Companies have stock letters
Stock table – how to read
Investing
Bonds – IOU from a company, the govt., or your hometown
Generally safer than stocks
Price (cost to buy) and yield (% you earn in a year) – inverse relationship
Collect interest until the bond matures, then you get principal
Bonds are rated for risk
Treasury Bonds – bills, notes or bonds depending on length of issue
Municipal Bonds – issued by state and local govts. (sewer, schools etc.)
Corporate Bonds – issued by companies
Investing
Mutual Funds – investors pool money to buy investments
that are managed by professionals for a fee
Thousands of funds and trillions of $s
Types of funds
Index
Balanced – mix of stocks and bonds
Life Cycle – target a retirement date
Sector Funds – target certain segments of the market
Money Market
Exchange Traded Funds (ETFs) – traded like stocks
Dollar cost averaging – lower the price the more shares you can buy
Asset Allocations – pick mix of investments in a fund
Planning
Long term planning for a number of things such as college,
retirement, a car, house etc. is important.
15-20 years you will live after retiring
Funding your retirement should be your 1st priority.
70% to 100% of income to retire = 10x your annual salary
Net worth – total assets-total liabilities (spreadsheet)
Social Security
$20K = $699/month
$40K = $1,046/month
$60K = $1,392/month
$80K = $1,626/month
$100K = $1,778/month
Planning
401K – pre-tax money that grows without taxes until
retirement
Tax and 10% penalty for early withdrawal (59 ½)
$17,500 limit on contributions
Can select various investment options
Employers sometimes contribute
Can loan from 401K
Planning
Roth – after tax money, tax free growth and tax free removal
at retirement
Benefits many especially if in lower tax brackets
3 groups to seriously consider Roths
1. Young workers
2. Parents or grandparents saving for college who will be of
retirement age when kids go to college
3. People who want to pass money to heirs (do not have to
begin withdrawals by 70 ½ like most retirement plans)
Planning
SEP IRAs and KEOGH plans – used for self-employed
Individual Retirement Accounts (IRAs)
IRAs have various investment and tax options
Reverse Mortgage – collect money on the value of your
house either as a LOC or a monthly payment. Must repay it
either through the sale of your house or other funds.
Planning
College Planning
Calculators are online to help with college planning
3 types of accounts
Coverdell Accounts – work like IRAs, not tax deductible, no tax on
interest if used for education, cons – contribution limits and income
limits
529 Plans – beneficiary has no claim to $, each state has one, can use any
states, can contribute much more $, can either be prepaid or a savings
plan with investment options
UGMA & UTMA – Uniform Gifts or Transfers to Minors Act – money
put into an account that is taxed and $ goes to child when no longer a
minor
Life Insurance – can put extra $ into life insurance that doesn’t count
towards financial aid and then borrow that money for school
Planning
Financial Aid
Grants and scholarships – do not have to pay back
Loans – subsidized or unsubsidized
Federal Work Study Program – part time work at school
Planning
EFT – Expected Family Contribution
35% of student’s assets
50% of student’s income
2.6% to 5.6% of parent’s assets depending on their age
22% to 47% of parent’s income
Assets for retirement and primary residence are not counted
Life insurance is not counted
Insurance
Insurance gets no respect until you need it and then you’ve
had a bad day.
Insurance buyers are grouped by risk and actuaries calculate
insurance rates.
Risk is shared among a group of people who pay premiums.
Premiums are invested.
Coverage – how much money the policy will pay out
Premium – cost of coverage – preferred, standard,
substandard & uninsurable
Deductible – how much you have to contribute on a claim
(higher deductible = lower premium)
Insurance
Life Insurance
Term and Cash-Value
Term - cheaper, in place for a limited amount of time, could
expire before you do
Term can usually be converted to cash value
Cash Value - 4 to 8 times cost of term, has a savings portion,
remain in effect forever, can loan against them, break even in 14
or 15 years
Lapse – when a policy expires due to not being paid
Insurance
Who may not need life insurance?
Single people with no dependents
Working couple with no kids who don’t need the other’s income
Retirees with no financial obligations
Wealthy people with large estates
Children unless they make $$$ or you want it for their future
Why buy life insurance?
Dependent children
Married to a non-working spouse
You have other people you support
You have debts
You want to maximize your pension
You have business partners
Insurance
5 to 10 times your annual salary needed
Do not buy as an investment (usually)
Buy term and invest the difference
Annuities – paid a set amount of money for a set period of
time
Many different types
Insurance
Homeowner’s Insurance
Required by lender
Insure to replace damage to home or loss of personal items
Actual Cash Value vs. Replacement Cost
Keep a home inventory in a safe place
Automobile Insurance
Car is biggest liability
Parts of a policy: liability, collision, comprehensive, uninsured,
underinsured, medical and personal injury protection
States set minimum requirements
Shop around for rates
Good credit may equal lower rates (other factors)
Insurance
Ways to lower rates
Homeowners – deadbolts, sprinklers, alarm, fire alarm, fire
extinguishers, smoke detectors, don’t smoke, & home
inspection
Automobiles – multi-car discount, avoid tickets, anti-theft
devices, anti-lock brakes, airbags, driver’s education, good
grades, electronic payment, certain occupations, marriage &
bundling policies
Taxes
Payroll – federal, state, local, SS, Medicare, Medicaid, EMT
Gas
Property (school, county & local) – cars and RVs in some states
Sales
Realty transfer
Entertainment tax
Vending
Use
Occupational privilege
Capital gains
Consumption – hunting license, hotels, toll roads, etc.
Inheritance
Corporate
Permits and fees (marriage, building, zoning, etc.)
Taxes
Taxes
Taxes