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
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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
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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
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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
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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
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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
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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
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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
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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
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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,
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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
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$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
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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
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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?
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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?
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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
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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
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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