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Personal Finance Things you need to know to make the most of your money!
Financial Institutions - Banks People can deposit their money in a bank, a savings and loan association, or a credit union. A bank is a corporation that stores deposits from individuals and businesses and makes loans in order to earn a profit. Banks use the money customers deposit to make loans for homes, cars, or other expensive items. Reserves are protected by the FDIC – Federal Deposit Insurance Company Services offered by banks include checking accounts, savings accounts, loans, traveler’s checks, certificates of deposit etc.
Savings and Loan Associations Similar to a bank Gets most deposits from consumers instead of businesses, and lends most of its money out to home buyers Reserves also protected by the FDIC Services include Checking accounts, CDs, savings accounts, other banking services
Credit Union Not for profit financial institution that is owned and controlled by its members, usually people who work in the same company or occupation. Credit union deposits earn interest, and depositors are eligible to borrow money from the credit union at lower interest rated than a bank would charge Reserves also protected by the FDIC Services include savings accounts, checking accounts, credit cards, CD’s, etc. https: //www. cuofga. org/
Investments Investment – money you pay into a business with the expectation (not guarantee) of future rewards Relationship between risk and return: The greater the risk you are willing to take, the higher the potential rewards/return you can earn Examples include savings accounts, CD’s, mutual funds, bonds, and stocks
Savings Accounts How it works: Put your money in a savings account at a bank, savings and loan or credit union. The institution pays you a small amount of interest (. 5 – 2%) per year. The interest rate is low because the bank is trying to make a profit – they charge a larger percentage in interest on loans so that they can make a profit Very low risk – your money is protected by the federal government – FDIC
Certificates of Deposit (CD’s) How it works: put in a deposit you promise to leave in the bank for a specific amount of time, usually a year or more Type of savings account with a higher interest rate (3 -5%) Limit on time – 6 months, 1 year, 2 years Put money into a CD and earn higher interest rate or return for a short amount of time. There is a penalty if you take money out early Safe investment – insured by FDIC- low risk
Mutual Funds Type of investment in which company pools money from many investors and uses it to buy a variety of stocks and bonds called a portfolio. How does it work? Put money in – buy shares in fund – someone manages your account – Less risky than stocks because stocks are diversified – Rate of return depends on success of investment Benefit – offers a compromise by including low-risk, low-return stocks with some high-risk, high –return stocks. Investors do not lose all of their money buy still have the opportunity to earn high profits (depending on the market) Medium risk 5 -6% List of mutual fund companies http: //www. seedship. com/mf/
Bonds When you buy a bond you are lending money to a corporation, fed. , state, or local gov’t, or organization. In return, the bond issuer pays you interest periodically and then repays the cost of your bond plus interest at its maturity date (several years later) Earn higher interest rates than savings accounts or CD’s – will depend on the issuer. Low- medium risk – gov’t bonds come with lower risk than corporate bonds One exception – Junk bonds – exceptionally risky company, very high interest rate to compensate for possibility of non payment – very high risk
Bonds are rated according to risk Bond Rating Moody's Standard & Poor's Aaa AAA Aa A Baa Ba, B Caa/Ca/C C AA A BBB Risk BB, B CCC/CC/C D Grade Risk Investment Lowest Risk Investment Low Risk Investment Medium Junk High Risk Junk Highest Risk Junk In Default
Stocks Investment with highest risk, highest possible rate of return You buy shares of stock which are shares of ownership in a company Earn dividends on stocks – you can profit or lose money based on success of company How does it work? Through a brokerage firm you can purchase stock in a company – prices vary from penny stocks to thousands or millions for one share. Various stock exchanges exist – NY Stock Exchange, American Stock Exchange, NASDAQ, S&P 500, International Exchanges The DOW Average is an index – an average of all exchanges together. We can look at where the DOW is and get an overall picture of how the market is performing
Pyramid of Risk and Return Highest Risk/Potential Return Junk Bonds Stocks Real Estate Corporate Bonds Mutual Funds Certificate of Deposit Lowest Risk/Potential Return or Loss Savings Account U. S. Savings Bond
Simple Interest What is simple interest? – you are charged interest ONLY on the original amount of the loan What is formula for figuring simple interest? Interest = P * R * T Interest = Principal x interest Rate X Time (years) Example: 1, 000 bank loan (P) 10% interest 1 year Interest = 1, 000 *. 10 * 1 = $100 Add interest back to Principal to get the total amount you will repay the bank = $1100
Compound Interest – Interest charged on interest, - charged on principal and amount you owe - can be charged annually, bi-annually, quarterly, or even monthly This gets expensive – common of credit card companies Formula for Compound Interest A = P (1 + i)n A - the amount in the account P - principal i – interest rate n – number of years compounded If it is compounded bi-annually the formula will change to n/2, quarterly n/4, monthly n/12
Simple v. Compound Interest If you borrowed 15, 000 at 7% interest for 4 years, how much would you pay in interest? $4200 (simple interest) How much would you pay back total? (Principal + Interest) $19, 200 If you had an investment of 15, 000 at 7% interest that was compounded annually, how much would be in the account after 4 years? $19, 661. 94 A difference of $461. 94 because of compound interest.
Example – Compound Interest If 10% interest on 1, 000 is compounded annually: A = 1000(1+. 10)1 A = 1000 (1. 10) 1100 is how much you are charged after the first year After 2 years it would be A = 1000(1+. 10) 2 which would equal $1210 After 5 years it would be A = 1000 (1+. 10)5 which would equal This is good if you have an investment that pays compound interest, bad if you are being charged compound interest.
Interest Cont. What is an annual rate? Amount of interest charged per year rather than per month What is a fixed interest rate? Interest rate that never changes – variable interest rate can go up at any time What is an annual fee? Yearly charge just for having the credit card, whether you use it or not What is a finance charge? A fraction of the annual interest rate on your monthly balance (how credit card companies charge interest)
Inflation Increase in general level of prices 2 main causes of inflation 1. Demand-pull – aggregate demand rises faster than producers can supply goods and services, the result is shortages, which leads to higher prices 2. Cost-push inflation – if aggregate supply falls because of a natural disaster, demand stays the same, there will also be shortages, which results in higher prices
Inflation, Cont. How does inflation affect consumers? You cannot buy as much for your money as you could in the past – you are especially hurt if you are living on a fixed income and cannot earn any other money. If you have a cost of living adjustment in your contract, your employer will increase your wages to match the inflation rate How does inflation affect savings? You have less money to save, banks suffer as deposits decline and loan values decrease Who benefits from inflation and how? People who have borrowed money – the value of the money they are paying back is less than they value of the money they originally borrowed.
Credit – the ability to obtain goods and services now based on an agreement to pay for them later Examples: bank loans for cars, homes, education, credit cards Benefit – convenient, allows us to enjoy good before we pay for them Cost – increases cost of goods, can lead to spiraling debt, can destroy financial stability now and in the future
3 C’s of Credit 1. Creditworthy – ability to pay the money back – lender does not want to take the risk that you might not pay the money back – to determine this they will need information about your job, income, savings, current expenses, how many people depend on you, other debts, etc. 2. Collateral – what property do you have that the bank could take from you if you do not pay the loan – property, income, etc. 3. Credit History – how well you have managed your bills and credit in the past – will get your credit score from a credit bureau – score is based on how responsible you have been with previous loans – the higher your score the better
WHAT MAKES UP A TYPICAL CREDIT SCORE? Source: Fair Isaac and Consumer Federation of America, 2005 22 Slide 2 – What Makes Up a Typical Credit Score? Lesson Reference: Credit, Activity 2 – Overhead 2
IMPROVING YOUR CREDIT SCORE • • 23 Pay bills on time. Don’t open a lot of new accounts too rapidly. Correct mistakes. www. annualcreditreport. com – credit report once a year with no penalty Shop for loan rates within a focused period of time. Keep balances low on revolving credit. Pay off debt. Check your credit report. Slide 3 – Improving Your Credit Score Lesson Reference: Credit, Activity 2 – Handout 2
Taxes are classified according to the relative effects they have on people with high incomes and people with low incomes. There are 3 types 1. Proportional – people with higher and lower incomes pay the same portion or percentage of their income in taxes. This is also known as a flat tax, because everyone pays the same flat rate. Very few taxes are proportional in the U. S. – an example is Social Security – it is proportional – everyone pays the same percentage of their income( 6. 2%), up to 102, 000. Any amount earned over 102, 000 is not taxed by Social Security. A proportional tax has the same effect on the all incomes – does not redistribute income
Progressive Taxes People with higher incomes pay a larger proportion or percentage than those with lower incomes. Progressive tax rates are graduated based on income – your tax rate gradually increases as your income increases. Example – income tax in the United States Should place a heavier burden on the wealthy, because they pay a higher percentage in taxes However, this is not always the case because of tax deductions to reduce taxable income The goal of progressive taxes is to redistribute income and reduce inequalities in income.
2015 Income Tax Brackets in the U. S.
Regressive Taxes People with lower incomes pay a larger portion or percentage of income than people with higher incomes. Places a greater burden on the lower incomes. Example – Sales tax – the upper, middle, and lower incomes both pay sales tax, but those with lower income pay a greater percentage of their income in sales taxes for the same items
Insurance Define: Policy – written agreement between you and the insurance company – explains what losses the company will cover, how much it will pay to cover losses, and how much you will pay for this protection Deductible – amount of loss that you must pay yourself before the company will step in and pay the rest Claim- request for payment of your losses Premium – the amount of money you must pay each month, quarter, or year in order to guarantee coverage
Types of Insurance Car Insurance – required by all states to have a minimum amount – liability coverage Liability – pays for any personal injuries or property damage for the other car Collision – pays damages for your own car Comprehensive – not your fault (hit a deer, hail damage, tree fell on your car) The younger you are the higher your premium – males pay more than females – when you turn 25 your rates go down, safe driving record makes rates go down, get married – rates go down
Insurance, cont. Health Insurance – pays medical bills if you are sick or injured – until age 26 can get through parents– cheapest way to get it is through your job Property insurance – replaces belongings if they are stolen or destroyed by fire, flood, weather – protects value of your house Disability Insurance – if you suffer an illness or injury that keeps you from working for an extended period – will pay you 75% of your monthly income until you recover Short Term – if you will be out for 3 months or less – pays after 10 th consecutive day out of work – more expensive Long Term – if you will be out for an extended period of time – pays after 3 months out of work – less expensive
Insurance, Cont. Life Insurance – provides money to the people you leave behind when you die. You name a beneficiary – the person you want to receive the money 2 kinds A. Term Life – cheaper and pays a higher death benefit. You can only buy a policy for a limited time – when it is over you have to buy a new policy, at a higher price, because term-life premiums increase the older you are. Pays only when you die – has no cash value b. Whole Life – more expensive, pays a lower death benefit – provides coverage for your whole life and the premiums never increase. It is an investment – has a cash value that increases over time. You can withdraw or borrow money from it for emergencies or other expenses.
Skills to be successful in the Job Market What are the fastest Growing Occupations predicted? Home health aides, network systems, data communication, medical assistants, physician assistants, computer software engineers. 13 qualities that employers are looking for 1. Analytical (problem skills) skills 8. Ability to focus on detail 2. Computer skills 9. Honesty and integrity 3. Flexibility and adaptability 10. Leadership ability 4. Interpersonal (people) skills 11. Organizational skills 5. Motivation and initiative 12. Strong Work Ethic 6. Self-confidence 13. Teamwork 7. Communication skills