* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download course
Survey
Document related concepts
Securitization wikipedia , lookup
Expenditures in the United States federal budget wikipedia , lookup
Financial economics wikipedia , lookup
Household debt wikipedia , lookup
Negative gearing wikipedia , lookup
Systemic risk wikipedia , lookup
Interest rate wikipedia , lookup
Financial literacy wikipedia , lookup
Present value wikipedia , lookup
Conditional budgeting wikipedia , lookup
Interest rate ceiling wikipedia , lookup
Debtors Anonymous wikipedia , lookup
Systemically important financial institution wikipedia , lookup
The Millionaire Next Door wikipedia , lookup
Transcript
COURSE Personal Finance 8726 UNIT: D Managing and Protecting Resources ESSENTIAL STANDARD: 8.00 C3 11% Apply procedures for managing personal finances. OBJECTIVE: 8.01 B2 4% Understand options for saving and investing. ESSENTIAL QUESTIONS: How are saving and investing similar, and how are they different? Why do some people find it so difficult to save and invest? What “rules” can help build smart saving and investing habits? What factors should be considered when selecting saving and investing options? UNPACKED CONTENT Saving and investing Saving Investing Investing is purchasing assets that earn interest over time. Investments are assets purchased with the goal of increasing income. To make a profit over time Volatility Saving is setting aside present income for future use. Savings is the portion of income not spent on consumption. To make money available for future needs * To prepare for emergencies * To prepare for major purchases purchases * To achieve financial goals A bonus or side-benefit Usually earns lower rates of interest Money may be withdrawn at any time Usually not volatile; rates are fixed Risk Usually little risk of losing money Definition Primary purpose Reasons for saving and investing Interest earnings Return Liquidity * To pay recurring expenses * To prepare for future * To prepare for retirement The main focus Usually earns higher rates of interest Money may not be easily accessible Rate of return and value may change suddenly and significantly Usually more risk, but risks may be necessary to make a profit Reasons individuals may fail to save/invest Not being able to meet current needs and wants Not being aware of how much needs to be saved for future goals Over-relying on credit for emergencies Over-relying on job security and insurance OBJECTIVE: 8.01 B2 4% Understand options for saving and investing. UNPACKED CONTENT “Rules” for saving and investing View saving and investing as a fixed expense Rule of Saving: Pay yourself first; take a portion of earnings for saving/investing before spending any of your paycheck 70-20-10 Saving and Investing Rule: For any money earned, spend 70%, save 20%, and invest 10% Saving and Investing Plan: For those whose values or lifestyle make saving 30% unrealistic, start a saving and investing plan in order to continually save a fixed amount Rule of 72: Divide 72 by the rate of interest earned on an investment to find the number of years needed to double an amount of money invested Factors to consider when choosing saving and investing options Liquidity Minimum deposit/balance Interest rates/rate of return Risk factors Transactions Security Saving and investing options Savings accounts Money market accounts Certificates of deposit Savings bonds Individual retirement accounts (IRAs) Stocks Bonds Mutual funds Comparison: Saving and Investing Criteria for Comparison Saving Investing Definition Saving is setting aside Investing is putting money to present income for future work so that it earns interest use. over time. Savings is the portion of Primary purpose Investments are assets income not spent on purchased with the goal of consumption. increasing income. To make money available for To make a profit over time future needs Reasons for . . . * To prepare for emergencies * To pay recurring expenses * To prepare for major purchases * To prepare for future purchases * To achieve financial goals * To prepare for retirement Interest earnings A bonus or side-benefit The main focus Return Usually earns lower rates of Usually earns higher rates of interest interest Money may be withdrawn at Money may not be easily any time accessible Usually not volatile; rates are Rate of return and value may fixed change suddenly and Liquidity Volatility significantly Risk Usually little risk of losing Usually more risk; risks may be money necessary to make a profit Options for Saving and Investing Certificates Savings Accounts Money Market of Deposit Savings Bonds Definition An account in a bank/financial institution that allows one to make deposits and withdrawals A type of savings account in which deposits are invested by the bank/financial institution to yield additional earnings A certificate issued by a bank/other institution to show that money has been deposited for a certain term Nontransferable debt certificates issued by the U.S. Treasury Minimums Minimum deposits usually lower than other savings options Minimum opening deposit usually higher than with savings accounts Minimum opening deposit varies Smallest denomination purchased is generally $50 or $500, depending on series of bond Withdrawals and liquidity Usually the most liquid savings option Usually allows person to write a limited number of checks per month Usually must pay a substantial penalty to withdraw money early Most can be cashed after 6 months; some may carry penalties if cashed before 5 years Interest rates and rates of return Usually lower interest rates than other savings options, but may vary Usually higher interest rate than savings accounts, but may vary Interest rate is usually fixed until the end of the term Fixed and variable rates; interest earnings subject to state, but not federal, taxes. Federal taxes can be deferred until cashed or stops earning interest. Interest paid when bond is cashed, or every 6 months by direct deposit to checking or savings account Transactions Use bank teller, ATM, phone, online; no checks; get monthly statement Withdrawals and transfers limited Usually cannot make additional deposits during the term, but can add to it when you renew Usually can be cashed after 6 months. Some carry a penalty if cashed before 5 years, but pay current value (higher than face value) after 5 years. Security and risk factors Protected by FDIC or NCUA insurance Generally protected by FDIC or NCUA insurance Generally protected by FDIC or NCUA insurance Since generally backed by the federal government, these are relatively safe. Options for Saving and Investing Definition Minimums Withdrawals and liquidity IRA Stocks Bonds Personal savings plan used to set aside money for retirement Shares of ownership and interest in assets and earnings of a company Debt issued by a government or company for a specified time A group of investments (stocks and bonds) held in common with shares owned by many investors Vary Vary Vary Vary Traditional IRAscontributions taxdeductible; taxed when withdrawn Stockholders may buy and sell stocks when they wish Liquidate when mature; vary from short-term (days, weeks) to longterm (years) Management fees must be paid when you sell or redeem shares, even if earnings are low Roth IRA- not taxdeductible; earnings tax-free Mutual Funds Can be liquidated at any time; no term or maturity dates Interest on municipal bonds exempt from federal income tax Tax-deferred plans: *Keogh Planretirement plan for the self-employed 401k-employersponsored retirement plan Interest rates and rates of return Vary with type and status Transactions Purchased through financial institution Security and risk factors A reasonably safe investment when the economy is stable When directors approve, dividends paid from net profits; interest rates vary Bought on securities exchanges (stock markets), over-thecounter markets, initial public offerings, or directly from company Earnings based on how well company does Common or preferred? *Common-more risk, more potential for gains *Preferred-paid first, fixed earnings, low risk Type of company? *Blue chip-from big companies, less risk *Growth-from growing companies, more risk *Penny-from high-risk companies, less than $1 per share, very risky Interest earnings vary according to type of bond and level of risk Corporate and municipal, usually bought/sold through brokers; US government, issued by Treasury Generally protected by FDIC or NCUA insurance; generally considered safe and reliable Fixed and variable rates; interest earnings subject to state, but not federal, taxes Bought and sold through investment brokers Funds are diversified in various investments so losses in one fund may be offset by gains in another A reasonably secure investment when the economy is stable Money markets are not FDICinsured Term Definition General Terms save To set aside present income for future use invest To put money to work earning interest over time profit Money remaining in a business after expenses are paid interest Money paid for the use of someone else’s money over a period of time return The income that can be made on an investment liquidity How easily an asset can be converted into cash volatility How easily the interest or cash value of an investment can change risk The possibility of earning or losing money from an investment transaction A saving/investing activity---e.g., deposits, withdrawals, and transfers Saving and Investing Options savings account An account in a bank/financial institution for saving, making deposits/withdrawals money market A savings account in which deposits are invested to yield additional earnings CD A certificate of deposit stating money has been deposited for a specific time savings bond A debt certificate issued by the U. S. Treasury that is not transferable IRA An Individual Retirement Account used to save money for retirement Koegh plan A tax-deferred retirement plan for self-employed people Roth IRA A personal savings plan; contributions are not tax-deductible; earnings are tax-free stock A share of ownership and interest in the assets and earnings of a company common stock Stock in a public corporation; returns vary, but higher risk preferred stock Stock with fixed dividends, less risk blue chip stock Stock from large companies, less risk growth stock Stock from growing companies, more risk penny stock Stock that costs less than $1 per share; extremely high risk bond A certificate of debt given by a company or government that entitles the bondholder to the original amount plus interest paid by a set date mutual fund A group of investments held in common with shares owned by individual investors COURSE Personal Finance 8726 UNIT D Protecting and Managing Resources ESSENTIAL STANDARD: 8.00 C3 12% Apply procedures for managing personal finances. OBJECTIVE: 8.02 B2 3% Understand personal financial planning. ESSENTIAL QUESTIONS: What are the steps in financial planning? What are the benefits of financial planning? What are the basic types of financial statements, and how is each used? How do income and expense statements compare with spending plans? UNPACKED CONTENT Financial Planning Used for planning ways to reach financial goals A continual, cyclical process of tracking, then anticipating, income and expenses Steps in the process of financial planning Identify financial goals Prepare a balance sheet showing what you own and what you owe Track income and expenditures for a set time period, usually a month, and record in an income and expense statement Analyze amount of money earned and how it was spent Prepare a spending plan with anticipated income and expenses to meet financial goals during the next time period At the end of the time period, revise financial goals, if needed, and use the actual income and expenses to again analyze income and how it was spent Prepare your next spending plan Note that three types of financial statements, shown above in bold font, are needed for financial planning. Benefits Learn to live within one’s means Helps avoid financial difficulties Have resources for one’s desired standard of living Reduces the need to use credit Increases sense of security Lessens anxiety about money matters Stay in control of finances Become financially independent Financial Statements Balance sheet Shows assets, liabilities, and net worth of an individual or family Reason needed: need to know financial status in order to plan finances OBJECTIVE: 8.02 B2 3% Understand personal financial planning. UNPACKED CONTENT Financial Statements, continued Income and expense statement Also known as cash flow statement A list of all income and expenses for a specified time period A historical type of record that serves as the basis for a spending plan Shows whether individual/family was able to live within his/her/their means Shows where income was spent Shows when expenses exceed income and areas of excess expense Shows if income was sufficient to meet expenditures Spending plan Also known as a budget or a financial plan A tool used to plan income and expenses for a future time period Used to track income and expenditures Used to evaluate spending at the end of a time period Comparison of income and expense statement with spending plan Criteria Income and expense statement Spending plan Time orientation Past---a historical record of what was earned and spent Future ---a projection of anticipated earnings and expenditures Basic use Used as a foundation for planning one’s finances Used to estimate finances for a future time period Specific uses Shows if living within means Shows where money was spent Shows when too much is being spent on a certain category of expenses Shows if additional income is needed to meet necessary expenses Is used to develop a spending plan Where fits in financial planning Helps one live within means Helps plan where to spend money Helps track income and expenditures Reduces the likelihood of having to use credit and go into debt Becomes the income and expense statement at end of specified time period Balance Sheet Scenario: Jessica Dalton is a full-time student at State University. She rents an apartment near campus with three other students; her share of the monthly rent is $300. When the weather is good, she enjoys walking to class, which saves on her gasoline expenses. She spent $90 this month on gas and auto upkeep. She spent $625 this month on food, clothing, entertainment, and student expenses. She currently has $200 in current bills due and owes her credit card company $650. She still owes $2,000 on her car and owes her older brother $500. Jessica works weekends as a server at a nearby restaurant and earned $450 this month in wages and tips. Jessica has $1,200 in her checking account and $400 in savings. Her grandfather gave her stock valued at $500 for her birthday. The value of her car is $5,000. She has other assets totaling $800. Balance Sheet for Jessica Dalton as of _____________________________________ (Date) Assets Wages and tips Checking account Liabilities $450 Apartment rent $ 300.00 $1200 Gas & upkeep $90 Savings account $400 Food, clothing, entertainment, and student expenses) $625 Stock $500 Current bills due $200 Car $5000 Credit card Other assets $650 $800 Car $2000 Owes brother $8350 TOTAL ASSETS> $500 $4065 TOTAL LIABILITIES> NET WORTH = Total Assets minus Total Liabilities = $4285 Jessica has been invited to move to a larger apartment where she would only share space with one person. Her monthly cost for rent would be $750 and she would have to pay a security deposit of one month’s rent when she moves in. What advice would you give Jessica and why? No, liquid assets are less than current bills. She does not have enough to pay the deposit and insufficient monthly income to cover her current rent (which is less than ½ the new)and expenses Appendix 8.02D Key Terms: Financial Planning Term Definition Financial Planning financial planning A process of tracking and anticipating income and expenditures financial goal A specific aim to be accomplished with the use of financial planning continual Ongoing, without ending cyclical Occurring in a cycle, with steps repeated in sequence over and over wealth Having a large amount of money or property living within one’s means Being able to pay all expenses with available income Financial Statements financial statement A document or tool that shows personal financial information/data balance sheet A financial statement that shows the assets, liabilities, and net worth of an individual or family on a set date asset Anything with monetary value that a person owns liability Anything that is owed to someone else; a debt net worth The amount of money remaining when total liabilities are subtracted from total assets income and expense statement A financial statement that shows all income and expenses of an individual or family during a specific time period, usually a month or a year cash flow The income and expenses of an individual or family during a time period income Total earnings received expense Any expenditure; anything that costs money net gain The amount of money one has after subtracting expenses from income net loss The amount of additional money needed when expenses are greater than income spending plan A financial statement used to plan income and expenses for a future time period; also known as a budget or financial plan COURSE Personal Finance 8726 UNIT D Protecting and Managing Resources ESSENTIAL STANDARD: 8.00 C3 12% Apply procedures for managing personal finances. OBJECTIVE: 8.03 C3 5% Apply procedures to manage personal income and expenses. ESSENTIAL QUESTIONS: What are the principles of financial planning? What are the elements of spending plans? What are the steps in the spending plan process, and how is each used? UNPACKED CONTENT Principles of financial planning (JumpStart Coalition) Money doubles by the “Rule of 72” Your credit past is your credit future Start saving young Stay insured Budget your money Don’t borrow what you can’t repay Map your financial future Don’t expect something for nothing High returns equal high risks Know your take-home pay Compare interest rates Pay yourself first (The JumpStart Coalition, http://www.jumpstartcoalition.org/files2010/2010_J$_Calendar.pdf) Elements of spending plans Income---money earned from wages, salaries, tips, withdrawals from savings and investments, interest earnings, scholarships, sales of properties, and gifts Expenses Fixed expenses---due by a specified date, often agreed upon in a contract; difficult to change in a short time Flexible expenses---not due by a specified date; usually these are easier than fixed expenses to reduce or eliminate Net gain---when one has more income than expenses, the difference between the two Net loss---when one has more expenses than income, the difference between the two OBJECTIVE: 8.03 C3 5% Apply procedures to manage personal income and expenses. UNPACKED CONTENT The spending plan process Set SMART financial goals Specific Measurable Attainable Realistic Time-bound Organize Determine format to use Select categories for the spending plan Select a time period Decide Make realistic decisions and estimates for categories of spending. If income is less than expenses, decide whether to earn more income, decrease expenses, or a combination of these. Implement---put the spending plan into action Note: Implement and control are to be done at the same time. Control Records kept as the spending plan is implemented reveal potential problems early, such as overspending in one category. Use a computer or calculator to check records for accuracy. Keep a credit spreadsheet to log all credit transactions, including both charges and payments. Types of control systems 1. Envelope system 2. Spending plan 3. Check register system Evaluate Determine if the spending plan process has worked Compare estimated income and expenses to actual Assess progress toward financial goals Revise the spending plan (including financial goals) as needed and recycle to beginning of process Key Terms: Managing Income and Expenses Term Definition Elements of Spending Plans income Money earned---from wages, salaries, tips, withdrawals from savings, interest earnings, scholarships, sales of properties or possessions, gifts, etc. expense Money spent---for both fixed and flexible expenses; an expenditure anticipated An amount of income or expense that is expected, planned, or projected actual An amount of income or expense that was really earned or spent fixed expense An expense that is due by a certain date, often agreed upon in a contract, and difficult to change in a short time flexible expense An expense that is not due by a certain date and is easy to reduce or eliminate The Spending Plan Process specific financial goal A financial goal that states exactly what is to be done with money measurable financial goal A financial goal that gives an exact dollar amount attainable financial goal A financial goal for which one can determine how to reach it realistic financial goal A financial goal that is affordable and doable time-bound financial goal A financial goal that states exactly WHEN the goal needs to be reached organize spending plan Determine appropriate recordkeeping format, select categories and time period decide Make realistic decisions and estimates for categories of the spending plan implement Put the spending plan into effect control Keep accurate records while the spending plan is being implemented evaluate Determine how well the spending plan process has worked envelope system Placing exact amount of cash for an expense in a labeled envelope spending plan A financial statement used to track expenses from day to day check register system Tracking expenses in a checkbook register divided into spending plan categories