Download Chapter 1: Understanding Personal Finance

Chapter 1: Good Money Habits in Understanding Personal Finance
Make the following your money habits in understanding personal finance:
1. Spend significantly less than you make and save using a pay-yourself-first approach.
2. Stay up-to-date with current economic conditions and the knowledge to manage your
personal finances.
3. When making financial decisions, use marginal and opportunity costs and time value
of money calculations.
4. Establish financial goals and take actions to achieve them.
5. Take advantage of tax sheltering through your employer’s benefits program.
6. Believe in compounding by allowing your money to work for you over time by
earning interest on top of the principal and other accrued interest.
7. Keep debt under control.
8. Take responsibility for managing your own financial success.
Chapter 2: Good Money Habits in Career Planning
Make the following your money habits in career planning:
1. Take the time to plan and make the effort required to obtain employment in your
career.
2. Identify your career planning values and live them in your selection of jobs and in
your performance at work.
3. Do not miss an opportunity to continually enhance your education and professional
training.
4. Understand your preferred work-style personality.
5. Practice effective employment search strategies, especially interviewing skills.
Chapter 3: Good Money Habits in Financial Statements, Tools and Budgets
Make the following your money habits in financial planning statements, tools, and
budgets:
1. Identify your financial values, goals, and strategies so you can always keep a balance
between spending and saving and stay committed to your financial plans.
2. Develop your own balance sheet and update it annually.
3. Develop your own cash-flow statements monthly or quarterly and compile them into
an annual statement each year.
4. Calculate your financial ratios annually to assess your financial progress.
5. Develop a list of your financial goals. Start with the shorter-term goals and then
expand your list to longer-range goals. Update and revise your goals annually.
6. Start an uncomplicated personal financial record-keeping system that meets your
needs.
Chapter 4: Good Money Habits in Managing Income Taxes
Make the following your money habits in managing your income taxes:
1. Reduce your income taxes by signing up for tax-advantaged employee benefits at
your workplace.
2. Contribute to your employer-sponsored 401(k) retirement plan at least up to the
amount of the employer’s matching contribution.
3. Buy a home to reduce income taxes.
4. Do your own tax return so you can learn how to reduce your income tax liability.
5. Maintain good tax records.
Chapter 5: Good Money Habits in Managing Checking and Savings Accounts
Make the following your money habits when managing checking and savings accounts:
1. Use a free, interest-earning checking account for your day-to-day spending needs.
2. Use high-interest savings accounts for funds you will not need for six months to about
five years in the future.
3. Use investments for needs that will not occur until five or more years in the future.
4. Maintain an emergency fund sufficient to cover three months of expenses.
5. Buy certificates of deposit when saved funds will not be needed until a specific future
date.
6. Reconcile your account statements monthly.
Chapter 6: Good Money Habits in Building and Maintaining Good Credit
Make the following your money habits for building and maintaining good credit:
1. Protect your credit reputation just as you would guard your personal reputation.
2. Calculate your own debt limits before taking on any credit.
3. Obtain copies of your credit bureau reports regularly, and challenge all errors or
omissions on them.
4. Never cosign a loan for anyone, including relatives.
5. Always repay your debts in a timely manner.
Chapter 7: Good Money Habits Credit Cards and Consumer Loans
Make the following your money habits in credit cards and installment loans:
1. Move credit card balances to lower-cost accounts, if necessary.
2. Never make convenience purchases on bank credit cards on which you carry a
balance.
3. Pay your credit card balances in full each month, or no longer than two or three
months later.
4. Check your monthly billing statements against your receipts for accuracy, and
challenge discrepancies.
5. Use student loans for direct education expenses only rather than to maintain a better
lifestyle.
6. Select installment loans that have a low annual percentage rate.
Chapter 8: Good Money Habits in Vehicles and Other Major Purchases
Make the following your money habits in vehicle and other major purchases:
1. Think through all of your major purchases using the planned buying process.
2. When planning to buy vehicles, check repair ratings history in the April issue of
Consumer Reports magazine.
3. Purchase late-model, high-quality used vehicles and check their ownership history at
www.carfax.com and any recall history at www.nhtsa.gov.
4. Obtain price information from at least three sources and aggressively negotiate prices
and financing terms for major purchases.
5. Never tell a seller what payment you can afford.
6. Promptly and firmly seek redress when dissatisfied with purchases or services.
Chapter 9: Good Money Habits in Buying Your Home
Make the following your money habits when buying your home:
1. Read your leases and all other real estate contracts before signing.
2. Save the funds for a down payment in a tax-sheltered Roth IRA account.
3. Get your finances in order before shopping for a new home by reducing debt,
budgeting better, and clearing up anything that keeps you from having a high credit
score.
4. Buy a home as soon as it fits your budget and lifestyle so you can take advantage of
special income tax deductions and the likelihood of substantial price appreciation
over time.
5. Thoroughly explore mortgage loan sources and options to determine which one best
fits your needs.
6. If you make a down payment of less than 20 percent on a home, cancel private
mortgage insurance as soon as the equity in your home pushes the loan-to-value ratio
to 80 percent.
Chapter 10: Good Money Habits in Managing Property and Liability Risk
Make the following your money habits in managing property and liability insurance risk:
1. Always insure your home and vehicles.
2. Purchase insurance policies with very high liability limits to protect against the
possibility of catastrophic losses.
3. Verify that your auto insurance policy covers rental car losses so you can wisely
ignore sales pressure to purchase such overpriced coverage.
4. Always comparison shop for insurance locally as well as online.
5. Maintain a verifiable inventory of all your insured property so that you can collect
what is coming to you in the event of a loss.
6. Once each year, reassess what types of and how much insurance coverage you need.
Chapter 11: Good Money Habits in Managing Health Expenses
Make the following your money habits in managing health expenses:
1. Always maintain coverage for direct health care expenses.
2. When changing employers, consider continuing your medical care plan coverage
using rights established through the COBRA law.
3. Working people should sign up for an employer-sponsored premium conversion plan
and a flexible spending account for health care spending, when available, to save
money on taxes.
4. If you are a frequent user of health care, reduce spending on deductibles and
coinsurance by choosing an HMO or PPO.
5. Take advantage of employer-sponsored long-term disability income insurance or
consider purchasing protection individually.
6. Regularly reevaluate your need for long-term care insurance against your resources
for providing such care on your own.
Chapter 12: Good Money Habits in Life Insurance Planning
Make the following your money habits in life insurance planning:
1. Calculate your life insurance needs every three years or when major life events occur,
such as the birth of a child.
2. Avoid being talked into buying types and amounts of life insurance that you do not
need.
3. Shop for term life insurance on the Internet to obtain the lowest possible rates.
4. Employ the principle of “buy term life insurance and invest the rest” with guaranteed
renewable or level-premium term life insurance.
5. Contribute the money saved by purchasing term rather than cash-value insurance into
your retirement plan.
6. If you decide that you need a cash-value life insurance policy, get one with a
guaranteed insurability option.
Chapter 13: Good Money Habits in Investing Fundamentals
Make the following your money habits in investing fundamentals:
1. Sacrifice some of your income by investing for your future needs and lifestyle.
2. Start early in life to invest in a diversified portfolio of assets consistent with your
investment philosophy.
3. When investing for the long term, willingly accept more risk.
4. Invest regularly through your employer’s retirement plan using an asset allocation
strategy.
5. Invest no more than 10 percent of your portfolio in your company stock, or any single
company stock, for that matter.
6. Follow the buy-and-hold long-term approach to investing.
7. Invest in stocks, mutual funds, bonds, and real estate, not life insurance or annuities.
Chapter 14: Good Money Habits in Investing in Stocks and Bonds
Make the following your money habits in investing in stocks and bonds:
1. Include stocks and bond or mutual funds that own stocks and bonds in your
investment portfolio.
2. Use fundamental analysis to determine a company’s basic value before investing in a
stock.
3. Resist putting money into so-called hot stocks.
4. Invest part of the conservative portion of your portfolio in TIPS (Treasury InflationProtected Securities) to beat inflation.
5. Use zero-coupon bonds to help fund a child’s education and your retirement.
Chapter 15: Good Money Habits in Mutual Funds
Make the following your money habits when investing through mutual funds:
1. Match your investment philosophy and financial goals to a mutual fund’s objectives.
2. Invest only in no-load mutual funds that have low expenses and have no or a low 12b1 fee.
3. Get the right mix of asset classes in your long-term fund investments and learn to
love consistency.
4. Sign up for automatic reinvestment of your mutual fund dividends.
5. Invest regularly through your employer’s retirement plan.
6. Rebalance your portfolio at least once a year and dump the slackers.
Chapter 16: Good Money Habits in Real Estate and High-Risk Investments
Make the following your money habits when investing in real estate and high-risk
investments:
1. Consider the disadvantages before investing in real estate.
2. Invest only in real estate properties that have a positive cash flow.
3. Finance real estate investments with conventional mortgages, not mortgages with
adjustable interest terms.
4. Use the discounted cash-flow method to help determine the right price to pay.
5. If you put money into high-risk assets, limit your investment to no more than 10
percent of your portfolio.
Chapter 17: Good Money Habits in Retirement Planning
Make the following your money habits in retirement planning:
1. Save early and often by beginning early in life to invest in mutual funds through taxsheltered retirement accounts and continuing to invest every year.
2. Take enough risk to increase the likelihood that you will have enough money in
retirement.
3. Save within an employer-sponsored retirement plan at least the amount required to
obtain the full matching contribution from your employer.
4. Diversify your investments and limit company stock to no more than 10 percent of
your portfolio.
5. Contribute to Roth IRA and traditional IRA accounts to supplement your employersponsored plans.
6. Keep your hands off your retirement money. Do not borrow it. Do not withdraw it.
When changing employers, roll over the funds into the new employer’s plan or a
rollover IRA.
7. Keep your hands off your retirement money. Do not borrow it. Do not withdraw it.
When changing employers, roll over the funds into the new employer’s plan or a
rollover-IRA.
Chapter 18: Good Money Habits in Estate Planning
Make the following your money habits in estate planning:
1. Every three years or whenever your family situation changes, review the beneficiary
and ownership designations in your life insurance policies, retirement plans, bank
accounts, and other assets to make certain they will transfer the property according to
your wishes.
2. Always have both an up-to-date will and a letter of last instructions and revise them
as major life events occur.
3. Prepare and regularly update advance directive documents so others can make the
right decisions for you if you become incapacitated.
4. Once a year, discuss with your spouse or significant other your family’s financial and
estate plans.
5. Be positive that certain family members or friends know where you keep financial
records, advance directives, your will, and an estate planning checklist.