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• I. Personal Financial Planning is arranging to spend, save and invest your money wisely, so you are able to live comfortably, have financial security , and achieve your personal financial goals • A. Goal setting is the foundation of personal financial planning • • • • 1. There are 3 types of financial goals a. Short Term Goals are goals that you would like to achieve within 3 months b. Intermediate Term Goals are goals that you would like to accomplish within 3 months to a year c. Long Term Goals are goals that you would like to accomplish over a year or longer • 2. Unfortunately, most people never reach their financial goals because, because they fail to plan and have no financial goals • B. Before planning for the future we must understand the concept of money; • Money is something that is used for trading, saving, lending, and investing • 1. Money (currency) itself has no real value unless people accept is as something of value • 2. Money in the U.S. is fiat money, meaning the government has deemed it money or legal tender • 3. In the past, people used shells, stones, corn, etc. for money • 4. Modern society uses coins, currency, checks and debit cards for money • 5. Goods and services are directly exchanged using money • 6. Functions of Money - Money has 3 basic functions • a. It’s a medium of exchange meaning it’s used to purchase goods/services in the global marketplace • b. It’s a standard of value it’s used to measure the value of goods/services • c. It’s a store of value meaning it holds it’s value and can be stored or saved • 7. Properties of money For money to function in an economy, it should possess the following characteristics: • a. It should be divisible meaning it can be divided into smaller units (eg. a dollar bill can de divided into 4 quarters, etc.) • b. It’s Usable meaning you can take it anywhere • c. It’s Stable meaning money should have stable value; the stability of money is important to an economy; and the federal government takes measures to keep prices stable to avoid inflation (high prices) or deflation (low prices) • 8. In today’s global economy each country’s currency has a value that is different from those of other countries • a. A country’s currency’s value is established, in the Foreign Exchange Market (International Currency Market) • b. And global currencies are bought and sold in these foreign exchange markets • c. When currency values are not set by Foreign Exchange Markets, they are set at fixed rates by their governments • d. The value of one currency in comparison to another currency is called the exchange rate (eg. One U.S. Dollar is worth $13.35 in Mexican Peso’s) • e. Exchange rates change from day to day, and from country to country • f. The amount a country’s currency is worth depends on the number of other countries that want to buy their products; If demand for a countries goods and services increase the value of their currency will increase (eg. If demand for California Wine increases in the global marketplace, the value of the dollar will increase in the global marketplace) • g. When the value of a country’s currency goes up in comparison to another country’s currency, it is said to appreciate in value, and when it goes down, the currency depreciates in value • h. Currency exchange rates affect everyone, whether your shopping online for goods from another country or just buying products that were imported from another country • I. Currency has 2 classifications: Hard Currency or Soft Currency • 1. Hard Currency is any globally traded currency that is considered stable and highly liquid • Criteria for a currency to be classified as a hard currency is: • * The currency must come from a politically and economically stable country • *The currency has a long term history of the stability of it’s purchasing power • U.S. Dollar British Pound Sterling • European Euro Japanese Yen • Swiss Franc Canadian Dollar • Australian Dollar • J. Soft Currency (weak currency) is any global currency that is expected to fluctuate erratically or depreciate against other currencies • 1. The currencies of most undeveloped countries are soft currencies • 2. These currencies fluctuate according to the countries political or economic status • 3. These currencies are not preferred for international trade • 4. An example of a soft currency would be the Zimbabwean Dollar • • C. The money you earn from your chosen occupation or other sources is called Earned Income • 1. Types of Earned Income • a. wages- paid by the hour (eg. $20.00 per hour) • b. salary- you receive a set amount of payments (eg. $70,000 per year) • c. Commission – amount of money one earns based upon the level of sales he/she has obtained • 2. Gross Income-is the total amount of earned income from your wages/salaries before payroll deductions • 3. Net Income- is the total amount of one’s earned income after payroll deductions are deducted (Take Home Pay) • 4. Discretionary Income-money you have left after paying your essentials, such as bills, clothing, transportation costs,etc. • 5. Payroll Deductions- are money subtracted from your gross income; the biggest deduction for most people are payroll taxes • D. Payroll Taxes- money that is deducted from your Earned Gross Income • 1. Federal Income Taxes-fee paid to the federal government to help support federal government programs; this money is collected by the employer each pay period and paid to the IRS (Internal Revenue Service) • 2. State Income Taxes- fee paid to the state where you reside, to pay for state government programs; this money is collected by the employer each pay period and paid to the Treasury Department in the state you reside in • 3. Social Security Tax (FICA)- is a federal program that collects taxes from most employees to fund federal programs for the elderly, the blind and low income families/individuals • 4. Medicare – are taxes collected from most employees to fund medical benefits for individuals 65 years of age or over • E. Taxes are classified as: • 1. Progressive Tax Rate are taxes that impose a higher tax rate on those with higher incomes • 2. Regressive Tax Rate are taxes that impose a higher tax with lower incomes • 3. Proportional Tax Rate imposes the same tax rate on all regardless of income • a. The U.S. has a Progressive Tax Rate • b. The Progressive Income Tax is used as income redistribution, meaning that the taxes paid by those earning higher incomes is used to pay for social welfare programs such as benefits for the elderly and retired, the sick or invalid, dependent survivors, single mothers, unemployed, work injured and • F. What is taxed in the U.S. • 1. Personal Income Tax- your income • 2. Sales Tax-goods/services you purchase • 3. Property Tax-real estate • 4. Wealth Tax- estate and gift taxes (estate taxes are taxes on property one receives after someone’s death); gift taxes are (taxes on money or property that you give someone during your lifetime, it’s taxed on the basis of its value) • 5. Excise Taxes- are taxes on certain items such as air fare, gasoline, alcohol, tobacco products and phone service • II. The first step in your personal financial plan is choosing an occupation (how you earn your living) • A. One can have a career or one can have a job • 1. A Career-is a commitment to work in a field you find interesting and fulfilling; a job is work you do mainly to earn money • 2. Your choice of career will affect the money you make, the people you meet, and how much spare time you have • 3. Having a college education does not guarantee that you will meet your financial goals, however, acquiring more education increases your potential earning power (the amount of money you earn over time) • C. Besides earning an Income, many employees receive non-cash compensation which are called Benefits • 1. Benefits include the following • a. Health Insurance • b. Life Insurance • c. Paid Vacation • d. Pension (retirement plan) • 3. Companies are not required by law to offer or to pay for employee benefits I. Real Estate A. Real Estate is classified as land and anything attached to it, such as buildings and natural resources 1.One major factor people make when considering housing decisions is lifestyle (how you choose to spend your time and money) 2. One basic consideration, about housing is whether to rent or buy 3. Renting is a good choice for young adults who are beginning their careers 4. Renting also appeals to people who want mobility, and do not want to devote time and money for property maintenance (mowing the lawn, shoveling snow, property repair, etc.) • B. Buying a Home • 1. Buying a home is a huge financial commitment and is one of the most costly purchases that most people make • 2. Because very few people have enough money to pay for a house in full, they have to finance it with a home mortgage loan (long term property loan) These are normally 30 year loans • 3. To buy a house also requires a down payment, which is usually 20 percent of the purchase price of the property in addition to other fees associated with purchasing the property • 4. Most Homebuyers use a real estate agent (person who is licensed to facilitate the buying/selling of real estate) to help them find a home • 5. The Real Estate agents fee is normally paid by the seller, not the buyer • 6. You must 18 years of age to buy real estate on your own in the U.S. • C. Types of Property • 1. Residential Property is property in which an individual or family lives in; there are 3 types of residential property: • a. Single Family Homes- the most popular type of residential property, is usually on its own lot, with it’s own yard • b. Multi Unit Housing- usually single buildings, divided into individual units (eg. Condo’s, townhouses, duplex, lofts, etc. • c. Manufactured Homes- There are 2 types of Manufactured Homes, Mobile Homes and Prefabricated Homes • 2. Income Property- property used to generate income • With income property the owner generate income 2 ways, they can collect rent or sell the property for a profit • a. Rental Property- is any type of dwelling unit or property rented for a length of time • b. Undeveloped Property- is unused land intended only for investment purposes; with undeveloped land no rent is paid to the owner; the financial gain on this type of property comes from the sale of the property after it has risen in value • • D. Home Values- several factors affect the value of a house including its size, condition, quality and location • 1. Location is extremely important • 2. The distance between your home/work, available public transportation, the quality of the local school system and public services also affect a home’s value • E. Renting • 1. When you rent the place where you live, you become a tenant • 2. The landlord is the person who owns the property you are renting • 3. When you rent a rental unit you sign a legal document called a lease, which defines the condition of the rental agreement between the tenant and the landlord • 4. Most people who rent live in apartments • a. These units may be located in a two-story house, high-rise building or an apartment complex • 5. Advantages of Renting • a. Mobility – You can vacate/leave the property when your lease ends, or if you find a job in another city, you can give notice to your landlord and move quickly and simply • b.Fewer Responsibilities – Tenants are not responsible for making major repairs or maintaining the property, that’s the landlord’s responsibility • c. Low initial Costs- when you sign a lease, you normally pay a security deposit, which is paid to the owner of the property to guard against any financial loss or damage that the tenant may cause • a. When the tenant moves out , the landlord may return the security deposit, minus any charges for damages the tenant may have caused or for any unpaid rent • 6. Factors that affect the cost of renting • . Location- The amount of your monthly rent will depend on the location, or neighborhood in which you choose to live • 2. Living Space- The size of the rental unit will also affect the cost of a rental unit • 3.Utilities- In some rental units, the tenant may have to pay for utilities, such as electricity, gas, water and trash • 4. Renters Insurance- A type of insurance that covers the loss of a tenant’s personal property as a result of damage or theft • A. Credit- is an arrangement to receive cash, goods or services now and pay for them in the future • 1. Consumer Credit-is the use of credit for personal use • 2. A common form of consumer credit is a credit card account issued by a Financial Institution, such as (eg. Banks, Credit Unions, Merchants, etc.) • 3. Consumer credit is a major force in the U.S. economy- (any analysis of the U.S economy includes consumer credit spending which is a major force in the economy) • 4. Credit Cards enable consumers to make purchases they may not be able to afford at the moment • 5. Types of Credit- 2 basic types of credit • a. Closed-End Credit-is a one time loan that is paid back over a specified period of time in payments of equal amounts (eg. Vehicle loans, mortgage loans, furniture loans, etc.) • b. Open-End Credit-is a loan with a certain limit on the amount of money you can borrow for goods/services (eg. Department store (Macy’s) and bank credit cards (Visa, MasterCard, etc.) • 6. Alternative Types of Credit Cards • a. Debit Cards- Let’s the consumer electronically withdraw money from their checking/savings accounts • b. Store – Value Cards (Pre-paid cards)- Cards that are prepaid, providing the card holder with immediate money • c. Travel and Entertainment Cards- (eg. American Express) are not really credit cards, used primarily for business, entertainment and travel; the balance is due in full each month • 7. The Language of Credit • a. APR (Annual Percentage Rate) the cost of using credit; the amount of interest you pay annually • b. Credit Report is a detailed record of your personal credit and financial transactions • c. Credit Score is a rating used by companies to help lenders decide whether or not, and how much credit can be extended to borrowers • 8. Creditworthiness- Before financial institutions extend credit to consumer they consider the applicant’s Capacity, Character and Capital known as the “3 Cs of credit” • a. Capacity is the applicant’s ability to repay the loan • a. To determine capacity lenders will verify the applicant’s employment and income • 2 • b. Character shows whether he/she has proven to be trustworthy in repaying debts • a. To determine character they will check the applicants credit report and ask for credit references • c. Capital is the amount of money the applicant has beyond debts • a. To determine the amount of capital the applicant has, they will look at the applicants savings account, checking accounts and investments • I. Banking- one of the most important components of personal financial planning is managing your finances • A. Today, there are more than 11,000 banks, 2,000 savings and loan associations, and 12,000 credit unions in the U.S. • 1. These financial institutions make money by lending consumers and businesses money via loans . • 2. There are 3 main types of banks in the U.S. • a. Commercial Banks (Full Service Banks), most of the banks in the U.S. are Commercial Banks • * make a profit, they earn this profit by charging much more interest on the money they lend than the interest they pay on savings accounts • * They offer services such as checking/savings accounts, mortgage loans, small business loans, student loans, commercial loans, investment advising, etc. • 1. These banks were originally established to offer savings accounts and home mortgages (they charged lower interest rates on loans and higher interest rates on savings accounts) • 2. In the 1980’s, 20% of Savings and Loan Associations failed , so the government passed new regulations that allowed them to charge higher interest rates and offer more services like credit cards • c. Credit Unions Member owned financial institution • 1. Credit Unions are formed by large corporations and organizations for their employees • 2. Credit unions are Not-For-Profit Organizations because their purpose is to serve their customers not to maximize their profits • 3. Credit unions offer their members competitive rates, and other financial services to their members • B. Types of Financial Services • 1. Savings Accounts • a. Regular Savings Account- are good if you make frequent deposits and withdrawls; they require little or no minimum balance; however the interest earned on these type of accounts are relatively low compared to other savings options • b. Certificates of Deposit (CD) is a savings option in which money is deposited for a stated period of time, to earn a specific rate of return (interest); offers a higher interest rate than a regular savings account • c. Money Market Accounts type of savings account offered by banks and credit unions that pay higher rates, have higher minimum balances than regular savings accounts; Minimum balance is $1000-2500, and only allow 3-6 withdrawls a month • d. U.S. Savings Bonds- (Patriot Bonds) are another savings option; you can purchase these bonds from the federal government in amounts that range from $25- $5,000.00 • 2. Payment Services- are the 2nd category of financial services; the most commonly used payment services are checking accounts • Types of Checking Accounts • a. Regular Checking Accounts- usually do not require minimum balances • b. Interest Earning Checking Accounts are a combination of checking and savings accounts; these accounts pay interest if you maintain a specific minimum balance • “Many checking accounts offer overdraft protection, which is an automatic loan to cover checks that the balance in the account won’t cover” • 3. The 3rd category is Borrowing- If you need to borrow money, financial institutions have many options for borrowing the following: • • • • Auto Loans Mortgage Loans Personal Loans Student Loans • 4. The last category of financial services are other financial services such as financial planning services, income tax assistance, bond and mutual fund investment assistance, etc. • Financial Planning Services • Income Tax Assistance • Investment Assistance, etc. • C. Problematic Financial Institutions • 1. Pawnshops • Make loans based on the value of tangible possessions such as jewelry or other valuable items • Many low and moderate income families utilize these organizations to obtain cash loans quickly • They charge higher fees than other financial institutions (interest) • They have become the “neighborhood bankers” and the “local shopping malls” because they provide both lending services and retail shopping services, by selling items that the owners do not redeem • While most states regulate Pawnshop rates, 3% or more a month is common • 2. Check Cashing Outlets • There are more than 6,000 check cashing outlets in the U.S. • You are not required to have an account with these organizations • They charge anywhere from 1-20% of the face value of a check, however the average is 2-3% • For low income families these rates can be a significant portion of their household budget • They also offer other services such as utility bill payments, money orders, private postal boxes, etc. • 3. Payday Loans • Also known as cash advances, check advance loans, and delayed deposits • Interest rates range from 659-1300% • These type of financial institutions have increased in recent years due to the economy • The most frequent user of these types of institutions are workers who are trapped by debt, or people who have been driven into debt by misfortune