Financial PlanningUnit 1: Banking & Credit RECAP

What’s the BIG DEAL about MONEY?

It allows us to move beyond the barter (good for good) system

Characteristics of Money:– Durability– Portability– Divisibility– Uniformity– Limited Supply– Acceptability

What’s the BIG DEAL about MONEY?

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What’s the BIG DEAL about MONEY?

US first created lawful money (backed by silver and gold). We currently use a fiat money system – LEGAL TENDER (backed by the confidence in its value)

How can you buy

stuffwithout CASH?

The Emergence of a Cashless Society:

All the ways we DON’T use CASH:

• Gift Cards• Debit Cards• Checks• Money orders• Credit Cards• Electronic Transfers

How do YOU Make Money?

• You will spend approximately 86,000 hours of your life working (about 10,000 days)

• Your CAREER Choice should be based on values and beliefs, not necessarily money (A LABOR OF LOVE)

How do YOU Make Money?

• Take the following into account as well:–Education Requirements–Job Trends–Job Outlooks

US Income at a Glance…Criteria Overall Less than

9th grade

High school

drop-out

High school

graduate

Some college

Associates degree

Bachelor's degree

Bachelor's degree or

more

Master's degree

Professional degree

Doctorate degree

Median ind.

income

Male, age 25+ $33,517 $15,461 $18,990 $28,763 $35,073 $39,015 $50,916 $55,751 $61,698 $88,530 $73,853

Female, age 25+ $19,679 $9,296 $10,786 $15,962 $21,007 $24,808 $31,309 $35,125 $41,334 $48,536 $53,003

Both sexes,

age 25+

$32,140 $17,422 $20,321 $26,505 $31,054 $35,009 $43,143 $49,303 $52,390 $82,473 $70,853

Median household income $45,016 $18,787 $22,718 $36,835 $45,854 $51,970 $68,728 $73,446 $78,541 $100,000 $96,830

US Income at a Glance…

The median income in New York State for a person with less than 1 year’s experience is:

$47,000*www.payscale.com

3.05 million

30.5 million

274.5 million

305,000

30,500

Finding the Job for YOU• Research• Internships and Job

Shadowing• Part-time jobs early in life

–Most successful people worked part-time as teenagers

Other SOURCES OF INCOME

• Investments• Self-Employment• Rental Income• Windfall Income

What Factors Influence Income?

• Capacity to earn, knowledge, skills, level of education

• Job Opportunities• Employment benefits (monetary and

non-monetary)• Inflation and Deflation• Taxation

HOW MUCH WILL YOU MAKE?

TAXES! TAXES! TAXES!

The goal of tax planning is to arrange your financial affairs so as to minimize your taxes and keep the most of your money.

TAXES! TAXES! TAXES!

GROSS INCOMEAll income before taxes and

deductionsWhat your employer pays you to

work

TAXES! TAXES! TAXES!MANDATORY Deductions:• Federal, State (maybe

local) TAXES• Social Security (FICA)• Medicare (FICM)

NON-MANDATORY:• Automatic savings

(Contributions to retirement plans that are taken out of gross pay)

• Health Insurance Premiums

• Life Insurance Premiums• Union dues• Charitable Contributions,• and more…

TAXES! TAXES! TAXES!ADJUSTED GROSS INCOMEGross income minus allowable

deductionsTAXABLE INCOMEIncome amount used to calculate

taxes owed (may include income other than paycheck)

TAXES! TAXES! TAXES!TAKE-HOME PAYWhat you get to take home

(sometimes called NET Pay)

How to pay LESS in Taxes:

1. Increase your tax DEDUCTIONS (standardized vs. itemized)

2. Take advantage of TAX CREDITS

3. Increase your withholdings

1. Increase your TAX DEDUCTIONS

• There are standard deductions for singles ($6,100), married couples ($12,200) & heads of households ($8,950)

• Itemized deductions include:• Expenses for healthcare• Mortgage interest• Gifts to charity• Job-related expenses• State/local/property taxes

2. Take advantage of TAX CREDITSTax credits

reduce your tax. Straight up - $ for $ reduction

There are tax credits for:• Earned Income Tax (for

low income families)• Child Tax• Education• Retirement Savings

Contribution• 1st Time Homebuyer• Dependent Care• Energy Efficient Home

3. Increase your WITHHOLDINGSIncrease the amount of money taken out

of each paycheck throughout the year – you’ll get a bigger refund at the end.

CLAIM 0 – More money is taken out of each paycheck and you are more likely to get a refundCLAIM 1 – Less money will be taken out of each paycheck, but you may end up owing money at tax time

THANKS UNCLE SAM!

Tax Practice More Tax Practice

My (possible) Future Plans

The Financial Planning PROCESS

1. Set SMART Goals

2. Analyze Information

3. Create a Plan

4. Implement the Plan

5. Monitor & Modify the Plan

BUDGETING

CREDIT BASICSFinancial Planning RECAP

Credit•Money you borrow to pay for things, with a promise to pay it back later

Advantages of Credit

• Allows for large purchases

• Use it well & it builds a good credit score

• Useful in emergencies (CC)

• More convenient than carrying cash

Disadvantages of Credit

• Fees and interest can make credit expensive

• Chance of identity theft increases

• Hard to resist the “impulse buy”

• Poor use may affect your ability to get:

– Employment – Housing – Insurance

The Role of the FED• WATCH VIDEO• Set Monetary Policy• Regulate Financial

Institutions• Act as a BANK for

Banks and Cus• Set the PRIME

INTEREST RATE Affects the rate they charge US

SOURCES of CREDIT1. Financial Institutions

• Banks/Credit Unions/Savings and Loan Associations

2. Credit Card Companies3. Retailers4. **Predatory Lenders” (aka) Loan

Sharks”

LOAN SHARKS AND PREDATORY LENDING

•Payday Lending• Borrower gives lender a postdated check, lender

gives $$, borrower pays back $$ with fee

•Rent-to-Own Services• More expensive than a consumer installment

loan

•Refund Anticipatory Services• Get refund money upfront (but it is minus a fee)

Catch Phrases of Abusive Lenders

“125 percent of your home/car’s value”

“Incredibly low monthly payment”

“No upfront fees”

“Even if you have a bad credit history…”

“It’s free and you have nothing to lose”

“Act now, this is a limited-time offer”

Four Major Types of CREDIT

• Secured Loans• Unsecured Loans• Credit Cards• Consumer Installment Loans• Lines of Credit

SECURED LOANSIs backed by collateral• Usually has a lower

interest rate• Bank/CU can take

collateral if you don’t pay

• Examples: Auto Loan, Mortgage

UNSECURED LOANSIs NOT backed by

collateral• Usually has a higher

interest rate because it is riskier for the bank/cu

• Examples: Personal Loan, some Student Loans

CREDIT CARDS• Allow you buy now

and pay later• Only get charged

interest if you DO NOT pay your bill off in full when it comes

the united states of credit

how did it all begin?• 1949, New Yorker Frank McNamara

finished dinner and realized he left his cash at home

• Came up with an idea about a card that could be used in place of cash at restaurants

• Diners Club was born

how did it all begin?• 1958, American Express issued its first

charge card, used primarily for travel and entertainment

• Eight years later, BankAmericard became first to let you carry a balance

Today*…• Nearly 54 million US households carry

some form of credit card• On average, they carry a balance of

$10,115

*Brooke Nevils, Womansday article

$792 Billion

total national credit card debt as of February 2011

CONSUMER INSTALLMENT LOANS

Money you borrow to pay for specific items (like a car, computer, furniture)

• Pay a little each month (with interest)

• Examples: Home Depot, Pottery Barn

LINES OF CREDIT• Can borrow up to a certain

amount (from a bank, CU or a business), but only pay interest on what you actually take out and use.

• Example: Home Equity Line of Credit (HELOC)

Which type of loan would be best for the following situations?

1. To finance a college education2. To make small purchases in a

retail store3. To make home improvements4. To consolidate debts

ANSWERS:1. To finance a college education

• Student loan (sec/unsec)• HELOC• Installment Loan (payment plan from college)

2. To make small purchases in a retail store• Credit Cards

3. To make home improvements• Installment or HELOC

4. To consolidate debts • Unsecured (personal loan), HELOC

THE COST OF CREDIT• FEES• INTEREST• RISK OF USING CREDIT

FEES• Annual

maintenance fees

• Service charges• Late fees

INTEREST

ANNUAL PERCENTAGE RATE (APR):– The cost of credit on a yearly

basis, expressed as a percentage

Financial institutions charge money at a certain rate to let you use their money:

INTERESTFixed

– Interest rate stays the same during the term of the loan

Variable– Interest rate may change during

the loan’s term

SIMPLE Interest Calculation

PRINCIPLE X RATE X TIME = INTEREST– Principle = amt borrowed– Rate = APR (decimal)– Time = in years (months are X/12)– Interest = amt of interest you owe

Cathy Buys a Car!!

Amount Borrowed: $15,000APR: 4.5%Term: 3 years

PRT = I15000*.045*3 = $2,025

Car really costs: $17,025

RISKS OF USING CREDIT• Will affect your credit score• May affect:

–Employment–Ability to get future credit–Mental health

Borrowing Money Responsibly

Would you…1. Use credit to pay overdue bills?2. Use credit to make a purchase

even if you have the cash?3. Use credit if you really wanted

something but could not afford the monthly payments?

4. Borrow money to invest in something?

SAVING TO MEET GOALS

SAVE EARLY AND SAVE OFTEN!!!

EXPERTS RECOMMEND YOU PYF 10%

SAVING TO MEET GOALSLIQUIDITY• Ability to turn your

savings (or investment) asset into cash quickly and easily (example – a savings/checking account)

ILLIQUIDITY• An asset than

CANNOT be sold quickly without substantial loss (example – stocks that have decreased in value)

COMMON SAVINGS PRODUCTS

IRAs Traditional & ROTH

US Savings BONDS

Regular Savings Regular Checking

Money Market Accounts

CDs

SIMPLE SAVINGS MATHSIMPLE INTEREST

PRT = IP = PrincipleR = Interest RateT = Time in yearsI = Interest EarnedJohn puts $1,000 into a 1 year CD at Meridia earning .45%. How much interest does he earn when the CD matures?

COMPOUND INTEREST

A = P(1+R)nA = Amount in accountP = PrincipleR = Interest RateN = Number of yearsJohn puts $1,000 into a money market account at Meridia earning .25%. If the rate does not change at John leaves his money alone for 10 years, how much will he earn?

SIMPLE SAVINGS MATHAPR

Annual rate that is charged for

borrowing (or made by investing),

expressed as a single percentage number that represents the

actual (YEARLY COST OF FUNDS) over the

term of a loan.

APY

The effective annual rate of

return taking into account the

effect of compounding

interest

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