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Personal Finance
CREDIT CARDS
A typical credit card payment of $41.00 would be divided like this:
INTERESTINTEREST
$30.0071% of your 71% of your
paymentpayment
PRINCIPAL$11.0029% of your
payment
Based on $2,000 balance, 18% IR and minimum payment equal to 2% of balance.
Let’s suppose you have 3 credit card accounts:
Bank Balance Int. Rate Min.Paymt. $ in Interest
One Bank $1,300.00 15% $52.00 $16.25
Two Bank 1,700.00 18% 68.00 25.50
Three Bank 1,200.00 16% 48.00 16.00
TOTAL $4,200.00 $168.00 $57.75TOTAL $4,200.00 $168.00 $57.75
**the average American has 1515 credit cards in their wallet.
Let’s look at it another way:
Bank Balance Int. Rate Min.Paymt. $ in Interest
One Bank $10,350.00 15% $259.00 $129.38
Two Bank 4,300.00 18% 108.00 64.50
Three Bank 7,000.00 16% 176.00 93.33
TOTAL $21,650.00 $543.00 $287.21TOTAL $21,650.00 $543.00 $287.21
**for most people, $287.00 is a monthly car payment.
If you only paid the minimum payment AND you never charged another item, here is what it actually costs you to pay the accounts off:
Bank Repayment Amount Cost in Interest to You
One Bank $20,101.00 $9,751.00
Two Bank 9,836.00 5,536.00
Three Bank 14,344.00 7,344.00
TOTAL $44,281.00 $22,631.00TOTAL $44,281.00 $22,631.00
**AND if you’re a little late with the payment, the bank will add a $35.00 late
charge to the balance.
SAVING
Compound Interest
INTEREST RATE:INTEREST RATE: the the amount paid for borrowing amount paid for borrowing someone else’s money. It is someone else’s money. It is usually expressed as anusually expressed as an Annual Annual Percentage Rate (APR)Percentage Rate (APR)
A one-time A one-time $1,000 $1,000
investment with investment with a 6%, 9%, and a 6%, 9%, and
12% rate of 12% rate of returnreturn
How interest rates affect your Return on Investment (ROI)
How interest rates affect your Return on Investment (ROI)
Mary and John graduate from high school in the same year. Starting at age 18, Mary invests $2000 per year for 7 years and stops. John sees that Mary has saved a lot of money and begins investing $2000 per year at
age 25 and continues for the next 40 years. Who will have the most money
with which to retire at age 65?
Mary John
Mary’s investment of $14,000 resulted in $628,329 when she reached age 62.
John’s investment of $66,000 resulted in
$600,082 when he reached age 62.
SAVING
Rule of 72
The Rule of 72The Rule of 72……states that 72 divided by the interest rate will result in the number of years it will take your investment to double…...
SAVING
Diversification
Diversification -- not putting all financial “eggs” in one basket.
COMMODITIES
PENNY
STOCK
SPECULATIVESTOCKS/BONDS/
MUTUAL FUNDS
COLLECT-IBLES
FINANCIALFINANCIAL
PLANNINGPLANNING
PYRAMIDPYRAMID
Highest Risk/Highest Risk/
Highest Highest EarningsEarnings
Lowest Risk/Lowest Risk/
Lowest Lowest EarningsEarnings
BLUE CHIP COMMON
STOCK
REAL ESTATE
GROWTH MUTUAL FUNDS
BALANCED MUTUA L FUNDS
HIGH-GRADE PREFERRED
STOCK
HIGH-GRADE CONVERTIBLE
BONDS
MONEY MARKET
ACCOUNTS or MUTAL FUNDS
HIGH-GRADE MUNICIPAL BONDS or
MUTUAL FUNDS
HIGH-GRADE CORPORATE
BONDS or MUTUAL FUNDS
INSURED SAVINGS/ CHECKING ACCOUNTS
U.S. SAVINGS BONDS
CERTIFICATES OF DEPOSIT
TREASURY ISSUES
AUTOMOBILE INSURANCE
HOMEOWNERS OR RENTERS
INSURANCE
LIFE INSURANCE
MEDICAL/ DISABILITY INSURANCE
LIABILITY INSURANCE
SAVING
Taxes & Inflation
INFLATION -- increase in the prices of goods and services caused by rapid expansion of the money supply.
RECESSION -- extended downturn in economic activity in excess of 3 months.
DEPRESSION -- extended downturn in economic activity in excess of 6 months.
One way the government measures inflation is the
Consumer Price Consumer Price Index (CPI)Index (CPI)
CPI -- prime indicator of inflation and recession
• Comprised of a market basket of goods and services.
• Measures current cost of living against base year (1996)
Value at end of 1995 of $1 invested in 1926
Purchasing Power of the Dollar
$1.00
$.25
1970 1980 1990
The Impact of Inflation
• 1973$ 4,012
• 1993$ 18,924
• 2013$ 40,084
• 1973$ 32,900
• 1993$133,500
• 2013$292,515
The Threat of Inflation & Taxes
$10,000 invested for a year
Gross Return
After Tax (28% bracket)
Less Inflation (3%)
Net Return
4%
$10,400
$10,288
$(300)
$9,988
8%
$10,800
$10,576
$(300)
$10,276
10%
$11,000
$10,720
$(300)
$10,420
SAVING
CDs
CD -- a time deposit that gains interest. There is typically a penalty for early withdrawal.
Jumbo CD -- a time deposit of $100,000 or more.
Brokered CD
• Sold by a stock broker to a client.
• Stock broker shops for best interest rate before selling to a client.
• Can be sold without penalty on the secondary market (similar to a bond)
SAVING
Bonds
Bond
Ratings
Moody’s Standard& Poors
Meaning
Aaa AAA
Best quality, with the smallestrisk, issuers are exceptionallystable and dependable.
Aa AA
High quality, with a slightlyhigher degree of long-term risk.
A A
High-to-medium quality, withmany strong attributes butsomewhat vulnerable tochanging economic conditions
Baa BBB
Medium quality, currentlyadequate but perhaps unreliableover the long term.
I NVESTMENTGRADEBONDS
Ba BB
Some speculative element withmoderate security, but not wellsafeguarded.
B B
Able to pay now but at risk ofdefault in the future.
Caa CCC
Poor quality, clear danger ofdefault.
Ca CC
Highly speculative quality, oftenin default.
C C
Lowest rated, poor prospect ofrepayment, though may still bepaying.
__ D In default.
JUN KBONDS
BONDS
NOTE: Junk Bonds have been known to have interest rates as high as 12% at a time when government bonds were only 8%.
BUYING BONDS AT A DISCOUNT
Suppose Al buys a $1000 bond with a coupon rate of 5 percent. The person who buys the bond (Al) is called the “holder,” while the seller of the bond is called the “issuer.”
Interest rates go up to 6 percent, and Al needs to sell the bond. (noone wants to buy a 5 percent bond when the interest rate is 6 percent)
Al offers to sell the bond to Patsy “at a discount” for $950--taking $50 off the $1000 value of the bond.
Patsy now owns a par value $1000 bond for $950.
FINANCIAL MARKETS
Markets in which money is lent for periods longer than one year are called CAPITAL
MARKETS.
When money is lent for less than one year, it is called a MONEY MARKET. Money market
investments are NOT insured by FDIC (Federal Deposit Insurance Corporation).
FINANCIAL MARKETS
Financial assets that can only be redeemed by the original holder are sold on a PRIMARY
MARKET. (ex: savings bonds, small CDs)
Financial assets that can be resold are sold on SECONDARY MARKET. This option for
resale provides liquidity to investors.
**For example: if the mortgage on a house does not meet the banks’ criteria for sale on the secondary market, the borrower may have to pay a higher interest rate for their mortgage.
SAVING
Mutual Funds
What Is A Mutual Fund?
A mutual fund is a professionally managed pool of money.A mutual fund is a professionally managed pool of money.
$$ Company “B”Company “B”Company “B”Company “B”
Company “C”Company “C”Company “C”Company “C”
Company “A”Company “A”Company “A”Company “A”
Mutual Funds – A collection of stocks,
bonds, or other securities bought by a group of investors and managed by a professional investment company.
•Money is Professionally Managed.
•Diversified.
•Flexible.
•Marketable.
•You Have Control.
Why Own One?
Open-end funds –(most common)
the fund will sell as many shares as investors want. Cannot trade in stock market, only buy or sell through mutual fund company.
Closed-end funds -- have a limited number of shares for trading on an exchange or OTC.
Load funds -- includes a sales charge (usually 5%), + fees. Purchased through a broker.
No-load funds -- charge a management fee, not a commission.
Net Asset Value (NAV) –
The total value of the fund’s holdings divided by the number of shares. (= price per share)
A Hypothetical ExampleInvesting $100 per month with different rates of return
10 years 20 years 30 years 40 years
12%10%8%6%
10 years 20 years 30 years 40 years
12%10%8%6%
$1,188,240$1,188,240
$637,680$637,680$351,430$351,430$200,140$200,140
$200,140$200,140$351,430$351,430$637,680$637,680
$1,188,240$1,188,240
$100,950$100,950$150,030$150,030$227,930$227,930$352,990$352,990
$46,440$46,440$59,290$59,290$76,570$76,570$99,910$99,910
$16,470$16,470$18,420$18,420$20,660$20,660$23,230$23,230
6%6%8%8%
10%10%12%12%
Assumed RatesAssumed Rates 10 Years10 Years 20 Years20 Years 30 Years30 Years 40 Years40 Years
$100 Investment Per Month$100 Investment Per Month
The hypothetical illustration and the 6%, 8%, 10% and 12% nominal rates compounded monthly, are not guaranteed or intended to demonstrate the performance of any actual investment and assumes $100/month investment. Assumes payments are made at the beginning of the compounding period and are rounded to the nearest $10.
WhenYou Become Financially
Independent Depends on How Much Money
You Can Invest.
WhenYou Become Financially
Independent Depends on How Much Money
You Can Invest.
At age 65, could you live on $140,000 / Year?
At age 65, could you live on $140,000 / Year?
40 Year Plan -- 40 Year Plan -- Invest $120/Mo.
• 30 Year Plan -- Invest $400/Mo.
• 20 Year Plan -- Invest $1,400/Mo.
Invest $6,025/Mo.• 10 Year Plan --
@ 12% Average Rate of Return
To do that, you need to accumulate $1,400,000
The High Cost of Waiting
Cost to wait includes monthly contributions. This hypothetical example demonstrates compounding at specified rate and not Cost to wait includes monthly contributions. This hypothetical example demonstrates compounding at specified rate and not the performance of any actual program. No allowance for taxes, applicable fees or inflation. Rate of return is nominal, the performance of any actual program. No allowance for taxes, applicable fees or inflation. Rate of return is nominal, compounded monthly.compounded monthly.
Don’t Procrastinate!Don’t Procrastinate!
Cost to WaitCost to Wait
$ 61,590$ 61,590
$254,850$254,850
Total in 40 YearsTotal in 40 Years
$637,680$637,680
$576,090$576,090
$382,830$382,830
Begin SavingBegin Saving
NowNow
In One YearIn One Year
In Five YearsIn Five Years
Saving $100 per month at 10% returnSaving $100 per month at 10% return
The Best IRA Option for you The Best IRA Option for you Traditional IRATraditional IRA
ContributionsContributions
Contribution/Distribution age limitContribution/Distribution age limit
EarningsEarnings
Withdrawalsafter age 591/2Withdrawalsafter age 591/2
Up to $4,000Tax DeductibleUp to $4,000Tax Deductible
70 1/270 1/2
Tax-deferredTax-deferred
Roth IRA Roth IRA Up to $4,000Non-deductibleUp to $4,000Non-deductibleNo age limitNo age limit
Tax-deferredTax-deferred
Earnings tax-free if Roth IRA account has been open at least 5 years
Earnings tax-free if Roth IRA account has been open at least 5 years
All of the money will be taxable upon withdrawal
All of the money will be taxable upon withdrawal
Money taken will be taxable w/10% penalty
TAX FREE MONEYno matter how much is withdrawn!
Taxes before 59 1/2
Comparing IRA Income Participation Limits
Traditional IRA • Full eligibility income limits for
retirement plan participants
Roth IRA• Full eligibility income limits
(regardless of retirement plan participation)
Full EligibilityFull Eligibility
2006$80,000$50,000
2006$80,000$50,000
Married
Single
Married
Single
2006 and onMarried $150,000Single $95,000
2006 and onMarried $150,000Single $95,000
Famous last words ...
“... if only I had invested…"
SAVING
Stocks
Corporation:
A legal entity that can conduct business in its own name in the same way that an individual
does and that is owned by stockholders.
Financial Markets
The Stock Market– Stock represents a claim to partial ownership in a firm and a
claim to the profits that the firm makes.– The sale of stock to raise money is called equity financing.
• Compared to bonds, stocks offer both higher risk and potentially higher returns.
– The most important stock exchanges in the United States are the New York Stock Exchange, the American Stock Exchange, and NASDAQ.
• Share of stock-- represents
ownership in a corporation or a claim
on the assets of a corporation.
Dividends -- optional payments of annual profits to stockholders.
Growth Stock -- stock where the dividends are reinvested into the stock.
Initial Public Offering (IPO) --when stock is initially offered to the public.
ADVANTAGES OF A CORPORATION
•Corporations continue to exist even if one or more owners of the corporation sell their shares or die.
•Stockholders are not personally liable for the debts of the corporation; they have limited liability.
•Corporations are usually able to raise large sums of money by selling stock.
DISADVANTAGES OF CORPORATIONS
•Corporations are subject to double taxation. (corporate income tax and personal income tax)
•Corporations are difficult to set up.
Stock split -- when a stock’s high price is discouraging new investors, the company splits the stock to a lower price; thus creating more shares at a lower price.
For example:
100 shares at $50 per share equals
200 shares at $25 per share
Would you invest in this company?
Microsoft Corporation 1978
First Sep 21, 1987 2 for 1 Sep 18 = 114.50
Sep 21 = 53.50
Second Apr 16, 1990 2 for 1 Apr 12 = 120.75
Apr 16 = 60.75
Third Jun 27,1991 3 for 2 Jun 26 = 100.75
Jun 27 = 68.00
Fourth Jun 15, 1992 3 for 2 Jun 12 = 112.50
Jun 15 = 75.75
Fifth May 23, 1994 2 for 1 May 20 = 97.75
May 23 = 50.63
Sixth Dec 9, 1996 2 for 1 Dec 6 = 152.875
Dec 9 = 81.75
Seventh Feb 23, 1998 2 for 1 Feb 20 = 155.13Feb 23 = 81.63
History of Microsoft Stock SplitsHistory of Microsoft Stock Splits Symbol:Symbol: MSFTMSFTIPO: IPO: March 13, 1986March 13, 1986 Last updated:Last updated: August 18, 1998August 18, 1998
History of Microsoft Stock SplitsHistory of Microsoft Stock Splits Symbol:Symbol: MSFTMSFTIPO: IPO: March 13, 1986March 13, 1986 Last updated:Last updated: August 18, 1998August 18, 1998
First Sep 21, 1987 2 for 1 Sep 18 = 114.50
Sep 21 = 53.50
SecondApr 16, 19902 for 1 Apr 12 = 120.75
Apr 16 = 60.75
Third Jun 27,1991 3 for 2 Jun 26 = 100.75
Jun 27 = 68.00
Fourth Jun 15, 1992 3 for 2 Jun 12 = 112.50
Jun 15 = 75.75
Fifth May 23, 1994 2 for 1 May 20 = 97.75
May 23 = 50.63
Sixth Dec 9, 1996 2 for 1 Dec 6 = 152.875
Dec 9 = 81.75
SeventhFeb 23, 1998 2 for 1 Feb 20 = 155.13Feb 23 = 81.63
2 shares = $107.00
4 shares = $243.00
6 shares = $408.00
9 shares = $681.75
18 shares = $910.74
36 shares = $2943.00
72 shares =
$5877.36$5877.36
MORTGAGE TYPESMORTGAGE TYPES
FixedFixed
•30 years vs. 15 years The 30-year mortgage has lower monthly payments, yet ultimately costs more; the 15-year mortgage mortgage requires higher monthly payments, but builds equity faster.
AdjustableAdjustable•home loans in which the interest rate changes periodically, rising or falling with an index.
•Advantage: Lower interest rates than the fixed.
•good for borrowers who expect to move within the next few years.
•0ne-year ARMs, in which the initial interest rate changes after one year and then is adjusted every year thereafter; and 3/1 and 5/1 ARMs, in which the initial rate changes after three or five years, then is adjusted annually
BALLOON MORTGAGEBALLOON MORTGAGE:: the payments are calculated over an amortization period of perhaps 15 or 30 years. But the remaining principal balance of the mortgage is payable in full after a fixed, agreed period, often 5, 7 or 10 years. Common with seller financing and commercial loans.
REVERSE MORTGAGEREVERSE MORTGAGE::
•Best for retired people
•You remain the owner of your home just like when you had a forward mortgage. You are still responsible for paying your property taxes and home-owner insurance and for making property repairs.
• When the loan is over, you or your heirs must repay all of your cash advances plus interest. Reputable lenders don't want your house; they want repayment.
MORTGAGES-LOANS with HIGHER RATES:MORTGAGES-LOANS with HIGHER RATES:
•Mobile homes: in financing, the key is the word "mobile." The less mobile a manufactured home is, the better the financing deal a consumer can get.
•Vacant land: land loans are riskier for lenders because the loan's collateral, the property, isn't currently being used. That makes it easier for the owner to walk away and leave the lender with the land. Because of that, down payments and interest rates are higher for land loans than they are for mortgage loans.
CHOOSE YOUR PATH
Retirement
Working 36Working 3636
100 People At Age 65100 People At Age 65
Source: 2005 Department of Health and Human Services
Deceased 5Deceased 555
OK 4OK 444
Wealthy 1Wealthy 1
1154
Dependent 54Dependent 54
The Wealthy 1%The Wealthy 1%
Source: Department of Health and Human Services
CEO/President 10%CEO/President 10%
10%10%
Salesperson 5%Salesperson 5%
5%5% Lottery/ 1%InheritanceLottery/ 1%Inheritance1%1%
Doctor/Attorney 10%Doctor/Attorney 10%
10%10%
Entrepreneur 74%Entrepreneur 74%
74%
Most People Don’t Plan To Fail, They Fail To Plan
Most People Don’t Plan To Fail, They Fail To Plan
Bank Accounts
Bank Accounts
Mor
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eM
ortg
age
Credit C
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Credit C
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Savings Accounts
Savings Accounts
Mutual Funds Mutual FundsA
uto
& H
ome
Aut
o &
Hom
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401(k
)
401(k
)
Life InsuranceLife InsuranceYOUYOU