Personal Financial Literacy

5/14/2014

Warm Up – A little bit longer than normal!

This is your chance to write about the dream life you would like to have. When you close your eyes and imagine the life you could have what would it look like?

• What kind of work will you be doing? • Where will you live? • What kind of house or apartment will you have? • What kind of car will you drive? • Will you get married? • Will you have a family? • What will you do in your free time? Hobbies? Sports? • How will you contribute to society (volunteering, charity,

church, etc) ?

Financial Planning

Discussion:

• What do you think the first thing you need in order to plan from month to month?

*education, income, career, and life choices impact an individual's financial plan and goals*

More Education = More Earning Power.This chart shows that, on average, a college graduate earns $1 million more in their lifetime than a high school graduate, and the gap is growing!

Vocabulary

• Wage: A regular payment, typically paid on a daily or weekly basis, made by an employer to an employee, esp. to a manual or unskilled laborer.

• Salary: A fixed regular payment, typically paid on a monthly or biweekly basis but often expressed as an annual sum, made by an employer to an employee.

Financial PlanningGross Income the total amount of money one earns, before taxes

$12.00 an hour wageMultiply by 40 hours per week $480/Week

Multiply by 52 weeks a year $24,960/year

Divided by 12 months a year $2,080/ month

Equals = Gross monthly income $2,080/ month

• Pre- tax deduction – Any money that is taken out of your gross pay before you pay taxes. These deductions are benefits paid by your employer.– Examples – Savings for Retirement

• 401K• 403B Roth• Flex Spending Account – for medical expenses

• Income tax – Money taken from your gross monthly income by the government.

TaxesType of Taxes Definition Example for Budget

Federal Income Tax (9%)charge imposed by the federal government on the annual gains of a person to pay for government programs, agencies, and other things

$2,080 x .09 =

187.20

FICA (Social Security and Medicare) (7.65%)

The federal law which requires employers to withhold a portion of employee wages and pay them to the government trust fund which provides retirement benefits. An acronym for Federal Insurance Contributions Act. More commonly known as social security.

$2,080 x .0765 =

159.12

State Income Tax (7%)charge imposed by the state government on the annual gains of a person to pay for government programs, agencies, and other things

$2,080 x .07 =

145.60

Net Incomethe total amount of money you make after taxes. From the amount you will pay for rent, food, transportation, etc.

2080 – 187.20 – 159.12-145.60 =

1588.08

Where does your tax money go?

How taxes were created• The 16th Amendment

created income tax.• The current federal tax

system is progressive• This means the more

money you make, the more you are taxed

Review: What is a regressive tax?

Your friend the IRS:• IRS – Internal Revenue Service

generates tax forms and collects taxes

• Withholding – a portion of money taken from your gross income before you get your paycheck.

• At the end of the year, you determine the amount of taxes you owe, if you paid too much throughout the year, the surplus will be returned as a tax refund.

IRS withholding tips:

• The government withholds a minimum amount, after that you decide how much additional money you would like to withhold. (But this is like loaning the government money with no interest. If you are disciplined you could set the money aside and collect interest on your savings. )

How to Read A Pay Stub

Warm Up 5/20/14

• On the board

WARM UP

• Work on the spending sheet from the homework last night.

Let’s PlanKey points:

• It’s simple to create a Spending Plan—write down how much money comes in during an average month and then decide how you’re going to spend it.

• Putting it down on paper helps you see where you can make better money decisions.

• The right spending plan can help you set aside enough to pay your bills, have some savings for emergencies, and some money left over in your pocket…every month.

• Create a spending plan you can live with. Be realistic and flexible. The trick is to live within your income so you can pay expenses but still have some money left-over for your own flexibility.

• Review your plan every month. Adjust it as your income and expenses change.

• Savings is a discretionary expense—it’s up to you to decide how much of your money you’re going to set aside for your future. Don’t forget to “pay yourself” by saving!

What is a spending plan?• What is the difference between income and

take-home income?

• There is a difference between your income (the total amount you earn) and your take-home pay (net income).

• Net income = the amount of money earned after taxes, insurance, or other costs have been subtracted.

• Base your spending plan on your take-home pay.

Spending Step-by-Step

• To make your monthly income last, what order should you pay for things? Place these steps in the correct order

• Pay your monthly bills• Set aside money for weekly and day to day expenses• Put money into savings• Set aside money for larger expenses.• Set aside money for your major future goals• If you begin to earn more, increase the amount you save

as much as you can

Why and how should you track your spending?

• To get a clear picture of your spending right now, keep a spending diary for a month or two.

• Save your receipts. Write down items and amounts for what you spend.

List an example for each of these three types of expenses.

• Fixed expenses: – Regular amounts that generally don’t change

much.– Monthly expenses like rent or car payments.– Bills you receive less often, like car registration or

insurance.

Flexible/Variable expenses:• Occur on a regular basis and are also for

necessities.• You have more control over how much you

spend.• For example, you can control how much you

spend on groceries or how many long distance phone calls you make in a month.

Discretionary Expenses

• Money you choose to spend, but don’t necessarily have to spend.

• Could include clothes, movies, and dining out.

What should you do if you find there’s not enough income to cover expenses?

• After writing your spending plan, you may find that there’s not enough money to go around.

• Fixed expenses may be difficult to change so look for ways to decrease your flexible/discretionary expenses—and/or, increase your income.

What are trade-offs?

• Most people can’t afford everything they want, so they make tradeoffs.

• Making tradeoffs may mean giving up things or buying something less expensive, so you can afford things that are valuable to you.

• Tradeoffs may also relate to how you spend your time. To make more money at your job, you may have to work more hours.

Insurance – essentially a bet between you and your insurance company.

Types of Insurance• Life Insurance – is a contract between an insured

(insurance policy holder) and an insurer, where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") upon the death of the insured person.

– Term life insurance offers simple, affordable coverage for a set time period, typically 10 to 30 years.

– Whole Life insurance is a permanent insurance, fixed premiums, guaranteed death benefit, and cash value growth.

Creating a Budget

• After selecting your occupation, create a real budget and make sure you have enough money to pay all your bills!

Health Insurance

• is insurance against the risk of incurring medical expenses among individuals

• Health, Cancer, Dental, Vision, and Women’s Health

Property Insurance• provides protection against most risks to property, such as fire, theft

and some weather damage.

• Specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, or boiler insurance.

• Property is insured in two main ways—open perils and named perils.

• Open perils cover all the causes of loss not specifically excluded in the policy. Common exclusions on open peril policies include damage resulting from earthquakes, floods, nuclear incidents, acts of terrorism, and war. Named perils require the actual cause of loss to be listed in the policy for insurance to be provided. The more common named perils include such damage-causing events as fire, lightning, explosion, and theft.

Travel Insurance

• covers trip cancellation (with cash reimbursement), out-of-network medical/evac, lost/delayed baggage

How the game works:

• Your bet – you will get

sick / have an accident• Their bet – You will not

get sick / have an accident

• The risk (various factors that effect your health) you have plays into the cost of your insurance

Insurance vocabulary

• Premium – money paid to the insurance company for your policy. (If you remain accident free and healthy, the insurance company makes money)

• Deductible – the amount of money you must pay before the insurer will cover any expenses.

• Replacement cost – the cost it would take to replace the damaged item

• Actual Cash Value – worth of the item before the accident.

Shopping around for insurance

HELPFUL INSURANCE HINTS:• obtain many estimates to find the best price• look for a low premium (lowest amount you

need) that meets the amount of coverage you need.

• Also must take into account how much you can afford!

Personality SurveyGENERALIZATIONSThe following generalizations can be helpful in applying this inventory to individual settings.

1.People who have the same strengths in the dimensions will seem to “click,” to arrive at decisions more quickly, to be on the same wavelength. Their decisions, however, may suffer because of their weaknesses, exhibiting blind spots and holes that correspond to the list of weakness for that type.

2.People who have different strengths in the dimensions will not see eye-to-eye on many things and will have difficulty accepting some views, opinions, and actions of the other. The more dimensions in which the two differ, the greater the conflict and misunderstanding of each other. However, decisions resulting from their interaction will benefit from the differing points of view and strengths of each.

3.People may be sensitive about criticisms in their areas of weakness and likely prefer not to use these dimensions. As a result, conflict may occur when they must do so or when others point out deficiencies in these areas.

4.People will normally gravitate toward others who have similar strengths and weaknesses, although people of differing types are often drawn to one another because the strengths of one are admired and needed by the other.

5.People’s values, beliefs, decisions, and actions will be profoundly influenced by all four of the stronger dimensions in their typology.6.While a person’s typology cannot be changed to its opposite, each person can learn to strengthen their weaker dimensions to some extent

and to develop personal life strategies to overcome problems that result from their weaknesses.

IMPLICATIONSThe Personal Style Inventory raises several implications to consider.

1.Individuals, groups, and organizations with a preponderance of members whose strengths are in one type should seek out and listen to people of the opposite types when making decisions. Task-oriented groups would often benefit from a mixture of types.

2.People should realize that many differences in beliefs, values, and actions are the result of differences in style rather than of being right or wrong. Rather than be concerned over the differences, we need to understand and accept them and value the perspective they give.

3.When people must, of necessity, interact often with the same people (in teaching, business, marriage, etc.), interactions can be more congenial, satisfying, and productive if those involved, especially those with the greater power, understand the needs of others based on typology differences and adjust to them.

4.When interacting to accomplish tasks, people should be careful to label their values as values and then proceed to examine the facts and forces involved without defending the value position

Warm Up1. Explain the difference between disposable

income and discretionary income.

2. Briefly describe three types of insurances.

3. What is a premium and a deductable.

4. How should you determine the insurance policy that works best for you.

Warm Up

• On the Board

Warm Up(answer each question using complete sentences)

1. Explain the difference between gross income and net income (take-home pay).

2. What should you do if you find there’s not enough income to cover expenses? (think discretionary fund and flexible spending)

3. Since you are familiar with creating a budget, explain why education is a factor in determining you future income.

Creating a Budget

• Create a spending worksheet!

Banking

• A bank is an institution for receiving, keeping, and lending money

Early Banking in the US

• Very informal banking• A merchant would allow customers to deposit

money and charge a small fee• But this was not always safe…

– what if the merchant goes out of business or is not trustworthy?

Two views on banking

• Federalists (Alexander Hamilton)– Centralized banking was necessary– Hamilton proposed a national bank

• issue a single currency• monitor other banks throughout the country• manage the federal government’s funds

• Anti-Federalists (Thomas Jefferson)– Decentralized banking system– Banks should be created and operated by the states

Functions of Banks

• Storing Money- banks provide a safe, convenient, insured place to store money

• Federal Deposit Insurance Corporation (FDIC)- created in 1933 to insure customer deposits if a bank fails (up to $250,000 per account)

Functions of Banks

• Saving Money- banks provide 4 ways to save money– saving accounts –is a type of bank account where extra

money can be stored, separate from your primary (checking) account and still draw interest.

– checking accounts – A demand deposit, because checks can be paid “on demand”

– money market accounts – money lent to the bank for a short period

– certificates of deposit (CDs) – money lent to the bank for a longer period of time, this is a time deposit because the money cannot be withdrawn immediately without penalty.

Functions of Money

• Loaning Money- banks provide loans, and make money by charging the borrower interest

• Banks use fractional reserve banking- meaning that banks only keep a fraction of funds on hand and lend the remainder. The Federal Reserve establishes the required reserve ratio, or the fraction of deposits that must be held in reserve.

• Credit Cards- banks issue credit cards (a card entitling its holder to buy goods and services based on the holder’s promise to pay later), and make money by charging interest

• Collateral- property used to secure a loan. Lenders require collateral to ensure they will not lose money on defaulted loans.

Types of Financial Institutions

• Commercial Banks- offer checking services, accept deposits, and make loans

• Savings and Loans- originally created when members deposited funds into a general fund and then borrowed money to buy their own homes; now serves many of the same functions of a bank

• Credit Unions- cooperative lending associations for particular groups (i.e. state employees), usually small, specialize in home mortgages and car loans, some provide checking/saving

Credit Cards

When used and managed properly, credit cards offer:• convenience• a sense of security• the ability to build a good credit history

Credit Cards

• When used irresponsibly, credit cards can cause:• excessive debt• a poor credit history• long-term financial liability

Credit Card Costs

• Annual fees- many financial institutions charge an annual fee for the privilege of using their card

• Interest- financial institutions charge card holders monthly interest on credit card balances (expressed as %APR)

• Penalty rates- many financial institutions raise your interest rate if you make late payments or exceed your credit limit

• Low interest teaser rates- these rates are time-limited, and are raised to a higher rate later

Credit Card Terms

• Annual Percentage Rate (APR)- your interest rate• Minimum monthly payment- smallest payment

you can make and still be in good standing. The most expensive way to pay your credit card bill

• Credit report- collection of info obtained from your creditors reflecting the extent of your credit and payment history (your credit “report card”). Negative info remains for 7 years!

Credit Card Do’s

• Pay your bills on time• Limit yourself to one credit card• Differentiate between wants and needs• Pay your bill as soon as you receive your statement• Pay your bill in full each month (at least- pay more

than the minimum monthly payment)• Check monthly statements• Notify your bank if you move, or if your card is lost

or stolen

Credit Card Don’ts

• Don’t use your card for major purchases (school, car, etc.)

• Don’t skip payments• Don’t’ use one credit card to pay another• Don’t give in to opportunities to raise your credit

limit

Writing a Check

Finish Budget Project

• All Requirements are due

• Finish EverFi

• Test on Friday (we will review tomorrow)

Closure

• Do you think you could live on $12/hour? (About $25,000 per year) Why or why not?

• What difficulties did you encounter as you were planning your budget? Be specific!

Closure

• How does your education impact the financial plan and goals that you have?

• How does a budget help people in making economic decisions?

In debt we trust• While a large number of Americans carry a certain amount of

personal debt, few are aware of just how common and widespread the debt crisis has become. In 2006, it was estimated that the debt owed by American citizens totaled well over ten trillion dollars, and many economists believe that with more people owing so much and the nation's money supply in the hands of a dwindling number of people, a collapse along the lines of the 1929 stock market crash is not only possible but likely. Documentary filmmaker Danny Schechter explores this growing dilemma in In Debt We Trust: America Before The Bubble Bursts, which examines the various manifestations of the debt crisis – credit card companies who allow young and naïve customers to rack up large debts, loan firms who demand massive interest and penalties from homeowners struggling to stay afloat, lobbyists who helped push legislation through Congress making it harder for ordinary people to obtain bankruptcy protection, and punishing interest rates which can sometimes top out at 700%.