Personal Finance Final Review

Career Decision StepsWhat is the difference between a job and a career?

Jobs are usually taken to just earn moneyCareers usually lead to true satisfaction

Selecting a career begins with matching:1. Your educational level2. Your skills3. The amount of money you want to earn

Financial Planning Steps

You begin the financial planning process with a Career StrategyWays to develop a career strategy are:

1. Identify your personal and career interests.2. Make a list of things you enjoy doing.3. Think about how you could turn an activity that

you like into a career.

SETTING GOALS -S.M.A.R.T. GOALS

S pecificM easurableA ttainableR esults-OrientedT ime bound

Time Frame of Personal Goals– Short-term: 0 to 3 months to

achieve• Example: Save to buy a pair of jeans

– Intermediate: 4 to 12 months to achieve

• Example: Save for summer vacation– Long-term: More than 1 year to

achieve• Example: Save to purchase a condo

SETTING GOALSKnow Your Time Horizon

SETTING GOALSIdentify Your Attitude Toward Money

The purpose of goal setting is to provide direction for your planning

Evaluating Your Alternatives

• Evaluate the alternatives:– Compare consequences

• Opportunity costs or trade offs– What’s the value given up when making one

choice instead of another

Evaluating Your Financial Health

• Assets– Things you own of value

• Liabilities– Amounts you owe to others

• Net Worth– Statement listing all assets and

liabilities– Gives you an idea of your overall

general financial situation

– A minus L = Net Worth

Evaluating Your Financial Health

• Income– Wages– Salary– Tips– Gifts– Allowance

• Expenses– Taxes– Bills– Utilities– Debts– Rent

Main Idea: The DifferenceMore Income = Cash SurplusLess Income = Insolvency

…or you must sell off other assets?

HOME FILES are used for documents that are fairly easy to replace

Advantages• Easy to set up• Easy to use and access• Inexpensive

Disadvantages• Vulnerable to damage

Home Files

SAFETY-DEPOSIT BOXES are used for documents that are hard to replace

Advantages• Safe from damage• Separate from other documents • Access is limited• Contents usually insured

Disadvantages• Harder to access• Costs money (about $100 year)

Safety-Deposit Boxes

Computer Files are used for documents that are easy to keep electronically or that are useful in planning

Advantages• Automatic calculation of amounts• Usually has tool to help in tracking and

planning

Disadvantages• Data can be lost

Computer Files

Estimate Your Net Income• Gross income is the total amount of income from

your wages before any payroll deductions• Payroll deductions (TAXES) are amounts your

employer deducts from your pay• Federal Income Tax• State Income Tax• Local Income Tax• Social Security Tax (FICA)• Medicare Tax (FICA)• Health Insurance• Retirement Savings

–Net Income is your gross pay minus deductions; also known as Take-Home Pay

If income is

unpredictable

decrease your

estimated amounts

Form W-4Tells your employer how much to withhold from your paycheck for federal income taxes.

ExpensesExpenses: represent bills you must pay for items you have used upTwo basic types of expenses:• Fixed Expenses are amounts that cost the same

amount every time.– Pay Yourself First – try payroll deduction– Emergency Fund – savings account with enough

money to cover 3-6 months of expenses– Loans for car, home or college

• Variable Expenses are items that you pay for every month but that fluctuate in amount – Includes items like gas for the car and food– Tips for estimating amounts

The Five Cs of Credit• Character: Way you

handle money and have repaid debt in the past.

• Capacity: Ability to pay the debt after other monthly expenses.

• Capital: Value of your assets or what else you own.

The Five Cs of Credit

• Collateral: Something of value can be given in lieu of payment.

• Credit History: How you have used credit in the past – Creditors will ask about:

1. whether or not you pay your bills on time2. whether you have ever applied for bankruptcy3. your current credit rating which can be

purchased from one of three agencies

• Credit Report: record of your personal financial transactions, or credit history– For Past 7 to 10 years– You should check your credit

report at least once a year

Credit Reports and Credit History

Credit Card and Fees

• Transaction Fees and Other Charges• Three (3) major fees you should watch!!!

– Cash advances– Late payments– Exceed credit limit

Credit Card Terms• Grace Period

– Known as the “free period”– Lets you avoid finance charges

• If you pay in full before due date– Making minimum payments

• Takes years to pay off balance• Never advised to do!!!• Adds interest and increases costs

Credit Card Consumer Rights

• How to Solve a Problem– Don’t wait until your account is turned

over to a collection agency– Contact the credit card company and

ask for help or make other payment arrangements

• If you want to dispute a credit report, bill, or denial of credit, write to the appropriate company and send you letter “return receipt requested”

Checking Advantages

Easy to pay othersProof of Payment

Keeps money safe

Helps with Budgeting

Debt Cards v. Credit Cards

DEBIT Cards are available for deposits, withdrawals, transfers and bank statements.Takes your money from your bank account instantly w/o recourse

Credit cards are available for purchases and cash advances.They run on a billing cycle each month or every period.Rules and regulations apply!

Mortgage Types

Mortgage: a loan a bank makes to a person or persons to buy real estate

– Fixed – interest rate stays the same– Adjustable – interest rate can go up

or down• Can adjust yearly (1 Year ARM)• Can adjust at specified times (5/1 ARM)

OVERVIEW OF SAVINGS Paying yourself first means that

when you get a paycheck, you put away the money you want to save for your goals.

There are many reasons to pay yourself first. For example:

 

Treat savings like a normal expense

Manage your money better Increase your savings Improve your standard of

living.

Does It Balance?Reconciling your checking account statements

Why reconciling is important?• Lets you check for mistakes and checks

you wrote but did not enter.• Gives you a chance to subtract other

charges that the financial institution may have added.

• Lets you add any interest that your checking account may have earned

Pros and Cons of EFTElectronic Funds Transfer

Pros• Direct deposit of pay• Convenience• Personal Safety• Knowledge of

account• Time Savings

Cons• May have fees• Increased chance that

your personal information will be stolen

• Granting access to your accounts can be problematic

Auto Insurance

• Based on Risk & Loss

• Why do you need it?– To financially protect

yourself, others, and your car in the case of an accident.

– State Law

Insurance and Pennsylvania Law

• Must maintain automobile insurance– If not, State can cancel registration,

driver’s license, suspend other privileges• Minimum Requirements by law

– Liability Coverage (Mandatory) (Claims against you)

• $15,000 per individual• $30,000 per incident• No property damage

Insurance

Premiums:– Payment made for insurance

are called premiums– Can be monthly, bimonthly,

quarterly, semi-annually, or annual

– Can vary due to coverage

Liability Insurance

• Covers bodily injury or property damage that YOU cause to another person and/or vehicle.

100/300/50$100,000 bodily injury coverage per personLimit of $300,000 bodily injury coverage per

accidentProperty Damage Limit of $50,000

Liability Insurance

How to Explain Coverage Limits: 100/300/50$100,000 bodily injury coverage per personLimit of $300,000 bodily injury coverage per

accidentProperty Damage Limit of $50,000

This means if 10 people are hurt in an accident they all are covered by $300,000

Any one person is limited to $100,000

Collision & Comprehensive• Required if you finance

your car• Covers the cost to repair

YOUR car if YOU are at fault in an accident.– Don’t need this insurance if the

cost (premium & deductible) exceeds the value of the car.

• Deductible: The amount of money you must pay first before any claim will be paid

• Comprehensive covers the costs to repair your vehicle for damage that might occur from:– Natural disasters– Vandalism– Theft– Fire– Animal hitting the vehicle

(i.e. deer)– Falling Object– Glass Coverage

Step #1 – Car BuyingIdentify Personal Wants and Needs

• How will you use your car? – Narrow Your Choices

• Drive to school• Carry Friends• Hauling• Drive to work• Carry family members• Sports and Recreation

Pricing, Terms, and the Purchase

• Invoice Price• Base Price• Monroney Sticker Price (MSRP)• Dealer List Price• Beware of Bait & Switch

– Advertise one low-priced car and then switch you to another.

• The final price will be the negotiated price

Why Invest in Stock?• Earn regular income – dividend

payments☺When do you reap the benefits? Buy low, sell high…hopefully – Sell at higher price than you bought?

• Capital gain– Sell at lower price than you bought?

• Capital loss

• Stocks are a long-term investment strategy

A stock certificate or stock share is a piece of paper that shows partial

ownership in a corporation.

Risks

Risk – the chance of losing part or all of an investment.

◦Rule #1: Higher Risk…Higher Return◦Rule #2: Higher Risk… More volatile price swings◦Rule #3: Higher Risk… Considered more speculative!!

Usually… the higher the risk …the higher the expected return on investment

Diversification

• Spreading or reducing of risk related to purchasing and holding of different types of investments– Decreases the overall risk of your portfolio– Reduces the impact of economic changes

• One industry may be up or positive• Another may be down or negative

– Doesn’t guarantee positive returns but lessens the potential risk associated with investment

– Can use multiple strategies when diversifying

What is a Mutual Fund?• An investment company that

invests its shareholders’ money in a diversified portfolio of securities – “Investment company” is the legal term– “Mutual fund” is the popular term– Professional management – Diversification

• Each fund has a specific objective

Advantages of Mutual Funds• Pooled Diversification

– A process whereby investors buy into a diversified portfolio of securities for the collective benefit of the individual investors

• Professional management– The mutual fund managers are supposed to

know what they are doing• Low initial outlay of capital

– You can start with $25 to $50 per month• Convenient to buy and sell

compared to stocks and bonds– Can be sold online, in-person, or by phone

Drawbacks of Mutual Funds• Transaction Costs

– Some mutual funds charge sales fees called “loads”

• Front-end loads, back-end loads, etc.– Many others are “no-load” funds

• But some “no-load” funds can wind up costing you more than “load” funds

• Annual Management Fees– Typically from 0.5% (or less) to 2.5% (or

more)

• Many mutual funds do not match the market’s performance

• Not federally insured!