Finance 200

What happens if the economy is bad?

-Interest rates are low to encourage people to take out loans so they will jump start the economy -shares are down and companies are not buying bonds -bond values go up more because they have higher returns then the interest rates

What is the difference between level 1 and level 6 budgeting?

1. Level 1 - The majority of America does this - an inefficient intuitive sense of what is in your checking/savings/credit card accounts 6. Level 6 - Reducing future expenses based on planning and projections. Less than ½ of 1% of all Americans do this!

What are the two purchasing habits of millionaires?

1. Purchasing Habits a. Rarely purchase brand names or expensive items b. "I can't get my wife to spend any money"

What has happened to health care costs?

230%

What the 100 year yields of Gold and Dow Jones look like?

238% - 31,792%

What are the 10 traits of a 401 K?

401(k) Traits ● A 401k is behaviorally efficient because you don't see the money withheld from your paycheck. If you don't see it, you won't miss it ● Contribution is often matched by employer (as an incentive to retain high quality employees) ● Several investment options ● No tax paid on contribution ● No tax paid annually on investment gains ● Tax is paid upon withdrawal ● Cannot be withdrawn until age 59 ½, (if withdrawn before there is a significant penalty of 10%. Early liquidation will also require taxes to be paid) ● Someone else does all the work (you select the investments and someone else manages the account completely) ● The money you contribute is always yours, even if you leave the company ● Money contributed by your employer may be on a vesting schedule, meaning that you need to work for that company for a certain period of time before their contribution becomes yours.

what percent of BYU students are financially independent and what is the rule after school?

66% - don't ask for money

Pensions plans in 1980 and 2011.

82% - 17%

What is a derivative, what is it used for, is it a financial asset, and what are 5 examples?

Derivative Why are they around, what are they used, and how do you identify them? ● A contract that derives value from the movement of a financial asset (you are really investing in the volatility of the market, not the asset itself). ● You do not actually own the investment like in equity or debt. Equity and debt are financial assets. Derivatives are not ● Derivatives are used to speculate or hedge ● Examples of Derivatives ○ Credit Default Swaps ○ Futures Contracts ○ Options Contracts ○ Forward Contracts ○ Interest Rate Swaps

What is a Home Equity Debt Consolidation Loan? What are the pros and cons? What does Bro. Marsh suggest that we do?

Home Equity Debt Consolidation Loans - A loan where you consolidate all of your debts into one, lower monthly payment (you have a lower interest rate and the loan is typically amortized over 30 years). In this loan you use the equity in your home as collateral for the loan. While there are some unique circumstances where this type of loan is recommended by Brother Marsh, overall, avoid this type of loan like the plague (we will talk more about this later as well). ● While these loans make sense financially (you now have only one payment to make, a lower interest rate and the interest payments can be tax deductible), they don't make sense behaviorally ● Most people who take these loans out are not required to change their lifestyle. Because of this, many people regain all of the debt they consolidated in a short number of years ● Once you see the first I in HXII, you will see Brother Marsh's recommendation

What are the 4 things that have investment in the names and what do they stand for?

Investment companies - Mutual funds, index funds, insurance company, etc... Investment Indexes - Dow Jones Industrial, S&P 500, etc... measures market performance, segments (sectors), used as a benchmark (compare to other investments), allow index and other funds to mirror the index Investment Objectives - Mid cap, large cap, micro cap, High Yield funds, corporate bond funds, emerging market funds, international funds, real estate funds, muni funds, money market funds, etc... Investment Markets - Places to invest - Exchange or Over the Counter

what are the 4 positive and negative things about real estate?

Real Estate Positives ● Leverage (you get to use debt to maximize your return) ● Rent income ● Depreciation, the non-cash expense ● Behaviorally sound Negatives ● Leverage - more debt means more risk ● Landlord - high maintenance investment ● Valuation uncertainty (the value of the property can go up and down quickly without a reliable way to track as compared to the stock market) ● Illiquidity (hard to turn to cash quickly without losing significant value).

What are the three matches and what are their benefits?

Tax, Employee, and Salary Index

What are the 6 investment rules?

a. Invest for the long term b. Familiarity with company/industry they are investing in c. Dull/Normal" Investments d. 12% Return over the past 10 years e. Increasing dividends each quarter f. Same management team now is the same as the last 10 years

What are the 7 examples of speculation?

○ Options - For example, you pay $20 bucks for a chance to buy a BYU ticket to the Rosebowl at face value. If BYU doesn't make the Rose Bowl then you lose all your money. If they do you can sell your ticket for an incredible gain. Very risky. You only get to EXERCISE your option in BYU goes to the Rose Bowl. ○ Hedge Funds - A Mutual fund that invests in very aggressive, complicated, and speculative investments. Very high leverage ○ Arbitrage - The simultaneous purchase and sale of an asset in order to profit on the difference in price in different markets ○ Futures - Entering a contract to purchase certain assets in the future at a fixed price (betting on whether the value of the asset with increase or decrease). You are speculating on the price movement of an underlying asset. Can be used to hedge (or safeguard) your assets or to profit off of someone needing to hedge ○ Currency Trading - Basically arbitrage between currencies (buy currency x with currency y and then buy currency z with currency x and then buy more of currency y than originally owned) ○ Credit Swaps - A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer (the creditor of the reference loan) in the event of a loan default (by the debtor) or other credit event ○ Real Estate Flipping - Purchasing real estate with the hope that the value increases and you sell the property for a profit (Can easily over leverage yourself)

What are the 3 downsides and 6 upsides to debt consolidations?

● Debt Consolidation Loans ○ Disadvantages ■ Assets pledged by borrower (generally a home) as security for loan repayment ■ Asset is forfeited if loan cannot be repaid ■ That asset is your home if it's a home equity consolidation loan ■ Your interest rate is lowered and you only have one debt to make payments toward each month ■ The problem with debt consolidation loans is that most people (82%) re-accumulate the original debt within 3 years. They get the financial benefits but do not change the behavior wiping out the financial benefits ■ Following Elder Ashton's Accelerated Debt Plan will eliminate your debt in approximately the same amount of time ■ Debt Consolidation Loans/Home Equity consolidation loans are different than refinancing your loan. ○ Debt Consolidations Loan Advantages - KNOW THESE ■ One Payment ■ Lower Payment ■ Lower Interest Rate ■ Tax Deductible Interest ■ Makes more borrowing possible ■ Possible accelerated payoff

11 strategies that do not work

● Debt Consolidation Loans ● Investment Life Insurance (also called Whole Life Insurance) ○ Contains a death benefit component (like term life insurance) AND an investment component ○ 80% of all investment life insurance policies are cancelled within 5 years of purchase ○ Whole life insurance investment only a 50% refund ○ With regards to life insurance, purchase term life insurance and invest in your 401(k) ● The quest for higher than expected yields ○ People can grow accustomed to higher yields. When these returns don't come consistently, people make overly aggressive and risky investments. This leads to losing money ● Traditional Budgeting ○ We should do this, but almost nobody actually follows it. It works if you can stay strong on it ○ Works financially, but not behaviorally ○ Level I through Level VI ■ Most of America is at Level I, while less than ½ of 1% is at Level VI ● Rent-To-Own Contracts ○ AVOID THESE AT ALL COSTS ○ End up costing WAY more than it should ● Payday loans, auto-title loans, tax anticipation loans, credit card cash advance, No-one-turned down auto loans, small dollar loans... ○ STAY AWAY FROM THESE ○ Incredibly high interest rates ○ Interest rates for all of these can go higher than 300%!!!!!!!!!!! ○ Payday loans that are rolled over once can be charged over 1000% interest! ○ DON'T LISTEN TO MONTEL WILLIAMS!! ○ Utah does not have a cap on loan interest rates (note that Montel Williams has to say that Money Mutual services are not available in NY because of the interest rates) ● Two-Income Households ○ Using both incomes for spending and applying for loans. If one of those incomes disappears then financially the family falls apart ○ Recognize that we are not saying that only one spouse in the family should work. This is entirely up to each individual family and their circumstance ○ The Millionaire Next Door comments on two-income households ■ The spouse rarely worked ■ If the spouse did work, they generally did not work in a time consuming professional career ● Economic Outpatient Care ○ Money given to an adult child ○ For every dollar given to an adult child there is an equal decrease in their enthusiasm to make money ● Merchant 'Smart Shopper' Incentives ○ Including but not limited to... Frequent Flyer Miles, preferred shopper discounts, gift cards, contests, coupons, credit card incentives, mail in rebates, warehouse 'bulk purchasing', 'discount retailers', bundling incentives, etc... ○ Are Millionaires Fastidious shoppers? No (this means they don't spend a great deal of time running around time chasing the best deal or couponing or etc... ● Gift Cards ○ 30% of gift cards go unused (and expire each year) ● Credit Card Rewards ○ When getting credit card rewards take the cash (cash back). There are often many stipulations on frequent flyer miles and point based systems (causing you to lose your reward or being unable to redeem it)

What are 9 strategies that work?

● Home Purchase ● 401(k) ● Accelerated Debt Reduction ● Million Dollar Choices ● Income producing Real Estate ○ This may not be the most appealing option for many people because of the individual effort that is required (late night calls to fix the plumbing for example) ○ You may also be put in tough or uncomfortable situations depending on your personality (collecting rent, evicting tenants, etc.) ● Owning your own business ○ Franchises are generally the best while MLMs are often the worst (Multi-Level Marketing) ● Getting Married ● Staying Healthy ● Optimism

What are the 4 fraud mentalities?

● Looking for a break - "finally getting a break" ● Something for nothing - want to be a winner ● Different from everyone else - "new" "different" "secret" "special" "exclusive" ● Smarter than everyone else - "I know better"