Lesson 20: Personal Finance and Investments
What is your credit score based on?
-Bill paying history -Number of accounts held (what kind) í more accounts is more points -How much of available credit is being used í less being used is more points -How long accounts have been opened, how often you've applied -Recent credit activity -Any occurrences of debt referred for collection, a foreclosure, or a bankruptcy and how old these are
What are the three main focuses for personal finance?
1. Manage cash flow (income - expenses) 2. Grow net worth (assets - liabilities) 3. Preserve net worth (50/20/30)social
What are the four important factors for selecting investments?
1. Your investment horizon 2. Your risk tolerance 3. Liquidity needs 4. Asset allocation goals
What are the 3 most basic classes of investments?
1. stocks - for investors seeking growth of their investments 2. bonds - for investors seeking steady income from their investments 3. cash (or cash equivalents) - for investors seeking to preserve their capital for minimal risk/loss
A _____ ____ is a fund that tools money from many investors to purchase a variety of different securities. It is actively ____ by a portfolio manager who devote large amounts of time to picking securities that will meet ______ objectives. They are usually managed to achieve a particular ______. The ___ ____ ___ is how much money each investor gets. The ___ _____ ___ is how much the mutual fund is worth in total. An _____ _____ ____ is a fund that invest in stocks and other securities. It is not actively ____ but is a basket of security that tracks various indexes for stocks, bonds and more speculative types of investments. They created to track indexes - how well a particular type of investment typically _____. This is a ____ ___ way of getting into the market because stocks aren't traded on a regular basis. Both tools allow people to develop a _______ portfolio easily by investing in the fund. ETFs tend to do (better/worse) than managed mutual funds.
A MUTUAL FUND is a fund that tools money from many investors to purchase a variety of different securities. It is actively MANAGED by a portfolio manager who devote large amounts of time to picking securities that will meet PORTFOLIO objectives. They are usually managed to achieve a particular GOAL. The NET AVERAGE VALUE is how much money each investor gets. The ASSETS UNDER MANAGEMENT is how much the mutual fund is worth in total. An EXCHANGE-TRADED FUND is a fund that invest in stocks and other securities. It is not actively MANAGED but is a basket of security that tracks various indexes for stocks, bonds and more speculative types of investments. They created to track indexes - how well a particular type of investment typically PERFORMS. This is a LOW COST way of getting into the market because stocks aren't traded on a regular basis. Both tools allow people to develop a DIVERSIFIED portfolio easily by investing in the fund. ETFs tend to do BETTER than managed mutual funds.
Estate Planning: A _____ is how you want your assets distributed. An _____ assembles and values your estate, files income and other taxes, and distributes assets. A ___ _____ is a special type of legal entity that holds property for the benefit of another.
A WILL is how you want your assets distributed. An EXECUTOR assembles and values your estate, files income and other taxes, and distributes assets. A TRUST FUND is a special type of legal entity that holds property for the benefit of another.
AVOID MAKING MIN PAYMENTS ON CREDIT CARDS POWER OF COMPOUNDING!!!!!
AVOID MAKING MIN PAYMENTS ON CREDIT CARDS POWER OF COMPOUNDING!!!!!
_______ is when your investment returns larger earning over time due to interest. After receiving interest in first year, the amount of interest you will receive the next year will be larger because ______. This can be a good thing when it comes to money in the bank, but can be a bad thing when it applies to ____ ___ ___ that you have to pay back - wait longer to pay will mean you have to pay more interest.
COMPOUNDING is when your investment returns larger earning over time due to interest. After receiving interest in first year, the amount of interest you will receive the next year will be larger BECAUSE YOU'LL HAVE A GREATER AMOUNT OF MONEY TO RECEIVE INTEREST ON. This can be a good thing when it comes to money in the bank, but can be a bad thing when it applies to CREDIT CARD DEBT that you have to pay back - wait longer to pay will mean you have to pay more interest.
Credit cards have the power of ______ - interest makes amount due very large when you only pay the min. Paying off the balance each month gets rid of any _____ payments. There is no ____ account required, you can spend ___ than what is currently in your account, this can affect your ____ ____, and some offer ___for purchases. Debit cards do not have _____ and accesses your ___ account directly. You cannot spend ___ than what is currently in your account. It does not affect your ___ ___ and there are no ____ for purchases.
Credit cards have the power of COMPOUNDING - interest makes amount due very large when you only pay the min. Paying off the balance each month gets rid of any INTEREST payments. There is no CHECKING account required, you can spend MORE than what is currently in your account, this can affect your CREDIT SCORE, and some offer REWARDS for purchases. Debit cards do not have INTEREST and accesses your CHECKING account directly. You cannot spend MORE than what is currently in your account. It does not affect your CREDIT SCORE and there are no REWARDS for purchases.
What is disability insurance?
Disability insurance pays a portion of your income if you can't work for an extended period because of an illness or injury.
Financial benefits of home buying are that it's an ____, it forces you to save money, interest paid on your home loan is tax _____, and the home will ideally ____ in value. Mortgage payments usually follow one of three models: ____, ____ or ____. _____ _____ __ (___) is closing costs/fees paid upfront to get a different interest rate than typical mortgage rates. Monthly mortgage rates may include: _____ and interest, private mortgage ______ (to insure the lender), and escrow (homeowner's _______ and ______ taxes). It is usually a good idea to pay bit more than required monthly patent toward principal if possible - this reduces the ____ to pay the mortgage and how much ____ you pay.
Financial benefits of home buying are that it's an INVESTMENT, it forces you to save money, interest paid on your home loan is tax DEDUCTIBLE, and the home will ideally APPRECIATE in value. Mortgage payments usually follow one of three models: 1. 30-year fixed (borrowing for 30 years) at 3.5% 2. 15-year fixed at 2.75% 3. 5/1 adjustable rate mortgage (rate is usually fixed for 5 years and then can go up or down based on economy) ANNUAL PERCENTAGE RATE (APR) is closing costs/fees paid upfront to get a different interest rate than typical mortgage rates. Monthly mortgage rates may include: PRINCIPAL and interest, private mortgage INSURANCE (to insure the lender), and escrow (homeowner's INSURANCE and PROPERTY taxes). It is usually a good idea to pay bit more than required monthly patent toward principal if possible - this reduces the TIME to pay the mortgage and how much INTEREST you pay.
Good health allows people to work, earn money, and enjoy life. If an individual was to develop a serious illness or have an accident without being ______, they might find themselves unable to receive treatment or be in debt to the hospital. Many ______ provide health insurance benefits to full-time employees. Even if employees have to pay part of the premiums, employer-provided health insurance is generally the most ______. Married couples may be able to take advantage of family plan coverage under just ____ of the employer plans. If an employer does not offer health insurance or an individual is self-employed, they will need to explore other insurance options. The _____ ____ marketplace is a good starting point. One also can contact insurers directly to see what type of coverage is available locally. Consider co-pays, deductibles, premium costs, network coverage, and covered expenses to determine which plan yields the most benefits. Comprehensive health plans will often cover dental, vision, and alternative medical treatment (e.g., chiropractic). Such plans tend to be the most expensive.
Good health allows people to work, earn money, and enjoy life. If an individual was to develop a serious illness or have an accident without being INSURED, they might find themselves unable to receive treatment or be in debt to the hospital. Many EMPLOYERS provide health insurance benefits to full-time employees. Even if employees have to pay part of the premiums, employer-provided health insurance is generally the most AFFORDABLE. Married couples may be able to take advantage of family plan coverage under just ONE of the employer plans. If an employer does not offer health insurance or an individual is self-employed, they will need to explore other insurance options. The FEDERAL HEALTHCARE marketplace is a good starting point. One also can contact insurers directly to see what type of coverage is available locally. Consider co-pays, deductibles, premium costs, network coverage, and covered expenses to determine which plan yields the most benefits. Comprehensive health plans will often cover dental, vision, and alternative medical treatment (e.g., chiropractic). Such plans tend to be the most expensive.
____ and ____ insurance are two types of property insurance that provide protection in the event of fire, natural disaster, or burglary. It can also protect individual against personal liability if someone is _____ inside the home. Homeowner's insurance is generally ______ by the lender when one has a home mortgage. The insurance premium is often ____ ____ the mortgage payment.
HOMEOWNER'S and RENTER'S insurance are two types of property insurance that provide protection in the event of fire, natural disaster, or burglary. It can also protect individual against personal liability if someone is INJURED inside the home. Homeowner's insurance is generally REQUIRED by the lender when one has a home mortgage. The insurance premium is often BUILT INTO the mortgage payment.
_____ ______ ______ allow people to buy stocks and funds, just like a brokerage, but they have different taxation rules. 1. A ____ ____ is a specific type of investment account that allows one to contribute money after tax. When investors turn 59 ½, they can take out the contributed money ____-_____. 2. A ______ is another type of retirement account sponsored by an ______. It works opposite of a Roth IRA. Contributions to the account are tax-free, and members are taxed when the money is _______ from the account. Additionally, many employers will ______ one's contribution to the 401 (k) account up to a certain point. Workers can also choose what investments their 401 (k) money makes. 3. A _____ plan is another type of retirement account, designed specifically for ________ individuals. It may also be known as HR 10 or a qualified plan. It can be set up for ____ businesses to benefit both the small business owners and the employees at the business. The contribution limit is _____ for a Keogh plan vs. a 401 (k) plan. Like a 401 (k), a Keogh plan allows for contributions before ___ (i.e., tax deductible). Also, as with a 401 (k) plan, Keogh account funds will typically be invested in a _____ of investing instruments (i.e., stocks, bonds, mutual funds, etc.)
INDIVIDUAL RETIREMENT ACCOUNTS allow people to buy stocks and funds, just like a brokerage, but they have different taxation rules. 1. A ROTH IRA is a specific type of investment account that allows one to contribute money after tax. When investors turn 59 ½, they can take out the contributed money TAX-FREE. 2. A 401(K) is another type of retirement account sponsored by an EMPLOYER. It works opposite of a Roth IRA. Contributions to the account are tax-free, and members are taxed when the money is WITHDRAWN from the account. Additionally, many employers will MATCH one's contribution to the 401 (k) account up to a certain point. Workers can also choose what investments their 401 (k) money makes. 3. A KEOGH plan is another type of retirement account, designed specifically for SELF-EMPLOYED individuals. It may also be known as HR 10 or a qualified plan. It can be set up for SMALL businesses to benefit both the small business owners and the employees at the business. The contribution limit is HIGHER for a Keogh plan vs. a 401 (k) plan. Like a 401 (k), a Keogh plan allows for contributions before TAX (i.e., tax deductible). Also, as with a 401 (k) plan, Keogh account funds will typically be invested in a PORTFOLIO of investing instruments (i.e., stocks, bonds, mutual funds, etc.)
Investments for growth are used to increase your _____ ____. ____ _____ purchases make investors shareholders in the company. ____ stocks give investors dividend payments from company profits. ____ stocks do not pay dividends - the company reinvests profits backing the company to fuel further growth. _____ ______ is the principle that as a company grows its profits, their stock will usually become more valuable, allowing investors to sell the stock for a higher price than they bought it. A well-diversified stock portfolio contains stocks representing a mix of company ____, ____, and _____,
Investments for growth are used to increase your NET WORTH. COMPANY STOCK purchases make investors shareholders in the company. INCOME stocks give investors dividend payments from company profits. COMMON stocks do not pay dividends - the company reinvests profits backing the company to fuel further growth. GROWTH INVESTING is the principle that as a company grows its profits, their stock will usually become more valuable, allowing investors to sell the stock for a higher price than they bought it. A well-diversified stock portfolio contains stocks representing a mix of company SIZE, COUNTRY, and SECTOR,
Investments for income provide investors with a predictable source of _______. This comes from steady ____ or ____ payments. They typically less volatile than _____ investments. They are good tool to _____ an investment portfolio. _____ _____ are state/local/federal issue bonds to raise money. The government pays interest until the ___ ____, when bondholders receive their initial investment back. They are usually highly ____ because they can be easily sold to other investors. These are sometimes seen as ____ _____. _____ ______ are more risky than government bonds and are a form of long-term debt financing for corporations. Bonds pay interest and at ___ ___, bondholders receive their initial investment back. They are generally more conservative than _____, but the underlying value of a corporate bond can increase/decrease based on changes to the ____ ____ ___ in the economy or the ______ of the company. ____ ______ constitute partial ownership in a company; they are shares of publicly traded companies. They are generally liquid but the _____ of different stocks varies widely. Some pay a ______, which is a distribution of profits from the company. These types of stocks generally come from industries like ___, ___ and ____. They have low _____ but can still lose value if the company performs poorly. A different kind of stock, a _____ ___, provides ownership advantages of common stock and the income advantages of bonds, and dividend payments are ____.
Investments for income provide investors with a predictable source of INCOME. This comes from steady INTEREST or DIVIDEND payments. They typically less volatile than GROWTH investments. They are good tool to DIVERSIFY an investment portfolio. GOVERNMENT BONDS are state/local/federal issue bonds to raise money. The government pays interest until the MATURITY DATE, when bondholders receive their initial investment back. They are usually highly LIQUID because they can be easily sold to other investors. These are sometimes seen as CAPITAL PRESERVATION. CORPORATE BONDS are more risky than government bonds and are a form of long-term debt financing for corporations. Bonds pay interest and at MATURITY DATE, bondholders receive their initial investment back. They are generally more conservative than STOCKS, but the underlying value of a corporate bond can increase/decrease based on changes to the GENERAL INTEREST RATE in the economy or the CREDITWORTHINESS of the company. INCOME STOCK constitute partial ownership in a company; they are shares of publicly traded companies. They are generally liquid but the VOLATILITY of different stocks varies widely. Some pay a DIVIDEND, which is a distribution of profits from the company. These types of stocks generally come from industries like REAL ESTATE, UTILITIES and NATURAL RESOURCES. They have low VOLATILITY but can still lose value if the company performs poorly. A different kind of stock, a PREFERRED STOCK, provides ownership advantages of common stock and the income advantages of bonds, and dividend payments are REQUIRED.
Investments in capital preservation avoid losing ___ especially for ___-term goals/needs. Investors pay little to no ___ and the investments are very _____. This include bank accounts (if they pay ____), ___ ____ accounts, which is an alternative to a savings account that may pay higher interest, and a ____ _____ ______ - a type of savings account where you agree to leave the money on deposit for a specific period of time; longer the CD term, the better the interest rate.
Investments in capital preservation avoid losing VALUE especially for SHORT-term goals/needs. Investors pay little to no INTEREST and the investments are very SECURE. This include bank accounts (if they pay INTEREST), MONEY MARKET accounts, which is an alternative to a savings account that may pay higher interest, and a CERTIFICATE OF DEPOSIT - a type of savings account where you agree to leave the money on deposit for a specific period of time; longer the CD term, the better the interest rate.
Life Insurance: ___ ____ insurances combines pure insurance and savings; accumulates cash value usually at a set rate. ___ ____ insurance is pure insurance protection for a given number of years; it costs less the younger you buy it. ____ ____ insurance is whole life insurance that invests the cash value of the pocky in stocks or other high-yielding securities.
Life Insurance: WHOLE LIFE insurances combine pure insurance and savings; accumulates cash value usually at a set rate. TERM LIFE insurance is pure insurance protection for a given number of years; it costs less the younger you buy it. VARIABLE LIFE insurance is whole life insurance that invests the cash value of the pocky in stocks or other high-yielding securities.
Life insurance is often critical if ____ or with _____. Yet, even single people can benefit from having life insurance. In case of death, life insurance can meet several _____ needs. In the case of someone who's married with a family, it can replace lost ____, help to pay lingering debts, or pay for children's ____ education. If single, life insurance could pay for burial costs and pay off any debts left behind. Some employers offer a basic life insurance as a benefit and some allow employees to purchase additional coverage at their group rate. An additional consideration is whether to purchase term or permanent life insurance. ____ life insurance is coverage for a specific time period, typically five to 30 years. _____ insurance, sometimes called whole life, provides coverage as long as premiums are paid. This latter type of coverage also builds cash value that can be borrowed against or invested for growth. Of the two, ____ life insurance tends to be less expensive. However, _____ coverage provides a component of regular investment that some find attractive. One's coverage ability depends on their ____ and ____ profile. Younger and healthier individuals generally find it easier to gain coverage and at lower costs. A brief medical exam may part of the application process.
Life insurance is often critical if MARRIED or with DEPENDENTS. Yet, even single people can benefit from having life insurance. In case of death, life insurance can meet several FINANCIAL needs. In the case of someone who's married with a family, it can replace lost INCOME, help to pay lingering debts, or pay for children's COLLEGE education. If single, life insurance could pay for burial costs and pay off any debts left behind. Some employers offer a basic life insurance as a benefit and some allow employees to purchase additional coverage at their group rate. An additional consideration is whether to purchase term or permanent life insurance. TERM life insurance is coverage for a specific time period, typically five to 30 years. PERMANENT insurance, sometimes called whole life, provides coverage as long as premiums are paid. This latter type of coverage also builds cash value that can be borrowed against or invested for growth. Of the two, TERM life insurance tends to be less expensive. However, PERMANENT coverage provides a component of regular investment that some find attractive. One's coverage ability depends on their AGE and HEALTH profile. Younger and healthier individuals generally find it easier to gain coverage and at lower costs. A brief medical exam may part of the application process.
Most states require that every vehicle owner carry basic _____ insurance that covers liability. If buying a car with a loan, the lender will likely require ____ coverage be added to the policy. If in an accident, ____ insurance covers damages to the other vehicle and occupants, while _____ covers damage to the vehicle owner. Most automotive insurance policies cover ____ injury or death of ___ ____ in an incident when one is legally responsible. While it generally pays for medical expenses related to the incident it can also cover ____ _____ costs. Coverage can include ____ ____ for those in the vehicle owner's car as well, regardless of who was at fault. Rental car coverage can also be included in the policy. Remember, the more coverage in the policy, the higher the premium costs.
Most states require that every vehicle owner carry basic AUTO insurance that covers liability. If buying a car with a loan, the lender will likely require COLLISION coverage be added to the policy. If in an accident, LIABILITY insurance covers damages to the other vehicle and occupants, while COLLISION covers damage to the vehicle owner. Most automotive insurance policies cover BODILY injury or death of ANOTHER PERSON in an incident when one is legally responsible. While it generally pays for medical expenses related to the incident it can also cover LEGAL DEFENSE costs. Coverage can include MEDICAL TREATMENT for those in the vehicle owner's car as well, regardless of who was at fault. Rental car coverage can also be included in the policy. Remember, the more coverage in the policy, the higher the premium costs.
Portfolio Diversification w/ Stocks: ____-___ _____ are companies valued at (market cap) over $10billion. An example is ____ ___ companies, which is the nickname for a select number of industry leaders that have provided their shareholders with stable earning over a number of years. These types of stocks are generally the most ____ type of growth investments. ____ and ____-____ _____ are companies valued at $300-10bil. They are more risky than the former, but they have more potential for fast _____. Another way to diversify your portfolio is to invest in _____ stocks. Stocks in _____ foreign countries have similar risks to domestic stocks, but ____ _____ stocks are more risky and volatile. A third way to diversify your portfolio is to invest in different _____ - some are more stable and safe than others. The ____ sector is less volatile than the _____ sector, for example.
Portfolio Diversification w/ Stocks: LARGE-CAP STOCKS are companies valued at (market cap) over $10billion. An example is BLUE CHIP companies, which is the nickname for a select number of industry leaders that have provided their shareholders with stable earning over a number of years. These types of stocks are generally the most CONSERVATIVE type of growth investments. SMALL and MID-CAP STOCKS are companies valued at $300-10bil. They are more risky than the former, but they have more potential for fast GROWTH. Another way to diversify your portfolio is to invest in FOREIGN stocks. Stocks in DEVELOPED foreign countries have similar risks to domestic stocks, but EMERGING ECONOMY stocks are more risky and volatile. A third way to diversify your portfolio is to invest in different SECOTS - some are more stable and safe than others. The CONSUMER sector is less volatile than the TECHNOLOGY sector, for example.
Retirement: _____ ____ is a government sponsored program intended to provide supplemental income to retirees. The premise of the program is that while working, individuals pay into the _____ _____ ______. This will show up as a tax on one's paycheck. Upon retiring, workers receive a payout of the fund, based on how much they contributed throughout their working life.
Retirement: SOCIAL SECURITY is a government sponsored program intended to provide supplemental income to retirees. The premise of the program is that while working, individuals pay into the SOCIAL SECURITY FUND. This will show up as a tax on one's paycheck. Upon retiring, workers receive a payout of the fund, based on how much they contributed throughout their working life.
Selecting investments: ____ ____ has to do with how soon you need money. For the short-term, you should use only the (safe/risky) investments. For the long-term, you could use (safe/risky) investments and look for higher _____. _____ ____ has to do with how much risk you can handle. Safe investments tend to have ___ returns, while risky investments may bring ____ returns. Higher risk investments tend to be more ____ - the price can change quickly and dramatically in either direction. _____ ______ has to do with how quickly you can sell an investment and convert to cash. Don't always assume that a liquid investment is automatically ____, or that a safe investment is automatically ____. _____ _____ is the process of spreading your money across several different types of investments to reduce risk. Doing this means that than losses in one investment are more likely to be ____ by gains in another.
Selecting investments: INVESTMENT HORIZON has to do with how soon you need money. For the short-term, you should use only the SAFE investments. For the long-term, you could use RISKY investments and look for higher RETURNS. RISK TOLERANCE has to do with how much risk you can handle. Safe investments tend to have LOWER returns, while risky investments may bring HIGHER returns. Higher risk investments tend to be more VOLATILE - the price can change quickly and dramatically in either direction. LIQUIDITY NEEDS has to do with how quickly you can sell an investment and convert to cash. Don't always assume that a liquid investment is automatically SAFE, or that a safe investment is automatically LIQUID. ASSET ALLOCATION is the process of spreading your money across several different types of investments to reduce risk. Doing this means that than losses in one investment are more likely to be OFFSET by gains in another.
The ___ ___ ______ is the performance of an investment that is measured by taking the dollar amount of your investment gains and dividing it by the original amount invested. It is expressed as a ______. The key to accurate ____ ____ ______ is dividing your return on investment by the original investment value, not the total value of the investment now.
The RATE OF RETURN is the performance of an investment that is measured by taking the dollar amount of your investment gains and dividing it by the original amount invested. It is expressed as a PERCENTAGE. The key to accurate RATE OF RETURN is dividing your return on investment by the original investment value, not the total value of the investment now.
_____, which can be fixed or variable, are contracts to make regular payments to a person for life or for a fixed period. This guarantees an income until the person dies.
annuities
Portfolio management = ___ ____
asset allocation
What are the different categories of asset allocation portfolios based on risk?
conservative, balanced, growth, aggressive
What is the time value of money?
much better to have liquid cash to spend or invest today than money incoming later; could potentially make more money investing
True or False: A diversified portfolio of stocks, bonds and cash lowers the risk of your investments.
true
