Unit 8: Financial Planning

Mutual Funds

Mutual funds allow you to invest in securities. A mutual fund is an investment company that pools money from lots of investors to purchase a stock portfolio, bonds, money markets, or combinations of investments. The performance of all the investments determines the return, so risk is involved.

Avoid Becoming a Victim of Identity Theft

N 13.

Rules to Live by When Making Discretionary Investment Decisions

N 6.

Retirement Plans

Retirement plans are the best way to save for retirement. Choices include IRAs, 401(k), SEP, and Keoghs. You do not pay taxes on these plans until you retire. Retirement plans are usually invested in a mixture of stocks, bonds, and mutual funds.

Activity 145.1

Savings and Investment Options

module 145 : N 7.

Select a Savings or Investment Option

Module 144: Creating Excess for Investment

Simple interest is interest paid annually on the principal, while compound interest is interest paid periodically on the principal plus interest already earned. With compound interest, your money's growth rate increases as opposed to simple interest. If you want to know how long it will take your investments to double, use the rule of 72 to find out. Before making any investments, however, always consider liquidity, safety, and return. When you understand the time value of money, you know that the future value of invested money will have the same value as the non-invested money you have today.

Pickpocket

Someone who steals your wallet or purse while it is on your person

Stock Analyst

Stock analysts look at the overall trends in the stock market and help explain them to others. They might work for a financial firm that serves individual investors, or they might specialize in stocks from a particular industry, such as medical devices or Internet software. Stock analysts need to be good at math and working with numbers. They need a bachelor's degree, and will be more competitive with an additional business degree (MBA). Stock analysts are usually well paid, although like the stock market, the field is not particularly stable.

Stocks

Stocks allow you to buy ownership in a company. Your return on the investment depends on the company's success or failure. The performance of stock is also affected by the economy as a whole.

payroll taxes

Taxes based on the payroll of a business

Activity 145.2

The Facts About Income Sources and Income Funds Exercise

Securities and Exchange Commission (SEC)

The SEC's mission is to protect investors and maintain fair, orderly, and efficient markets, as well as to facilitate capital formation.

costs and benefits

The bad and good points related to making a decision.

principal

The initial money placed in an investment

interest

The money periodically added to the balance

rule of 72

The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest.

dividend

The portion of corporate profits paid out to stockholders

inheritance

The process by which physical and biological characteristics are transmitted from the parent (or parents) to the offspring

cunclusion

There are many options for savings and investing. They include savings accounts, CDs, money market accounts, stocks, bonds, mutual funds, Treasury securities, real estate, and retirement plans. When determining the investment that is best for your needs, consider the risks, rewards, convenience, and liquidity. Income sources for investing include income funds, gifts, inheritances, and earnings.

Death Benefits

There are two different types of death benefits available from Social Security. There is a one-time, lump-sum payment in the amount of $255 that may be available for specific family members after the death of a recipient of Social Security. Only the spouse or minor child of the deceased is eligible for this payment under certain circumstances.

Dumpster diving

Thieves look through trash to find your personal information.

conclusion

This module reviewed the risks and typical advice of investing during a bear market. The key point to remember during this type of economy is to maintain your personal goals, and to be realistic about your comfort level with taking financial risks. Investments such as savings accounts, CDs, and money market accounts are all excellent ways of maintaining and growing your savings. Higher-risk types of investments include stocks and bonds.

costs and risks

Time/cost dependency links: costs increase when problems take longer to solve than expected. Price protection risks (a rise in input costs) increase if the duration of a project is increased.

Figuring Simple Interest

To determine simple interest, use this formula: interest = principal × rate × time. I = P × r × tI = (5,000.00) × (.02) × (1)I = 100.00

Figuring Compound Interest

To find how much interest you would earn for the second year, use this formula: I = (P2 = p1 + I 1) × r × tI = (5,000.00 + 100.00) × (.02) × (1)I = 102.00

Trusts can be either ....

Trusts can be either revocable, like the inter-vivos trusts, or irrevocable. An irrevocable trust is one in which changes cannot be made unless the beneficiary approves

U.S. Savings Bonds

U.S. savings bonds are government-issued bonds that can be bought for as low as $25. The expiration date varies and the interest rates are low.

Module 147: The Role of Inflation

Understanding factors outside of your control can help you protect your income and assets. Remember, when inflation goes up, the value of your money and your investments goes down. You know that the inflation rate tends to increase over time. But when it increases too much or too fast, inflation causes problems. Actions by the government can affect your financial future, too.

Skimming

When a thief uses a device to copy your credit or debit card numbers.

phrase

When you invest, you want to increase your income and build your assets.

retirement income

Workers and their spouses can begin receiving benefits at age 62 at reduced rate.

purchasing power

a comparison of income versus the relative cost of a standard set of goods and services in different geographic areas

income sources

all of the places from which you receive income

Consumer Price Index

an index of the variation in prices paid by typical consumers for retail goods and other items.

Certificates of Deposit (CDs)

are accounts that earn a rate of interest that is proportional to the length of time your money is held. The longer the bank keeps your money, the higher the interest your money will earn.

income funds

are funds that you receive as a result of your investments. Income funds may also be reinvested to continue building your investment portfolio.

U.S. bonds and treasuries

debt securities issued by the federal government

liquid investments

from which money can be removed at short notice and low cost. You can access your money at any time, with no penalty or fee. To open a savings or checking account, simply go down to your local bank with proper identification and ask to open an account. Know your options. Institutions other than banks that cash checks will charge a service fee—and may not be willing to cash a check at all.

Junk bonds

high-risk, potentially high-yield bonds that have been rated high-risk due to the increased likelihood of loan defaults or poor business performance.

Discretionary income

income minus shelter, food, utilities, taxes, insurance, and any other expenses for the basic necessities of life

diversified

increased variety to achieve a balance

affinity fraud

investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups

share

is a part of a company that you own.

Stocks

is a share in the ownership of a company. Because you are an owner you have a claim to a portion of that company's assets and earnings. The more stock you purchase, the greater your portion, or share, in the company's earnings.

money market account

is another type of savings account offered by banks and credit unions. The interest earned is based on the interest banks make on short-term investments. They differ from regular savings accounts in that they typically earn higher interest, but they also have higher minimum balance requirements (sometimes $1,000 to $2,500). Money market accounts also frequently limit the number of transactions allowed on the account—often just three per month. Money market accounts are set up in units of shares; one dollar of your money will buy one share.

bull market

is characterized by optimism and charging ahead. In a bull market, investors are optimistic and energized. Along with an elevated stock market, inflation is also high.

affinity investment

is one that is offered by someone you have a connection with. Affinity fraud occurs when a scammer joins or poses as a member of a group to get close with the group's members to scam them. The scammer gains trust by acting like he or she belongs to the same church, country club, political group, or professional organization.

savings account

is the most basic type of account offered by a bank; your money is held and insured, and typically earns interest over time. Depending on the amount of money in the account, a savings account can earn 1% interest or more. There is usually a low minimum amount ($25) required to open the account.

simple interest

is the most basic type of return on your savings or an investment. The amount of interest earned is based only on the principal. This type of interest is earned per period, such as quarterly (every three months), semiannually (every six months), or annually (every year).

inflation rate

is the percentage by which prices increase on a monthly or annual basis

checking account

is very similar to a savings account, except that it is easier to withdraw money in the form of a check or an ATM transaction. The money in a checking account will usually earn a lower interest rate than the money in a savings account because the balance in checking accounts tends to be less stable than the balance in savings accounts. The higher interest acts as an incentive for people to save, which provides money to banks that will use it to fund loans, which helps to keep the economy growing in a healthy way.

corporate bonds

long-term debt issued by private corporations typically paying semiannual coupons and returning the face value of the bond at maturity

interest rate

paid in money market accounts can fluctuate with the prime rate, which is the interest rate that commercial banks give their most creditworthy clients. This is because financial institutions use cash from money market accounts for other investments and to lend to other people—they are trying to earn more money as well. So if you invest $5,000 into a money market account during a strong economy, your money will earn higher interest than that same investment would earn when the economy is weak.

municipal bonds

tax-exempt bonds issued by state and local governments

Comprehension Check

terms

investments

the action or process of investing money for profit or material result.

Federal Reserve System (the Fed)

the central bank of the United States

time value of money

the increase of an amount of money due to earned interest or dividends

Ponzi scheme

using cash from newer investors to pay off older ones

Social Security

was designed as a safety net to provide income for older people when they stopped working. It is important to realize that Social Security payments are often less than what someone needs to survive. It is not a stand-alone retirement plan. Most retirees will need to supplement their Social Security income through savings, pensions, investments, continued employment, or adjusting their lifestyle. Do not wait until you are nearing retirement to think about how you will support yourself when you stop working.

discretionary spending

when consumers use leftover income to invest, save, or spend

mutual fund

which is a collection of several different stocks and bonds. A mutual fund company selects stocks and bonds that the company thinks will perform well overall. An investor can then buy shares of a mutual fund rather than the individual stocks that make up the fund. Mutual funds are attractive because they offer a less risky way of investing in the stock market. If one stock does poorly, chances are that another one in the same mutual fund has done well, so the overall outcome for the investor is still positive. A well-balanced portfolio will balance risk and reward for its investors.

In Module 141

you learned mutual funds are a way to invest in the stock market with less risk. You do not have to choose which stocks to buy and sell yourself. Mutual fund managers manage your money for you.

Changing Economic Conditions That Influence a Personal Financial Plan

- Economic conditions involve unemployment rates, stock market prices, and other factors. Inflation can negatively impact savings by eroding the purchasing power of savings over time. - Unemployment can affect financial plans by making it more difficult for individuals to budget, save, and meet financial obligations. - Deflation can reduce the value of assets you might own. - Slow economic growth can lead to an increase in unemployment rates. - Fiscal policy actions can affect an individual's current and future income. For example, actions of the Federal - - Reserve System affect interest rates and the availability of credit, so it is important to be aware of what the Fed is doing and how its actions affect your financial assets.

Bear-Market Investing

- Keep in mind how you want your money to grow. Know if your financial plans are long-term or short-term, flexible or strict. - Focus on your own goals rather than on the external economic trends. - Diversify your portfolio. You might choose to invest in a little-known foreign company, or lower-risk endeavors such as trRisk-Tolerance Tools

Economic Principles that Influence Personal Financial Planning

- People must make choices due to scarcity, which arises because, collectively, people have more wants than resources available to satisfy those wants. - Choices have opportunity costs, which is the value of the best alternative that was given up when making a choice. For example, suppose you buy a house and your mortgage payment is $1,000 a month. Before buying the house, you paid $500 a month for rent. The additional $500 a month is the opportunity cost to be a homeowner. - All choices have consequences, which are the outcomes of actions. - All choices have secondary effects, which are the side effects of your choice. - Decisions are made based on marginal analysis, which involves identifying the costs and benefits of a choice.

Applying Key Principles to Financial Planning

- Use a budget to detail how you plan to use your limited income to satisfy your wants. - Understand that there is a trade-off between spending now and saving. - Make decisions about how to invest money based on several factors, including expected return and the associated risk of the investment. - Consider economic conditions when setting financial goals.

Disability

1) Social Security Disability Insurance (SSDI)This disability program is for workers (and certain family members) who paid into the Social Security system for a certain amount of time, making them eligible for benefits. These benefits include a monthly check and the use of Medicaid. Medicaid is an insurance program that pays for hospital and medical bills. 2) Supplemental Security Income (SSI)SSI came into being in the 1970s. It is a program for those 65 and over, or someone of any age who is blind or otherwise disabled. This program is for people who have limited financial resources. The benefits include a monthly check and health insurance. There are very specific health and income guidelines for this program that restrict eligibility. This benefit is based on financial need: it does not matter whether the person paid into the Social Security system.3

Certificate of Deposit (CD)

A CD is set up through a bank or credit union for a specified time period, such as six months to five years. The return is higher than in a savings account, but if you take money out before the term expires, you risk a penalty such as losing the interest.

Consumer Financial Protection Bureau (CFPB)

A U.S. government agency that helps protect consumers by regulating financial products and services, like mortgages, credit cards, and student loans.

Module 142: Bull Market

A bull market is typically a time of expansion and investor optimism. As a result, it can be a good time to put money into the stock market. However, be aware of stock market bubbles. Sometimes too much optimism leads to a bubble. When this bubble bursts, there will be a market correction and stocks will lose a lot of value. Some companies may also go bankrupt.

Phishing

A fake e-mail from a business you have a monetary relationship with that tries to acquire your personal information.

Medicare

A federal program of health insurance for persons 65 years of age and older

inflation

A general and progressive increase in prices

Money Market Account

A money market account can be set up through most financial institutions and is a type of savings account that pays higher interest than a regular one. It also generally has a higher minimum balance requirement ($2,500 and up) and only allows a limited number of withdrawals per month.

stock exchange

A place where shares in a company or business enterprise are bought and sold.

Savings Account:

A savings account is set up through a bank and allows you to deposit money and earn interest. You can make withdrawals and deposits when you want. A checking account may be connected to it, but the checking account may not earn interest.

deflation

A situation in which prices are declining. Deflation can reduce the value of assets you might own. Deflation increases the value of money and decreases the value of tangible assets such as homes. Deflation is generally accompanied by increasing unemployment. Consumers who are worried about the future may reduce spending, which causes more unemployment. The process can become a downward spiral.

scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants

recession

A slowdown in a nation's economy

bear market

A steady drop in the stock market over a period of time. (is one in which investors are selling their stocks and are hesitant to buy stocks.)

Change of address

A thief changes the address for one of your bills so you do not see the purchases he or she makes.

Bonds

Certificates of debt that carry a promise to buy back the bonds at a higher price.When you purchase a bond, you are lending money to that entity for a defined period of time and at a fixed interest rate. Typically, you will get a dividend, or payout of the interest, on a regular basis, such as every year. At the end of the set term, your investment is returned to you.

compound interest

Compound interest allows your interest to be reinvested. This is the most common type of return on your savings or an investment. The interest may be stated as a yearly rate, but the compounding periods can be continuously, monthly, quarterly, and so on. The longer the money stays invested, the greater the impact from compound interest.

business cycle

Fluctuations in economic activity, such as employment and production

Fiscal policy

Government policy that attempts to manage the economy by controlling taxing and spending.

Monetary policy

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.

Nine million Americans

Have their IDs stolen each year

Module 146: Avoiding Shortcuts

Identity theft and scamming are serious problems that cost consumers, banks, credit card companies, and other organizations millions of dollars every year. You should know how to avoid having your identity stolen and how to avoid being scammed. Protect your money and property and avoid being taken in by smart and savvy con artists. As the saying goes, "Beware of wolves in sheep's clothing." Remember to do your research and take the time to think about investments that sound too good to be true. Ask lots of questions. Avoid shortcuts to minimize the risk of losing your money or having your identity stolen.

bubble

In a stock market bubble, prices increase far above the actual value of a company or its assets. Although a company shows high pricing on the stock market, its performance does not fulfill investors' expectations in the long run.

Module 141: Choosing a Variety of Investments

In this module, we have reviewed the different options for investing and saving your money. These range from storing your cash at home, to investing and trading your money actively on the stock market. With each option for investing your money, there are different rates of return, different terms for investing and recouping your money, and different levels of risk and reward. The decision of how, and how much, to invest is a personal one that is strongly tied to your individual financial goals. The lower the risk, the lower the reward. The reverse is also true: the higher the risk, the greater the reward. If you win, you win big; if you lose, your losses can be devastating.

Module 145: Investing Time in Monitoring Investments

In this module, you will compare and contrast investment and savings options. You will also learn about the costs and risks to consider before investing your money.

Module 143: Bear Market

In this module, you will look at your personal investment decisions during a bear market. Recall that a bear market is one in which growth is slow, prices are low or uncertain, and people tend to hold on to their money. In this module, you will look at reasons why this may or may not be smart.

Module 148: Planning for Retirement

It is important to plan for retirement and begin saving early in life. Social Security is only one part of a comprehensive retirement plan. People need to set aside other funds for retirement. There are many types of retirement plans; employers provide some and others are set up by individuals. There are different costs and benefits to each type of retirement plan.

pyramid scheme

An illegal form of multi-level marketing in which emphasis is placed on collecting initial fees from as many people as possible

opportunity costs

An opportunity cost is the cost of giving up something in order to have something else. For example, if you choose to join the swim team, your opportunity cost might be the chance to make the volleyball team.

Liquidity, Safety, Return

Before making an investment, consider liquidity, safety, and return. Liquidity has to do with the accessibility of your money. Can you get to it easily and convert it to cash? Safety has to do with risk. If you are afraid to lose money, look for safe investments.

Bonds

Bonds represent a loan you make to a corporation or the government, so they are debt investments. In exchange, you receive interest payments during a specific term and repayment of the principal.

Impersonation

Once an identity thief has your personal information, he or she pretends to be you.