Chapters 7-10

Determining the amount of an emergency fund

1. Estimate your monthly living expenses: -minimum monthly dollar amount you need each month -all your expenses minus taxes, savings, and nonessentials -essentials tend to be mortgage or rent, insurance, and cash payments 2. Determine your monetary assets -cash, savings, and checking accounts 3. Calculate your emergency fund ratio -divide monetary assets by monthly living expenses

Concepts in Action (Definitions)

-Coupon rate: The contractual interest rate that the bond issuer has agreed to pay the bondholder -Coupon payment: The dollar amount of interest that the bond issuer will pay the bondholder -Default risk: The risk that the bond issuer may not be able to repay the bond -Face value: The amount of money that the bond issuer will pay to the bondholder on the maturity date

Composition of the US bond market (in billions)

$3,831 state and local government. $13,647 US treasury. $8,759 mortgage-related bonds. $8,552 corporate bonds. $5,954 other bonds.

Financial advisor compensation

-A commission-based financial advisor receives some or all of his or her compensation from commissions generated when a client buys or sells a financial product -A fee-only financial advisor charges a client directly for services and receives no commissions based on what or how much a client buys

Market Equilibrium

-A supply and demand graph illustrates the fundamental building blocks pf modern economics -In almost all cases, as the price of a product falls, the demand for the product increases, and vise versa -Equilibrium is the point at which the two lines meet. This is where demand "equals" the supply of an asset.

Buying Stock

-After the stock is initially sold in the IPO market, investors, seeking to make a profit, can buy and sell the stock to other investors in the secondary market. -A bid price refers to the highest price a buyer will pay to purchase a specified number of shares of a stock at a specific time. -An ask price refers to the lowest price at which a seller will sell a share of stock.

Overview of Mutual funds

-An investment portfolio consists of individual stocks, bonds, and other assets that collectively represent the total investment assets of an individual or entity. -Diversification, the process of purchasing a variety of different securities, is essential to successful investing. -Mutual funds are investments that pool individual investors' money. -An advantage of mutual funds is they offer individual investors the opportunity to diversify even with limited funds.

Asset Allocation

-Asset Allocation is an approach in which you include different investments into one portfolio. -Diversification means to spread your investments across different types of assets to manage financial risk. This protects you against significant financial losses: -By spreading your investment money across more than one asset category, you can reduce risk and improve returns. (EX. 85% Stocks, 10% Bonds, 5% Cash)

Mutual Funds Investing in Other Mutual Funds

-Asset allocation funds invest in sever mutual funds based on a predetermined ratio of stocks and bonds. -Target date mutual funds are a special type of asset allocation fund managed based on an individual's expected year of retirement.

Overview of Savings

-Building an emergency fund as an opportunity cost: you are unable to use the cash for other items, such as longer vacation or an investment -An opportunity cost is the loss of a benefit that you would have received by choosing another option -On the other hand, failing to save also has an opportunity cost: being unprepared tp meet a financial emergency

Why foreign investments?

-Companies such as Honda automobiles, Samsung electronics and LG appliances are foreign companies. -If you buy their products, why not invest in them? -Owning foreign investments can help your portfolio grow while reducing risks through diversification.

Corporate and Federal Bonds

-Corporate bonds generally offer investors a higher coupon rate and often a longer maturity date. -Federal government bonds have maturity dates ranging from less than 1 year to 30 years. -Securities with a maturity date of: --1 year or less are treasury bills or T-bills -- 1 - 10 years are treasury notes -- 10 - 30 years are treasury bonds

Risks of Foreign Investments

-Currency exchange rates --Relationship to the US dollar -Different market operations --Rules, regulations, and protections differ -High trading costs -Less regulatory oversight --Buyer beware -Country risk --War, insurrection, sanctions, and expropriation increase risk and costs

Real Estate Assets

-Despite the tremendous investment opportunities in the real estate market, most individuals purchase real estate as a use asset rather than an investment -Recall: Use assets are those things that people purchase with the primary intent to use and maintain their current lifestyle (clothing, furniture, electronics) -Real estate can also be viewed as an investment asset because it has the potential to appreciate in value over time

Financial Fraud and Identity Theft

-Financial fraud occurs whenever someone attempts to deceive you with a promise of goods, services, money, or other benefits that really do not exist, were never intended to be provided, or were misrepresented -The US justice department defines identity theft as a crime in which someone wrongfully obtains and uses your personal data in some way that involves fraud or deception for his or her economic gain

Health care and health insurance

-Health insurance is a financial tool that allows individuals to manage the unpredictable and potentially excessive costs associated with health care -Health care expenses make one of the most significant monthly costs for most households - besides housing, transportation, and taxes.

Why you need Insurance

-Human capital encompasses your ability and willingness to work, learn, earn, and make wise decisions about how to save and invest money. It is one of your most valuable assets. Therefore: Perhaps the single greatest risk to anyone's human capital is the deterioration of person health.

Bond value

-If current interest rate = coupon rate --> Then fair market value = face value -If current interest rate < coupon rate --> Then fair market value > face value. *There is an inverse relationship between current interest rates and the fair market value of bonds: if current interest rates fall and are less than the coupon rate, then the fair market value of the bond will increase to an amount greater than the face value of the bond. -If current interest rate > coupon rate --> Then fait market value < face value. *If current interest rates rise and are more than the coupon rate, then the fair market value of the bond will decrease to an amount less than the face value of the bond.

Inflation

-Inflation is a measure of how much prices paid by consumers for goods and services change over time. -Inflation, may occur slowly, but is a more powerful factor than volatility concerning your long-term investments. -Deflation occurs when general prices decline. -The consumer price Index (CPI) is one measure that you can use to determine if inflation is occurring.

The role of insurance companies

-Insurance is the primary way people transfer risk of a loss to another party, like an insurance company. 1. A premium- the cost of the insurance 2. A deductible- the amount that you must pay on a claim before insurance pays 3. A copayment- a cost you share with the insurance company

Investors/Owners

-Investors buy and sell through stock exchanges, which are organized markets where buyers and sellers conduct stock transactions. -Owners are entitled - by law - to share in the profits of the firm. -The firm's investors also appoint, through open elections, the managers of the company.

Exchange-Traded Funds

-Mutual fund investors can only sell or buy shares in a mutual fund at the end of the trading day. -Mutual fund investors can only sell mutual fund shares back to the company that originally issued them. -An exchange-traded fund (ETF) has all the features of a mutual fund, combined with the ease of buying and selling a stock: --Buy and sell ETFs shares throughout the trading day --Nearly all ETFs are index-based on securities -ETFs fees are lower than mutual funds fees

Automobile Insurance

-Personal automobile policy (PAP): provides insurance coverage in case of an accident. A PAP pays: 1. Medical and property damage expenses to others harmed in an accident 2. Repair costs for your vehicle if your policy extends beyond liability coverage

Systematic Risk

-Risk associated with the economic environment in general and which diversification cannot eliminate is systematic risk. -Risk that can be greatly reduced through diversification is unsystematic risk. -The combination of systematic and unsystematic risk is your total risk.

Overview of Roth IRAs

-Roth IRAs allow individuals to contribute money to a retirement account on an after-tax basis (does not lower taxable income), unlike traditional IRAs. -A Roth IRA is an individual retirement account that has two significant advantages: 1. Investments accumulate earnings tax-deferred 2. Money taken out is tax-free for certain conditions

Roth IRA Withdrawals

-Roth IRAs allows 3 types of withdrawals: 1. withdrawal of principle any time after the account is initially funded 2. Qualifying withdrawal of earnings 3. Non-qualifying withdrawal of earnings The principle is the amount that you deposit into the account. Earnings are generated from the different types of investments within the account

Finding the right advisor

-Search for advisors who hold the certified financial planner (CPF) designation or another certification, such as a certified public accountant (CPA), accredited financial counselor (AFC), charted financial analysist (CFA), or charted financial consultant (ChFC) -A CPF professional must follow a fiduciary standard-always placing the interest of clients first.

Types of stocks

-Stocks focused on stock price appreciation are called growth stocks -Stocks that pay out a large portion of earnings in dividends are called income stocks -Stocks that provide shareholders a combination of stock price appreciation and dividends are called growth and income stock.

Domestic versus Foreign Investments

-The US economy is the largest in the world but that does not mean that it is always the fastest-growing or the best investment location. -Gross domestic product (GDP) is a measure of how an economy is growing.

Health insurance costs

-The cost to purchase health insurance is monthly premium charges by your health insurance provider. -A deductible is the amount the insured person must pay before the health insurance company will pay any funds for medical bills. -Coinsurance is the sharing of costs between the insured person and the health insurance company -A copayment or copay is a flat fee ( Range from 20 to 30 bucks) the insured person must pay to receive any healthcare service.

Bond Features

-The face value (or par value) of the bond: the amount of money that the bond issuer will pau to the bondholder on the maturity date. -The maturity date of the bond: the length of the loan contract (a few months, years, or decades in the future). -The coupon rate of the bond: the interest rate that the bond issuer has agreed to pay the bondholder. -The coupon payment for the bond: the dollar amount of interest that the bond issuer will pay the bondholder.

Bond Risks and Rating Agencies

-The risk that a company or government may not be able to repay the bond is called default risk. -A rating agency analyzes corporations and governments ability to repay debts. -Two well-known rating agencies in the US are Standard & Poor's and Moody's. -These rating companies evaluate companies and governments as follows: --Those with the highest probability of repaying their debts are rated as AAA (S&P) or Aaa (Moody). --Those with low probabilities of repaying their debts are rated as C. --Those that are unable to repay their debts are rated as D for default..

Discounted Dividend Valuation Model

-These are some valuation methods you can use yo research stock. -A calculation to use for companies that pay dividends regularly is the discounted dividend valuation model: Stock value = [dividend x (1+ dividend growth rate)] / [your required rate of return - dividend growth rate]

Risk tolerance and your portfolio

-Your risk tolerance encompasses a wide range of attitudes, including your willingness to invest in assets with (1) liquidity risk and (2) marketability risk. -Recall that your risk tolerance is your willingness to engage in risky behavior where outcomes are both unknown and potentially negative.

Taxation of Custodial and Beneficiary Accounts

-earnings from investments in UGMA and UTMA accounts are taxable in the year they are earned -the minor who whos the account is responsible for paying the tax on those earnings -custodial IRA accounts have tax-deferred growth

Protecting yourself from fraud

-never buy something from an unfamiliar person or business over the phone or internet -never pay a processing fee to receive a prize -never invest in something you do not understand -never send money overseas to someone you do not know -always ask to receive written material before sending money or providing account information -do not believe that a rich relative you don't know has left you money and then pay to get the details -a good rule is to be skeptical whenever it comes to anything that would separate you from your money!

Portfolio Management

-passively managed mutual funds (also known as index funds) are set to mirror the returns in the stock market rather than beat them. -Actively managed mutual funds are set to mimic almost any type of individual stock, bond, or other investment in the marketplace. --Seek to bring a higher return than the stock market --Value-oriented investors look for underprices stocks or bargains --Growth-oriented investors seek stocks where the share price is quickly increasing

Risk - the possibility of losing money if...

-prices increase over time: inflation risk -a company in which you invest closes: business risk -general interest rate increases: interest rate rick (reduces the value of investments) -you cannot sell something you own due to a weak market: liquidity risk

Types of International Investments

1. Global funds invest in foreign companies as well as US firms 2. International funds only invest outside the US 3. Regional funds invest in specific areas. such as Europe or Asia 4. Country funds invest in specific countries, like China

Common emergency expenses

1. Hospital stays 2. Major car repairs 3. Major dental

Types of Orders

1. Market order instructs the brokerage firm to buy (or sell) at the current ask or bid value 2. Limit order tells the brokerage firm to only buy (or sell) at a specific price or better 3. Stop order directs the brokerage firm to buy (or sell) only when the price fall below a set point

Where you can save your money

1. Savings account -an interest-bearing asset that allows you to earn a small return on your deposit -insured up to $250,000 for individuals -allows easy access to funds (ATM or in person withdrawals) 2. Money market account -an interest-bearing asset that allows you a higher return on your deposit -Insured up to $250,000 for individuals -allows easy, but slightly more restrictive, access to funds (ATM, in person, or a check) with limited number of withdrawals 3. Certificate of deposit (CD) -An interest-bearing asset that allows you an even higher return on your deposit -insured up to $250,000 for individuals -Generally purchased with one lump-sum dollar amount -Restricted access to funds with penalties for early withdrawal 4. Dedicated savings account -popular variation of a traditional CD -allow contributions of money to the CD until the maturity date

Assessing Risk

1. Subjective risk: Perception of the riskiness associated with behavior or decision -based on your personally developed probabilities of potential losses -based on expectations, fears, and worries -varies from one person to another 2. Objective risk: Ranking of risk using actual statistics -can be measured using probabilities

Building a portfolio

10% Online savings account 10% Real estate 10% International stock market and international mutual funds/ ETFs 40% S&P 500 and S&P mutual funds/ETFs 30% Bonds and mutual funds/ETFs

Fraud

3 well-known financial frauds 1. Ponzi schemes 2. Pyramid schemes 3. Telemarketing fraud

College Savings Plans

529 Plans or Qualified Tuition Programs, are popular college savings plan for parents and grandparents as these plans allow them to: -save for their children's or grandchildren's education tax-deferred -have tax-free distributions -remain in control of the money so that it can only be used for college expenses

What % of US bankruptcy filings are filed due to medical debt?

65%

Types of health insurance plans

A PREFERRED PROVIDOR ORGANIZATION (PPO) is a popular fee-for-service-plan - the most flexible and costly insurance --Allows the insured to use the services of different hospitals, clinics, and doctors without the prior permission --Offers reduced deductibles, copayments, and coinsurance to visit medical provider who belongs to an insurance network A HEALTH MAINTENANCE ORGANIZATION (HMO) is a popular form of managed care. --Provides medical care through a network of physicians and hospitals located in a specific geographical area --Charges relatively small copayments per visit --Intended to coordinate healthcare services in a way that prevents, rather than treats, illness HYBRID plan, combining elements of fee for service and managed care plan. A popular hybrid plan, combining elements of fee for service and managed care, is called a POINT OF SERVICE (POS) PLAN. --These will have lower out of pocket expenses if you use the services of network providers --To go outside the network, you must first receive a referral from a doctor inside your network to see a doctor outside your network. The most popular consumer driven plan is called a HIGH DEDUCTIBLE HEALTH PLAN (HDHP) and is designed to reduce premiums by providing an incentive to the insured to pay more upfront medical expense out of pocket. --Although premiums are much lower than fee for service plans, out of pocket expenses will always be much higher --These have higher minimum annual deductibles in 2018 for an individual and $2,700 in 2018 for a family --The annual out of pocket amount (including coinsurance and copayments) cannot exceed $6,650 (individual) $13,300 (family) in 2018

US Savings Bonds

A US savings bond is a way for Americans to lend money to the US government. In exchange, the federal government agrees to pay you interest -interest is automatically reinvested and is compounded semiannually -interest is added to the value of the bond rather than being paid out directly to the bondholder -US savings bonds continue to earn interest for 30 years from the issue date -the interest rate paid on US savings bonds varies, but the rates are generally higher than the savings paid by banks and credit unions

Brokerage accounts

A brokerage account is a prefunded arrangement between you and a broker-dealer firm that allows you to buy and sell investment assets. Recall brokers can be: 1. Full-service brokers 2. Online brokerage firms, discount brokers, or self-directed brokerage accounts

Cash-Value Life Insurance

A cash-value life insurance policy is one that blends pure term insurance with a savings option. -The cash value grows on a tax-deferred basis -You may barrow from the account without a credit check -More expensive than term policies -If you cancel the policy before death, you may pay a substantial penalty on any cash taken from the account

The costs of disability

A disability can stop your progress toward financial goal achievement. The national association of insurance commissioners recently noted the following: -Fewer than 40% of Americans could pay their bills if they were to become disables and not return to work. --Only 44% of US workers have any form of disability insurance coverage

Flexible Spending Accounts

A flexible spending account (FSA) allows you to out money aside on a pretax basis each year. Unlike an HSA, you must use your yearly contributions within the plan year. Allowed expenses are: -medical and dental for yourself, spouse, and dependents -deductibles and copayments (not insurance premiums) -prescription medication -insulin reimbursements without a prescription -medical equipment, such as crutches, bandages, and diagnostic devices -prescription eyeglasses and contacts

Health Savings Account

A health savings account (HSA) is a tax-advantages savings account that can be set up tp pay for out of pocket edible healthcare expenses --can be used anytime to pay medical expenses tax-free --Money can remain in the account and grow tax-deferred -You may contribute a limited amount each year -Deductibles, copays, and prescriptions can be the funds -You may establish an HSA if your only health insurance coverage is through a high deductible health plan

If you, as an investor, wanted to guarantee purchasing a stock at a specific price or better, which type of order would you use?

A limit order

Cash-value policy Options

A portion of each premium pays for term insurance. What is left goes into a "savings" account. -Whole life insurance: earn a fixed guaranteed rate of return -Universal life insurance: pays a higher return than whole life insurance on the cash value portion of your policy -Variable life insurance: allows you to invest in mutual funds with your savings -Variable universal life insurance: combines the best if variable and universal policies

Pyramid Schemes

A pyramid scheme is a scam typically based on selling products or recruiting new members into an organization -recruiters promise high commissions or a sizable share of money paid by new members -members may not earn high commissions, but may earn more based on fees paid by new members -can be lucrative to those on top of the pyramid, but later members end up losing as it becomes difficult to find new network members -once the number of new participants declines, the pyramid crumbles

Qualifying Withdrawal

A qualifying withdrawal, also called a qualifying distribution, of earnings is tax-free if it meets the following two contributions: 1. You are at least 59 1/2 years old, disables, or use the funds to purchase a first home (up to $10,000) 2. The Roth IRA account has been open for at least 5 years

Disability Insurance

A short-term disability policy will replace a portion of your salary for 3 or 6 months A long term disability policy usually kicks in after you cannot work for 6 to 12 months A simple rule to help you determine how much disability insurance you need: -Multiply your current gross income by 65% -Divide this in half to determine your short term need -If you don't have this amount, you might consider purchasing a short term disability policy

Stock Exchanges

A stock exchange is simply a place where buyers and sellers meet to trade stocks. Three major stock exchanges in the United States: 1. New York Stock Exchange (NYSE) 2. NASDAQ 3. American Stock Exchange (AMEX)

Determining Premium Costs

Although there are no absolute rules, you can estimate the cost of a disability policy using the following guidelines: -healthy working in a low-risk environment: multiple insurances by 1% -unhealthy working in a low-risk environment: 2% -healthy working in the high-risk environment: 3% -unhealthy working in the high-risk environment: 4%

Identity Theft

Before 1988, identity theft was not considered to be a federal crime. This changed when news spread that a convicted felon had stolen the identity of a man and done the following in the man's name: -ran up more than $100,000 in credit card debt -obtained a mortgage for a new home -purchased cars, boats, motorcycles, and guns

Overview of Bonds

Bonds represent contractual loans to corporations and governments. Advantages: 1. Provide low-risk fixed income in the form of interest payments. 2. Include a tax incentive for the companies that issue them. 3. Help investors diversify a portfolio.

Stock Ownership

Buying shares of stock: First, you must have a brokerage account - an account with an investment company - you deposit money and then use it to buy stock. Two main choices: 1. Full-service brokers such as Merrill Lynch and Edward Jones provide advice before you buy and sell stocks. 2. Online brokerage firms, or discount brokers such as Robinhood, TD Ameritrade, Fidelity, and E*Trade, are used by investors who do not need or want advice.

Investing Alternatives

Collectibles: assets that include jewelry, are, stamps, coins, collectible cards, teddy bears, vintage games, antiques, and other tangible assets Auctions: a public sale in which goods are sold to the highest bidder Pawnshops: a place where individuals can buy and sell collectibles and other personal property for cash; pawnshops help create a market for some collectibles

Beneficiary Accounts for Minors

College savings plans are specific types of accounts set up by states that allow individuals to set money aside for a designated beneficiary's higher education expenses College savings plans provide: -tax-deferred growth on earnings -tax-free distributions if the money is used for qualified educational expenses such as tuition, fees, books, equipment, housing, meal plans, and other necessary expenses

Liability Coverage

Collision Insurance pays for your car's repairs: -insures you, your family passengers, and other who drive your car with your permission -If claimed, you will receive that actual cash value of the repair or value of the car minus the deductible Comprehensive insurance is an optional coverage that helps pay for damage to your vehicle caused by an non accident event such as: -hail storms -broken windshields -vandalism

Advantages of Foreign Investments

Consider correlation statistics: -If the prices of two stocks move perfectly together, they have a correlation of 1. In contrast, if the stocks move perfectly opposite, then the correlation is -1. -Mathematically, risk is reduced when a portfolio consists of assets that are not highly correlated. -Generally, the price of stocks traded overseas has a low correlation with stock prices in the US. Basically, US and foreign stocks rarely move in the same direction over time.

The facts of identity theft

Consider the following statistics from the US Department of Justice: -nearly 18 million households have had at least one person age of 12 or older experience identity theft -more than 35% of all households in the US have experience misuse or theft rom a bank, savings, or utility account -the total loss associated with identity theft exceeds $13 billion per year

Disability Insurance

Disability is characterized by the following 3 requirements: 1. You cannot do the work you did before an accident or illness 2. You cannot readjust your skills because of your medical conditions 3. Your disability has or is expected to last for at least a one year or until death

What happens when you invest in a federally insured bank account?

Even though there is federal insurance in place, you still face inflation risk

Earnings per share

For a net profit of $1,000,000: If 1,000,000 shares were sold in the IPO, the firm's earnings per share (EPS) is $1 for each share Gross sales (sales price) - expenses = net profit or loss per cupcake * total units sold = net profit / total shares in the market = earnings per share

Bringing Rules together

For higher returns, you must be willing to: 1. Take greater financial risk 2. Sacrifice some liquidity (take on liquidity risk) 3. Give up some marketability (increase marketability risk)

Which of the following investments features is typically associated with ETFs but not mutual funds?

Funds can be traded throughout the day

Health Insurance Marketplace Plans

Health insurance purchased through the government website are called health insurance marketplace plans: -Platinum: low out of pocket maximum amount, high monthly premiums -Bronze: low monthly premiums, high out of pocket limits -Silver and Gold: in between Bronze and Platinum for premiums out of pocket limits -Catastrophic: available with very high deductibles, but low monthly premiums for people younger than age 30

Hedge funds

Hedge funds pool money from wealthy investors and invest in securities with holdings "hedged" against drops in the stock market. These are less well-regulated than other investment products, so can only solicit from accredited investors: An accredited investor is someone who has: -earned income that exceeded $200,000 -a net worth more then $1 million

Overview of insurance companies

Insurance companies specialize in health, home, auto, or life and operate under these general guidelines: -They aim to minimize their risks, so they provide protection when the frequency and severity of a loss is relatively low. -They spread the risk by building portfolios of assets by pooling premiums from thousands of people -If the severity and frequency of the risks insurance will the premiums they change

Benefits of long-term care insurance

Insurance pays a predefined daily, monthly, or lifetime amount to the insured person to help pay for the costs of care: -Skilled nursing care: provides around the clock medical care-most often in a nursing home -home care: provides usually half the amount paid for skilled nursing care at home NOTE: a long-term care insurance policy will NOT cover all the costs of care.

Managing your HO policy

Inventory everything you own. For anything with a value greater than $2,500, purchase a personal property floater (sometimes called a rider) as a way to add extra coverage to your policy. Make sure the HO policy provides inflation-adjusted replacement value. If you need it, purchase an umbrella policy or excess liability coverage in the amount of at least $1 million. Consider adding identify theft protection to your HO policy.

P/E Ratio

Investors also use a stock's P/E ratio to estimate the relative value of a stock (Price-to-Earnings ratio): (stock price per share [P] ) / (earnings per share [E] ) -This shows how much you are paying for one dollar of current earnings. -Stocks typically trade in a P/E range between 10 and 30.

Investment Levels

Level 1: Setting the foundation -very liquid and often insured assets -savings and checking accounts and certificates of deposit Level 2: Investments -assets with potential to make higher return over time -Mutual finds, stocks, and bonds Level 3: High-risk investments -investments that can generate very high returns / losses -Gold or other commodities

Life insurance

Life insurance provides a tax-free, lump-sum insurance benefit that can be used to pay final expenses, burial costs, debts, and other expenses. -The policy owner is the person who makes premium payments -The insured is the person that must die for the policy to pay off -The beneficiary is the person or entity that receives the policy death benefit when the insured dies

Maintaining Liquidity

Liquidity: how quickly you can convert an asset into cash -cash in your pocket -assets held in banks and credit unions -usually generates lower returns An emergency fund needs to be very liquid -Immediately accessible in case of unexpected expenses -Basic guideline: between 3 and 6 months of living expenses

Market Capitalization

Market capitalization (market cap) is the price of a stock multiplied by the total number of shares in the marketplace. Investors classify stock by market cap as follows: - > $10 billion is large company stock (large cap) - $2 -$10 billion is median company stock (mid cap) - < $2 billion is a small company stock (small cap)

Medicare and Madicaid

Medicare is government-provided health insurance available to those age 65+ -covers only limited long-term care expenses Medicaid is a governmental comprehensive health insurance program designed to provide essential medical care for the neediest in society -a person must have both limited income and assets -will pay for long-term care services, you will need to spend down your assets to the poverty level to qualify

How minors can own property

Minors (< age 18) can own titled assets (such as savings, investments, and real estate) indirectly through a custodial account as follows: -assets can be given, transferred, or owned by a minor using the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) custodial account -minors may also own custodial IRA accounts -the adult custodian may withdraw money, but the law states the custodian must use the money only for the minor's welfare

Split Limit

Most states require that you purchase a split limit PAP. The state of Georgia split limit requirements are 25/50/25 ($25,000/$50,000/$25,000) -$25,000 is that maximum the insurance company will pay in medical expenses for someone other than you or your family if you cause an accident (per individual) -$50,000 is the max the company will pay for all medical expenses for other involved in the accident (total cap the company will pay for each bodily injury) -$25,000 is the max the company will pay to coverage someone else's property that you damaged

Tax-planning benefits of transferring assets to minors

Nearly all custodial accounts are created through gifts or transfers from an adult to a child For example, gifting stock to a child: 1. By placing the stock into the UGMA or UTMA, the child must wait until age 18, 19, or 21 (depending on the state) before he can gain access to the stock 2. this may save the adult capital gains tax in the future 3. the adult will receive an income tax benefit

Return- money you make on an investment

Nominal return: Actual percentage return -For example, 1% return for your bank account Real rate of return: Inflation-adjusted return -For example, if prices increase by 3%, you really lose 2% in purchasing power

Options for purchasing savings bonds

OPTION 1: Directly from the treasury department -set up an account through the treasury direct portal on the US treasury department website -requires a min amount of $25 -the treasury department will send you an electronic record and reference number: THESE BONDS ARE PAPERLESS OPTION 2: Directly with your federal income tax refund -use form 8888 when you file your federal tax return -you will receive the actual paper I bonds in the mail 4 to 6 weeks after filing your tax return OPTION 3: Through payroll deductions -establish a treasury direct account and set up a payroll services plan --available from employers that offer direct-deposit to multiple accounts

Disadvantage of US savings bonds

Once you purchase a savings bond, you cannot cash in the bond for at least a year -If you cash in your savings bond after the first year but before 5 years of ownership, you will then forfeit the last 3 months of interest earned on the bond (similar to the early withdrawal penalty for a CD)

Best way to describe index mutual fund

Passively managed funds designed to mimic a specific market

Overview of emergency funds

Pure risk: a risk that results in an economic loss, such as needing to repair a car or replace a major appliance An emergency fund contains easily accessible money that is specifically set aside to cover pure risk

Real Estate Investment Trusts

Real estate investment trusts (REITs) are a way to ass real estate to your investment portfolio at low cost: -are similar to mutual funds - investor pool money to hire account managers to have enough to purchase multiple properties -Barrow additional money from banks to maximize the number of properties -solve the real estate investment dilemma - allows those with limited capital the chance to own real estate without having to take on debt or become a landlord -pay their investors dividends

Renter's Insurance

Renter's insurance (sometimes called tenants insurance) is similar to an HO policy except it is designed to provide property replacement and liability coverage rather than insurance to replace your residence. -renter's insurance is inexpensive and is well worth its cost -polices cost between $150 and $300 per year for $25,000 of coverage -You might be able to get a policy for less if you buy the insurance from the company that sold you auto coverage, as you may qualify for a multi-policy discount

Volatility

Risk generally means uncertainty or volatility. Volatility means how widely returns fluctuate over time.

Rules of Risk

Rule 1. Greater financial risks are associated with higher expected returns. Rule 2. Financial risk increases as asset liquidity risk increases. Rule 3. Financial risk increases as marketability risk increases

Advantages of US savings bonds

Savings bonds are : -easy to buy -easy to redeem -tax advantaged -safe (although bank accounts are insured by the FDIC, savings bonds are baked by the full faith of the US Treasury)

Saving and Investing

Savings: Money put aside for short-term goals Investments: Assets purchased to reach long-term goals Combine both options over your financial journey to accumulate wealth

Types of Savings Bonds

Series EE savings bond -min investment: $25 -maturity: 30 yr -interest rate: fixed Series I savings bond -min investment: $25 ($50 if purchased using a tax refund) -maturity: 30 yr -interest rate: variable based on inflation HELPFUL HINT: If you think that inflation will be high in the future, an I bond can be a prudent investment if you are looking for an ultra-low-risk asset.

Long-term care insurance

Someone unable to preform at least two activities of daily living (ADL) on a regular basis may need long-term care. The financial costs associated with long-term care can be quite significant. A way to transfer to potential financial risk associated with long-term care needs: purchase long-term care insurance.

State and Local Government Bonds

States, counties, and cities also barrow money. Bonds issued by states and local governments are called municipal bonds: -Funds are typically used to develop and maintain infrastructure (roads, buildings, parks, schools, and police and fire departments). -All interest earned is tax-exempt interest at the federal level.

The creation of a stock: Example

Step 1: Idea for a new product or service Step 2: Business expansion funded by loans and private investment Step 3: Continued growth and fundraising with an underwriter Step 4: Incorporation Step 5: Selling shares in an initial public offering (IPO)

How shareholders make money

Stocks are an asset that have the potential to produce income. Bill's Cupcakes example: 1. One cupcake sells for $2 - this is the gross sale 2. All expenses ($1.90) such as ingredients, labor, rent, and taxes all reduce the gross sales value 3. That one cupcake may produce a net profit of 10 cents ( Gross sales - expenses = net profit) 4. For 10,000,000 cupcakes at $0.10 each, the firm generates $1,000,000 (profit)

Telemarketing fraud

Telemarketing fraud occurs when a product or service is misrepresented in an unsolicited phone call, e-mail, or text message -a common line is as follows: "I am calling to inform you that you have won a free gift". -the reality is that no one ever gives away something for free -always assume that there is a catch to the story

Term-Life Insurance

Term-life insurance provides a death benefit if the insured person dies before a predetermined age. -The death benefit will equal the face value of the policy (the dollar amount of insurance selected) to be paid to the beneficiary upon the insured's death -The beneficiary only gets paid if the insured dies within the "term" of the policy -Term insured tend to be inexpensive -With age, the cost of term insurance increases

Identity theft protection

The Federal Bureau of Investigation (FBI) recommends: -never throw away ATM receipts, credit statements, credit cards, or bank statements; always shred or destroy these documents. -never give your credit card number over the telephone unless you made the call -never respond to a phishing scheme- an unsolicited e-mail asking you to provide personal information -always reconcile your bank accounts monthly and report any problems to your bank or creditor immediately -keep a list of all your credit cards, debit cards, and each account's contact information somewhere secure, such as a safe deposit box -obtain a copy of your credit report annually and report anything unusual right away

Protecting your investments

The Securities Investor Protection Corporation (SIPC) protects investors against the loss of cash and securities held at a brokerage firm. Even with SIPC insurance in lace, it is important to be aware of possible frauds, or consumer rip-offs: -always be skeptical of unrealistic promises -never rely solely on reputation or word-of-mouth referrals -verify details of investments proposals -always apply the principles of diversification

Working with a financial advisor

The term financial advisor describes a professional engaged in the business of providing financial and investment advice for a fee -sometimes the fee is paid as a commission -sometimes the fee is a direct payment from the client to the advisor

Using stocks to create wealth

There are two ways to make money owning stock: 1. Buying shares of stock in a profitable firm, holding the stock for a period of months or years, and then reselling the shares at a higher price. 2. Receiving earnings in the form of dividends.

Fees

Tips to keep fees to a minimum: 1. Avoid sales-loaded mutual funds. A sales load is a one-time commission paid to an investment salesperson either when the mutual fund is purchased or sold. Look for no-load mutual funds. 2. Avoid paying 12b-1 fees, if possible. A 12b-1 fee is an annual fund marketing expense passed on to shareholders in the mutual fund. 3. Buy the mutual fund with the lowest expense ratio. A mutual fund's expense ratio is a a measure of the total management fees and expenses charged to the mutual fund annually. -It is the % of the mutual fund used to pay these annual fees -Expense ratios range from less than 0.10% to more than 2.5% -The lower the expenses, the higher your returns

Out of Pocket Maximum

To protect individuals from potential catastrophic finical outcomes, the total amount of deductibles and coinsurance a person must pay is typically capped. This cap is referred to as the out of pocket maximum. Expenses above this cap are covered entirely by the health insurance company

Using IRAs effectively

Traditional IRA -make a contribution -receive an income tax deduction -pay less tax today -money grows tax-deferred -pay taxed on money taken out of the account in the future Roth IRA -make a contribution -no income tax deduction -postpone tax advantage to the future -money grows tax-deferred -pay no taxed on money taken out of the account in the future

Traditional IRA Withdrawals

Traditional IRAs do not provide the same flexibility in terms of withdrawals: -Some or all future withdrawals from traditions IRAs will be fully taxable -Traditional IRAs are subject to early withdrawal penalties Exceptions to the penalty include: -Withdrawals after age 59 1/2 -disability -first-time home purchase (up to $10,000)- -qualified higher education expense -to purchase medical insurance if you are unemployed

Uninsured Motorist and Gap coverage

Uninsured/underinsured motorist coverage pays medical and property damage expenses above what someone else's policy pays. -If someone drive without automobile insurance and caused you to be in an accident, you will then be responsible for paying your own expenses Gap coverage insures you for the "gap" between what you owe on your car and what the car is worth -When an insurance company considers your car "totaled", you only get paid the current market value, not what you owe. Gap insurance covers the difference

Risk tolerance matched with investments

Very high (19-20) Everything listed, plus other investments assets (commodities, collectibles, speculative stocks) High (15-18) Bonds, stocks, and real estate (junk bonds, medium-and small-company stocks, international stocks, investment estate) Moderate (11-14) Bank products, bonds, and stocks (long-term CDs, investments-grade bonds, highly regarded and well-known stocks, balanced mutual funds, ETFs) Low(7-10) FDIC-insured bank products and bonds (short-term CDs, online savings accounts, savings bonds, treasury bonds, highly rated corporate and municipal bonds) Very Low(5-6) FDIC-insured bank products (savings account, money market savings account)

Car accidents: what to do and no do

What to do -stop your car immediately -if someone is hurt, call 911 -exchange info with the other driver -stay calm and focused What NOT to do -never volunteer info about who might be to blame -do not sign anything at the the scene of an accident (other than a ticket from a law enforcement officer)

Stock: An Introdcution

When you buy stock, you buy ownership in a company. -Stock (also referred to as shares or equity) represents a piece of ownership in a company. -Publicly traded stocks can be bought in the stock market. -Privately held stocks are available to a relatively small number of people or family members own all the stock available.

Traditional & Roth IRA Investment Options

With an IRA, you tell the financial institution how to invest your money, typically with the following alternatives: -bank products (CDs and money market accounts) -mutual funds -exchange-traded funds (ETFs) -socks -bonds

Worker's compensation Insurance

Worker's compensation provides benefits when you are injured or become ill as the result of work. Pays benefits if you are hurt on the job doing something that was a function of your job. Disability insurance provides coverage regardless of the cause of the disability. Generally, disability insurance is can be a benefit provided by an employer or something that an employee can purchase on their own.

How much life insurance

You need just enough insurance to meet your needs. Here are a few ways to calculate an insurance need: Complex need analyses: calculate present values of future cash flows and add current debts, bills, and liabilities INCOME MULTIPLIER ESTIMATION: Current income multiplied by 10 and decreased by any current liabilities (income 45,000....how much life insurance do you need....450,000) Human life value approach: a time value of money calculation

Real rate of return

[(1 + Nominal return) / (1 + inflation rate)] -1

Ponzi Schemes

a ponzi scheme promises investors a low-risk, high rate of return, interest, or dividends: -the fraudsters pay early investors a rate of return (such as 10%) with money raised from people who invest later -the moment that some of the early investors demand all their money back or when no new investors can be found, the scheme falls apart

Concepts in Action

a. Money market account: An account that pays higher interest rates than a savings account, with a restricted number of withdrawals b. Certificate of deposit: A savings account that restricts withdrawals until a specific date; in exchange for a higher interest rate c. Savings account: An interest-bearing account providing depositors a safe and secure place for money d. Opportunity cost: the forgone benefit that you would get from doing the next best thing

Factors that determine your health

health behavior 40% genetic disposition 30% social circumstances 15% medical care 10% the environment 5%

Umbrella policy

homeowner policy, liability policy, PAP policy

Average healthcare costs for those in their 20s

hospital stay: 10,000 emergency room visit: over 2,000

Renter's insurance coverage

loss of property, personal liability, medical payments to others, loss of use of property