PF Final

Typical homeowner's policies cover which of these issues? Check all that apply.

Fire Frozen pipes Volcanic eruption Theft Damage from aircraft Vandalism

Managing your investment dollars to spread them across different asset classes, sectors, industries, securities, maturities, and markets is considered _____.

diversification

As part of your personal financial plan, the way to manage your assets after your death is to ___. The written instructions for your plan are covered in ___.

do estate planning a will

With a commission-based fee structure, the broker is compensated only for ___. This can lead to increased costs for the client, and an excessive amount of activity by the broker, known as ___.

executing a trade churning

The average historical performance for an investment is its _____.

expected return

A person who dies without a will is _____ and the state will determine how to distribute those assets.

intestate

A mutual fund is a(n) ___ that allows the investor to buy ___ with one investment.

investment portfolio a number of different securities

Ways of Dealing With Risks

lAvoiding Risks - Never leave your house! Does this avoid all risk? No! lReducing Risks - Caution does pay off by lowering the probability of loss, e.g. driving defensively lAssuming Risks - self-insurance, probably the best way to handle small, nuisance claims lTransferring Risks - Can you (or your family) afford to lose your life, home, health, car? If so, don't bother insuring. If not, pay someone to take the risk for you.

Future Value of an Annuity (FVA) Table A-4

nWe use this table when: nWe are savings a specific amount of money each period (month, year) nWe know how long we will save for nWe know what our interest rate is n nTable A-4 tells us what the sum of all the payments are in the future.

time value of money

nWhy does money have time value? nThree risks when investing/lending money nThe risk of losing your principal nThe risk of inflation nThe opportunity cost of not investing it elsewhere nThese risks require a loan or investment to pay interest as compensation for risk "Interest" is "the cost of acquiring money"

With a ___, you are assured of the amount and timing of your return unless the issuer defaults. (Ch. 12 & 14)

bond

Credit Sources

National credit cards Brokerage Accounts Personal Loans Pawnbrokers Consumer Finance Companies Life Insurance Companies Retail Credit Cards

Trading in the markets is limited to members of the exchange, so a ___ would execute trades for their clients. A firm that is trading for its own account is a ___.

broker dealer

Savings Growth

1.Amount of money in account 2.Frequency of compounding 3.Effective rate 4.Treatment of deposits and withdrawals

Services Offered

1.Checking accounts 2.Savings accounts 3.Consumer loans 4.Bank credit cards 5.Electronic banking services 6.Other banking services

Do It NOW!

1.Learning exactly what group health care coverage you actually do have through your job, your school, and/or your family. 2. Investigating the possibility of saving on income taxes via a premium conversion plan, flexible spending arrangement, or health savings account (HSA). 3.Identifying one behavior that you engage in that could lead to health problems later in life and taking steps to reduce its impact. 4.Always maintain coverage for direct health care expenses when changing employers using the COBRA law or a short-term health plan for protection. ●

Planning for Long-Term Custodial Care

1.The degree of impairment required for benefits to begin uActivities of Daily Living (ADLs) 2.The level of care covered uSkilled nursing care uIntermediate care uCustodial care uMany serious health events such as heart attack, stroke and cancer require that you receive rehabilitation and custodial care after the medical interventions have been completed. Health care plans tend not to cover such long-term care. u uLong-term care insurance can be purchased to protect against such expenses. u uThe degree of impairment required for benefits is usually based on the degree to which you can perform various activities of daily living such as eating, bathing, walking, dressing, using the toilet and others. u uPolicies tend to distinguish among levels of care as well depending on the degree that you require assistance.

Planning for Long-Term Care

3.The person's age 4.The benefit amount 5.The benefit period 6.The waiting period 7.Inflation protection uWhen planning for long-term care insurance you will want to consider several factors. u uThe person's age—the older the person is the higher the cost in keeping with the higher likelihood of requiring care. u uThe benefit amount is generally quoted on a per day basis. The cost of a stay in a skilled nursing facility can approach $150 per day or more. u uYou will also want to trade-off the benefit period and the waiting period. Selecting a longer waiting period will allow you to afford a longer benefit period. u uThe costs associated with rehabilitation and custodial care go up every year. Including an inflation protection clause that increases your benefit amount is a good idea.

Which of these are factors in the risk associated with the cost or premium? Check all that apply. (Ch. 10)

Amount of coverage needed Property being insured Person purchasing the policy

When you only use the assets you have in your brokerage account, you are running a ___. If your trades can exceed the assets in your account, you have a ___.

cash account margin account

Electronic Banking Services

Automated Teller Machines Preauthorized Payments & Transfers Debit Cards & Point-of-Sale Transactions Home Banking

Mistakes in Mutual Funds

Based on others' financial woes, you will make mistakes in personal finance when you: 1. Buy funds with high fees and expenses. 2.Withdraw dividends rather than reinvesting. 3.Chase performance by investing in "hot" funds.

Worst Financial Blunders in Managing Health Expenses

Based on others' financial woes, you will make mistakes in personal finance when you: 1. Go unprotected for health care when you change jobs. 2.Duplicate employer-provided health care protection with your employed spouse. 3.Ignore your need for disability income insurance.

Worst Financial Blunders in Retirement Planning

Based on others' financial woes, you will make mistakes in personal finance when you: 1.Start saving for retirement in your thirties, or worse, your forties. 2.Put away too little money for retirement each month. 3. Invest in mutual funds that charge high expenses.

There are two standard types of coverage included with auto insurance. Check those two here.

Bodily Injury Property Damage

What Constitutes an Insurance Risk?

Companies look for five characteristics before they will issue insurance. lRisk must be common to a large number of people lRisk must be present lLoss should be fortuitous lLoss must be definite lRisk should be spread over a wide geographic area

Addressing the Financial Burdens of Illness or Injury

Covering Your Direct Health Care Costs uGroup Health Plans are sold or provided collectively to an entire group of people rather than to individuals. Covering Your Lost Income uDisability Income Insurance uSocial Security disability income insurance Covering Your Rehabilitative and Custodial Care Costs uLong-term care insurance

Applying for Credit

Creditors look for the three "C's" 1. Capacity 2. Character 3. Collateral

Which of these are allowable deductions to reduce the size of your gross estate, prior to taxes? Check all that apply.

Current mortgage debt Charitable gifts Funeral expenses State estate tax

Selecting a Financial Institution

Distinctions blur as financial institutions become increasingly competitive. Consider convenience, cost, and the breadth of products offered when selecting financial products. lCommercial banks lSavings banks lCredit unions Brokerage firms

A basic health insurance policy covers which of these? Check all that apply.

Doctors and lab tests Hospitalization Surgical expenses

Match these health insurance terms with the best definition.

Formulary List of drugs covered by the insurer Major medical Type of insurance that covers the added costs of serious illness and injury Co-pay Partial payment from insured for specific services Deductible Payment made by insured before any payments are made from insurance Co-insurance Insured and insurer share payment for medical expenses Long-term care insurance Plan that covers expenses due to a disabling injury or illness

Funds

Funds with an Income Objective •Money Market Funds •Tax-exempt money market funds •Government securities money market funds Bond funds •Bond (or fixed-income) funds

Amortized loans

Is a loan that requires the borrower to make payments over time Most loans in the U.S. are amortized on a monthly basis....i.e. You pay your car/house/credit card each month When you mail a monthly payment to your lender a portion of that payment reduces the principle balance and a portion of your payment pays interest Let's develop an amortization table over the next few slides.

ChoosingBest Savings Option

Liquidity: Funds accessible? Safety: Is it risky? Yield: Is return good? Taxes: Any tax benefits? Minimum Investment: High or low?

Match these common terms in estate planning with their definition. (Ch. 11)

Living trust Established while the grantor is alive and won't become public record Simple will Bequeths all of the estate to the spouse Probate Legal process of validating a will Traditional will Bequeths half of the estate to the spouse and half to the children Living will Instructions for your affairs if you are incapacitated Power of attorney Authorizes someone to make decisions on your behalf Trust Manages assets through a separate legal entity for the benefit of beneficiaries Executor Person who manages the administration of the estate of the deceased

In 1965, the federal government established ___ to provide minimal health care for senior citizens. It also established ___ to provide health care for people in lower-income categories.

Medicare Medicaid

Select the correct definition for the elements in the formula PV x (1+r)t = FV.

PV stands for present value. FV stands for future value. The r stands for rate. The t stands for time.

Which of these are examples of typical annuities? Check all that apply.

Retirement plan payouts Installment purchases Mortgages

Classifications of Consumer Credit: Types of Repayment

Revolving (open-ended) Charge Accts. Closed-end Charge Accts. Regular Charge Accts. Mortgages

Savings Options

Savings accounts offered by banks and credit unions may be fixed or non-fixed time deposits lFixed time deposits or certificates of deposits (CD's) lNon-fixed time deposits ¡Passbook savings accounts Money market deposit accounts

Most insurers offer savings if you make upgrades to the home that reduce their risk. Indicate which of these are options that could reduce your premium.

Savings: Upgrade electrical wiring Add fire extinguishers Use deadbolt locks Add a security system No savings Build a swing set Add a smoke detector

401(k)s

Stock Funds GICs Bond Funds Money Mkt Funds Company Stock

403(b)s

Stock Funds GICs Bond Funds Money Mkt Funds Company Stock

IRAs

Stock Funds Money Mkt Funds GICs Bonds Savings Acc'ts Bond Funds Stocks Options/Futures

Sources of Credit

The different sources of credit available offer different rates. It pays to compare. -Primary sources of credit include: •Commercial banks •Savings banks •Credit unions

Endorsing a Check (Money Management)

Three types of endorsements 1.Blank endorsement - person merely signs his or her name on back 2.Restrictive endorsement - limits further negotiation of check 3.Special endorsement - names a third party who can cash the check

Calculate the annual payment of the loan? (How Loans Work) (Copy of loan amortization excel)

We are going to borrow $5,000 which will be paid over the next 3 years with a 4% annual interest rate. Go to your TVM tables and find table A-2 PV annuity. You will see the factor as 2.7751 (4%, 3 years). $5,000/2.7751 = 1,801.74 annual payment You can review the TVM lecture that we did earlier in the semester and specifically look at slides 24 -28 which provided examples on table A-2 PV annuity

A series of regular payments in the same amount is a(n)

annuity (ch. 4)

The price of a mutual fund is set ___ and then all orders placed the next day use that price. An exchange-traded fund (ETF) ___ so the market price changes continuously throughout the day.

at the end of the day it is traded like a stock

The Concept of Risk

lRisk: the uncertainty of injury or loss lTwo key elements common to all risks lThe possibility of loss lThe uncertainty about when or if the loss will occur lSpeculative risk - the possibility exists for gain as well as loss. If you choose correctly you could be rewarded (i.e. gambling or investing in stocks). lPure risk - there is NO possibility for gain, only for loss lInsurance companies only deal with pure risk.

Adverse Selection

lThe tendency of poorer-than-average risks to buy or continue insurance. Unchecked, it increases the probability of loss, which drives insurance companies out of the segment (or even business). Without a fair opportunity for profit, insurance would be unobtainable.

Instructions to buy shares only if those shares are available at a certain price within a certain period of time would be a _____.

limit order

A margin account allows you to exceed the amount in your account and use the broker's funds, but if your portfolio's value drops below a set amount, you could experience a ___. The amount of the investment that has to be cash is the ___ and is regulated by law.

margin call margin requirement

Present Value of a Future Sum

nCalculates what a future sum of money is worth today based on... nthe sum of money expected in the future (the "future value", FV) nwhen it is received in the future (the period, "N") nwhat rate of return it will earn (I) n nWe will use table A-1

The Effect of Increased Compounding or Discounting Periods

nConsider the following equations, where... n"Y" = "number of years" n"p" = "number of compounding (or discounting) periods per year" nIn other words, N = Y*p nFV = PV * (1+Re/p)(Y*p) nAND PV = FV / (1+ Re/p)(Y*p) nMore frequent compounding will increase your "effective yield" (aka, rate of return) because your interest is put to work (earning interest) faster. Conversely, if you owe money, an increase to the compounding frequency will lead to you paying more interest over time. Typical compounding periods are: daily, monthly, quarterly, semiannually, and annually. Be aware of the compounding periods when you invest your money (eg, in a CD) or when you take out a loan

Time Value of Money Variables

nEvery TVM problem has at least three of five variables n"Present Value" or "PV": a lump-sum received, paid, or invested TODAY n"Future Value" or "FV": a lump-sum to be received, paid, or accumulated TOMORROW (the future) n"I": the rate of interest received (if a fixed, known rate) n"Re": the "expected rate of return" (if unknown) n"N": the number of "compounding" or "discounting" periods n"Payment", or "PMT": an equal, periodic stream of payments received (an "annuity") or paid (a "loan")

Example using Table A-4

nEvery year, like clockwork, your company pays each of its employees a $2,000 Christmas bonus. You resolve to invest this year's (and every year hereafter) bonus in the Hot Stocks Growth Fund (Re = 10% per year). Assuming you work for this company your entire career, and that the bonus never changes, how much will your "stream of investments" be worth at the end of your 40th year of investing? nAnnuity, or PMT (or, "Annual Investment", in this case): $2,000 Compounding period, N: 40 years nExpected rate of return, Re: 10% n"FV of an Annuity" factor, FVA($1, 10%, 40) from Table A-4: 442.59 nFuture Value, FV = Annuity * FVA($1, 10%, 40) = $2,000 * 442.5926 = $885,185

Future Value vs. Present Value

nFuture value or Compounding: nWhat will a dollar invested today be worth tomorrow? nWhat will a series of equal, periodic payments be worth tomorrow? nPresent value or Discounting: nWhat is a dollar received at a certain time in the future worth today? nWhat is a series of equal, periodic payments received in the future worth today?

Example using A-2

nHot dog! You hit the Lottery! The State of Ohio will pay you $250,000 at the end of each year for the next 20 years. You figure to spend $100,000 each year and invest the rest in the Hot Stocks Growth Fund (Re: 10% per year). What is present value of the invested portion? nAnnuity, or "Annual Investment": $150,000 ($250,000 - $100,000) Discounting Period, N: 20 years nDiscount Rate, R: 10% n"PV of an Annuity" factor, PVA($1, 10%, 20): 8.5136 n Present Value, PV = Annuity * PVA($1, 10%, 20) = $150,000 * 8.5136 = $1,277,040

Table A-1 cont

nSoon after your first PV calculation, the economy takes a major turn for the worse. Wars break out, consumer goods are scarce, there is rioting in the streets, inflation goes to 7%. If this inflation persists, what is the PV of your inheritance now? nFrom table A-1 (7%, 30 years) = .1314 n100,000 * .1314 = 13,140 nInflation has a MAJOR impact on our money. Notice with a 4% rate we have $30,830; with a 7% inflation rate we have $13,140. The difference is what we lose due to inflation. n nIMPORTANT!!! nThe PV of a future sum decreases with time and a higher discount rate.

Another Example A-2

nThat eccentric rich uncle of yours, before he died, loaned you $10,000 to buy a car. He agreed to let you pay him back over 4 years, at 6% interest. Each annual payment is due at the end of each year. How much will your payments be? nPV of loan: $10,000 nLoan period, N: 4 years nInterest due, I: 6%, compounded annually nPVA, ($1, 6%, 4): 3.4651 nPV loan = PMT * ($1, 6%, 4) n10,000 = PMT * 3.4651 = $2, 886 per year for 4 years Total paid back to your uncle: $2,886 * 4 = $11,544 nTotal interest paid to your uncle: $11,544 - $10,000 = $1,544

TVM

nThe problems that we went over just scratch the surface of what TVM does. nTo keep things simple we did yearly calculations. nMany times we earn interest more often than yearly (compounding). (We may invest in bonds) nMany people invest monthly rather than yearly for their retirements. nEx. 401k money is deducted from every paycheck n nIf your really interested in learning more about TVM, then you may wish to purchase a financial calculator. Many calculators will come with instructions and examples. n

Annuities

nThis is simply having multiple payments. nFor the purposes of this class we will always assume that the payments are of the same amount nSuch as a house or car payment

Table A-3 Future Value of a Present Sum

nWe use this table when we know: nHow much we have today? (PV) nHow long we want to invest? (N) nWhat rate of interest can we earn? (i) n nTable A-3 tells us what that sum of money is worth in the future

Present Value of an Annuity (PVA)Table A-2

nWe use this table when: nWe are getting paid or paying a specific amount of money every period (month, year) nWe know how long we will paying for nWe know what our interest rate is n nTable A-2 tells us what the sum of all the payments are in the present (today's dollars)

Example 2: FV Annuity

nYou are 25 years old and want to retire when you're 55 (30 years from now). In order to do that, you figure you need $2,000,000 in the "bank". If you expect to earn 10% per year on your investments, how much do you need to invest at the end of each year to accumulate your retirement nest egg? nFV: $2,000,000 nExpected rate of return, Re: 10% nCompounding period, N: 30 years nFVA($1, 10%, 30 years) = 164.49 nFV = Annuity payment * FVA($1, 10%, 30) n2,000,000 = PMT * 164.49 nPMT = 12,158.79 nIf you save $12,158.79 for 30 years earning 10% interest compounded annually you will have $2 million dollars.

Another example A-3

nYou have $100 in a savings account and plan on leaving the money in the account for 5 years earning 3 percent interest. How much will you have at the end of the five years? nPV = 100; i = 3%; n = 5 nFuture Value factor, FV($1, 3%, 5) from Table A-3: 1.1593 nFV = 100 * 1.1593 = 115.93

Example using Table A-3

nYour beloved Grandmother dies, leaving you $22,000. Since you've taken Finance 3060, and given that you have a long time horizon, you invest your inheritance in the Hot Stocks Growth Fund. You expect a 10% average annual return. How much do you expect your windfall to be worth in 20 years? nPresent Value, PV: $22,000 nExpected rate of return, Re: 10% nCompounding periods per year: 1 nNumber of years, N: 20 nFuture Value factor, FV($1, 10%, 20) from Table A-3: 6.7275 nFuture Value = Present Value * FV($1, 10%, 20) = $148,005 nFV = 22,000 * 6.7275 = 148,005 nWhat might your inheritance be worth in 30 years? (All other facts the same.) n nIMPORTANT!!!! nFuture Value increases with time and with the rate of return earned. ni.e. The longer you leave your money in your investment account and/or the more interest you earn, then the more you will have in the future

Example using Table A-1

nYour eccentric, but rich, uncle dies and leaves you $100,000 via a trust he set up during his lifetime. The trust was instructed to give you the $100,000 upon your 60th birthday, which is 30 years away. You expect that the inflation rate will average 4% annually over the next 30 years. How much is your inheritance worth in today's dollars? nFuture Value, FV: $100,000 nInterest Rate (aka, "Discounting" Rate), Ie: 4% nDiscounting Period, N: 30 years nPresent Value factor, PV($1, 4%, 30) from Table 3: 0.3083 nPresent Value, PV = Future Value * PV($1, 4%, 30) = $100,000 * 0.3083 = $30,830

Compounding means that

nYour interest earns interest (the money earned today earns money tomorrow) nCompounding may be yearly, semi-annually, quarterly, monthly, daily, or continuously nWith simple interest, there is no compounding (eg, interest is paid only on the original principal...your interest doesn't "work" for you)

By purchasing a stock, you are buying a share of the company and ___. A company that shows a profit may issue ___.

of its future profits or losses a dividend

You have a 200/500/100 auto insurance policy. That means you have a $200,000 limit on ___, a $500,000 limit on ___, and a ​$100,000 limit on ___.

payment to one person in an accident payment to all people in an accident payment of property damage liability

An annuity that continues to make payments and has no end date is a(n)

perpetuity

Mutual funds

pool the invested funds of many investors and use them to invest in a diversified portfolio. •Mutual funds will likely be the first type of an investment one will make. This is because mutual funds are the primary option in most employer-based retirement accounts. Mutual funds pool the invested funds of many investors and use them to invest in a diversified portfolio of stocks, bonds and even other mutual funds. • •The diversification provided by mutual funds makes them ideal way to reduce investment risk.

Successful investing relies on accurately anticipating the ___ on investments. The more risk for the investor the greater ___. With less risk, the likelihood is greater that the return will be ___.

rate of a return the gain or loss lower but more predictable

The lesson of the time value of money is that, given the choice, you should want to

receive cash sooner and pay cash later

It's only possible to use the liquidity available now; the future value of the liquidity is affected by

risk, opportunity costs, and time

Forecasting the timing and the amounts of future cash flows requires

some judgement in calculations

A(n) ___ manages the assets on behalf of minor children or disabled dependents.

testamentary trust

Traditional IRA

the maximum contribution each year $6,000 or $7,000 if 50 or older Who is allowed to contribute Anyone with earned income maximum age that I can contribute 72 the federal income tax benefits Usually, contributions are tax deductible and earnings grow tax free Does the tax code have exceptions to the tax benefit Yes, if you or your spouse is covered by a retirement plan at work then you may not be able to contribute to the IRA Are there minimum required distributions (MRDs) Yes, you must start making withdrawals at 72 When can I withdrawal funds without penalty After age 59 1/2. If you withdrawal before 59 ½ 10% penalty plus ordinary income taxes

ROTH IRA

the maximum contribution each year $6,000 or $7,000 if 50 or older Who is allowed to contribute Anyone with earned income, up to a certain income limit maximum age that I can contribute No, any age the federal income tax benefits Earnings grow tax free but contributions are made on an after tax basis Does the tax code have exceptions to the tax benefit Generally, no as long as you meet the other eligibility requirements Are there minimum required distributions (MRDs) No When can I withdrawal funds without penalty After age 59 ½ and you have a 5 year waiting period on any contributions. If before age 59 ½, 10% penalty plus ordinary income taxes on any earnings

The insurance company will base its costs for your auto insurance on your age and driving history, as well as ___. You should choose your insurer based on their price, as well as ___.

the type of car you are buying and where you are driving it their reputation and customer service record

Any gift you make within the ____ prior to your death is considered part of your taxable estate by the federal government.

three years

Make sure you have this information (health care)

uChanges to your group plan can be made during the open-enrollment period. uCertificate of Insurance: This is the document or booklet that outlines group health insurance benefits

Important questions to understand

uHow Much Must Your Pay Out of Your Own Pocket? uDeductibles uCopayments uCoinsurance uAll plans have some provision for the member to pay some portion of their health care expenses out of their own pocket. These payments take three forms. u uDeductibles required that the member pay the first dollars of any health care during the year. Deductibles are usually in multiples of $100. An example might be $200 per person and $500 for the family under a family plan. u uCopayments are specific dollar amounts that must be paid for certain items of care. Examples might be $5 per prescription and $25 per doctor's office visit. u uCoinsurance requires the member to pay a percentage of any expenses after payment of the deductible and copayments. The typical percentage is 20 percent. Most plans with coinsurance place a cap on the amount the member must pay such as $1000 or $2000 per year.

Protecting Your Income During Disability

uImportant disability income insurance policy provisions: uWaiting period (or elimination period) uBenefit period uA longer waiting period will help you afford a longer benefit period. uWhen you buy disability income insurance you specify the percentage of income you wish to replace, when benefits should begin and how long benefits will last. You will want to design a plan that has the longest waiting period you can handle. This will allow you to select the longest benefit period affordable. It is the long periods of disability that can destroy one's financial well-being.

A personal liability policy that's attached to your homeowner's policy is a(n)

umbrella policy

A living will enables you to have arrangments in place for ___ in the event you are alive but incapacitated. You can also establish a(n) ___ to make decisions on your behalf while you are still living.

your finances and assets power of attorney

Preauthorized Payments & Transfers

¡Automatic payments or withdrawals made from customer's account ¡Advantages: lEliminates worry about check being lost or stolen lMoney received more quickly by payee ¡Examples: lDeposit of pay check or Social Security check Monthly payment of mortgage

US Savings Bonds

¡Backed by the US government ¡Purchase price is half of bond's face value ¡Interest earned is difference between purchase price and face value ¡If used for education and if the bonds are in your name (or jointly with your spouse), interest is entirely tax-free, subject to income limitations ¡Grandparents love to give EE Bonds to their grandkids... Should they?

Home (PC or Internet) Banking

¡Banking at home utilizes personal computer and phone lines ¡Used for bill paying, transfer of money, and checking account balances ¡Charges for service: $5 and $15 monthly (avg.) ¡How much time and money does it cost you to pay your bills? Time to record and write checks, address envelopes, apply stamps? Money for stamps, envelopes, checks? Home banking often makes sense provided you are comfortable with technology. ¡Things to consider when selecting a PC or internet bank: lThe breadth of products offered online lThe cost of products offered online lWill they pay you interest on your checking? lAre they FDIC insured (esp. Internet banks which are only a few years old) lWhat policies are in place for fouled up transactions? lAre you a good record-keeper? Security and reliability

Treasury Bills and Notes

¡Both backed by the US government ¡Both exempt from state and local taxes ¡Different maturities (T-Bills < 1 year, T-Notes > 1 year) ¡Different means of paying interest (T-Bills are discounted, T-Notes pay semi-annual interest) ¡Can be purchased via TreasuryDirect (http://www.treasurydirect.gov ) account at not cost (if less than $100,000 in $1,000 increments (minimum: $1,000)

Cash vs. Check Deposits

¡Cash Deposits: lImmediately available for use ¡Check Deposits: lMay not be available for use until check clears (up to two business days after deposited) lIf check is written against uncleared funds, may be returned (or bounced) marked "insufficient funds"

Guaranteed Checks

¡Certified Check lA personal check presented to the bank for certification ¡Cashier's Check lA check purchased by customer drawn on bank's general funds ¡Traveler's Check lA check used by business and vacation travelers; replaceable if lost

Managing Checking and Savings Accounts

¡Checking and savings accounts are the foundation of financial asset management ¡Cash balances lAre maintained for convenience lHave an opportunity cost because of the lost of potential interest

Treatment of Deposits & Withdrawals

¡Day of deposit or day of withdrawal lCalculates interest based on each day money is in the bank l ¡Other Methods lMinimum Balance - interest calculated on lowest amount held in the account lFirst In, First Out - interest calculated where a withdrawal reduces earliest balance first

Debit Cards

¡Look and act like ordinary MasterCard ¡A type of "electronic check" ¡Difference between debit and credit card? lCredit card allows financing of purchases lDebit cards allow amounts to be automatically deducted from checking account ¡As long as you can get a credit card with a grace period, and as long as you pay off your credit cards in full, why would you use a debit card?

Money Market Mutual Funds

¡Offered by investment firms ¡Not federally insured, though the risk is minimal ¡Interest varies with market interest rates ¡Require minimum initial deposit (usually $1,000) ¡Checks written on account: lLimited to $250 or more ($500 is avg.) lSome limit the number of checks

Reasons for savings

¡Provides money to meet budget by making available cash reserves ¡Provides an emergency fund in the event of financial hardship ¡Enables saver to put aside money for a specific future purpose

Checking Account

¡Steps involved in using a checking account include: lOpening an account lMaintaining an account lDepositing checks lEndorsing checks lBalancing a checkbook

Nominal vs. EffectivesRates of Interest ("Yield")

¡The "nominal" rate of interest if equal to the "effective" rate of interest if the interest on your account is compounded annually. ¡The "nominal" rate of interest is always smaller than the "effective" rate if compounding occurs more frequently (e.g. semiannually, quarterly, monthly, daily) ¡ALWAYS look at "effective" rates of interest for an "apples to apples" comparison between different bank products.

ATM's

¡Use has exploded in recent years ¡Simple, fast, convenient...and expensive if misused l"Foreign" banks typically charge $1-2 per transaction...not that taking a withdrawal and checking your account balance would be counted as TWO transactions ¡A PIN (personal identification number) is required ¡National ATM networks allow access of money anywhere in the country

401(k)s, 403(b)s, and 457s

•All of these plans are named for the Tax Code sections and paragraphs that allow their existence •401(k)s are plans administered on behalf of the employees of for-profit corporations •403(b)s are plans administered on behalf of the employees of non-profit corporations or state employees (e.g., teachers and professors) •457s are plans administered on behalf of the employees of government agencies - less common, these plans work similarly to 401(k)s and 403(b)s, but they have lower contribution maximums •401(k) and 403(b) participants can typically contribute up to the lesser of 15% of their salaries or $19,000 in a given year. The latter amount (finally!) will be indexed for inflation in the future. •401(k)s and, less frequently, 403(b)s sometimes allow the employee to take out loans against the value of their accounts. The maximum total debt is the lesser of $50,000 or 1/2 of the account's value. •Many 401(k)s offer matching contributions. For example, Ford matches $0.60 for every dollar the employee contributes up to 10% of his or her salary. •I am not aware of any 403(b) or 457 plans that match. •401(k)s and 403(b)s must be tapped by the year after the year the owner turns 70 1/2 years old •Withdrawals are considered ordinary income by the Federal and State governments, but not to most local jurisdictions.

Bad News About Credit

•Americans becomingly increasingly dependent on credit •Credit encourages people to live beyond their means, often leading to financial disaster.

How do 401(k)s, et al, work?

•Assumptions: -Single taxpayer -No dependents -28% marginal rate (Fed) -Does not itemize deductions -Employer matches each $ with $0.50 up to 5% of salary •Some observations about the previous example: -Don't forget: 401(k) savings also save you on State taxes, but not usually on local city taxes (they want their money up-front and they tax your gross salary). -The example assumes that the employee will contribute a flat $4,000 per year - it does not account for increasing investments as his/her salary increases. If her salary increases at 3% each year and if she contributes 10% of her salary each year, after 30 years she'll have over $1.2M. -Start as soon as you can with as much as you can for as long as you can...at least up to the maximum company match! -The company match used here is not terribly generous --if this were a Ford employee (for example), her contribution ($4,000) would be matched by $2,400 from Ford. Altogether, her contribution would "cost" her only $480. -Is the employee "poorer" today as a result of her 401(k) contributions? Yes, she has $240 less take-home pay each month. But if she never sees it, she'll never miss it...and 30 years from now, she'll be able to retire well. -Should you pay off high interest debt prior to contributing to your 401(k)? If the 401(k) has no match, maybe. If it has a match, NO!! In this example, the employee got a $1,000 matching contribution on her $4,000 contribution. This is a 25% gain on her investment! Is that better than paying 18% on a credit card? YES! -Even without a match, 401(k) contributions are compelling, simply because of the tax savings. If your income is close to spilling you into the next marginal tax bracket, you can sometimes preclude this by contributing more to the 401(k).

Repercussions of Bankruptcy

•Borrowers not relieved of -Back taxes -Alimony -Child support payments •Bankruptcy judgment on person's credit record for next 10 years •Credit will be difficult (and expensive) to obtain for that time period •Once considered a stigma to file for bankruptcy •Most of the filings initiated by the individual, rather than a creditor

What is "Loan Amortization?" (credit management)

•Can you construct a loan amortization table on your own? It's easy. •You know the initial loan balance ($4,000 in this case). How much interest do you pay in that first month? Assume you're paying 9% annually. In the first month you pay 9% per year divided by 12 months/year, or 0.75% per month. This monthly interest rate stays the same throughout the loan (if it's a fixed rate loan!) •Thus, in the first month, you pay 0.75% times $4,000 or $30 in interest. How much was your payment (which you computed on your financial calculator or with the help of tables)? $83.03. How much did you pay in principal? 83.03 -30 = $53.03. After this payment, how much do you owe on the loan? $4,000 -53.03 = $3,946.97. This is the figure you compute your interest on in the following month. Try it! (It's may be on the test.)

Credit Bureaus

•Clearinghouse of consumer credit information • •No judgments made by bureau on credit worthiness of person • •Information provided weighed differently by different lenders

The Credit Trap

•Compounding works FOR you if you have invested your money •Compounding works AGAINST you if you have finance charges You may pay MORE in interest than the original amount borrowed depending on the terms of the loan

How to Select

•Create a portfolio of funds in which to invest. •Choose no-load funds with low management fees. •Obtain investment information and advice. • •The choice of a load or no-load fund will depend largely on the time horizon of your investment goal. Load funds are not well-suited for shorter term goals. No-load funds with strong investment returns over time and low annual fees work best for all time horizons. • •Many investors will want to consult with an investment professional. The funds that you are considering may be able to guide you. If you are selecting a fund through your employer's tax-sheltered retirement plan you employer may have access to advisors to assist you.

Consequences of Credit Abuse

•Credit abuse can lead to: -Repossession of property -Garnishment of wages -Bankruptcy •A legal process where: -A person or business that cannot meet financial obligations is relieved of debt -Courts divide assets and income among creditors

Income from Mutual Funds

•Current Income from •Ordinary income dividend distributions •Capital gains distributions •Capital Gains: when you sell your shares for a higher price than when purchased. •The price of share of mutual fund is called its net asset value. Essentially it is a the per share net worth of the fund company. • •When you own mutual fund shares you make money two ways. •First, you receive current income while you own the shares from •Ordinary income dividend distributions from the dividends and interest the fund receives from the portfolio. •Capital gains distributions from any capital gains the mutual fund earns as it trades securities in the portfolio •Second, you receive capital gains when you sell your shares for a higher net asset value than when purchased.

Reach Your Goal Through Employer-Sponsored Retirement Plans (cont.)

•Defined-benefit retirement plans are yesterday's standard, a.k.a. Pension. •The second and increasingly less common employer-sponsored plan is the defined-benefit plan. This is the traditional pension plan that promises income in retirement. • •Defined-benefit plans are completely employer funded by deposits into a pool of money from which benefits are paid to retirees. You do not have your own account as with a defined-contribution plan. • •Your benefits during retirement are based on a formula using salary and years worked for the employer. For example, you might receive 2 percent of your last year's income multiplied by the number of years you worked for the employer.

Investing in Tax-Sheltered Retirement Account Makes it Easier to Reach Your Goal

•Funds put into regular investment accounts are after-tax money. •A tax-sheltered retirement accounts is one for which contributions are not subject to income taxes. •Your contributions may be tax deductible, i.e. pretax money. •Your earnings are tax-deferred. •You can accumulate more money by delaying taxes. •You withdrawals might be tax free, i.e. withdrawals are never taxed. This is the case for "Roth" type accounts.

Growth Objective

•Funds with a Growth Objective •Aggressive growth (or maximum capital gains) funds •Growth funds •Growth and income funds •Value funds •Large-cap, midcap, small-cap, and microcap funds • •Funds with a growth objective seek investments that are likely to experience capital appreciation. They focus their attention on grow the net asset value of the fund shares. • •Many different types of growth funds exist. Some a very aggressive in seeking growth and others blend some income generating securities into their portfolio. • •Value funds seek out securities that are undervalued by the market as a whole but which have strong fundamental prospects specific to the company. • •Funds can also focus solely on large-, medium-, small-, and very small-sized firms.

Growth and Income Object (extended)

•Funds with a Growth and Income Objective •Asset allocation funds •Life-cycle funds •Mutual fund funds • •A mutual fund that has a combined growth and income objective seeks a balanced return made up of current income and capital gains. Such funds heavily invest in common stocks. They invite less risk than growth funds but more than for income funds. • •Of particular interest to those investing for retirement are asset allocation funds that can be selected to fit the asset allocation pattern desired by the particular investor. • •Life-cycle funds are similar in that they tailor the investment mix to the age of the investor with more risk being sought while the investor is younger and less as the investor ages. • •Some mutual funds solely invest in other mutual funds.

Growth and Income Objective

•Funds with a Growth and Income Objective •Growth and income funds •Equity-income funds •Socially conscious funds •Balanced funds • •A mutual fund that has a combined growth and income objective seeks a balanced return made up of current income and capital gains. Such funds heavily invest in common stocks. They invite less risk than growth funds but more than for income funds.

Disallowed Investments in Retirement Acc'ts

•Generally, retirement plans do not allow... -Direct investment in precious metals (ie, no gold bars!) -Direct investment in real estate (ie, you can't put your house into your IRA, but you could invest in a REIT) -Life insurance policies

Understanding Your Social Security Retirement Income Benefits

•How you can qualify for Social Security benefits: •Social Security Credits are earned for every $1,320 (2018) in income for up to 4 per year. • •To be fully insured for retirement benefits you must have accumulated 40 credits. Thus, it takes most people ten years to become qualified for retirement benefits. Fully insured indicates that you are eligible for benefits rather than that you will receive the maximum possible benefit.

Individual Retirement Accounts

•IRAs have undergone a transformation with the most recent major tax act (TRA 1997). There are four "varieties" of IRAs that one can now consider. •Traditional IRAs: -Up to $5,500 in annual contributions fully or partially deductible from income, depending on... •Coverage by an employer pension plan -If not covered, employee may deduct up to $5,500 against his income -If covered, employee may be able to deduct, but only if his income is below: »fully deductible: $100,000 (MFJ) or $63,000 (Single) partially deductible: $119,000 (MFJ) or $73,000 (Single) •Traditional IRAs (cont.): -Tax-deferred growth -Withdrawals are taxed as ordinary income and may include an additional 10% penalty tax if the taxpayer is < 59 1/2 years old when the withdrawal is made. Must begin withdrawals no later than April 15th of the year following the year that the taxpayer turns 70 ½ •Non-deductible, Traditional IRAs: -Up to $5,500 in annual, non-deductible contributions -Tax-deferred growth -Any account value over the owner's basis is taxed as ordinary income (the basis is not taxed) - early withdrawal penalties apply if withdrawn earlier than 59 1/2 •Non-deductible, Traditional IRAs: -Can be a tax nightmare (e.g., have you kept good track of your basis over time with Form 8606? If not, you may pay tax - again - on your basis) -Must begin withdrawals no later than April 15th of the year following the year that the taxpayer turns 70 1/2 -With advent of Roth IRAs, non-deductible, traditional IRAs are far less compelling, except perhaps for high income taxpayers (e.g., > $160,000 annual income if MFJ) •Roth IRAs: -Up to $5,500 in annual, non-deductible contributions, limited by income (< $150,000 if MFJ, <$95,000 if Single) -Tax-deferred growth, and withdrawals are tax-free No minimum age for beginning of withdrawals •Education IRAs: -Up to $500 per year can be contributed in a child's name, but is non-deductible (recently raised to $2,000 per child per year!) -Withdrawals to pay for post-secondary education is tax-free -Withdrawals made for any other reason are fully taxable (as ordinary income) and would be subject to the penalty if applicable -All withdrawals must be made by the beneficiary's 30th b-day -An Ed IRA can be transferred to a child in "the same family" - it's unclear to me whether this would include cousins, or even offspring, or ??... -There are silly and complicated rules which preclude "double-dipping," like using Ed IRA money and the Hope Scholarship in the same year, for example. (These have since been relaxed.)

Getting a Copy of Your Credit Report

•If turned down for a loan, lender must provide you one for free. • •On a regular basis (at least every 2 years), even if your credit seems good, get copies on your own. How? Contact: -Experian: (888)397-3742 or www.experian.com -TransUnion: (800)888-4213 or www.transunion.com -Equifax: (800)997-2493 or www.equifax.com •If you discover an error, -Notify the bureau in writing -Bureau must also send out corrected copies to lenders who have recently requested a report

Index Funds

•Index Funds: These funds are unmanaged. •Index funds track the market as a whole for the particular market covered by the index used. •Index funds purchase a portfolio of securities that mirror one of the major securities markets indexes. Index funds are said to be unmanaged. It is not that they do not have a fund manager. Rather the manager simply buys securities that track some index of the market as a whole. • For example, many index funds simply track the Standard & Poor's 500 index.

Reach Your Goal Through Personally Established Retirement Accounts

•Individual Retirement Account (or IRA) •Traditional (or regular) IRA •Spousal IRA •Roth IRAs •Many people do not have access to an employer-sponsored account or, if they do, the account is inadequate to adequately build the needed nest-egg. In such cases, you can open a personal retirement account at a bank, credit union, brokerage firm, or mutual fund company. • •Individual retirement accounts, called IRAs come in both the traditional, tax-deductible form or as a Roth IRA. Up to $5,500 maybe contributed per year with another $1000 allowed for persons age 50 and over. With a traditional IRA deposits and investment growth are tax-sheltered until taxed at withdrawal. With a Roth IRA only the investment growth is tax-sheltered but withdrawals at retirement are tax-free. • •Self-employed persons may made deposits of their self-employment income into Keogh or SEP-IRA accounts as ways to save for retirement in a tax-sheltered account.

A comfortable retirement takes planning

•Invest early. •Invest regularly. •Use tax-sheltered accounts. •Diversify. •Most people can look forward to a forty-year working career with twenty-plus years of retirement to follow. But that retirement can be delayed or, worse, financially difficult without an adequately funded retirement savings plan. • •Your plan should focus on investing early, investing regularly, using tax-sheltered accounts and choosing a diversified investment portfolio.

How Much Should You Borrow?

•It is IMPORTANT to set DEBT LIMITS Rule of thumb for consumer debt: -No more than 10 -20% of take-home pay should be used to pay installment debt - Everyone's goal should be 0%!! -Mortgage debt should be excluded in this calculation -In a perfect world, mortgage debt would be the only debt we carried. Why? •History says that real estate will appreciate •Tax benefits (this likely is not true with the tax law passed in January 2018.....most people are now better off taking the standard deduction)

Advantages of Mutual Funds

•Mutual funds hire professional investment managers to manage the investments in the portfolio. • •Mutual fund shares are very liquid. With open-end funds, which are the most common, you simply sell your shares back to the funds. • •Transaction costs for mutual funds are low compared to other types of securities. • •Your investment choices are less complicated than for most other securities because funds very clearly disclose their investment objectives, where the portfolio is invested, past investment results and the costs associated with investing in the fund. •The most important advantage is the diversification that comes by investing through mutual funds. This diversification greatly reduces random risk. • •Mutual fund shares are affordable as the typical net asset value is low on a per share basis.

Information Provide by Credit Bureaus

•Personal data such as -Name and address -Employer and former employers -Spouse's name •Credit history •Information on public record such as -Criminal convictions -Bankruptcies -Civil suits

The Right Reasons for Borrowing

•Purchasing large goods that appreciate in value •Emergencies •Taking advantage of opportunities •Convenience •Establishing credit

Consumer Credit

•Serves an important economic role in America - provides liquidity and convenience. •Economic system depends on availability of credit - The "Consumer is King." •Car dealerships, building contractors, etc. all depend on credit to help their industry thrive.

Laws Governing Consumer Credit

•These laws insure that the borrower: -Has limited liability if card is lost or stolen -May withhold payment (without interest penalty) for disputed charges -Cannot be denied credit based on gender, race, age, etc. -Cannot be harassed by debt collectors

What should I do?

•This depends on your situation •Know what tax bracket you are in. The higher your tax bracket the greater the benefit to the traditional IRA when your contributing money • •Try to estimate your future expenses. This will help you plan on how much you will need to withdrawal each month. By knowing your annual income needed you can predict the tax. • •Remember, $6,000 pre-tax (traditional IRA) DOES NOT EQUAL $6,000 post-tax (ROTH IRA)

Rising Incidents of Bankruptcy

•Today the number of bankruptcies has risen dramatically -Filings in 1985 were 225,000 -Filings in 2018 were about 775,000! This is down 2.6% from 2017

The Wrong Reasons for Borrowing

•Using credit to live beyond your means •Examples: •To meet basic living expenses •To make impulse purchases •To purchase short-lived goods and services •If you can't pay your credit cards off each month, you're living beyond your means!

Credit Counseling

•Utilizes a professional who helps borrowers in overwhelming debt to: -Develop personal financial budgets -Arrange programs of debt repayment - •BEWARE of credit counselors who charge fees! Ask, "Who are they trying to help? Themselves, or me?"

Reach Your Goal Through Employer-Sponsored Retirement Plans

•Vesting gives you rights to your benefits. •Cliff vesting •Graduated vesting •The Federal Employee Retirement Income Security Act requires that employees become vested. Vesting is a term used for the nonforfeitable right an employee has to the nest-egg resulting from their employer's contributions. Cliff vesting provides for 100 percent vesting after being in a plan for 3 years. Graduated vesting phases in vesting in 20 percent increments beginning in year two with 100 percent vesting in year six. Many employers vest even sooner. •Defined-contribution retirement plan: today's standard. •The most common type of employer-sponsored plan is the defined-contribution plan. It is so named because the amount going into the plan for a covered worker is known each year. • •A plan can be either a noncontributory plan or a contributory plan. •Noncontributory plans are funded entirely by employer contributions. Contributory plans are ones where the employee and, possibly, the employer makes contributions into the plan each year. • •Benefits are based on the success of the investments made with the funds. These plans are self-directed meaning that the employee decides on the investments made with the funds.The success of the investments dictates the amount that will be available at retirement •Names of defined-contribution retirement plans: •401(k) Plans (with Roth versions) •403(b) Plans (with Roth versions) •457 Plans •Savings Incentive Match Plan for Employees IRA (SIMPLE IRA) •Various types of defined-contribution retirement plans exist. • •401(k) plans are for employees of private, profit-seeking companies. • •403(b) plans are for employees of non-profits and higher education institutions. • •457 plans are for public employees. These plans typically do not have employer contributions and are supplements to an employer-provided pension plan. • •Small non-corporate employers can set up SIMPLE-IRAs for themselves and their employees.

Choosing a Credit Card

•When choosing a card, you must consider: -The annual fee -The annual percentage rate -The length of the grace period Which Card is Best for You? The answer depends on your credit card use. Weigh the following attributes accordingly: •If you pay off the balance each month -No annual fee -A grace period •If you carry a balance each month -A low annual percentage rate

If you leave your employer

•When you leave your employer, what do you do w/ your 401(k)? -Leave it alone if (if and only if) the employer's plan... •Allows you to stay in the plan, •It has stellar investment options, •Administrative costs of the plan for non-employees are low -Cash it out, but consider these tax ramifications... •If > 59 1/2 years old, distribution taxed as ordinary income •If < 59 1/2, ordinary income tax plus a 10% penalty -Roll it over to a self-directed IRA (usually the best option) •Rollover with you as the middle-man -Employer's custodian required to withhold 20% for Federal tax -In order to escape taxation on all or part of the rollover, you must deposit 100% of the distribution into an IRA within 60 days of the distribution •Direct Rollover (Custodian-to-Custodian) -no tax implications whatsoever (aside from reporting the transfer)