HDFS 238 FINAL

IMPORTANCE OF HOME/RENTERS AND AUTO INSURANCE:

2 primary risks to longevity and finance: 1. Risk of living too long → outlive your savings 2. Risk of dying too soon → no provisions

3) How many exemptions are Jason and Kelly eligible for?

4

EMPLOYER RETIREMENT PLANNING:

401(k) - Private Corporations 403 (b) - Non-profits; educational institutions SIMPLE IRA (organizations of fewer than 100 employees)

GOVT. RETIREMENT PLANNING:

457 - State and local Governments

ADVANTAGES IN MICHIGAN:

529: withdrawals arent taxable, earnings are tax deferred MESP: choice of investment options, low fees, no income limit, tax free, deduction on contributions

Fair Credit Reporting Act:

: Allows challenges of errors in credit bureau data

Equal credit opportunity Act

: can only be denied credit based on your credit score; not age, gender, etc.

Fair debt Collections Practices Act:

: prohibits unfair or deceptive debt collection practices; no calling at unusual hours, numerous times, employers, making threats or false claims; offices that conduct their own collection are not restrained by FDCPA

Electronic Funds Transfer Act:

: right to correct errors in funds transfers (60 day challenge window), limits liability of lost/stolen ATM card ($50 if reported within 2 days, after 2 days $500, after 60 days unlimited)

Debt Management Practices snowball or power pay Method:

: stop using card and systematically pay off

BUDGET:

used as a plan for how an individual will spend their money (Future) document used to record planned and actual income and expenditures Should be divided as follows: Must Haves/Needs - 50% Wants - 30% Savings - 20%

EXCHANGES:

where stocks are bought and sold Ex. NYSE (New York Stock Exchange), AMEX (American Stock Exchange), and NASDAQ (1st electronic based stock market)

How does retirement planning affect different genders?

women are less likely to be covered by employer-sponsored retirement benefits women=39%, men=44% women receive less social security than men women live longer than men

TYPES OF ESTATE PLANNING:

· HO-1 (Basic Form) · HO-2 (Broad Form) · HO-3 (Special Form) · HO-4 (Renter's Insurance) · HO-5 (Premier Homeowner's Insurance) · HO-6 (Condo Policy)

ADVANTAGES OF ESTATE PLANNING:

avoids probate (living and dead) can reduce or eliminate taxes

Bharat Persaud's employer gave him a $2000 bonus last year and when Bharat was filling out his federal income tax form, he discovered that $1000 of it moved him from the 15 percent marginal tax rate to the 25 percent. How much tax will Bharat pay on the $2000?

$400 (Marginal Tax Rate is applied to your last dollar earned, so, first $1000 * 15% = $150; Second $1000 * 25% = $250; Total = $400

Investing:

- Involves risk, volatile in short term, potential for appreciation, used for mid-long term

CAPITAL LOSS:

- Selling your shares for less than what you paid for them.

DIVIDENDS:

- When companies are profitable, they distribute earnings to shareholders. Often resulting in the purchase of more share

APR

- annual percentage rate (rate paid to a financial institution by a borrower

APY

- annual percentage yield (rate paid to an investor by a financial institution)

Money Market Account

- financial account that pays interest based on current rates in money market

TIME VALUE OF MONEY:

- longer you save, the more money that will be accumulated (a dollar invested today is worth more than a dollar invested tomorrow) more money invested = more money accumulated (goes along with Compound Interest) Principal, Interest, Time

Counter Cyclic:

- move in opposite direction of economy unemployment rate gold/silver prices

Procyclic:

- move in the general direction of economy retail sales gross domestic product number of employees on non-farmer payroll

BETA VALUE:

- number used to predict future stock prices measure of an investment's volatility against similar investments over time Most stocks have a Beta of (+0.2 - +0.5) Beta = 0: stock is independent of market (Treasury) Beta < 1.0: stock price less sensitive to market (Income Stock) lower score means stock grows less in high markets, but loses less in low markets 1.0 < Beta < 2.0: stock price more sensitive to market (Growth Stock) higher score means higher yields in growing markets, greater losses in dropping market

Leading Economic Indicators:

- occur before economic changes try to predict economic future (Stock Market, Consumer Confidence Index)

Recession:

- recurring period of economic decline usually last 6 months - 1 year typically any 2% decline lasting around 10 months

INFLATION:

- steady rise in general level of prices occurs when the supply of money is greater than the supply of goods/services ++multiple indicators of inflation (procyclic and counter-cyclic)

KEY LENDERS formulas:

-quick formula -front end -back end ratio

INFLUENCE OF 15 YEAR VS. 30 YEAR CONVENTIONAL MORTGAGE:

15 year- pay less interest 30 year- pay more interest

4) What is their taxable income?

A) $67,500

2) Your Grandmother needs to...Review her Financial Affairs, where would you advise she go?

A). Financial Planner

How much insurance do I need in the following situations? l I am an OINK (one income, no kids)

A). I Need A Little InsurancE

l We are married and in the empty nest period of our lives. The children are finished with school and on their own.?

A). I Need A Little Insurance

l We just had a baby. How much life insurance do I need for the baby? (A or C is adequate)

A). I Need A Little Insurance C). None

Taxable income is determined by subtracting _________from gross income.

A. Exemptions B. Adjustments C. Deductions D. All of the above

Expenses:

ANY $ spent Fixed - usually paid in same amount each period, often contractual (rent, insurance, etc.) Variable - luxuries, not necessities (materials, utilities, etc.)

Income:

Any money taken in wages, child support, retirement, assistance, military allotments, veteran benefits, etc. 1. Gross income - income prior to taking out taxes 2. Net income - income AFTER taxes are taken out

Which of the following is MOST valuable to a taxpayer for the tax savings it provides?

B) $200 child care credit

2) Which tax form should Jason and Kelly complete to file their taxes?

B) 1040

Case Study: Total Wages Jason's Wages = $68,000 Kelly's Wages = $32,000 Married, 3 kids 18 -college student/independent 15 14 Own their own home (Mortgage Interest = $12,000) Union Dues $500 $1,000 Charitable Donations No Exclusions or Adjustments to their Income Questions: 1) Should Jason and Kelly utilize the Standard Deduction or Itemized Deduction given the information you know?

B) Itemized

3) Your Grandmother needs to...Turn over her financial affairs to a professional so she can travel, where would you advise she go?

B). Full Service Broker

l I am divorced with 2 young children and care for an elderly parent.?

B). I Need A Lot of Insurance

5) Your Grandmother needs to...Purchase Shares of Google, where would you advise she go?

C). Discount or Online Broker

Which of the following types of deductions cannot be taken by Sue (an average taxpayer) if she itemizes deductions?

C. Standard deductions

~Certifications for Financial Planners~

CFP- Certified Financial Planner: comprehensive planning CPA- Certified Public Accountant tax planning and preparation estate planning PFS- Personal Financial Specialist financial credential for CPA's AFC- Accredited Financial Counselor financial counseling and money management RIA- Registered Investment Advisor investment advisor Brokers: Act as an agent when people trade securities Full Service- full range of services (advice, research reports, newsletters, recommendations on buying and selling), help make decisions, commission and fees high Discount- charge commission that's 30-80% less than full service broker, transactions take place online and through phone, know what you want to buy

Which is better choice for bankruptcy?

CHAPTER 13

Credit unions vs. BANKS:

Credit Union - owned by members, higher interest rates/lower fees, not for profit, protected by National Credit Union Administration Banks - owned by stock/shareholders, for profit (highest return to holders), protected by Federal Deposit Insurance Corporation

1) Your Grandmother needs to... Purchase an Index Mutual Fund, where would you advise she go?

D). Mutual Fund Company

REPAYMENT (GENERAL):

Deferment and Forbearance Deferment- temporarily postpone payments in school at least ½ time, unemployed, military, economic hardship Forbearance- postpones payment if in financial hardship interest still accumulates

4) Your Grandmother needs to...Purchase Savings Bonds for Her Grandchildren, where would you advise she go?

E). Bank

TYPES OF CREDIT CARDS:

Ex: Car Loan (Closed Ended and Secure), Student Loans (Closed ended and Unsecure), Credit Cards (Open Ended and Unsecure) +Reward or Rebate Cards: cash back, points, rewards for purchases, higher APR +Prestige Cards (precious metals): Gold/Silver/Platinum, higher annual fees +Affinity Cards: Donate a percent of annual fee & amount charged. Usually associated with non-profits, other groups/foundations +Retail Cards +Travel & Entertainment Cards: Balanced paid within 30 days +Secured Cards: You back with your own money. Good for people with bad credit history; trying to reestablish history

FINANCIAL PLANNERS AND FEES:

Financial Planner: investment professional who evaluates personal finances and recommends strategies to set and achieve long- term financial goals. commission only- receive commision on products sold good if you only make a limited number of transactions fee-based charge an up-front fee AND a commission on products sold receive unlimited advice and consultation, ect fee-offset annual or hourly fee charged fee reduced by commission paid on products sold fee-only no commission charged, only fee for service DO NOT have the ability to sell financial products receive unbiased advice

TYPES OF MORTGAGES:

General Types of Mortgages a. Conventional Mortgage fixed interest rate fixed term fixed payment Predictable B. Adjustable-Rate Mortgage Interest rate varies Interest varies with broader economy Usually 1-3 percentage points below conventional C. FHA & VA Must qualify Backed by the government FHA: 3% - 5% VA: Smaller down payment or no down payment D. Interest-Only Only interest paid for a specific time period E. Graduated-Payment Smaller payments in earlier years Payments increase to larger-than-normal F. Reverse Mortgage Allows older individuals to borrow against the equity of the home Home that is fully paid Receive proceeds in monthly payments Homeowner loses equity

FRONT END RATIO:

Gross Salary x .28 = PITI (principle, interest, taxes, insurance)

BACK END RATIO:

Gross Salary x .38 = All monthly debt payments (expenditures for housing, auto, and credit payments)

PERSONAL RETIREMENT PLANNING:

IRA: 1+ contributions per year, account that holds investments funded with earned income, no taxes on yearly gains/dividends/distributions, tax deferred growth, tax deductible if: no work option, married and spouse has a plan, adjusted gross income qualifies. Roth IRA: uses after tax income, funds grow tax free, withdrawals tax free if taken after age 59 ½ from a 5yr old account, tax free withdrawals if for buyer's expenses or education, income ceilings, maximum contribution Traditional: taxed at withdrawal, tax deductible, income limited, age limited, maximum contribution, taxed to beneficiaries

STOCKS:

Income Stock - stock of relatively mature company company pays high amount of earnings as dividends company growth is slow and conservative (already an established company) Good for investors interested in short-term income Low P/E ratio, beta value < 1.0 Growth Stock - stock of company whose earnings are growing faster than average company reinvests high amount of earnings back into company company growth is rapid (often attributed with growing new industry such as tech.) Good for long term, more aggressive investors High P/E ratio, beta value > 1.5 Value Stock - stock with share prices deemed inexpensive compared to current earnings tend to trade at low price compared to companies fundamentals companies within industries that benefit from growing economy (e.g. auto industry) Good for engrossed investors who put time into researching companies Low P/E ratio Buy stock of a company who's prices are lower than what they are expected to be valued at, and who's shares are expected to grow Other Stocks - Micro cap - $300 million and under Small cap - $1 billion and under Mid cap - $1 - $8 billion Large cap - $8 - $100 billion Mega cap - More than $100 billion

Important Indicators:

Jobs, housing market (sales), consumer spending, business spending, inflation ,etc

Leftover $:

Leftover Funds should be placed in savings account, used to pay off debts, applied to loans and mortgages, and/or invested in retirement

CHAPTER 7:

Liquidation of Assets, Cannot File for another 8 years, On credit report for 10 years, must pass a "means" test to prove low income. Discharged liabilities: utilities, credit cards, landlord, medical bill Can NOT be discharged: education loans, taxes, child support

LONG TERM INVESTORS:

Long Term - A good rule of thumb is to have a higher ratio of riskier to conservative investments, when you're younger and then increase the percentage of more conservative and income-generating investments as you age. This can help you get the most return on investment in your younger years when it makes more sense to take financial risks.

COLLEGE SAVING PLANS:

MI 529 Plans MESP: choice of investment options, low fees, no income limit, tax free, deduction on contributions MET: tax deduction, 15 years to use funds, payroll deduction, transfer to immediate family, refund options available

MATURE WORKERS AND YOUNG ADULTS:

Mature Workers: Long duration unemployment has increased adverse effects on physical, mental, and financial health out of work longer than any other group Young Adults: employment is at the lowest level since record keeping began one of the hardest hit groups during the great depression

Assets:

Monetary - liquid or cash equivalent (don't depreciate) Tangible - use (depreciate over time - car, house, etc.)+. Investment - capital assets (stocks, bonds, etc.)

MUTUAL FUNDS:

Money Market Funds High Liquidity Safe Security can be tax exempt government securities Money Markets (MM) Bond Funds AKA: Fixed-Income Higher income than Money Market Funds (MMF's) many types

INDEX:

Monitors what is happening, trends, and economy Asses the general activity of the stock market widely reported in the news, TV, radio, and internet One type of mutual fund is an Index mutual fund

MUTUAL FUND ADVANTAGES AND DISADVANTAGES:

Mutual Funds Advantages diversification affordable professional management low costs flexibility of risk reinvestment of dividends dollar cost averaging Mutual Funds Disadvantages tax consequences

BALANCE SHEET:

Net Worth Statement (Assets - Liabilities = Net Worth) used as a tool to understand an individual's current financial situation (Present)

TYPES OF CREDIT:

Open-Ended: revolving credit Credit extended in advance Borrow up to your limit Secured:Secured by some form of collateral If delinquent, asset is taken Close-Ended: installment credit Repay original amount plus interest # of equal payments Unsecured:No collateral If delinquent, may go to court

CASH VALUE LIFE INSURANCE:

Permanent/whole coverage - No need to renew Builds Cash Value Higher Premium Can borrow against cash value of policy Can cash out of policy, but may incur surrender charges for the first several policy years Commissions paid to agent

Types of Policies: LIFE INSURANCE

Power of Attorney Designation of Patient Advocate Last Will and Testament Living Trust

P/E RATIO:

Price/Earnings Ratio (Current Market Price of a Stock / Earnings Per Share) Ranges: 7-10: Economically Successful Company 11-20: Rapidly Growing company 25+: Speculative Lower P/E ratios tend to have higher yields

PUBLIC VS. PRIVATE LOANS:

Private: higher/variable interest rates Public: cheaper option, sometimes have to qualify

TERM insurance:

Pure Protection Term Lengths available in 1, 5, 10, 15, 20, or 30 year terms Must renew at the end of the policy term Lower premiums than an equal amount of cash value coverage Commissions paid to agent

Spending Leaks:

Recurring expenses not included in budgets Identify leak identify cost of leak per period find a way to reduce cost of the leak come up with things that money could be used for if available (provides incentive)

CHAPTER 13:

Reorganization, Cannot file for another 2 years, Protected from lawsuits. *BETTER*

SAVINGS:

Safe, easily accessible, low return, used for short-term goals

Truth in lending (TIL):

Schumer Box (contains APR, variable rate info, method of computing balance, annual fees), Fraud protection (report fraud within 2 days, after 2 days only liable for $50)

BONDS:

Secure Bond: Assets used as collateral In default, trustee can seize assets In Bankruptcy, secured bond holders are paid first. Unsecure Bond: Doesn't name collateral as debt security Could be safer based on reputation of the company ALL Federal bonds are unsecure I Bond: Sold at face value interest paid in two ways fixed - set at time of purchase inflation indexed - paid in the amount of inflation EE Savings Bond: Most Popular Interest is fixed & paid up to 30 years Zero Coupon Bond: Can be municipal, corporate or treasury bonds Interest accumulates with bond itself Municipal Bond: Do NOT pay federal tax Must live in state issued Issued by local government; City/State Corporate Bonds: Money goes towards corporate expenses.

SHORT TERM INVESTORS:

Short Term - Look for investment vehicles with short-term maturity dates or options that allow you to access funds without penalty, such as a FDIC-insured money market account. Also, consider investing in U.S. savings bonds that have a maturity that matches the timeframe in which you want to make the purchase.

PAY DAY LOANS:

Short term loan secured by written checks or auto withdrawal. - Can only have one outstanding loan per customer of $600 w/ one lender & only two outstanding loans at one time. Business grants credit when they honor a personal check (with a lender fee of 20% or more) but agree not to deposit the check for a week or longer.

liabilities:

Short-term - less than 1 year to pay off (credit card, short-term loans) Long-term - more than one year to pay off (mortgage, car payment, etc.)

CAPITAL GAINS:

Stocks price goes higher than what you paid to buy it, you can sell your shares at a profit.

SUBSIDIZED VS. UNSUBSIDIZED

Subsidized: Government pays interest on loan while in school, based on need Unsubsidized: borrower responsible for interest at all times, NOT based on need

Financial Professionals:

Understand the various types of Financial Professionals and Apply them in a Personal Finance context

5) Would Jason and Kelly be eligible for any tax credits?

YES! Jason and Kelly - since they make less than $110,000 - can qualify for the FULL Child Tax Credit of $1,000 the 15 and 14 year old. The 18 year old is too old.

LOAN CONSOLIATION:

combine several loans into 1 payment lower fixed rate on variable interest loans lower monthly payment public service loan forgiveness can't consolidate private with federal loans

CASH FLOW STATEMENT:

tracks where money came from and went (Income vs. Expenses) used as a tool to understand spending habits and decide whether an individual is in a surplus or deficit (Past)

CARD Act 2009:

disclosure of consequences of paying minimum, no arbitrary deadlines (due 21 days after delivery), no increase in interest rates unless it is 6 months late, 45 day notice before increase in interest rate, no over-the-limit fees unless pre-approved, under 21 requirement of a co-signer or proof of income, illegality of universal default (late payment on one card would cause another card's interest rate to rise) most far reaching changes in credit card industry

example of CD:

ex. buy 1, 2, 3, 4, 5-year CD. upon maturity, reinvest all values, including interest, in a new 5-year CD offers highest amount of interest

Net Worth:

how much you're worth (financially), tend to follow a bell curve, peaking around 55-64 years old (Assets - Liabilities)

MUTUAL FUND FEES:

inside the fund money manager fee 12b-1 fee marketing fee printing fee advertising fee outside the fund (commission) front end load - A shares 2.5-8.5% best for long-term investor subtracted from original investment (up front charge) back end load - B shares commission assessed at time of sale load on a sliding scale (1.0-8.5%) higher expense ratio level load - C shares 1% charged to the account each year good for short-term investors no load index funds (little to no fees)

COMPOUND INTEREST:

interest calculated on principal and already accrued interest allows for much greater return on investments higher frequency = greater yield

Purchasing Power:

measure of goods and services one's income can buy

Establish Good Credit:

opening more lines of credit paying off outstanding credit opening an account at a financial institution or utilities

Electronic Funds Transfer Act

right to correct errors in funds transfers (60 day challenge window), limits liability of lost/stolen ATM card ($50 if reported within 2 days, after 2 days $500, after 60 days unlimited)

RISKS OF: stocks, bonds, and mutual funds

stocks: possibility of high risk, high return bond: reduced risk mutual fund: diversify risk

CERTIFICATE OF DEPOSIT:

time defined deposit of money sold by banks and credit unions fixed return rate for a fixed length of time principal does not fluctuate good balance of risk/reward penalty for early withdrawal Laddering CD's - buy different length CD's then reinvest upon maturity