Income Income: the amount of money that a person earns Sources of income Employment (including self-employment) Interest earned from a savings account Investment return Rental income from real estate Profits on the sale of goods and services Windfall (unexpected) income (e.g., gambling, lottery, inheritance, gift) CTE 85 The student will demonstrate knowledge of income earning and reporting by differentiating among sources of income.
CTE 86 The student will demonstrate knowledge of income earning and reporting by calculating net pay.
What s a W-4? The W-4 is an Internal Revenue Service (IRS) document used to control the amount of taxes taken out of your paycheck. Determined by number of allowances allowances > taxes withheld allowances < taxes withheld Can be changed anytime by submitting another W-4 through your employer. CTE 86 The student will demonstrate knowledge of income earning and reporting by completing a standard W-4 form.
Liquidity Liquidity: how quickly an asset can be converted into cash Products that are considered to be liquid: Checking accounts Savings accounts Money market accounts Certificates of Deposit (CDs)
Risk Pyramid Stocks Bonds Money Market / CDs / Treasury Bills Savings & Checking (Cash) INVESTING More risk / volatility Greater potential return (interest rate) Less liquid SAVING Less risk / volatility Lower potential return (interest rate) More liquid CTE 107 The student will demonstrate knowledge of investment and savings planning by comparing and contrasting investment and savings options.
Gift Cards 2 types: Retail gift cards Bank gift cards (carry network logo such as Visa or MasterCard) Rules: Inactivity fees can be charged after a card hasn t been used for at least 1 year Expiration dates must be clearly disclosed on the card and cannot expire for at least 5 years from the date the card was purchased.
Why currency has value Money doesn t have any inherent value. It s not worth more than any other piece of paper. Our money is valuable because our government says it is and, mutually, we believe that it has value. Fiat money: money not tied to any other commodity (e.g., gold, silver) It is limited in supply and other people want money (demand), so it retains its value. The Federal Reserve is responsible for the money supply.
Federal Reserve (The Fed) Roles: Guide monetary policy (controls the supply of money) Analyze domestic and international economic and financial conditions Study current issues Supervise the financial services industry Administer certain consumer protection regulations
U.S. Treasury Department Generally speaking, the U.S. Treasury is responsible for the revenue of the government. Other roles: Printing money (U.S. Mint) Collecting taxes (IRS) Manage government accounts and debt issues Oversee U.S. banks
Economic Concepts Opportunity Cost: the best alternative that you give up in order to do something else "To get one thing that we like, we usually have to give up another thing that we like. Making decisions requires trading off one goal against another. - Economist Greg Mankiw Example 1: The opportunity cost of going to college is the money you would have earned if you worked instead. Example 2: If a gardener decides to grow carrots, his opportunity cost is the alternative crop that might have been grown instead (tomatoes, pumpkins, etc.)
Inflation Inflation: rate at which the general level of prices for goods and services is rising; purchasing power falls. Who s hurt the most by inflation? Workers People on fixed incomes Savers Who s hurt the least by inflation? Businesses who can raise prices quickly without raising wages Borrowers who can repay their debts with money now worth less than when they borrowed it
Pay yourself first A common personal finance phrase that means to automatically direct savings contributions from each paycheck when it is received. In other words, pay yourself (savings) before you begin paying your monthly living expenses and making discretionary purchases.
Certificate of Deposit (CD) A savings certificate entitling the holder to receive interest. They restrict holders from withdrawing funds on demand. Can be issued in any denomination Generally issued by commerical banks and credit unions Insured by the FDIC and NCUA Terms range from 1 month to 5 years Holders will incur a penalty if the money is withdrawn before the maturity date
Where can you get credit? Tax preparers Autofinance company Consumer Finance Company Credit Unions Check cashiers * Payday Lenders Commercial Banks Retailers * Pawnshop Government Credit Card Company Family & Friends Life Insurance Companies Mortgage Lenders CTE 74 The student will demonstrate knowledge of credit and loan functions by comparing terms and conditions of various sources of consumer credit.
Loans Which institutions charge the highest interest rates on loans? Pawnshops Payday lenders Tax preparers Finance companies
Types of Banks Retail banks offers basic banking services to individuals Online banks retail banks that only operate on the Internet. Credit union non-profit banks that are owned by the members. Their goal is to earn money for the members, not shareholders. Formed by a group of people with something in common, restricted membership. Commercial banks like retail banks, except they provide services to businesses Investment banks help businesses and other organizations raise money by issuing stocks and bonds Savings & Loans ( Thrifts ) specialize in accepting savings deposits and making mortgage and other loans
Compound Interest Compound Interest Calculator: http://www.councilforeconed.org/resource/compound-interest-calculator/ CTE 106 The student will demonstrate knowledge of investment and savings planning by comparing the impact of simple interest vs. compound interest on savings.
Rule of 72 The rule of 72 is a mathematical rule for determining the number of years it will take for an investment to double in value. 72 rate = number of years for money to double
Saving Risk Investing Money Market Account Cash Equivalents Certificate of Deposit Liquidity Potential Return Stocks Securities Mutual Funds Savings Account Timeframe Bonds Real Estate Dividends & Capital Gain Stock indices Rule of 72 Compound interest Diversification Social Security Pensions 401(k) & IRA
Account Management Keep accurate records of every transaction and enter in a written register or budgeting software program PC: Quicken, mint.com (online) Apps: BUDGT, MoneyWise Balancing or reconciling your account involves comparing your records to the bank s records to make sure that they match. (=)
Getting your refund Paper check 8-10 weeks Direct Deposit 10-21 days Debit card Tax Refund Advances / Refund Anticipation Loans (RAL) / Refund Anticipation Checks (RAC) 1-2 days a.k.a. instant refund or assisted refund Loans offered by tax preparation companies Refund sent directly to the preparer by the IRS Very high service fees and interest rates (APR > 200% in some cases). Paying a high price to get your own money! No credit checks, but preparers request lien info from the IRS Some believe that this practice preys on lower-income families
Credit Card Cash Advances Service that allows cardholders to withdraw cash (at a bank or ATM) using their credit card. Cash Loan Processed as a regular credit card transaction Disadvantages: Expensive; significantly higher interest rates No grace period you pay interest from the day you take the advance Transaction fees; typically range from 2-4% (plus any ATM fees)
More about credit Beware of teaster rates or introductory rates An interest rate charged during the initial stage of a loan. It is not permanent and it expires a normal or higher than normal rate will apply. Truth in Lending Act of 1968 designed to protect consumers in their dealings with lenders and creditors Requires that all lenders calculate the APR exactly the same way so that consumers can comparison shop The APR must be disclosed when you open an account and must be noted on each billing statement
What s the benefit of a high score? Higher score = Less credit risk for lenders Higher score = Lower interest rates on credit CTE 76 The student will demonstrate knowledge of credit and loan functions by explaining the need for a good credit rating.
History Complete record of a person s borrowing, their ability to repay debts Report Detailed report of a person s credit history prepared by a credit agency and issued to subscribers Score Numerical representation of the info contained in a person s credit report & their creditworthiness CTE 76 The student will demonstrate knowledge of credit and loan functions by explaining the need for a good credit rating.
There are 3 major credit agencies The Big Three collect and report credit information. CTE 76 The student will demonstrate knowledge of credit and loan functions by explaining the need for a good credit rating.
What if I lose my credit card? Report loss or theft immediately Limits your liability for unauthorized charges Place a fraud alert on your credit card Review your credit statement carefully and follow up with a letter or email detailing transactions you didn t make Review your credit report for new accounts Keep records of all communications By law, cardholder liability for unauthorized use of a credit card tops out at $50.
Credit comes with a price * Annual Percentage Rate (APR): the cost of borrowing money expressed as an annual percentage Amount of Interest = Principal x Interest Rate x Time x x * Annual Percentage Yield (APY): accounts for the effects of compound interest, whereas APR is based on simple interest CTE 79 The student will demonstrate knowledge of credit and loan functions by calculating payment schedules for a loan, using spreadsheets, calculators, and online tools.
Loan Considerations * Collateral Property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making promised loan payments, the lender can seize the collateral to recoup its losses. * Secured Loan Guaranteed by collateral Ex: mortgage, auto loan * Unsecured Loan Based solely on promise to repay Ex: credit card Because these pose a bigger risk for lenders, they have higher interest rates and stricter conditions CTE 77 The student will demonstrate knowledge of credit and loan functions by comparing the costs and conditions of secured and unsecured loans.
Insurance Hope for the best, but prepare for the worst. Risk: (a) the chance of losing something (b) interaction with uncertainty Insurance: an investment that protects you financially from everyday risks Risk sharing: risk management method in which the cost of the consequences of a risk is distributed among several participants. CTE 81 The student will demonstrate knowledge of the role of insurance in risk management by evaluating insurance as a risk management strategy.
Insurance Vocabulary Coverage: the extent of the protection provided by insurance Premium: amount periodically paid by the beneficiary to the insurer for an insurance policy; the cost of coverage Risk Insurance premiums Risk Insurance premiums Deductable: a set amount the beneficiary must pay towards a claim before the insurance company pays any money CTE 81 The student will demonstrate knowledge of the role of insurance in risk management by evaluating insurance as a risk management strategy.
Types of Auto Coverage Liability: pays for accidental bodily injury & property damages to others VA minimum coverage: Bodily injury $25K/$50K; Property damage $20K Collision: pays for damages to your vehicle regardless of fault Comprehensive: pays for loss or damage to the insured vehicle that doesn t occur in an auto accident Guidelines suggest that if your car is worth < $2,000, it won t be worth it to buy comprehensive and collision. Lenders may also require until loan is paid off. Medical: pays medical & funeral expenses for you or others injured or killed in an accident while driving or riding in your vehicle CTE 82 The student will demonstrate knowledge of the role of insurance in risk management by distinguishing among types, costs, and benefits of insurance coverage, including automobile, life, property, health, and professional liability.
Term Life Insurance Death benefit only No investment component / no cash value Lasts for a set period of time provided you pay the premiums If you don t die, you can t collect Least expensive option Initial premiums generally are lower than those for permanent insurance, allowing you to buy higher levels of coverage at a younger age when the need for protection is often the greatest. Premiums increase as you grow older CTE 82 The student will demonstrate knowledge of the role of insurance in risk management by distinguishing among types, costs, and benefits of insurance coverage, including automobile, life, property, health, and professional liability.
Permanent Life Insurance Good from the day you buy it until the day you die = pure term insurance + an investment product Part of your premium goes toward building a cash value from investments made by the insurance company. Earnings are tax-deferred Agents argue that permanent is superior. They don t tell you about the high fees and commissions built into them. If you cancel your policy, policy holders receive the cash value ( surrender value ) minus any surrender fees, taxes, and/or loan payments owed. CTE 82 The student will demonstrate knowledge of the role of insurance in risk management by distinguishing among types, costs, and benefits of insurance coverage, including automobile, life, property, health, and professional liability.
Limited benefit term Lower premiums Provides a death benefit Stays in force until the insured dies Higher premiums Has an investment component (builds a cash value) CTE 82 The student will demonstrate knowledge of the role of insurance in risk management by distinguishing among types, costs, and benefits of insurance coverage, including automobile, life, property, health, and professional liability.
Health Insurance Purpose: protects against financial loss resulting from an accident or illness Types Traditional Go to the provider of your choice Pay for the services and file claims for reimbursement Managed Care or HMOs Use a network of selected doctors/providers With few exceptions, you must first consult with our primary care provider (PCP) for healthcare needs. PCP then refers patients to specialists. Typically pay less for medical care Must live or work within the plan s service area CTE 82 The student will demonstrate knowledge of the role of insurance in risk management by distinguishing among types, costs, and benefits of insurance coverage, including automobile, life, property, health, and professional liability.
Health Insurance Expenses Premium: periodic payment required to maintain your coverage Rarely paid in full by the employer Most often deducted from an employee s gross income Lower costs for consumers with good health, who exercise and are non-smokers Co-payment ( co-pay ): a set dollar amount which a patient must pay each time you receive a service Annual deductable: the amount you must pay each year to cover your medical care expenses before your insurance plan starts paying CTE 82 The student will demonstrate knowledge of the role of insurance in risk management by distinguishing among types, costs, and benefits of insurance coverage, including automobile, life, property, health, and professional liability.
Property Insurance Types Homeowners: typically covers the structure, contents, and some forms of personal liability Renters: Landlords have insurance to cover the structure. Renters insurance covers your belongings or liability for accidents. Mortgage: compensates lenders for losses due to the default of a mortgage loan. The borrower pays the premium; the lender is the beneficiary. Personal Article Floater: stand-alone coverage added to current home insurance used to insure valuable personal property that often requires more coverage than what is provided by an exisiting insurance policy Jewelry, furs, art, instruments, china/crystal, collectables, guns Assets covered must be appraised CTE 82 The student will demonstrate knowledge of the role of insurance in risk management by distinguishing among types, costs, and benefits of insurance coverage, including automobile, life, property, health, and professional liability.
Disability Insurance Replaces lost income in the event of an illness or accident resulting in a disability that prevents the insured from working at their regular employment Disability can be more disastrous financially than death because you lose the income but not living or medical expenses. Types Individual Employer-supplied General Workers compensation National social programs Social Security (U.S.) CTE 82 The student will demonstrate knowledge of the role of insurance in risk management by distinguishing among types, costs, and benefits of insurance coverage, including automobile, life, property, health, and professional liability.
Cost of Auto Insurance Factors affecting premium costs Age Gender (females v. males) Marital status Driving record Type of car Mileage (how often you drive) Location Prices vary by company, therefore compare prices thoroughly before you purchase a policy. CTE 82 The student will demonstrate knowledge of the role of insurance in risk management by distinguishing among types, costs, and benefits of insurance coverage, including automobile, life, property, health, and professional liability.
Cost of Auto Insurance Strategies to reduce the cost of car insurance Choose a car that looks good to insurance companies Increase the deductable Cancel collision insurance Carpool / drive less Install security alarm Maintain a good driving record Avoid submitting small claims Driver education course CTE 82 The student will demonstrate knowledge of the role of insurance in risk management by distinguishing among types, costs, and benefits of insurance coverage, including automobile, life, property, health, and professional liability.
Earning Income from Stocks 2 Ways Dividends the amount of a corporation s after-tax earnings that it pays its shareholders. Capital Gain [Loss] the difference between the selling price and the purchase price; it results in a financial gain [loss] for the seller. CTE 111 The student will demonstrate knowledge of investment and savings planning by describing how the stock market works.
Can you get a 10% return on investment? Stocks have historically outperformed other investments over an extended period of time - close to 10% over the long term (www.money.cnn.com). CTE 111 The student will demonstrate knowledge of investment and savings planning by describing how the stock market works.
SECONDARY MARKET PRIMARY MARKET New York Stock Exchange (NYSE) NASDAQ Stock Market Overview of the Market for Stocks Company X needs resources to grow / expand business Why do companies issue stocks and become public corporations? Offers stocks for sale for the first time in an Initial Public Offering (IPO) purchased by investment bankers Company X stock is offered for sale by brokers on one of two major stock markets Individual investor purchases Company X stock using phone, email, Web or fax orders. CTE 111 The student will demonstrate knowledge of investment and savings planning by describing how the stock market works.
Markets Performance Bear market: a market in which the prices of most stocks are falling Bull market: a market in which the prices of most stocks are going up Bull = Up CTE 111 The student will demonstrate knowledge of investment and savings planning by describing how the stock market works.
Bonds When you buy a bond, you are lending money ( IOU ). Considered to be relatively safe investments. Bondholders do not own part of the company and do not share in the company s profits. Types of bonds: Savings bonds: Issued by the U.S. Government. Doesn t pay interest payments. Treasury bonds: Issued by the U.S. Treasury Department. Municipal bonds ( munis ): Issued by local governments. Interest earned from municipal bonds is tax free. Corporate bonds: Issued by corporations. More risky than government bonds. Junk bonds (high-yield bonds): Higher rate of return. Investors must know that some of the issuing firms may not be able to repay. CTE 107 The student will demonstrate knowledge of investment and savings planning by comparing and contrasting investment and savings options.
Treasury Bills (T-bills) When you buy one you are essentially lending money to the government (type of government bond). Short-term investment that matures within a year. Backed by the government, therefore considered riskfree. Sold for less than face value Example: You might buy a $10,000 t-bill for $9,600. At the maturity date, the government will give you $10,000 which is the money you loaned them ($9,600) plus $400 interest. Money you gain is exempt from state & local taxes
Mutual Funds Mutual fund: A pool of money collected from many investors, and then used to buy stocks, bonds, and other securities. Primary advantages Diversification / Moderate risk Professional management There are more than 10,000 mutual funds in North America. What types of funds are there? Stock funds: Objective is long-term capital growth Bond funds: Objective is steady income to investors. Invest primarily in government and corporate debt Global funds: Invests in securities outside of your home country Index funds: Invests in companies that mirror a market index such as the S&P500 or DJIA. CTE 107 The student will demonstrate knowledge of investment and savings planning by comparing and contrasting investment and savings options.
Diversification Diversification: The strategy of spreading out investments to reduce risk Don t put all of your eggs in one basket What can you diversify? Different sizes of companies (e.g., large cap, small cap) Different industries (e.g., retail, energy, industrial, banks) Different securities (e.g., stocks, bonds, commodities) Different countries (e.g., U.S., emerging markets, Euro Pacific) Different strategies (e.g., growth, income)
Net Worth Net worth: the amount by which What you own exceeds What you owe Real estate Vehicles Bank accounts Investments Retirement accounts Cash Collectables Whole life insurance Mortgage Credit card debt Student loans Auto loans
Retirement Plans 401(k) 401(k): a savings plan offered by an employer to an employee; the employee contributes a percentage of his or her earnings to the account each pay period; money is taken out before taxes are withheld (tax-deferred). The employer may proportionally match the employee contribution Taxes are paid when money is withdrawn during retirement 401(k)s shift the responsibility for saving and investing for retirement from companies to individual employees. (U.S. News & World Report, Oct 2012) CTE 110 The student will demonstrate knowledge of investment and savings planning by contrasting alternative retirement plans.
Retirement Plans IRA Individual Retirement Account (IRA) a personal savings plan that allows you to set aside money for retirement Traditional IRA money is deposited before tax; taxes are paid when money is withdrawn during retirement (tax-deferred) Roth IRA Similar to a traditional IRA, however contributions are not tax deductable; no taxes are paid on withdrawals during retirement. CTE 110 The student will demonstrate knowledge of investment and savings planning by contrasting alternative retirement plans.
2014 Tax Brackets 10% <$18,150 15% $18,151-73,800 25% $73,801-148,850 28% $148,851-226,850 33% $226,851-405,100 35% $405,101-457,600 39.6% >$457,600 Graduated federal income tax system Progressive tax system
Pay Stubs
Primer 25% of adults who do not currently have non-retirement savings indicated that, if they did begin to save, they would keep their savings at home in cash. Why is a bank considered to be a safe place to keep money? Money deposited with a bank is insured by the Federal Deposit Insurance Corporation (FDIC), which is an independent agency of the U.S. Government. Established to restore consumer confidence in the national banking system following the Great Depression, the FDIC insures deposits in accredited banks and savings and loans up to $250,000. What is another reason to put your money into a bank? To earn interest.
SEC U.S. Securities and Exchange Commission (SEC) Role: Holds primary responsibility for protecting investors by enforcing securities laws and regulating the securities industry and the nation s stock exchanges.
CFPB Consumer Financial Protection Bureau (CFPB) Formed in 2011 out of the Dodd-Frank Act of 2010 Role: Protect consumers in the financial sector (banks, credit unions, payday lenders, mortgage businesses, debt collectors)