Personal FinanceBankingLoans/Borrowing MoneyBudgetingInvestingPlanningInsuranceTaxes

BankingMany different types of banks:

NationalStateCommercialCommunityFederalThriftsSavings and LoansTrustsCredit Unions

BankingBanks take in your deposits and in return pay you

interest. They takes deposits and make loans at a higher rate of interest. The difference is known as the spread.

Largest banks have 100s of billions and some over $1 trillion in assets.

Retail banks provide many servicesFDIC – Federal Deposit Insurance Corporation –

govt. agency that insures consumers against bank failuresPrevents a run on banksEach depositor is insured up to $250,000 for an

account at each bank.

BankingThe Rule of 72 – divide any interest rate by

72 and that’s how many years it will take to double your money (6% - 72/6=12 years)

Savings Accounts – most basic account to deposit cash and collect interest (rates are low)Good place for money if you will need it soon

or if you cannot afford riskier investmentsOther savings accounts are CDs and money

marketsBest rates can be found online at

www.bankrate.com

BankingMoney Market Accounts – vast market of

ultra-short-term, highly rated debt obligations issued by the govt., corporations and financial institutions that are tradedMoney markets are very safe, FDIC

protected, and have low rates a little higher than savings accounts

Need to keep a minimum balanceWithdrawals are limited

BankingCertificates of Deposit – CDs – time

deposits kept for a certain period of time in exchange for a better interest rate3,6, & 9 months as well as 1,2, & 5 yearsCD matures when period endsThe longer the maturity, the higher the

interest (typically)Early withdrawal penalties

BankingChecking Accounts – demand deposits that

give you the right to “demand” money upon presenting a checkChecks are tracked by numbers and are

processed through the national banking system

Generally checking accounts pay no interestBalance a checkbook to have good financial

managementFee if you are overdrawn of $25 or moreRecord all withdrawals for accuracy

Banking

BankingATM Cards – automated teller machines

Save banks $ and they can collect feesETF law limits losses if your card is stolen

Debit Cards – look and can act as credit cards, but take money directly from your accountMust have enough money in your account for

it to go throughWorks like electronic cash with no interest

chargesMerchants typically like them because of no

fees

BankingOther Banking Services

Vacation and Christmas ClubsSafety Deposit BoxesCredit CardsMortgagesCar LoansPersonal LoansTrustsBusiness Services – credit cards, loans,

leases, line of credit, checking

BankingOnline Banking

You can download account info., pay bills, transfer money, order checks, stop payment on a check, open a CD, find an ATM, get a home or auto quote, apply for loans, etc.

Can either access a regular bank or one that only exists electronically

Internet based banks have lower costs and can give you better interest rates

BankingThings to consider when choosing a bank

Depends on how you bank and what services you need (Affinity)

Relationship with a bank – examplesWhen is it open – late & weekends?What are the minimum balances and

associated fees?How is their internet banking and/or ATM

service?Many banks are competing to have you as a

customer.

BankingBreaking up with your bank

Moving, fees, getting married or for whatever reason

Open new account before you close the old account

Balance your checkbook so you do not overdraw

Notify companies where you automatically deposit or pay as this may take a few weeks

Make sure your old bank has your contact information for tax purposes or any other problems

Don’t forget your safety deposit box if you have one.

Borrowing Money

Borrowing MoneyCredit can be easy to come by and when

used prudently for purchases with long-term value, can be wise if you are smart about it.

Debt can tear your life apart, destroy friendships and marriages, ruin your retirement, and cause you to lose your home.

Millions each year file for bankruptcy or default on their loans

Examples – student loans and upside down mortgages

Borrowing MoneyDebt – You borrow money you don’t have to

but something you otherwise can’t afford to pay for now. The purchase may be small (McD’s) or large (house).

Borrower = youLender = person or company that lent you

the moneyPrincipal = money borrowedInterest = the charge the lender imposes

for the principalRepay over month (credit card) or decades

(mortgage)There is good debt and bad debt

Borrowing MoneyGood Debt – improves your life for a long

timeAn affordable home – most valuable asset of

most AmericansEducation – future earning power can be

worth investmentRental or investment real estate – real estate

has typically been a good investment (they aren’t making any more land)Get paid rent which should make you money

AutomobileSome say car is a bad investment because it

depreciatesA car is a necessity that improves standard of living

and gives access to better schools and neighborhoods

Can commute to a better paying job

Borrowing MoneyBad Debt – if you consume it, if it loses

value over time, or if you have to feed it, it’s bad debtAll random daily purchases (meals, gas,

groceries, electronics, etc.)Small purchases should be made with cash

instead of credit because they add up over time and can be 1,000s of dollars.

Debt can grow and control your life with excessive interest

Paying off credit cards each month is a possibility

Borrowing MoneyCredit Cards

Allows you to purchase goods and services when you don’t have the cash

Society increasingly going cashlessCC company fronts you money which is

interest free if paid within 30 days (there may be a fee)

American Express, Visa, MasterCard and Discover are the largest

Thousands of other cards from banks and stores

Many cards have rewards – airlines, college, cars etc.

Borrowing MoneyCredit Cards

Go astray when you rely on cards to live a life you cannot afford

Keep track of all monthly expensesMonitor your accounts for fraud or identity

theft

Charge Cards – different than a credit card in that you can charge what you want and it is paid off each month.American Express is the best example. You pay an annual fee and can receive

rewards

CREDIT CARDSCredit Card Act of 2009Developed by:

Federal Reserve BoardOffice of Thrift SupervisionNational Credit Union Administration

Credit Card$874 billion in CC debt

Average rate %14.62

Average college student almost $3,000 in CC debt

CREDIT CARDSNo Double Cycle Billing

Pay interest on previously paid balancesNo Interest Rate Increases in 1st 12 monthsPromotional rates must last 6 monthsNo Interest Rate Increases on pre-existing

balancesIncreased rate only applies to new balancesException – more than 60 days late

Credit CardsMust give 45 days notice before increasing

your interest ratePreviously 15 day notice

Interest rate could increase if you don’t make the minimum payment within 30 daysMust receive 45 day notice

Increased rate must be reviewed and lowered if review shows improved payment habits

Credit CardsPayments above the minimum must be

applied to highest interest rateNo fees to pay bill by phone, mail or online

unless it is on the due datePayments are due on the same day each

monthSundays?

Credit CardsNo over-the-limit fees unless you opt in

(transaction would be denied)Only one over the-limit-fee is allowed per

billing cycle & transaction

Credit CardsStatements must be sent 21 days before

the due datePayments received by 5:00 p.m. on the due

date are on timePayments are on time when received the

next business day after a holiday or weekend

Removal of new accounts from your credit report

Credit CardsMust disclose how long to pay off card

making minimum paymentMust include what the savings would be if

paid off early

Credit CardsUnder 21 must show proof of ability to

make paymentsCo-signer needed if cannot payCould push students to payday lenders and

pawn shopsMust stay 1000 feet from college campuses

Credit CardsNo rate capDoes not apply to business and corporate cardsNew fees

Lack of useNot using enoughAnnual FeePaper statementCustomer service callsIncrease credit limit requestCash advancesSecond card

Credit CardsAverage family over $8500 in CC debtMinimum is usually 2% of your balanceAt 14% it would take 36 years to pay off

this balance

Borrowing MoneyBad debt should be no more than 15% to 20% of

your income.Debt ratio is your total monthly or yearly payments

divided by your total monthly or yearly salaryExample $787.00 in monthly debt payments on a

$40,000 annual salary or $3,333 monthly salary = 24% debt ratio

Banks want a total debt ratio of no more than 40% for a mortgage

Using the above example a limit of $546.00 a month for a mortgage would be 40% or 30 years on $115,000 at 4%

Borrowing MoneyMaintaining a good credit report and credit score is vitalInterest rate you are charged and loan amount depends

on income and credit scoreEquifax, Experian and Trans Union provide credit scoresFICO or credit score is based on a mathematical formulaScores range from 300 to 850.The higher your score the better.The lower the more of a risk and the higher interest rateMedian score is 723 with 750 and higher being a good

scoreYou get 1 free report a year at www.myfico.com or within

60 days if you are denied financing

Borrowing MoneyWays to keep or improve your credit score

Pay bills on timeKeep outstanding balances lowClosing cards can hurt your scoreMany cards may hurt your scoreThe longer you keep credit cards the better

for your scoreYou may contest discrepancies in your

report

Borrowing MoneyRent vs. Borrow

RentDon’t expect to live in one place for longNot interested in property upkeepLarge debt concerns youWant the amenities of apt. complexesDon’t mind that rent will increase

BorrowExpect to settle down and establish self in communityDon’t mind upkeep or paying for itDon’t want to pay landlord 1,000s of dollarsWant tax breaks and possibility of profitingHouse payment will be fixed

Borrowing MoneyA number of factors go in to buying a houseOnce you qualify for a mortgage you have

closing costs which are put on a settlement sheetClosing costs

Points or origination feesProperty taxesEscrow feesHomeowners insuranceTitle InsuranceNotary feesWater and sewerTransfer taxes

Borrowing MoneyCan refinance your house to a lower rate

and or to use equityCan borrow against the equity in your

homeCan make an extra payment to reduce

interest payment

Borrowing MoneyCar buying (average new price $30,000)What do you need in a car?A car will only decrease in valueNegotiate the best price and use the internetCar loans are competitive and you should know

what you can affordLeasing lets you get more car as you rent the

portion of the car that you use with interestResidual value is the value of the car at the end of

the leaseExtra mileage and wear and tear can cost $$$You either turn the car in or you can buy it

Borrowing MoneyBankruptcy – complete or partial inability to repay all or part of

your debt (creditors)Federal Bankruptcy Court protects you from losing home, creditors

and wage garnishmentReasons for bankruptcy – overextended, unemployment, medical

expenses, and marital problemsBankruptcy should be last resort as it limits you in many ways and

is on your credit report for 10 yearsChapter 7 Bankruptcy is a liquidation where assets are sold and

creditors paidChapter 13 Bankruptcy is a reorganization where you can keep

property and have a plan to pay all or part of your debt as approved by a judge

Home (usually), furnishings, clothes retirement accounts and pensions are exempt

New law forces most people in Ch. 13 meaning you need to pay more and have to see a credit counselor

BudgetingPeople don’t like to budget because it is

confining, but they need to do it.Shows you what and where you are

spending your $.Call it a spending plan instead of a budgetMatches your income with your fixed

expenses and lets you decide on discretionary expenditures and savings.

It takes a few months to develop and use a plan.

Emergency fund of 3 months to a year’s salary should be a target.

Budget worksheet sample- online

InvestingInvesting should not be gamblingNYSE has buyers and sellers exchanging

over a billion shares or more per dayThere are many other stock exchanges

(NASDAQ and AMEX) along with brokerage houses like Merrill Lynch and Morgan Stanley.

Online investing like E-Trade along with various mutual funds and banks use the stock markets

InvestingBrokerage firms – analyze companies, pick stocks

and execute trades for many types of customersPeople have different investing philosophies

depending on several itemsIndexes measure groups of stocks

Russell 2000 = small companiesWilshire 5000 = all U.S. companiesCertain geographical indexesNASDAQDow Jones Industrials – DOW 30 large cos. picked

by WSJS & P 500 – 500 largest U.S. companies

InvestingStocks – partial ownership of a company

Over time profits and growth should increase the share price and lead to a dividend or share of the profits

$3000 of Microsoft in 1986 worth $800,000 today

Vote on company issues with your sharesCompanies have stock letters

Stock table – how to read

InvestingBonds – IOU from a company, the govt., or

your hometownGenerally safer than stocksPrice (cost to buy) and yield (% you earn in a year) –

inverse relationshipCollect interest until the bond matures, then you get

principalBonds are rated for riskTreasury Bonds – bills, notes or bonds depending on

length of issueMunicipal Bonds – issued by state and local govts.

(sewer, schools etc.)Corporate Bonds – issued by companies

InvestingMutual Funds – investors pool money to buy

investments that are managed by professionals for a feeThousands of funds and trillions of $sTypes of funds

Index Balanced – mix of stocks and bondsLife Cycle – target a retirement dateSector Funds – target certain segments of the marketMoney MarketExchange Traded Funds (ETFs) – traded like stocks

Dollar cost averaging – lower the price the more shares you can buy

Asset Allocations – pick mix of investments in a fund

PlanningLong term planning for a number of things such as

college, retirement, a car, house etc. is important.15-20 years you will live after retiringFunding your retirement should be your 1st priority.70% to 100% of income to retire = 10x your annual

salaryNet worth – total assets-total liabilities (spreadsheet)Social Security

$20K = $699/month$40K = $1,046/month$60K = $1,392/month$80K = $1,626/month$100K = $1,778/month

Planning401K – pre-tax money that grows without

taxes until retirementTax and 10% penalty for early withdrawal

(59 ½)$17,500 limit on contributionsCan select various investment optionsEmployers sometimes contributeCan loan from 401K

PlanningRoth – after tax money, tax free growth and

tax free removal at retirementBenefits many especially if in lower tax

brackets3 groups to seriously consider Roths

1. Young workers2. Parents or grandparents saving for

college who will be of retirement age when kids go to college

3. People who want to pass money to heirs (do not have to begin withdrawals by 70 ½ like most retirement plans)

PlanningSEP IRAs and KEOGH plans – used for self-

employed

Individual Retirement Accounts (IRAs)

IRAs have various investment and tax options

Reverse Mortgage – collect money on the value of your house either as a LOC or a monthly payment. Must repay it either through the sale of your house or other funds.

PlanningCollege Planning

Calculators are online to help with college planning3 types of accounts

Coverdell Accounts – work like IRAs, not tax deductible, no tax on interest if used for education, cons – contribution limits and income limits

529 Plans – beneficiary has no claim to $, each state has one, can use any states, can contribute much more $, can either be prepaid or a savings plan with investment options

UGMA & UTMA – Uniform Gifts or Transfers to Minors Act – money put into an account that is taxed and $ goes to child when no longer a minor

Life Insurance – can put extra $ into life insurance that doesn’t count towards financial aid and then borrow that money for school

PlanningFinancial Aid

Grants and scholarships – do not have to pay back

Loans – subsidized or unsubsidizedFederal Work Study Program – part time work

at school

PlanningEFT – Expected Family Contribution

35% of student’s assets50% of student’s income2.6% to 5.6% of parent’s assets depending

on their age22% to 47% of parent’s income

Assets for retirement and primary residence are not counted

Life insurance is not counted

InsuranceInsurance gets no respect until you need it and

then you’ve had a bad day.Insurance buyers are grouped by risk and actuaries

calculate insurance rates.Risk is shared among a group of people who pay

premiums.Premiums are invested.Coverage – how much money the policy will pay outPremium – cost of coverage – preferred, standard,

substandard & uninsurableDeductible – how much you have to contribute on a

claim (higher deductible = lower premium)

InsuranceLife Insurance

Term and Cash-ValueTerm - cheaper, in place for a limited amount

of time, could expire before you doTerm can usually be converted to cash valueCash Value - 4 to 8 times cost of term, has a

savings portion, remain in effect forever, can loan against them, break even in 14 or 15 years

Lapse – when a policy expires due to not being paid

InsuranceWho may not need life insurance?

Single people with no dependentsWorking couple with no kids who don’t need the other’s

incomeRetirees with no financial obligationsWealthy people with large estatesChildren unless they make $$$ or you want it for their future

Why buy life insurance?Dependent childrenMarried to a non-working spouseYou have other people you supportYou have debtsYou want to maximize your pensionYou have business partners

Insurance5 to 10 times your annual salary neededDo not buy as an investment (usually)Buy term and invest the differenceAnnuities – paid a set amount of money for

a set period of timeMany different types

InsuranceHomeowner’s Insurance

Required by lenderInsure to replace damage to home or loss of personal

itemsActual Cash Value vs. Replacement CostKeep a home inventory in a safe place

Automobile InsuranceCar is biggest liabilityParts of a policy: liability, collision, comprehensive,

uninsured, underinsured, medical and personal injury protection

States set minimum requirementsShop around for ratesGood credit may equal lower rates (other factors)

InsuranceWays to lower ratesHomeowners – deadbolts, sprinklers, alarm,

fire alarm, fire extinguishers, smoke detectors, don’t smoke, & home inspection

Automobiles – multi-car discount, avoid tickets, anti-theft devices, anti-lock brakes, airbags, driver’s education, good grades, electronic payment, certain occupations, marriage & bundling policies

Taxes Payroll – federal, state, local, SS, Medicare, Medicaid, EMT Gas Property (school, county & local) – cars and RVs in some states Sales Realty transfer Entertainment tax Vending Use Occupational privilege Capital gains Consumption – hunting license, hotels, toll roads, etc. Inheritance Corporate Permits and fees (marriage, building, zoning, etc.)

Taxes

Taxes

Taxes