Presentation on theme: "UNIT 7.2: AP REVIEW OF PERSONAL FINANCE “WHO MONITORS THE STOCK MARKET IN THE USA?” They are not insured but at least they have been reviewed."— Presentation transcript:
UNIT 7.2: AP REVIEW OF PERSONAL FINANCE
“WHO MONITORS THE STOCK MARKET IN THE USA?” They are not insured but at least they have been reviewed.
Regulating Investing Investments are regulated by the: Securities and Exchange Commission (SEC) 1. The SEC regulates all trading of all securities in America. 2. They help ensure that the Stocks, Bonds, & Mutual Funds that are for sale are legitimate and from a company that shows (or could show) a profit. 3. They also establish ethics for stock brokers, which reduces the amount of unethical and illegal activities in the business of trading securities. (Such as insider trading.)
WHAT ARE SOME INVESTMENTS IN THE WORLD?
Stocks: money given by stockholders that they are willing to risk in the hopes of a return on their investment. There is no guarantee of a return on your investment. At least the company has been reviewed by the Securities and Exchange Commission (SEC). This is known as Equity Financing : Two types of Stock: Common Stock: many shares of this and it does not always have benefits, like paying a dividend. Dividend is a regular payment written to the stockholder based on earnings. Preferred Stock: fewer shares of this offered to the public and it generally does pay a dividend. Common Investment Types Personal Video File: Dividends Personal Video File: Dividends
Government Savings Bonds: Not the best for investing, unless you hate risk. Series I: $50, $75, $100, $200, $500, $1,000, and $5,000. $5,000 is the maximum purchase in one calendar year. If you redeem I Bonds within the first 5 years, you'll forfeit the 3 most recent months' interest; however after 5 years, you won't be penalized, but will pay tax. Series EE: $50, $75, $100, $200, $500, $1,000, $5,000, $10,000. Only difference is that you can withdraw these early for educational expenses without a penalty or tax. Government Savings Bonds half value then they mature to the face value)
COMPANY / GOV INVESTOR HOW DO BONDS WORK Improve factories Buys a $500, 5 year Bond at 5% interest (You can buy it directly from the company or you can go through a bank) Purchase Capital After 5 years, the company has to repay bond (+ interest) Estimated return of Estimated return of $635 PROBLEM: Is $635 going to be worth the same in 5 years? NO INFLATION:the steady rise of prices for goods and services. INFLATION: the steady rise of prices for goods and services. (Compounded monthly over 60 months)
Mutual Funds (Key Word: Diversity) Common Investments Types Personal Video File: Mutual Funds Personal Video File: Mutual Funds
Mutual Funds:mutual funds are not sold by the corporation directly. They are sold by banks and investment firms. Mutual Funds: mutual funds are not sold by the corporation directly. They are sold by banks and investment firms. A mutual fund is a combination of hundreds of pieces of different stocks from many different corporations. The benefit of a mutual fund is that it is a diversified investment (not all your eggs are in one basket)... …and a mutual fund is controlled by a investment firm, which means when you buy a mutual fund you benefit from professional management. Common Investments Has over 10,000 funds to choose from Ex: FBGRX
MUTUAL FUND COMPANY INVESTOR Diversify Medical Stock Tech Stock Automotive Stock Team of professional advisors looks over each fund Investment Providers Investment Providers Common Investment Types You have the power to pick your own funds.
RISK AND RETURN: WHAT’S THE RELATIONSHIP? (Investments and Loans)
The Investor’s Relationship Between Risk & Return Rate of Return Risk to Investor U.S. Savings Bonds Savings Accounts Real Estate Stock-based Mutual Funds Certificates of Deposit Stocks Bond-based Mutual Funds Corporate Bonds
WHAT’S THE COST TO BORROW MONEY? HOW DO BANKERS DEAL WITH RISK AND RETURN? (Loans)
Bankers’ Relationship Between Risk and Interest Charged Risk to Bank Interest Charged Mortgage on a house Mortgage on a mobile home Loan for a new car Loan for buying land Loan for a used car Loan for a boat Loan for a new business No collateral loan (credit card) Rate depends on the projected success of the business
WHAT ARE SOME DIFFERENT INVESTMENT ACCOUNTS? (Retirement to Saving for College)
I.R.A. Individual Retirement Account (Setup by your individual) 401K or 403 (b) (Setup by your employer) 529 Plan (Setup by your individual) For Corporate Employees For Government Employees Various Investment Accounts
401K – Retirement account setup through your employer where deposits are made by the employee and employer. Invests heavily in mutual funds. (more on this type of account later) ROTH 401K – Deposits are taxed, but no tax when you withdraw at retirement (after 60 years) Traditional 401K – Withdrawals are taxed, but no tax when you deposit during career. 403B (Roth & Trad versions) – Basically a 401K, but only for government and non-profit employees. Invests heavily in mutual funds. Individual Retirement Account (IRA) (Roth & Trad versions) – Basically a 401K, but setup by an individual and deposits are made only by that individual. Invests heavily in mutual funds. 529 Plan – State-specific plan setup for kids to fund their education. Caregiver’s deposits are tax free and withdraws are tax free IF used for educational expenses (tuition, fees, books, meal plan, other..) Invests heavily in mutual funds. Various Investment Accounts
IRAs & 401Ks 401Ks: In 1978, Congress amended the Internal Revenue Code, later called section 401(k), whereby employees are not taxed on income they choose to save for retirement… …however, in order to qualify an employer must set up this account on behalf of a employee and may contribute to the employee’s retirement and… …money cannot be withdrawn from the 401k until age 60. If money is taken out for emergencies then the employee must surrender 10% of the withdrawn amount as a penalty for early withdrawal. IRAs: The only difference is that these are set up by individuals and employers do not contribute to the account. Saving for the Far Future So, how much can one make on these accounts? So, how much can one make on these accounts? Personal Video File: 401K Personal Video File: 401K
INVESTMENT COMPANY (FUNDED WITH MUTUAL FUNDS) EMPLOYEE IRA & 401k Diversify Medical Stock Tech Stock Automotive Stock Team of professional mutual fund managers REQUIREMENTS: WITHDRAW WITHOUT PENALTY AFTER 60 YEARS OLD. MUST WITHDRAW BY AGE % EARLY WITHDRAW PENALTY (401K & IRA). MAX YOU CAN PUT IN PER YEAR IS $17,500 (401K) OR $5,500 (IRA) PER PERSON. TRADITIONAL 401K/IRA: DEPOSITS ARE TAXED WHEN YOU RETIRE. ROTH 401K/IRA: DEPOSITS ARE TAXED DURING YOUR WORKING YEARS. You + Employer (or just you) places % of your paycheck in the 401K / IRA. Personal Video File: Roth vs Trad Personal Video File: Roth vs Trad
Traditional IRA vs Roth IRA TraditionalRoth How money is taxed? Funded with pre-tax dollars (called a deferred account) Funded with after tax dollars Earnings taxed while in account? NONO Withdraw before age 60 10% penalty + taxes No penalty or taxes Withdraw after age 60 Pay taxes No taxes
Traditional IRA vs Roth IRA EXAMPLETraditionalRoth Deposit: $5000 No tax Taxes paid = $1600 (assumes 32% tax) Actual Deposit $5000$3400 Value in 5 Years $10,000$7,800 Withdraw $3,400 before 60 years old $1088 in taxes ($3400 x 32%) + $340 (10% penalty) Total: $1,972 Total Withdrew: $3,400 Assume after 60 and never withdrew any money & you are in a 25% tax bracket $20,000 Total Value -$5,000 paid in taxes Total withdrew: $15,000 $15,600 Total Value Total withdrew: $15,600
“FIGHTING INFLATION: TYPES OF INTEREST” Simple & Compound Methods What is the most powerful force in the universe?
Simple Interest versus Compound Interest 2.) Compound interest Compare the TWO ways to compute interest 1.) Simple interest Which one would an investor prefer? Which one would a company that issues the investment prefer? Year 1: 5% of $100 = $5 + $100 = $105 Year 2: 5% of $105 = $ $105 = $ Year 3: 5% of $ = $ $ = $ Year 4: 5% of $ = $ $ = $ Year 10: = $ Year 1: 5% of $100 = $5 + $100 = $105 Year 2: 5% of $100 = $5 + $105 = $110 Year 3: 5% of $100 = $5 + $110 = $115 Year 4: 5% of $100 = $5 + $115 = $ Year 10: = $150 Year 10: = $150
Complete the following problems: Compound Interest Earned Practice FV = PV (1 + ( r/n) ) nt 3% APR (daily) for 5 years. 3% APR (semi-annually) for 5 years. 3.Savings Account Example: APR (daily) for 1 years.
EX: $1000 ( ) = $1,249 future value 10 periods ($249 gained in interest) EX: You purchased a $1,000 Certificate of Deposit 4.5% APR (annually) for 5 years. Interest is compounded every 6-months (semi-annually). What is the future value of the investment?.045 / 2 periods per year =.0225 Effective Rate of Interest Compound Interest Earned Practice FV = PV (1 + ( r/n) ) nt However if you adjust for an average inflation rate of 1% per year the Real return is -.5%!
EX: $300 ( ) = $365 future value 2920 periods ($65 gained in interest) EX: You have $300 in your savings 2.5% APR (annually) for 8 years. Interest is compounded every day. What is the future value of the account?.025 / 365 periods per year = Effective Rate of Interest Compound Interest Earned Practice FV = PV (1 + ( r/n) ) nt However if you adjust for an average inflation rate of 1% per year the Real return is -5.5%!
HOW CAN I SAFEGUARD MY FINANCIAL LIFE? TYPES OF INSURANCE: HEALTH, LIFE, & LIABILITY (Ways to protect yourself against the unthinkable)
1. Life Insurance: designed to provide loved-ones with a source of income to pay for funeral, housing, and children’s education expenses. Becomes more expensive as you get older. WHOLE LIFE: More expensive monthly premiums, but the money in the policy gains an amount of interest and you can take out money as a loan if needed. TERM LIFE: Much less expensive premiums. Bought in lengths of 10, 20, 30 year terms. Price is fixed for length of term. Money in the policy does NOT gain interest and you can NOT take out money as a loan. Types of Insurance There are 2 types: Personal Video File: How Much Insurance do I Need Personal Video File: How Much Insurance do I Need
2. Health Insurance: provides payments for regular and emergency healthcare procedures. Without this one can find that a single trip to the doctor can cost $600 to $2000. Emergency services can run $10,000 - $120,000. Becomes more expense as you get older. 3. Liability Insurance: designed to provide protection incase you (or your property) injures someone. Usually required by state law. Types of Insurance
Is credit a threat or addition to my investments? CREDIT CARDS & YOUR CREDIT SCORE WHO KNOWS MORE ABOUT MY FINANCES THAN ME?
Credit Cards SOME FACTS 1. Average balance per family is $8, Average interest rate on cards is 18% 3. 1 out of 4 college students have $3,000 in card debt 4. College students are targeted since most students can only pay 30% of their card debt in a year. 5. Using a credit card at a ATM to withdraw cash will cost on average 28% in interest. Personal Video File: Card Game Show Personal Video File: Card Game Show PVF: Credit Reform Act Card Fees PVF: Credit Reform Act Card Fees
Credit Cards 1. Shopping for credit cards is the same as shopping for a car or picking the college you want to go to. 2. You are NOT charged interest if you pay off the balance within 25 days of making the purchase. 3. You must shop for the lowest interest rate, and the LEAST FEES (annual fees, late fees, over-credit limit fees) 4. Find the card that gives rewards, such as cash-back or miles for plane tickets. 5. By having a credit card and paying the balance on a regular basis, you will improve your credit history. (named after the Fair Issac Corp, the company that pioneered credit scoring. Scores average between 300 and 850, the higher the better) Personal Video File: Card Game Show Personal Video File: Card Game Show PVF: Credit Reform Act Card Fees PVF: Credit Reform Act Card Fees Access this site for your free credit check
Credit Card Charges Example: 15% APR ÷ 365 =.0004 DPR (.0004 x 30) x $1000 = $12.32 Card Balance Prime Rate set by Federal Reserve Additional Rate set by your bank
FICO Score/Credit Ratings Credit Reporting Agencies Personal Video File: Quest for Credit (8 min) Personal Video File: Quest for Credit (8 min) FICO scores are developed by… Personal Video File: How to Keep FICO Up (2 min) Personal Video File: How to Keep FICO Up (2 min) Access this site for your free credit check