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Personal Finance Bob Donchez
CUBIC 2017 Day 2 Personal Finance Bob Donchez CUBIC Personal Finance
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The Financial Planning Process Personal Finance Topics
Assessing financial position Basics of personal taxes Insurance Managing personal debt Setting and achieving goals Retirement topics Investment topics Putting it all together
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The Role of Insurance 4-1 Rationale for Insurance
Concept for Insurance: protecting the financial plan Protects downside risk; provides cash flows when planned cash flows interrupted Loss of income Unexpected expenses Comes at an unavoidable cost (premiums) Going without insurance very risky; alternatives?
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The Role of Insurance 4-2 A Review of Insurance
Emergency cash 3 – 6 months of cash savings Savings, short term bonds, CD’s Covers unexpected expenses such as job loss, medical problems Available for unexpected positive opportunities Buys time so you don’t have to sell securities when markets are down
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The Role of Insurance 4-2 Auto/Homeowner/Renter Insurance
Auto insurance components Part A: Liability Part B: Medical expense Part C: Uninsured motorist Part D: Collision (damage to vehicle) Premiums based on: Car value Coverage level Deductible
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The Role of Insurance 4-2 Auto/Homeowner/Renter Insurance
Homeowner’s insurance policy types HO 3: “All risk” (except flood, earthquake, war, etc) HO 4: Renters insurance (belongings, liability) HO 6: Condo insurance Premiums based on: Property value Coverage level Deductible
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Do you have medical/health insurance?
?? Question Do you have medical/health insurance? A. No B. Yes, through my parents C. Yes, through my work D. Yes, on my own E. Don’t know
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What is the average total medical cost of a 3 day hospital stay?
?? Question What is the average total medical cost of a 3 day hospital stay? A. $5,700 B. $9,800 C. $12,000 D. $22,500 E. $30,000
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The Role of Insurance 4-3 Health Insurance (ACA-Affordable Care Act)
Key Features Mandatory coverage or tax penalty Standardized level of coverage (example: preventative care) No pre-existing conditions Subsidies (reduced premiums) for low income Risks of NOT carrying health insurance Increased health risks Tax penalties Wreck your financial plan Wreck your family’s/parents financial plan
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The Role of Insurance 4-3 Health Insurance (ACA-Affordable Care Act)
Coverage options On parents’ policy to age 26 Provided through work Privately through an “exchange” New: no pre-existing conditions exclusion Required or tax penalty
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The Role of Insurance 4-3 Health Insurance (ACA-Affordable Care Act)
Key terms Premium: regular payment for coverage Deductible: amount you pay for covered service initially (for example $2,000 deductible, after which 80% is covered Co-payment: fixed dollar amount paid for certain services at time of service (example $40 doctor visit)
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The Role of Insurance 4-3 Health Insurance (ACA-Affordable Care Act)
Key terms (continued) Co-insurance: fixed percent charge paid (example, after deductible, insurance pays 80%, you pay 20%) Out of pocket expense: maximum you pay before insurance pays 100% of allowed charges. Current maximum is $6,350 for individual and $12,700 for families Does not include premiums paid or non-allowed/non-covered charges
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The Role of Insurance 4-3 Health Insurance (ACA-Affordable Care Act)
The lower the premium, the higher the out of pocket costs The higher the premium, the lower the out of pocket costs Below, the amount paid by plan providers; you pay balance:
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The Role of Insurance 4-3 Health Insurance (ACA-Affordable Care Act)
Comparing plans—example Note: Rates may be lower for persons with lower incomes (through tax credits) Bronze Plan Silver Plan Premium $188/mo $262/mo Deductible $5,750 $3,600 Co-pays $30-$40 None Co-insurance 30% 10% Single OOP max $6,350
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The Role of Insurance 4-3 Health Insurance (ACA-Affordable Care Act)
Other providers of medical care Workman’s compensation “workcomp”: state based payment for work related illness and injury Medicare– medical insurance for age 65 up Medicaid—medical insurance for low income COBRA—medical coverage between jobs
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The Role of Insurance 4-3 Health Insurance (ACA-Affordable Care Act)
On-line resources
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A 30 year old has what chance of a 90+ day disability prior to age 65?
?? Question A 30 year old has what chance of a 90+ day disability prior to age 65? A. 20% B. 40% C. 50% D. 70%
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The Role of Insurance 4-4 Disability insurance
The case for disability insurance Policy features Waiting period (example: 3 or 6 months) Coverage amount (example: 60% of gross income) Coverage period (example: to age 65) “your” (first 2 years) versus “any” (after 2 years) occupation Methods to reduce premiums—get at work
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Do you currently have life insurance?
?? Question Do you currently have life insurance? A. Yes, and I know amount and type B. Yes, but I’m not sure about amount & type C. No D. I don’t know
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The Role of Insurance 4-5 Life insurance
Basic types of insurance Term life Whole life Universal/variable life
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The Role of Insurance 4-5 A Review of Insurance
Life Insurance Policy Type Coverage Period Annual Premium Death Benefit Cash Value Term Life Specified period 1-30 years Least expensive Fixed benefit None Whole Life Permanent protection Fixed premium Fixed, based on policy Variable Life Fixed or variable premium Flexible, based on investment account performance Depends on investment account performance
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The Role of Insurance 4-5 Life insurance
Strategies for use of life insurance—who needs it? Married with single wage earner Kids Own a small business Determining coverage amounts
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The Role of Insurance 4-6 Bundling coverage to reduce cost
From work, get Term life Disability Medical From insurance carrier, get Homeowner, Renter’s insurance Car insurance
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Go to Colorado Health Exchange link: http://connectforhealthco.com/
10/29/2017 Assessing Current Financial Position Exercise 2A: Select a personal health plan Go to Colorado Health Exchange link: Select and compare two health plans Complete the table given for each plan and indicate which plan is preferable to you and why (link below). Send completed for by attachment—be sure to include team number/names in . Exercise Assignment CUBIC Corporate Finance
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Describe your debt situation:
?? Question ) Describe your debt situation: A. I have virtually no debt B. I have student loans C. I have credit card balance(s) D. I have a mortgage E. I have a combination of the above
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?? Question Have you ever gotten into trouble with credit cards? (couldn’t afford, missed payments, could only pay minimum) A. No, never B. No, but have had “close call” C. Yes, in the past D. Yes, currently
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Managing Personal Debt 4-1 Types and Forms of Personal Debt
Average debt for students that have debt: $30,000
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Managing Personal Debt 4-1 Types and Forms of Personal Debt
Revolving credit (credit cards) No set pay off date High variable interest rate Variable payments Secured by general credit worthiness
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Managing Personal Debt 4-1 Types and Forms of Personal Debt
Installment credit (example: car loan) Fixed pay off date (intermediate term, 3-7 years) Fixed payment Fixed interest rate Secured by asset and credit worthiness, credit score
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Managing Personal Debt 5-1 Types and Forms of Personal Debt
Home Mortgage Long term pay off date (10 to 30 years) Fixed or variable interest rate Fixed or variable payments Secured by asset and credit worthiness, credit score
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Managing Personal Debt 5-2 Use and Role of Personal Debt
Our basic choice and trade-offs Save and earn return, forego use of asset to later Borrow and pay interest, have use of asset now If debt is used, the choices are: What kind of debt? For what purpose? How much is borrowed? What is total expense?
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Managing Personal Debt 5-2 Use and Role of Personal Debt
General recommendations Avoid on-going credit card debt entirely, pay off monthly Don’t use credit cards to “make ends meet” Borrow only for “key” asset needs when affordable Car, major appliances, furniture, house Use fixed rate installment debt, mortgage How much borrowing is sensible?
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Managing Personal Debt 5-2 Use and Role of Personal Debt
Selecting good loans—characteristics: Credit cards Link to bank No annual fee No interest if paid monthly Points/benefit program Low APR if planning to have continuing balance Installment debt Consider your bank first
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Managing Personal Debt 5-2 Use and Role of Personal Debt
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Managing Personal Debt 5-3 Debt and Time Value of Money Problems
Borrowing creates RISK Risk you can’t “perform”/pay on debt Risk of loss of asset, foreclosure, repossession Risk of opportunity cost Funds borrowed now cannot be used for other purposes later
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Managing Personal Debt 5-3 Debt and Time Value of Money Problems
Working with your calculator
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?? Question You’re interested buying a car. If you can secure a loan for 48 months at 6% annual interest rate You have saved $3,000 for a down payment and can afford a payment of $200 per month. What’s the total price you can pay on the car? A. $ 6,600 B. $ 8,500 C. $11,500 D. $14,500
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?? Question You’re interested buying a car. The total cost of the car is $27,500 and you have saved $4,000 for a down payment. A loan proposal is for 60 months at 7% annual interest. What would your monthly payment be? A. $ 356 B. $ 465 C. $ 785 D. $1,164
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?? Question You’re considering buying a house. The total cost is $227,000 and you have saved $25,000 for a down payment. The mortgage is fixed rate 5.5% for 360 months. What would your monthly payment be? A. $ B. $ C. $ 1,086 D. $ 1,147
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Managing Personal Debt 5-4 Credit Reporting and Managing Debt
Credit file and your rating is important Affects whether you get credit Affects the cost of credit Can affect employment It’s important to run your own credit report regularly What’s going on in report; catch fraud & ID theft Check accuracy, correct mistakes Who’s checking up on you; running your report
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Managing Personal Debt 5-4 Credit Reporting and Managing Debt
Factors determining credit score
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Managing Personal Debt 5-4 Credit Reporting and Managing Debt
Running your own credit report Free report required to be provided annually Services: Experian, Equifax, TransUnion Consumer credit counseling:
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Managing Personal Debt 5-4 Credit Reporting and Managing Debt
FICO SCORE QUALITY EXCELLENT VERY GOOD 723 MEDIAN FICO SCORE GOOD 687 AVERAGE FICO SCORE NOT GOOD POOR
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Go to: http://annualcreditreport.com
10/29/2017 Assessing Current Financial Position Exercise 2B: Get your credit history Go to: Complete the form below and return by attachment. Be sure to include team number/names in . Exercise Assignment CUBIC Corporate Finance
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