Personal Finance Garman/Forgue Ninth Edition

Personal Finance Garman/Forgue Ninth Edition
Chapter 1: Understanding Personal Finance PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Use the building blocs to achieving financial success. Understand how the economy affects your personal financial success. Apply economic principles when making financial decisions. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Perform time value of money calculations.
Make smart decisions about your employee benefits. Identify the professional qualifications of providers of financial advice. Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Literacy Financial literacy is knowledge of:
Facts Concepts Principles Technological tools …that are fundamental to being smart about money. Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Responsibility
Financial responsibility means being accountable for your future financial well being. that you strive to make good decisions in personal finance. Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Success Spend less to save and invest! Savings Investments
Standard of Living Level of Living Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Success Financial Happiness: Satisfaction about money matters. Use the Building Blocks of financial success Know how the economy affects your personal financial success Copyright ©Houghton Mifflin Company. All rights reserved.

The Economy and Business Cycles
Economy: System of managing the resources of a country, state, or community. Economic Growth: Increasing production and consumption in the economy. Copyright ©Houghton Mifflin Company. All rights reserved.

The Economy and Business Cycles
The economy grows and contracts over time: Expansion Peak Trough Copyright ©Houghton Mifflin Company. All rights reserved.

Future Direction of the Economy?
Track the Gross Domestic Product Track the Employment Report Track the Index of Leading Economic Indicators Track the Consumer Confidence Index Copyright ©Houghton Mifflin Company. All rights reserved.

Inflation Inflation: Steady rise in the general level of prices.
How does inflation affect income and consumption? Copyright ©Houghton Mifflin Company. All rights reserved.

Inflation How inflation is measured: Consumer Price Index (or CPI)
Personal Inflation Rate Copyright ©Houghton Mifflin Company. All rights reserved.

Track the Federal Funds Rate
Rates banks charge each other Set by the FED Copyright ©Houghton Mifflin Company. All rights reserved.

Think Like an Economist
Opportunity Cost: Cost of decision measured by the value of the next best alternative. Copyright ©Houghton Mifflin Company. All rights reserved.

Think Like an Economist
Marginal Utility/Cost: Usefulness or cost of the next increment of something. Marginal Tax Rate: Tax rate at which your last dollar earned is taxed. Copyright ©Houghton Mifflin Company. All rights reserved.

FAQ in Personal Finance
What will an investment (or a series of investments) be worth after a period of time? This question asks for a future value. Copyright ©Houghton Mifflin Company. All rights reserved.

FAQ in Personal Finance
How much has to be put away today (or as a series of investments) to provide some dollar amount in the future? This question asks for a present value. Copyright ©Houghton Mifflin Company. All rights reserved.

Calculating Future Values
Future Value (FV): Valuation of an asset projected to the end of a particular time period in the future. Compounding Copyright ©Houghton Mifflin Company. All rights reserved.

Calculating Future Values
Future value of a lump sum Future value of an annuity Rule of 72: Reveals number of years for principle to double Copyright ©Houghton Mifflin Company. All rights reserved.

Calculating Present Values
Present value of a lump sum Present value of an annuity Copyright ©Houghton Mifflin Company. All rights reserved.

Smart Money Decisions at Work
Flexible benefit plans offer tax-free money Flexible Benefit (Cafeteria) Plan Copyright ©Houghton Mifflin Company. All rights reserved.

Making decisions about… Participating in employer life, disability, and long-term care insurance plans Participating in your employer’s retirement (or tax-sheltered retirement) plan Copyright ©Houghton Mifflin Company. All rights reserved.

Employer Retirement Plans
First advantage: tax-deductible contributions Second advantage: employer’s matching contributions Copyright ©Houghton Mifflin Company. All rights reserved.

Employer Retirement Plans
Third advantage: tax-deferred growth Fourth advantage: starting early really pays off Copyright ©Houghton Mifflin Company. All rights reserved.

Professional Financial Planning Advice
A true financial planner should be able to analyze a family’s total needs in such areas as: investments taxes insurance education goals retirement Copyright ©Houghton Mifflin Company. All rights reserved.

Appropriate professional designations and credentials for planners: Certified Financial Planner (CFP) Chartered Financial Consultant (CFC) Certified Public Accountant (CPA) Accredited Financial Counselor (AFC) Mutual Fund Chartered Counselor (MFCC) Registered Investment Advisor (RIA) Copyright ©Houghton Mifflin Company. All rights reserved.

How financial planners are compensated: Commission-only financial planners/brokers Fee-based financial planner/brokers Fee-offset financial planners/brokers Fee-only financial planners Copyright ©Houghton Mifflin Company. All rights reserved.

Top 3 Financial Missteps in Personal Finance
People slip up in building and maintaining good credit when they do the following: Think only about money matters when faced with a financial problem. Spend more than they earns. Get financial advice from amateurs. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Personal Finance
Spend significantly less than you make and save using pay-yourself-first. Stay up-to-date with current economic conditions and the knowledge to manage your personal finances. Copyright ©Houghton Mifflin Company. All rights reserved.

When making financial decisions, use marginal and opportunity costs and time value of money calculations. Establish financial goals and take actions to achieve them. Copyright ©Houghton Mifflin Company. All rights reserved.

Take advantage of tax sheltering through your employer’s benefits program. Believe in compounding by allowing your money to earn interest on top of the principal and other accrued interest. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 2: Career Planning PPT slide program prepared by Amy Forgue and Ray Forgue.

Career Planning Career: Lifework chosen by a person to use personal talent, education, and training. Career Planning: Finding employment that will use your interests and abilities and that will support you financially. Copyright ©Houghton Mifflin Company. All rights reserved.

Key Steps in Career Planning
Create your Career Goal and Career Plan. Clarify your interests Interest Inventories: Scaled surveys that assess career interests and activities. Copyright ©Houghton Mifflin Company. All rights reserved.

Take advantage of networking. Professional Networking: Making and using contacts with individuals, groups, and other firms to exchange career information. Copyright ©Houghton Mifflin Company. All rights reserved.

Financial and Legal Aspects of Employment
Compare salary and living costs in different cities. Compare using city indexes. City Indexes: Comparing wages and cost of living for various employment locations. Copyright ©Houghton Mifflin Company. All rights reserved.

Effective Employment Search Strategies
Assemble a resume. Resume Chronological Format Skills Format Functional Format Copyright ©Houghton Mifflin Company. All rights reserved.

Interview for Success Do some research before the interview.
Compile revealing personal stories. Prepare questions to ask the interviewer. Prepare responses for anticipated interview questions. Copyright ©Houghton Mifflin Company. All rights reserved.

Interview for Success Create positive responses to negative questions.
Be ready for telephone interviews. After the interview, evaluate it and send a thank-you note Copyright ©Houghton Mifflin Company. All rights reserved.

Top 3 Financial Missteps in Career Planning
People slip up in building and maintaining good credit when they do the following: Don’t learn as much as possible about a company before going for an interview. Copyright ©Houghton Mifflin Company. All rights reserved.

Top 3 Financial Missteps in Career Planning
Change jobs and cash out employer-sponsored retirement savings plans, instead of leaving it there, transferring it to the new employer’s 401 (k) plan, or moving it to a rollover IRA account. Fail to use the COBRA law to continue participating in the old employer’s medical health plan benefits for up to 18 months. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Career Planning
Take the time to plan and make the effort required to obtain employment in your career. Identify your career planning values and live them in your selection of jobs and your performance at work. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Career Planning
Do not miss an opportunity to continually enhance your education and professional training. Understand your preferred work-style personality Practice effective employment search strategies, especially interviewing skills. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 3: Financial Statements, Tools, and Budgets PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Identify your financial values, goals, and strategies. Use balance sheets and cash-flow statements to measure your financial health and progress. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Evaluate your financial strength and progress using financial ratios. Maintain the financial records necessary for managing your personal finances. Outline and work toward achieving your financial goals through budgeting. Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Values, Goals, and Strategies
Financial Planning: Managing income and wealth continuously through life to meet financial goals. Copyright ©Houghton Mifflin Company. All rights reserved.

Values define your financial success. Financial goals follow from values. Financial Goals: Specific objectives to be attained through financial planning and management efforts. Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Statements Components of the balance sheet: Assets
Liabilities Net Worth Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Statements Assets: What Is owned
Monetary Assets (or liquid assets or cash equivalents) Tangible (or use) assets Investment (or capital) assets Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Statements Liabilities: What Is owed
Short-term (or current) liability Long-term liability Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Statements Net Worth: What is left
Copyright ©Houghton Mifflin Company. All rights reserved.

Strategies to Increase Your Net Worth
Increase Assets. Decrease Liabilities. or both! Copyright ©Houghton Mifflin Company. All rights reserved.

Cash-Flow Statement The Cash-Flow Statement tracks where your money came from and went. Income Expenses Surplus (or Net Gain or Net Income) Deficit (or Net Loss) Copyright ©Houghton Mifflin Company. All rights reserved.

Cash-Flow Statement Expenses Fixed Expenses Variable Expenses

Financial Ratios Basic liquidity ratio
Liquidity: The speed and ease with which an asset can be converted to cash. Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Ratios Asset-to-debt ratio
Do you have enough assets compared to liabilities? Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Ratios Debt service-to-income ratio
Can you meet your total debt obligations? Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Ratios Debt payments-to-disposable income ratio
Can you pay your debts? Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Ratios Investment assets-to-total assets ratio
Do you need to invest more? Copyright ©Houghton Mifflin Company. All rights reserved.

Financial Record Keeping
Financial record keeping saves time and makes you money. Financial Records: Documents that evidence financial transactions. Copyright ©Houghton Mifflin Company. All rights reserved.

Budgeting Rules for successful budgeting: Keep it simple.
Make it personal. Keep it flexible. Be positive. Copyright ©Houghton Mifflin Company. All rights reserved.

Budgeting – Action Before
Set financial goals. Long-term goals Intermediate goals Short-term goals Copyright ©Houghton Mifflin Company. All rights reserved.

Budgeting – Action During
Control spending. Monitor unexpended balances to control overspending. Use a subordinate budget. Pay by check to record the purpose of expenditures. Copyright ©Houghton Mifflin Company. All rights reserved.

Budgeting – Action During
Keep track of credit transactions. Justify exceptions. Use the envelope system. Copyright ©Houghton Mifflin Company. All rights reserved.

Budgeting – Action After
Evaluate budgeting progress. Budget Variance: Difference between amount budgeted and actual amount spent or received. Copyright ©Houghton Mifflin Company. All rights reserved.

What to Do with Budgeted Money Left Over at the End of the Month
Put into a revolving savings fund. Build a cash reserve in a savings account. Pay down credit card debt. Copyright ©Houghton Mifflin Company. All rights reserved.

What to Do with Budgeted Money Left Over at the End of the Month
Put toward a mortgage or other loan. Invest in a retirement account. Spend like “made money.” Copyright ©Houghton Mifflin Company. All rights reserved.

Top 3 Financial Missteps in Financial Statements, Tools and Budgets
People slip up in building and maintaining good credit when they do the following: Fail to plan for occasional, non-monthly expenditures. Underestimate how much you spend each month. Using credit cards to “balance” your budget. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Financial Statements, Tools, and Budgets
Identify your financial values, goals, and strategies so you can always keep a balance between spending and saving and stay committed to your financial plans. Develop your own balance sheet and update it annually. Copyright ©Houghton Mifflin Company. All rights reserved.

Develop your own cash-flow statements monthly or quarterly and compile them into an annual statement. Calculate your financial ratios annually to assess your financial progress. Copyright ©Houghton Mifflin Company. All rights reserved.

Develop a list of financial goals. Start with short-term goals and then expand your list to longer-range goals. Update and revise your goals annually. Start an uncomplicated personal financial record-keeping system that meets your needs. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 4: Managing Income Taxes PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Explain the nature of progressive income taxes and the marginal tax rate. Differentiate among the eight steps involved in calculating your federal income taxes. Use appropriate strategies to avoid overpayment of income taxes. Copyright ©Houghton Mifflin Company. All rights reserved.

Introduction Tax Planning: Seeking legal ways to reduce, eliminate, or defer income taxes. Taxable Income: the income upon which income taxes are levied. Copyright ©Houghton Mifflin Company. All rights reserved.

Taxes Progressive income taxes and the marginal tax rate
Internal Revenue Service (or IRS) Internal Revenue Code The progressive nature of the federal income tax Progressive tax Regressive tax Copyright ©Houghton Mifflin Company. All rights reserved.

The Marginal Tax Rate Marginal tax bracket (or MTB) Marginal tax rate
Indexing Copyright ©Houghton Mifflin Company. All rights reserved.

Marginal Tax Rate and Financial Decisions
Your effective marginal tax rate is probably 43%. Your average tax rate is lower. Average tax rate: Proportion of total income paid in income taxes. Copyright ©Houghton Mifflin Company. All rights reserved.

8 Steps in Calculating Your Income Taxes
Determine your total income. Determine and report gross income after subtracting exclusions. Subtract adjustments to income. Subtract either the IRS’s Standard Deduction for your tax status or itemize your deductions. Copyright ©Houghton Mifflin Company. All rights reserved.

8 Steps in Calculating Your Income Taxes
Subtract the value of your personal exemptions. Determine your preliminary tax liability. Subtract tax credits for which you qualify. 8. Calculate the balance due the IRS or the amount of your refund. Copyright ©Houghton Mifflin Company. All rights reserved.

Total Income Total Income: Compensation from all sources.

Total Income Income to include:
Wages and Salaries Commissions Tips Earned Gambling and Lottery Winnings Include capital gains and losses in Total Income. Long-term gain (or loss) Copyright ©Houghton Mifflin Company. All rights reserved.

Gross Income Income to exclude: Gifts Inherited money or property
Income from a carpool Federal income tax refunds Copyright ©Houghton Mifflin Company. All rights reserved.

Gross Income More income to exclude:
Employee contributions to flexible spending accounts Reimbursements from flexible spending accounts Child support payments received Copyright ©Houghton Mifflin Company. All rights reserved.

Subtract Adjustments to Income
Adjusted Gross Income (or AGI) Copyright ©Houghton Mifflin Company. All rights reserved.

Deductions Subtract either the IRS’s standard deduction for your tax status or your itemized deductions. Standard deduction depends on filing status. $5350 for single individuals $10,700 for married couples Copyright ©Houghton Mifflin Company. All rights reserved.

Deductions Itemized deductions: Medical and dental expenses

Deductions Itemized deductions: Taxes you paid
Real Estate Property Taxes (home or land) Personal Property Taxes State, Local, and Foreign Income Taxes State and Local Sales Taxes (instead of state and local income taxes) Copyright ©Houghton Mifflin Company. All rights reserved.

Deductions Itemized deductions: Taxes you paid
Interest Paid on Home Mortgage Loans “Points” Interest Paid on Home-Equity Loans Copyright ©Houghton Mifflin Company. All rights reserved.

Deductions Itemized deductions: Interest you paid
Interest paid on loans used for investments Mortgage insurance premiums on new loans after January 1, 2007 Copyright ©Houghton Mifflin Company. All rights reserved.

Deductions More itemized deductions: Gifts to charity
Casualty and theft losses Copyright ©Houghton Mifflin Company. All rights reserved.

Deductions Miscellaneous deductions in excess of 2% of adjusted gross income Other miscellaneous deductions allowed at 100%: Gambling losses Business expenses for workers with disabilities Copyright ©Houghton Mifflin Company. All rights reserved.

Exemptions Exemption (or Personal Exemption)
Subtract the value of your personal exemptions. Each exemption reduces taxable income by $3400. Copyright ©Houghton Mifflin Company. All rights reserved.

Exemptions Claiming another person as an exemption
What if you are claimed as an exemption? If someone else claims you, you cannot claim yourself. The opposite is also true. Copyright ©Houghton Mifflin Company. All rights reserved.

Tax Liability Determine your preliminary tax liability.
Subtract tax credits for which you qualify. Tax Credit: Dollar-for-dollar decrease in tax liability. Copyright ©Houghton Mifflin Company. All rights reserved.

Tax Credits Hope Scholarship Credit Lifetime Learning Credit
Earned Income Credit Child Tax Credit Child and Dependent Care Credit Retirement Savings Contribution Credit Copyright ©Houghton Mifflin Company. All rights reserved.

Avoid Taxes Through Proper Planning
Practice legal tax avoidance, not tax evasion. Copyright ©Houghton Mifflin Company. All rights reserved.

Avoid Taxes Through Proper Planning
A dollar saved from taxes is really two dollars - or more. Opportunity cost Earning another dollar to replace one given to the IRS Earnings on a dollar not given to the IRS Copyright ©Houghton Mifflin Company. All rights reserved.

Reduce Taxable Income Via Your Employer
Premium only plan Transportation reimbursement plan Copyright ©Houghton Mifflin Company. All rights reserved.

Dependent Care Flexible Spending Account
Flexible Spending Account (or FSA or Expense Reimbursement Account) Copyright ©Houghton Mifflin Company. All rights reserved.

Defined-Contribution Retirement Plan
401(k) Retirement Plan Matching Contributions Copyright ©Houghton Mifflin Company. All rights reserved.

Make Tax-Sheltered Investments.
Tax-Sheltered Investments: Investments that yield returns that are tax advantaged. Copyright ©Houghton Mifflin Company. All rights reserved.

Reducing Taxable Income: Other Strategies
Investing with pretax income Tax-deferred investment growth IRA Roth IRA Copyright ©Houghton Mifflin Company. All rights reserved.

Top 3 Financial Missteps in Managing Income Taxes
People slip up in building and maintaining good credit when they do the following: Turn all you income tax planning over to someone else. Overwithhold too much income to receive a refund next year. Ignore the impact of income taxes in you personal financial planning. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Managing Income Taxes
Reduce you income taxes by signing up for tax-advantaged employee benefits at your workplace. Contribute to you employer-sponsored 401(k) retirement plan at least up to the amount of the employer’s matching contribution. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Managing Income Taxes
Buy a home to reduce income taxes. Do your own tax return so you can learn how to reduce your income tax liability. Maintain good tax records. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 5: Managing Checking Savings Accounts PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives List and define the tools of monetary asset management and identify the types of financial services firms that provide those tools. Earn interest and pay no or low fees on your checking accounts. Make the best use of the benefits of savings accounts. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Explain the importance of placing excess funds in a money market account. Describe electronic money management, including your legal protections. Discuss your personal finances and money management more effectively with loved ones. Copyright ©Houghton Mifflin Company. All rights reserved.

Monetary Asset Management
What is monetary asset management? Monetary assets = Cash Copyright ©Houghton Mifflin Company. All rights reserved.

The Three Tools of Monetary Asset Management: Low-cost, interest-earning checking accounts Interest-earning savings accounts Money market accounts Copyright ©Houghton Mifflin Company. All rights reserved.

Who provides monetary asset management services? Financial Services Industry: Companies that provide monetary asset management and other services. Copyright ©Houghton Mifflin Company. All rights reserved.

Depository Institutions
Commercial Banks Insured by Bank Insurance Fund (or BIF) of the FDIC Savings Banks (or S&Ls) Insured by Savings Association Insurance Fund (or SAIF) of the FDIC Copyright ©Houghton Mifflin Company. All rights reserved.

Depository Institutions
Mutual Savings Banks (or MSB) Credit Union (or CU) Insured by the National Credit Union Share Insurance Fund (or NCUSIF) Copyright ©Houghton Mifflin Company. All rights reserved.

Deposit Insurance Deposit Insurance is a real plus.
The maximum insurance on all single-ownership (individual) accounts (held in you name only) is $100,000. The maximum insurance on all joint accounts (accounts held with other individuals) is $100,000. Copyright ©Houghton Mifflin Company. All rights reserved.

Deposit Insurance The maximum insurance on all retirement accounts is $200,000. A maximum of $100,000 in insurance per beneficiary is payable on “death accounts”. Copyright ©Houghton Mifflin Company. All rights reserved.

Other Financial Service Providers
Mutual Funds Stock Brokerage Firms Insurance Companies Copyright ©Houghton Mifflin Company. All rights reserved.

Tool #1: Interest-Earning Checking Accounts
Debit (or Check) Card Copyright ©Houghton Mifflin Company. All rights reserved.

Tool #1: Interest-Earning Checking Accounts
Types of checking accounts: Interest-Earning Checking Account [or Negotiable Order of Withdrawal (NOW) Account] Tiered Interest Lifeline Banking Account Copyright ©Houghton Mifflin Company. All rights reserved.

When You Write a Check Cleared Substitute Check Stop-Payment Order

Payment Instruments for Special Needs
Traveler’s Checks Money Orders Certified Check Cashier’s Check Copyright ©Houghton Mifflin Company. All rights reserved.

Endorse Your Checks Properly
Bank Endorsement Special Endorsement Restrictive Endorsement Copyright ©Houghton Mifflin Company. All rights reserved.

Protect Yourself from Bad Check Fees
Automatic Funds Transfer Agreement Automatic Overdraft Loan Agreement Bounce Protection Agreement Copyright ©Houghton Mifflin Company. All rights reserved.

Tool #2: Savings Accounts
Time Deposits Copyright ©Houghton Mifflin Company. All rights reserved.

How to save: “Pay Yourself First” Saving is not glamorous; slow and steady wins the race! Emergency fund Other savings goals can be broken down into short-term goals and monthly savings amounts. Copyright ©Houghton Mifflin Company. All rights reserved.

Savings Account Interest
Amount of Money on Deposit Method of Determining the Balance Interest Rate Applied Annual Percentage Yield (APY) Copyright ©Houghton Mifflin Company. All rights reserved.

Savings Account Interest
Frequency of compounding Grace Period Copyright ©Houghton Mifflin Company. All rights reserved.

Tax Consequences of Saving for Children’s College
Put money in a Section 529 college savings plan. Put money in a Coverdell Education Savings Account (ESA). Put money for college in a custodial account. Put money in a Roth IRA. Copyright ©Houghton Mifflin Company. All rights reserved.

Tool #3: Money Market Accounts
Super NOW Accounts Money market deposit accounts Money market mutual funds Copyright ©Houghton Mifflin Company. All rights reserved.

Asset Management Accounts
Central Asset Account (or AMA) Sweeps Copyright ©Houghton Mifflin Company. All rights reserved.

How Ownership of Accounts Is Established
Individual Account Payable at Death Designation Joint Account Copyright ©Houghton Mifflin Company. All rights reserved.

How Ownership of Accounts Is Established
Joint Tenancy with Right of Survivorship Tenancy in Common Tenancy by the Entirety Copyright ©Houghton Mifflin Company. All rights reserved.

Electronic Money Management
Electronic Funds Transfers (or EFTs) ATM Transaction Fee: Payments levied each time an ATM is used. Copyright ©Houghton Mifflin Company. All rights reserved.

Consumer Protection Regulations
Electronic Funds Transfer Act Disclosure Statement Periodic Statements Fixing errors Protection for lost cards Copyright ©Houghton Mifflin Company. All rights reserved.

The Psychology of Money Management
Managing money and making financial decisions are different. People ascribe strong emotions to money. Copyright ©Houghton Mifflin Company. All rights reserved.

How to Talk About Financial Matters
Get to Know Yourself Focus on Commonalties Learn to Manage Financial Disagreements Use Positive “I” Statements Be Honest and Talk Regularly Copyright ©Houghton Mifflin Company. All rights reserved.

How To Develop Money Sense in Children
Give an Allowance Encourage Work Teach Them to Make Good Choices through Increasingly Complex Activities Talk About Family Finances with Children Be a Role Model Copyright ©Houghton Mifflin Company. All rights reserved.

Top 3 Financial Missteps in Managing Checking and Savings Accounts
People slip up in building and maintaining good credit when they do the following: Paying high fees unnecessarily. Keeping most of your excess funds in you checking account where it earns you very little interest. Failing to reconcile your accounts on a regular basis. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Managing Checking and Savings Accounts
Use a free, interest-earning checking account for your day-to-day spending needs. Use high-interest savings accounts for funds you will not need for six months to about five years in the future. Use investments for needs that will not occur until five or more years in the future. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Managing Checking and Savings Accounts
Maintain an emergency fund sufficient to cover three months of expenses. Buy certificates of deposit when saved funds will not be needed until a specific future date. Reconcile your account statements monthly. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 6: Building and Maintaining Good Credit PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Explain reasons for and against using credit.
Establish your own debt limit. Achieve a good credit reputation. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Describe common sources of consumer credit.
Identify signs of overindebtedness and describe options available for debt relief. Copyright ©Houghton Mifflin Company. All rights reserved.

Reasons For and Against Using Credit
Good uses of credit include emergencies, reservations, convenience, owning expensive items sooner, etc. Copyright ©Houghton Mifflin Company. All rights reserved.

Reasons For and Against Using Credit
The downside of credit: Use of credit reduces financial flexibility It Is tempting to overspend Interest is costly Interest, Finance Charge, Annual Percentage Rate (or APR) Copyright ©Houghton Mifflin Company. All rights reserved.

Setting Debt Limits You should set your own debt limit.
Debt payments-to-disposable income method Use debt payments-to-disposable income ratio. Copyright ©Houghton Mifflin Company. All rights reserved.

Setting Debt Limits Ratio of debt-to-equity method
Debt-to-Equity Ratio: Ratio of your consumer debt to your assets. Equity: Amount by which the value of a person’s assets exceeds debts. Copyright ©Houghton Mifflin Company. All rights reserved.

Setting Debt Limits Continuous-Debt Method: If you are unable to get completely out of debt every four years, you probably lean on debt too heavily. Dual-earner households should consider a lower debt limit. Copyright ©Houghton Mifflin Company. All rights reserved.

Managing Student Loan Debt
Choose the most advantageous repayment pattern allowed. Pay electronically. Make your repayments on time, every time. Consolidate your student loans. Copyright ©Houghton Mifflin Company. All rights reserved.

Credit Approval Process
You apply for credit. Credit Application Credit History The lender conducts a credit investigation. Credit Rating Credit Report Credit Bureau Credit Scoring (or Risk Scoring) System Copyright ©Houghton Mifflin Company. All rights reserved.

Credit Approval Process
The lender decides whether to accept the application. Credit Agreement Promissory Note Tiered Pricing Copyright ©Houghton Mifflin Company. All rights reserved.

Unfair Credit Discrimination is Unlawful
Equal Credit Opportunity Act (ECOA) Unfair discrimination is illegal. Copyright ©Houghton Mifflin Company. All rights reserved.

Making Sense of Your FICO Credit Scores
Payment History: 35% Amounts Owed: 30% Length of Credit History: 15% Taking on More Debt: 10% Types of Credit Used: 10% Copyright ©Houghton Mifflin Company. All rights reserved.

Your Credit Reputation
Building a credit history: Establish both a checking account and a savings account. Have your telephone and other utilities billed in your name. Request, acquire, and use an oil-company credit card. Copyright ©Houghton Mifflin Company. All rights reserved.

Sources of Consumer Loans
Depository institutions loan money to their banking customers. Sales finance companies loan money to buy consumer products. Consumer finance companies make small cash loans. Copyright ©Houghton Mifflin Company. All rights reserved.

Sources of Consumer Loans
Stockbrokers loan money to their clients. Insurance companies loan money to their policyholders. Copyright ©Houghton Mifflin Company. All rights reserved.

Alternative Lenders Payday lenders Rent-to-own program Pawnshop

10 Signs of Overindebtedness
Exceeding debt limits and credit limits Not knowing how much you owe Running out of money Paying only the minimum amount due Copyright ©Houghton Mifflin Company. All rights reserved.

Debt Collection Federal law regulates debt collection practices.
Federal Fair Debt Collection Practices Act (FDCPA) Debt collection agencies Copyright ©Houghton Mifflin Company. All rights reserved.

Steps to Take to Get Out from Under Excessive Debt
Determine your account balances and the payments required. Focus your budget on debt reduction. Contact your creditors. Copyright ©Houghton Mifflin Company. All rights reserved.

Steps to Take to Get Out from Under Excessive Debt
Take on no new credit. Refinance. Avoid bad help. Find good help. Copyright ©Houghton Mifflin Company. All rights reserved.

Bankruptcy Bankruptcy is a last resort. Discharged debts

The Top 3 Financial Missteps in Building and Maintaining Good Credit
People slip up in building and maintaining good credit when they do the following: Make late payments on credit cards. Pay more than 15 percent of disposable income toward nonmortgage debt payments. Fail to regularly check the accuracy of credit bureau files. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Building and Maintaining Good Credit
Protect your credit reputation just as you would guard your personal reputation. Calculate your own debt limits before taking on any credit. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Building and Maintaining Good Credit
Obtain copies of your credit bureau reports regularly, and challenge all errors or omissions on them. Never cosign a loan for anyone, including relatives. Always repay your debts in a timely manner. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 7: Credit Cards and Consumer Loans PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Compare the common types of consumer credit, including credit cards and installment loans. Describe the types and features of credit card accounts. Manage your credit card accounts to avoid fees and finance charges. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Describe the important features of consumer installment loans. Calculate the interest and annual percentage rate on consumer loans. Copyright ©Houghton Mifflin Company. All rights reserved.

Types of Consumer Credit
Installment credit (or closed-end credit) Noninstallment credit Open-ended credit (or revolving credit) Credit limit Credit (or charge) card Copyright ©Houghton Mifflin Company. All rights reserved.

Types of Consumer Credit
Cash advances Personal line of credit Home-equity line of credit Service credit Copyright ©Houghton Mifflin Company. All rights reserved.

Credit Card Accounts Minimum payment Principal Default

Types of Credit Card Accounts
Bank credit cards Cash advance (or convenience) checks Balance transfer Prestige card Affinity cards Copyright ©Houghton Mifflin Company. All rights reserved.

Types of Credit Card Accounts
Retail credit card accounts Retail Credit Card: Allows customers to make purchases on credit at any of the outlets of a particular retailer. Travel and Entertainment (T&E) cards Copyright ©Houghton Mifflin Company. All rights reserved.

Aspects of Credit Card Accounts
Teaser Rate: A temporarily low introductory rate to entice borrowers to apply for a credit card. Default rates Universal default Variable interest rates, variable interest rate cards Copyright ©Houghton Mifflin Company. All rights reserved.

Preapproved credit card offers Annual and Transaction Fees Transaction fee: A small charge levied each time a card is used. Liability for lost or stolen cards Copyright ©Houghton Mifflin Company. All rights reserved.

Managing Credit Cards Wisely
Credit (or periodic) statement Billing (or closing or statement) date Due date: The specific day by which the credit card company should receive payment from you. Copyright ©Houghton Mifflin Company. All rights reserved.

Transaction date: The day on which a credit cardholder makes a purchase. Posting date: The day the credit card company is informed of the transaction and the charge is posted to the account. Copyright ©Houghton Mifflin Company. All rights reserved.

Grace period: Time period between the posting date of a transaction and the payment due date during which no interest accrues. Minimum payment amount: Lowest allowable monthly payment required by the lender. Copyright ©Houghton Mifflin Company. All rights reserved.

Credit for merchandise returns and errors Credit receipt: Written evidence of any items returned that notes the specific amount and date of the transaction. Copyright ©Houghton Mifflin Company. All rights reserved.

How Credit Card Balances Are Calculated
Understand consumer installment loans. Cash Loan Purchase Loan (or Sales Credit) Copyright ©Houghton Mifflin Company. All rights reserved.

Installments Loans Installment loans can be unsecured or secured.
Unsecured Loan (or Signature Loan) Secured Loan Cosigner Collateral Acceleration Clause Copyright ©Houghton Mifflin Company. All rights reserved.

Purchase Loan Installment Contracts
Installment purchase agreements (or collateral installment loans) Conditional sales contracts (or financing leases) Copyright ©Houghton Mifflin Company. All rights reserved.

Calculating Interest on Consumer Loans
Truth in Lending Act (or TIL) Copyright ©Houghton Mifflin Company. All rights reserved.

Calculating an Installment Loan Payment
Use Table 7.1 in the text for the interest rate and time of the loan amount involved. Variable-rate (or adjustable-rate) loans Copyright ©Houghton Mifflin Company. All rights reserved.

The Declining-Balance Method
Periodic Interest Rate: The monthly rate applied to the outstanding balance of the loan. Amortization Copyright ©Houghton Mifflin Company. All rights reserved.

Other Methods Add-On Interest Method
Rule of 78s (or Sum of the Digits) method for calculating prepayment penalties Discount method of calculating interest Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps with Credit Cards and Consumer Loans
People slip up in building and maintaining good credit when they do the following: Fail to shop for the lowest APR on their credit cards and consumer loans. Pay more than 15 percent of disposable income toward nonmortgage debt payments. Fail to regularly check the accuracy of credit bureau files. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Credit Cards and Consumer Loans
Move credit card balances to lower-cost accounts, if necessary. Never make convenience purchases on bank credit cards on which you carry a balance. Pay your credit card balances in full each month, or no longer than two or three months later. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Credit Cards and Consumer Loans
Check your monthly billing statements against your receipts for accuracy, and challenge discrepancies. Use student loans for direct education expenses only rather than to maintain a better lifestyle. Select installment loans that have a low annual percentage rate. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 8: Vehicle and Other Major Purchases PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Explain the three steps in the planned buying process that occur prior to interacting with sellers. Describe the five aspects of major purchases that require comparison shopping. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Negotiate and decide effective when making major purchases. Evaluate your purchase decisions and, if necessary, effectively seek redress. Copyright ©Houghton Mifflin Company. All rights reserved.

Do Your Homework What do you really want? Need Want Impulse Buying
Generic Products Copyright ©Houghton Mifflin Company. All rights reserved.

How To Buy Smart Become an expert
Preshopping Research: Gathering information before actually beginning to interact with sellers. Copyright ©Houghton Mifflin Company. All rights reserved.

How To Buy Smart What price should you expect to pay?
Manufacturer’s Suggested Retail Price (or MSRP): The suggested initial asking price. Dealer Sticker Price: Includes additional charges tacked on by the dealer. Copyright ©Houghton Mifflin Company. All rights reserved.

How To Buy Smart What is a fair interest rate? Loan preapproval

How To Buy Smart Is a rebate available?
Rebate: A partial refund of a purchase price offered as an inducement to buy. Copyright ©Houghton Mifflin Company. All rights reserved.

How To Buy Smart What is my trade-in worth? Can I afford it?

How To Buy Smart Use comparison shopping to find the best buy.
Compare prices. Copyright ©Houghton Mifflin Company. All rights reserved.

How To Buy Smart Compare financing options.
Consider leasing instead of buying. Leasing: Renting a product while the ownership title remains with the lease grantor. Copyright ©Houghton Mifflin Company. All rights reserved.

Leasing Terminology Open-end lease
Closed-end lease (or walkaway lease) Copyright ©Houghton Mifflin Company. All rights reserved.

Leasing Terminology Additional leasing fees: Disposition fee
Early termination charge Early termination payoff See comments on prior slide. ALSO: 2 terms appear on p218 but not here (“early termination payoff” and “balloon automobile loan”) – add the first on this slide and the second on its own slide? Copyright ©Houghton Mifflin Company. All rights reserved.

Compare Warranties Warranty Implied Warranty Express Warranties
Full Warranty Extended warranties are overpriced! Copyright ©Houghton Mifflin Company. All rights reserved.

Negotiation Negotiating (or haggling)
Negotiate effectively and decide at home. Successful negotiators are armed with information. Copyright ©Houghton Mifflin Company. All rights reserved.

Negotiation Negotiate your price. New-Vehicle Buying Service
Professional Shoppers Invoice Price (or Seller’s Cost) Dealer Holdback (or Dealer Rebate) Copyright ©Houghton Mifflin Company. All rights reserved.

Negotiation Negotiate your interest rate.
Get a firm price for the vehicle. Negotiate the lowest possible APR through the dealer. Borrow elsewhere if the rate is lower. Obtain a firm commitment on a trade-in allowance. Sell the vehicle yourself if the allowance is too low. Copyright ©Houghton Mifflin Company. All rights reserved.

Negotiation Negotiate your trade-in. High-Balling

Make the Decision Finalizing a car deal. Low-balling Buyer’s order

Evaluate Your Decision
Redress Alternative Dispute Resolution Programs Mediation Lemon Laws Small-Claims Court Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps In Big-Ticket Purchases
People slip up in when they do the following: 1. Rely upon the seller as their source of information for price, financial terms, and trade-in value. 2. Tell a seller what they can afford to pay so the seller can avoid disclosing his or her lowest price. 3. Don’t complain when products fail to perform as expected. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Vehicle and Other Major Purchases
Think through all of your major purchases using the planned buying process. When planning to buy vehicles, check repair ratings history in the April issue of Consumer Reports magazine. Copyright ©Houghton Mifflin Company. All rights reserved.

Purchase late-model, high-quality used vehicles and check their ownership history at and recall history at Obtain price information from at least three sources and aggressively negotiate prices and financing terms for major purchases. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 9: Buying Your Home PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Decide whether rented or owned housing is better both financially and personally. Explain the up-front and monthly costs of buying a home. Describe the steps in the home-buying process. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Distinguish among the conventional and alternative ways of financing a home and list the advantages and disadvantages of each. Identify the important aspects of selling a home. Copyright ©Houghton Mifflin Company. All rights reserved.

Rented Housing Rent, deposit, and related expenses
Rent: Cost charged for using an apartment or other housing space. Security Deposit: Ensures that you do not move without paying your rent. Copyright ©Houghton Mifflin Company. All rights reserved.

Rented Housing Lease agreement and restrictions
Lease: Contract specifying both tenant and landlord legal responsibilities. Periodic Tenancy: Lease agreement can be terminated by either party if they give proper notice in advance. Copyright ©Houghton Mifflin Company. All rights reserved.

Rented Housing Lease agreement and restrictions
Tenancy for a Specific Time Subleasing Add items from bulleted list on text p233? ALSO, do you want to add a slide with info from box on p232? Copyright ©Houghton Mifflin Company. All rights reserved.

Owned Housing Condominiums and cooperatives
Condominium (or Condo) Homeowner’s Association Homeowner’s fee Manufactured housing and mobile homes Copyright ©Houghton Mifflin Company. All rights reserved.

Renting vs. Buying Who pays more: Renters or Owners?
What does it cost to buy a home? Consider the tax consequences of buying your home. Copyright ©Houghton Mifflin Company. All rights reserved.

Up-Front Costs Most up-front costs are due at the closing.
Closing costs Down Payment: Portion of the purchase price that is not borrowed. Copyright ©Houghton Mifflin Company. All rights reserved.

Up-Front Costs Point (or Interest Point): Fee equal to 1 percent of the total mortgage loan amount. Attorney fees Title search and insurance Miscellaneous fees: Home inspection, appraisal fee, etc. Copyright ©Houghton Mifflin Company. All rights reserved.

Monthly Costs Monthly costs include both principal and interest.
Mortgage principal and interest. PITI Copyright ©Houghton Mifflin Company. All rights reserved.

Monthly Costs Loan-to-Value (or LTV) Ratio Mortgage Insurance
Private mortgage insurance (or PMI) Federal Housing Administration (FHA) Department of Veterans Affairs (VA) Home warranty insurance Copyright ©Houghton Mifflin Company. All rights reserved.

Misc. Fees Some fees are paid both up-front and then monthly
Taxes (T) and Insurance (I) Escrow account Real estate property taxes Homeowner’s insurance Copyright ©Houghton Mifflin Company. All rights reserved.

The Steps of Home Buying
Get your finances in order. Prequalify for a mortgage. Front-end ratio Back-end ratio Mortgage broker: Individual or company that acts as an intermediary between borrowers and lenders. Copyright ©Houghton Mifflin Company. All rights reserved.

Search for a home online and in person. Agree to terms with the seller. Make an offer to buy. Purchase offer (or offer to purchase): Written offer to purchase real estate. Copyright ©Houghton Mifflin Company. All rights reserved.

Prepare for the closing. Hire your own inspector. Hire an attorney. Sign your name on closing day. Uniform Settlement Statement: Lists all of the costs and fees to be paid at the closing. Copyright ©Houghton Mifflin Company. All rights reserved.

Financing a Home Items to consider: The amount borrowed
The mathematics of mortgage loans Lien Foreclosure Principal Amortization schedule The amount borrowed The interest rate Length and maturity of the loan Copyright ©Houghton Mifflin Company. All rights reserved.

Financing a Home The conventional mortgage loan
The adjustable-rate mortgage loan Teaser Rate Payment Caps Negative Amortization Copyright ©Houghton Mifflin Company. All rights reserved.

Financing a Home Alternative mortgage loans Interest-only mortgage
Graduated-payment mortgage Lender buy-down mortgage Rollover (renegotiable-rate) mortgage Growing-equity mortgage Assumable mortgage Land contract (contract for deed) Reverse mortgage (or home-equity conversion loan) Copyright ©Houghton Mifflin Company. All rights reserved.

Selling a Home Should you list with a broker or sell a home yourself?
Fizbo: For sale by owner (FSBO) Selling carries its own costs Brokers Commission Prepayment Fee Be wary of seller financing! Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps When Buying Housing
People slip up in when they do the following: 1. Fail to search for and negotiate for the lowest mortgage interest rate possible. 2. Fail to request that private mortgage insurance be canceled when their loan-to-value ratio drops to 80 percent. Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps When Buying Housing
People slip up in when they do the following: 3. Pay off a mortgage early when carrying credit card debt or not saving regularly through a qualified tax- sheltered retirement plan. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Buying Your Home
Read your leases and all other real estate contracts before signing. Save the funds for a down payment in a tax-sheltered Roth IRA account. Copyright ©Houghton Mifflin Company. All rights reserved.

Get your finances in order before shopping for a new home by reducing debt, budgeting better, and clearing up anything that keeps you from having a high credit score. Copyright ©Houghton Mifflin Company. All rights reserved.

Buy a home as soon as it fits your budget and lifestyle so you can take advantage of special income tax deductions and the likelihood of substantial price appreciation over time. Copyright ©Houghton Mifflin Company. All rights reserved.

If you make a down payment of less than 20 percent on a home, cancel private mortgage insurance as soon as the equity in your home pushes the loan-to-value ratio to 80 percent. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 10: Managing Property and Liability Risk PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Apply the risk-management process to address the risks to your property and income. Explain basic insurance terms and the relationship between risk and insurance. Design a homeowner’s or renter’s insurance program to meet your needs. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Design an automobile insurance program to meet your needs. Describe other types of property and liability insurance. Summarize how to make an insurance claim. Copyright ©Houghton Mifflin Company. All rights reserved.

Introduction Property Insurance Liability Insurance

Risk and Risk Management
What is the nature of risk? Speculative risk Pure risk Copyright ©Houghton Mifflin Company. All rights reserved.

The Risk-Management Process
Step 1: Identify sources of risk. Peril: Event that can cause a financial loss Step 2: Estimate risk and potential losses. Loss frequency Loss severity Copyright ©Houghton Mifflin Company. All rights reserved.

Step 4: Implement the risk-management program. Large-Loss Principle: Insure the losses that you cannot afford, pay the small losses out of your own pocket. Step 5: Evaluate and adjust the program. Copyright ©Houghton Mifflin Company. All rights reserved.

Understanding How Insurance Works
Premium Insurance Policy Copyright ©Houghton Mifflin Company. All rights reserved.

Hazards make losses more likely to occur. Hazard: Any condition that increases the probability that a peril will occur. Only certain losses are insurable. Fortuitous losses Financial loss Copyright ©Houghton Mifflin Company. All rights reserved.

Homeowner’s Insurance
Coverages Property insurance Named-perils policies All-risk (open-perils) policies Copyright ©Houghton Mifflin Company. All rights reserved.

Homeowner’s Insurance
Liability insurance Homeowner’s general liability protection Homeowner’s no-fault medical payments protection Homeowner’s no-fault property damage protection Copyright ©Houghton Mifflin Company. All rights reserved.

Types of Homeowner’s Insurance Policies
Basic Form (HO-1) Broad Form (HO-2) Special Form (HO-3) Renter’s Contents Broad Form (HO-4) Condominium Form (HO-6) Older Home Form (HO-8) Copyright ©Houghton Mifflin Company. All rights reserved.

Buying Homeowner’s Insurance
How much coverage is needed on your dwelling? Replacement-cost requirement How much coverage is needed on your personal property? Actual cash value (of personal property) Contents replacement-cost protection Copyright ©Houghton Mifflin Company. All rights reserved.

Automobile Insurance – Losses Covered
Coverage A: Liability insurance Automobile Bodily Injury Liability Automobile Property Damage Liability Family Auto Policy (FAP) Personal Auto Policies (PAP) Copyright ©Houghton Mifflin Company. All rights reserved.

Protection for Other Property and Liability Loss Exposures
Comprehensive personal liability insurance Professional liability insurance Professional liability insurance (or malpractice insurance) Umbrella (or excess) liability insurance Floater Policies Copyright ©Houghton Mifflin Company. All rights reserved.

How to Collect on Your Property and Liability Losses
Contact your insurance agents. Document your loss. File your claim. Claim adjuster Sign a release. Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps In Managing Property and Liability Risk
People slip up in when they do the following: 1. Buy only the legal minimum coverage on the liability insurance on their car. 2. Fail to keep good records that could serve to document insured property losses. 3. Pay high premiums because they select low deductibles on property insurance. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Managing Property and Liability Risk
Always insure your home and vehicle. Purchase insurance policies with very high liability limits to protect against the possibility of catastrophic losses. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in managing Property and Liability Risk
Verify that your auto insurance policy covers rental car losses so you can wisely ignore sales pressure to purchase such overpriced coverage. Always comparison shop for insurance locally as well as online. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in managing Property and Liability Risk
Maintain a verifiable inventory of all your insured property so that you can collect what is coming to you in the event of a loss. Once each year, reassess what types of and how much insurance coverage you need. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 11: Managing Health Expense PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Identify ways that people can manage the financial burdens resulting from illness or injury. Distinguish among the types of protection for direct medical expenses. Describe the general benefits and limitations of medical care plans. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Explain how to protect yourself from the expenses for long-term care. Develop a plan for protecting your income when you cannot work due to disability. Copyright ©Houghton Mifflin Company. All rights reserved.

Addressing the Financial Burdens of Illness or Injury
Group Health Plan Covering Your Direct Medical Care Costs Medicaid, Medicare Covering Your Rehabilitative and Custodial Care Costs Long-term care insurance Covering Your Lost Income Social Security disability income insurance Copyright ©Houghton Mifflin Company. All rights reserved.

Sources of Protection from Direct Medical Care Costs
Medical Care Plan Health Maintenance Organizations HMOs, Managed Care Plans Primary-Care Physician Individual Practice Organization Copyright ©Houghton Mifflin Company. All rights reserved.

Making Changes in Your Group Plan
Changes to your group plan can be made during the open-enrollment period. Copyright ©Houghton Mifflin Company. All rights reserved.

Traditional Health Insurance
Comprehensive Health Insurance Indemnity Plan Preferred Provider Organization Copyright ©Houghton Mifflin Company. All rights reserved.

Consumer-Driven Health Care
High-Deductible Health Care Plan Health Savings Account (or HAS) Heath Reimbursement Account (or HRA) Copyright ©Houghton Mifflin Company. All rights reserved.

Making Sense of Your Medical Plan Benefits
Certificate of Insurance: Paper or booklet that outlines group health insurance benefits. Copyright ©Houghton Mifflin Company. All rights reserved.

What Types of Care Are Covered?
Dental expense insurance Vision care insurance Preexisting conditions Copyright ©Houghton Mifflin Company. All rights reserved.

Who Is Covered When does coverage begin and end?
Optionally renewable policies Guaranteed renewable policies Noncancelable policies Copyright ©Houghton Mifflin Company. All rights reserved.

How Much Must Your Pay Out of Your Own Pocket?
Deductibles Copayments Coinsurance Copyright ©Houghton Mifflin Company. All rights reserved.

Policy Limits Item limits Episode limits Annual limits
Lifetime or aggregate limit Copyright ©Houghton Mifflin Company. All rights reserved.

Coordination of Benefits
Maintain your medical care plan between jobs. COBRA rights Portability option Copyright ©Houghton Mifflin Company. All rights reserved.

Planning for Long-Term Care
The degree of impairment required for benefits to begin Activities of Daily Living (ADLs) The level of care covered Skilled nursing care Intermediate care Custodial care Copyright ©Houghton Mifflin Company. All rights reserved.

Planning for Long-Term Care
The person’s age The benefit amount The benefit period The waiting period Inflation protection Copyright ©Houghton Mifflin Company. All rights reserved.

Protecting Your Income During Disability
Disability income insurance Social Security disability insurance Copyright ©Houghton Mifflin Company. All rights reserved.

Protecting Your Income During Disability
Level of need Important disability income insurance policy provisions: Waiting period (or elimination period) Benefit period Degree of disability Split-definition policies Residual clause of disability income policy Social Security rider Cost-of-living adjustments Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps In Managing Health Expenses
People slip up in when they do the following: 1. Going unprotected for health care when changing jobs. 2. Duplicating employer-provided health care protection with your spouses. 3. Ignoring the need for protection of income during a period of disability. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Managing Health Expenses
Always maintain coverage for direct health care expenses. When changing employers, consider continuing your medical care plan coverage using rights established through the COBRA law. Copyright ©Houghton Mifflin Company. All rights reserved.

Working people should sign up for a n employer-sponsored premium conversion plan and a flexible spending account for health care spending when available, to save money on taxes. Copyright ©Houghton Mifflin Company. All rights reserved.

If you are a frequent user of health care, reduce spending on deductibles and coinsurance by choosing an HMO or PPO. Take advantage of employer-sponsored long-term disability income insurance or consider purchasing protection individually. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 12: Life Insurance Planning PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Understand the reasons why you might need life insurance and calculate the appropriate amount of coverage. Distinguish among the types of life insurance. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Explain the major provisions of life insurance policies. Apply a step-by-step strategy for implementing a life insurance plan. Copyright ©Houghton Mifflin Company. All rights reserved.

Introduction Risk of dying too soon Risk of living too long

How Much Life Insurance Do You Need?
The primary reason for buying life insurance is to allow the family members of the deceased to continue with their lives free from the financial burdens that death can bring. Beneficiary: The person named in the policy to receive the funds. Copyright ©Houghton Mifflin Company. All rights reserved.

What Needs Must Be Met? Final expenses: One-time expenses occurring just prior to or after a death. Income-replacement needs Readjustment-period needs Copyright ©Houghton Mifflin Company. All rights reserved.

What Needs Must Be Met? Debt-repayment needs College expense needs
Other special needs Copyright ©Houghton Mifflin Company. All rights reserved.

What Needs Must Be Met? Government benefits can reduce the level of need. Social Security survivor’s benefits Social Security blackout period Existing insurance and assets reduce the level of need. Copyright ©Houghton Mifflin Company. All rights reserved.

What Dollar Amount Do You Need?
The Multiple-of-Earnings Approach: easy but flawed. The Needs-Based Approach: a better method Copyright ©Houghton Mifflin Company. All rights reserved.

Two Basic Types of Life Insurance
Term Life Insurance (or Pure Protection) Face amount Cash-Value Life Insurance Cash-Value: Represents the value of the investment element in the life insurance policy. Copyright ©Houghton Mifflin Company. All rights reserved.

Term Life Insurance Guaranteed Renewable Term Insurance
Protects you against the possibility of becoming uninsurable. Level-Premium Term Insurance Reenter Provision Copyright ©Houghton Mifflin Company. All rights reserved.

Term Life Insurance Decreasing Term Insurance
Convertible Term Insurance Group Term Life Insurance Credit Term Life Insurance Copyright ©Houghton Mifflin Company. All rights reserved.

Cash-Value Life Insurance
Some forms of cash-value life insurance pay a fixed return: Cash-Value Life Permanent Insurance Whole (or Straight) Life Insurance Limited-Pay Whole Life Insurance Adjustable Life Insurance Modified Life Insurance Endowment Life Insurance Copyright ©Houghton Mifflin Company. All rights reserved.

Cash-Value Life Insurance
Some forms of cash-value life insurance pay a variable return: Universal life insurance Variable life insurance Variable-Universal (or Flexible-Premium) life insurance Don’t be fooled by vanishing-premium or return-of-premium policies. Copyright ©Houghton Mifflin Company. All rights reserved.

Understanding Your Life Insurance Policy
Owner (or Policyholder) Insured Contingent Beneficiary Copyright ©Houghton Mifflin Company. All rights reserved.

Policy Terms and Provisions Unique to Life Insurance
Life Insurance Application: The policyholder’s offer to purchase a policy. Lives Covered First-to-Die Policies: Cover more than one person but pay only when the first insured dies. Survivorship Joint Life Policy: Pays when the last person covered dies. Copyright ©Houghton Mifflin Company. All rights reserved.

Death Benefit: Amount that will be paid to beneficiary when the insured dies. Grace Period Lapsed policy Multiple Indemnity Multiple Indemnity Clause Copyright ©Houghton Mifflin Company. All rights reserved.

Settlement Options Lump sum Interest income
Income of a specific amount Income for a specific period Income for life Copyright ©Houghton Mifflin Company. All rights reserved.

Policy Features Unique to Cash-Value Life Insurance
The Policy Illustration Guaranteed Minimum Rate of Return Current Rate Nonforfeiture Values Cash-Surrender Value Copyright ©Houghton Mifflin Company. All rights reserved.

Policy Features Unique to Cash-Value Life Insurance
Policy loans Automatic Premium Loan Living Benefit Clause Viatical Companies Waiver of premium Guaranteed Insurability (or Guaranteed Purchase Option) Copyright ©Houghton Mifflin Company. All rights reserved.

Step-by-Step Strategy for Buying Life Insurance
First ask whether or not, and for how much, your life should be insured. Then properly integrate your life insurance into your overall financial planning. Buy term and invest the rest. Layering term insurance policies Before my rewrite, #6 was completely different than on p 326. Copyright ©Houghton Mifflin Company. All rights reserved.

Where and How to Buy Your Life Insurance
You can easily buy life insurance online. Premium Quote Service: Offers computer-generated comparisons among 20 to 80 different companies. Or you can use a local insurance agent. Before my rewrite, #6 was completely different than on p 326. Copyright ©Houghton Mifflin Company. All rights reserved.

Where and How to Buy Your Life Insurance
Compare costs among policies Net Cost Method Interest-Adjusted Cost Index Method Interest-Adjusted Net Payment Index Method Before my rewrite, #6 was completely different than on p 326. Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps in Life Insurance Planning
People slip up in when they do the following: 1. Let their life insurance agent convince them how much and what type to buy. 2. Buy their life insurance during their childbearing years through cash-value life insurance. 3. Ignore their changing need for life insurance as their life progresses. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Life Insurance Planning
Calculate your life insurance needs every three years or when major life events occur, such as the birth of a child. Avoid being talked into buying types and amounts of life insurance that you do not need. Copyright ©Houghton Mifflin Company. All rights reserved.

Shop for term life insurance on the internet to obtain the lowest possible rates. Employ the principle of “buy term life insurance and invest the rest” with guaranteed renewable or level-premium term life insurance. Copyright ©Houghton Mifflin Company. All rights reserved.

Contribute the money saved by purchasing term rather than cash-value insurance into your retirement plan. If you decide that you need a cash-value life insurance policy, get one with a guaranteed insurability option. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 13: Investment Fundamentals PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Explain how to get started as an investor.
Discover your own investment philosophy. Identify the kinds of investments that match your interests. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Describe the major factors that affect the rate of return on investments. Decide which of the five long-term investment strategies you will utilize. Create your own investment plan. Copyright ©Houghton Mifflin Company. All rights reserved.

Starting Your Investment Program
Investing is more than saving. Savings Investing Securities Stocks Portfolio Are you ready to invest? Copyright ©Houghton Mifflin Company. All rights reserved.

Your Investment Philosophy
How to handle investment risk Pure risk Speculative risk Investment risk Copyright ©Houghton Mifflin Company. All rights reserved.

What is your Investment Philosophy?
Are you a conservative Investor? Preservation of capital Are you a moderate investor? Risk indifferent Are you an aggressive investor? Risk seeker Copyright ©Houghton Mifflin Company. All rights reserved.

Your Investment Philosophy
Should you take an active or passive investing approach? Copyright ©Houghton Mifflin Company. All rights reserved.

Identify the kinds of investments you want to make.
Do you want to lend or own? Lend = Bonds Debts Fixed maturity Fixed income Equities Choose investments for their components of total return. Copyright ©Houghton Mifflin Company. All rights reserved.

Random and Market Risk Random (or unsystematic) risk Diversification
Systematic (or market or undiversifiable) risk Copyright ©Houghton Mifflin Company. All rights reserved.

Other Types of Investment Risks
Business failure (or financial) fisk Inflation (or purchasing power) risk Time risk Business cycle risk Copyright ©Houghton Mifflin Company. All rights reserved.

Other Types of Investment Risks
Market-volatility risk Liquidity risk Reinvestment risk Marketability risk Copyright ©Houghton Mifflin Company. All rights reserved.

Returns Transaction costs reduce returns
Commissions Leverage may increase returns. Copyright ©Houghton Mifflin Company. All rights reserved.

The Tax Consequences in Investment Fundamentals
After-Tax Return Income Versus Capital Gain Tax-Deferred Investments Tax-Exempt Income Tax-Exempt Investments Copyright ©Houghton Mifflin Company. All rights reserved.

Establish Your Long-Term Investment Strategy
Real Rate of Return Securities Markets Bear Market Bull Market Copyright ©Houghton Mifflin Company. All rights reserved.

Long-term investors understand market timing. They are market timers. Calculate the real rate of return (after taxes and inflation) on investments. Copyright ©Houghton Mifflin Company. All rights reserved.

Strategy 2: Dollar-cost averaging buys at “below-average” costs. Dollar-Cost Averaging (or Cost Averaging) Below-Average Costs Dollar-cost averaging in a fluctuating market Average Share Price Average Share Cost Copyright ©Houghton Mifflin Company. All rights reserved.

Strategy 3: Portfolio diversification reduces portfolio volatility. Strategy 4: Asset allocation keeps you in the right investment categories at the right time. Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps In Investing
People slip up in when they do the following: 1. Invest only money that is left over at the end of the month. 2. Follow a conservative investment philosophy for long-term goals. 3. Fail to regularly rebalance the assets in their portfolio. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Investing Fundamentals
Sacrifice some of your income by investing for your future needs and lifestyle. Start early in life to invest in a diversified portfolio of assets consistent with your investment philosophy. When investing for the long term, willingly accept more risk. Copyright ©Houghton Mifflin Company. All rights reserved.

Invest regularly through your employer’s retirement plan using an asset allocation strategy. Invest no more than 10 percent of your portfolio in your company stock, or any single company stock, for that matter. Copyright ©Houghton Mifflin Company. All rights reserved.

Follow the buy-and-hold long-term approach to investing. Invest in stocks, mutual funds, bonds, and real estate, not life insurance or annuities. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 14: Investing in Stocks and Bonds PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Explain how stocks and bonds are used as investments. Classify common stocks according to their major characteristics. Describe fundamental and numerical ways to evaluate stock values. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Determine whether an investment’s potential rate of return is sufficient. Use the Internet to evaluate common stocks in which to invest. Summarize how stocks are bought and sold. Describe how to invest in bonds. Copyright ©Houghton Mifflin Company. All rights reserved.

Bonds Principal Maturity Date

Dividends and Splits How do stock dividends and stock splits work?

The Major Characteristics of Common Stocks
Match your investment choices using P/E ratio and Beta. Price/Earnings (or P/E) Ratio Trailing P/E Ratio Projected P/E (or Forward P/E) Ratio Earnings Yield Copyright ©Houghton Mifflin Company. All rights reserved.

How to Evaluate Stock Values
Use fundamental analysis to evaluate stocks. Fundamental Analysis Technical Analysis Corporate earnings are most important. Copyright ©Houghton Mifflin Company. All rights reserved.

Numerical Measures to Evaluate Stock Prices
Cash Dividends Dividends Per Share Dividend Payout Ratio Dividend Yield Book Value Book Value Per Share Price-to-Book Ratio Copyright ©Houghton Mifflin Company. All rights reserved.

About Employee Stock Options
An employee stock options is a gift, like a bonus, from an employer to an employee that allows that allows employees to benefit from the appreciation of their employer’s stock without putting any money down. Copyright ©Houghton Mifflin Company. All rights reserved.

Calculating a Stock’s Potential Rate of Return
Alpha Statistic Use beta to estimate the risk of the investment. Estimate the market risk (or systematic risk). Calculate your required rate of return. Copyright ©Houghton Mifflin Company. All rights reserved.

Calculate the Stock’s Potential Rate of Return
Add up projected income and price appreciation. Potential Rate of Return Approximate Compound Yield (or ACY) Compare the required rate of return with the potential rate of return on the investment. Copyright ©Houghton Mifflin Company. All rights reserved.

How To Use the Internet to Evaluate and Select Stocks
Begin by setting criteria for your stock investments. Basic investment information: Fool.com kiplinger.com/personalfinance/ money.cnn.com/pf/indes.html finance.yahoo.com/marketupdate?u Copyright ©Houghton Mifflin Company. All rights reserved.

Stock-Screening Tools: Screen.yahoo.com/stocks.html screen.morningstar.com Security analysts’ research reports Corporate news Annual reports, 10-K reports, prospectus Copyright ©Houghton Mifflin Company. All rights reserved.

Economic data Stock market data (Securities market index) Dow Jones Industrial Average Standard & Poor’s 500 Index NASDAQ Composite Index Russell 3000 Index Wilshire 5000 Index Copyright ©Houghton Mifflin Company. All rights reserved.

Use portfolio tracking to monitor your investments: E*Trade: us.etrade.com/e/t/home MSN Money: moneycentral.msn.com Morningstar: morningstar.com InvestorGuide.com Copyright ©Houghton Mifflin Company. All rights reserved.

How to order stock transactions: The process of trading stocks involves a floor broker and a specialist. Securities prices are either matched or negotiated. Negotiated price: bid Price, ask price, spread Copyright ©Houghton Mifflin Company. All rights reserved.

Types of stock orders (executing an order): Market order Limit order Stop order (or stop-loss order) Time limits: fill-or-kill order, day order, open (or good-till-canceled [GTC]) order Copyright ©Houghton Mifflin Company. All rights reserved.

Margin buying and selling short are risky trading techniques. Margin trading is buying stocks on credit (using a margin account). Margin buying Margin rate Copyright ©Houghton Mifflin Company. All rights reserved.

Investing In Bonds Corporate, U.S. government, and municipal bonds
Bond rating Default (or Credit) risk U.S. government bills, notes, and bonds Copyright ©Houghton Mifflin Company. All rights reserved.

Investing In Bonds Treasury bills (t-bills), notes, and bonds
Discount yield, I-bonds TIPS (or Treasury Inflation-Protected Securities) U.S. Government savings bonds Series EE savings bonds Copyright ©Houghton Mifflin Company. All rights reserved.

Investing In Bonds Unique characteristics of bond investing:
Coupon rate (or coupon, coupon yield, or stated interest rate) Serial or sinking fund Secured bond or unsecured bond (debenture) Copyright ©Houghton Mifflin Company. All rights reserved.

Evaluating Bond Prices and Returns
Interest rate risk results in variable value. Market interest rates Interest rate risk Fixed yield Premium Copyright ©Houghton Mifflin Company. All rights reserved.

Six Decisions for Bond Investors
Decide on credit quality. Decide on maturity. Determine the after-tax return. Select the highest yield to maturity. Consider selling. Think about investing in bond mutual funds. Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps of Investing in Stocks and Bonds
People slip up in investing in stocks and bonds when they do the following: 1. Seek to invest in just one stock that promises to make them a lot of money. 2. Neglect to carefully research investment choices. 3. Hold onto a lousy investment too long instead of cutting losses by selling it. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Investing in Stocks and Bonds
Include stocks and bond or mutual funds that own stocks and bonds in your investment portfolio. Use fundamental analysis to determine a company’s basic value before investing in a stock. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Investing in Stocks and Bonds
Resist putting money into so-called hot stocks. Invest part of the conservative portion of your portfolio in TIPS to beat inflation. Use zero-coupon bonds to help fund a child’s education and your retirement. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 15: Investing Through Mutual Funds PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Describe the features, services, and advantages of investing in mutual funds. Differentiate mutual funds by investment objectives, types, and characteristics. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Summarize the fees and charges involved in buying and selling mutual funds. Establish strategies to evaluate and select mutual funds that meet your investment goals. Copyright ©Houghton Mifflin Company. All rights reserved.

Why Invest in Mutual Funds?
Net Asset Value (or NAV): Per-share value of a mutual fund. Dividend income and capital gains Ordinary income dividend distributions Capital gains distributions Copyright ©Houghton Mifflin Company. All rights reserved.

Advantages of Investing Through Mutual Funds
Diversification Random (or nonsystematic) risk Affordability Professional management Fund investment advisers Copyright ©Houghton Mifflin Company. All rights reserved.

Unique Mutual Fund Services
Convenience Ease of buying and selling shares Check writing and electronic transfers Distribution of or automatic reinvestment of income and capital Copyright ©Houghton Mifflin Company. All rights reserved.

Telephone and internet exchange privileges Exchange (or switching, conversion, or transfer) privilege Beneficiary designation Automatic investment Copyright ©Houghton Mifflin Company. All rights reserved.

Types of Investment Companies
Closed-End Mutual Fund Real Estate Investment Trust (or REIT) Unit Investment Trust (or UIT) Exchange-Traded Fund (or ETF) Copyright ©Houghton Mifflin Company. All rights reserved.

Index Funds: These funds are unmanaged. Growth and income objective Growth and income funds Equity-income funds Socially conscious funds Asset allocation funds Life-cycle funds Copyright ©Houghton Mifflin Company. All rights reserved.

Load and No-Load Funds Load funds always charge transaction fees.
Front-end load Stated commission Percentage of the amount invested Some no-load mutual funds assess 12b-1 fees. 12b-1 (or distribution) fee Trailing commissions Copyright ©Houghton Mifflin Company. All rights reserved.

Load and No-Load Funds Some no-load funds assess deferred load and redemption fees. Deferred (or back-end) load Redemption charge (or exit fee) Copyright ©Houghton Mifflin Company. All rights reserved.

Fees and Charges of Mutual Fund Investing
Disclosure of fees in standardized expense table What’s best: load or no load? Low fee or high fee? Copyright ©Houghton Mifflin Company. All rights reserved.

Selecting Funds in Which to Invest
Review your investment philosophy and investment goals. Eliminate funds inappropriate for your investment goals. Copyright ©Houghton Mifflin Company. All rights reserved.

Screen and compare funds that meet your investment criteria. Fund screener (or fund screening tool) Profile prospectus (or fund profile) Monitor your mutual fund portfolio. Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps In Mutual Fund Investing
People slip up in mutual fund investing when they do the following: 1. Buy funds with high fees and expenses. 2. Withdraw dividends rather than reinvesting. 3. Chase performance by investing in “hot” funds. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Mutual Funds
Match your investment philosophy and financial goals to a mutual fund’s objectives. Invest only in no-load mutual funds that have low expenses and have no or a low 12b-1 fee. Copyright ©Houghton Mifflin Company. All rights reserved.

Get the right mix of asset classes in your long-term fund investments and learn to love consistency. Sign up for automatic reinvestment of your mutual fund dividends. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 16: Real Estate and High-Risk Investments PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Demonstrate how you can make money investing in real estate. Calculate the right price to pay real estate investment and how to finance your purchase. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Assess the disadvantages of investing in real estate. Summarize the risks and challenges of investing in collectibles, precious metals, and gems. Explain why options and futures are high-risk investments. Copyright ©Houghton Mifflin Company. All rights reserved.

Making Money Investing in Real Estate
Real Estate: property consisting of land, structures attached to the land, and accompanying rights and privileges Direct Ownership: actual legal title to a property Copyright ©Houghton Mifflin Company. All rights reserved.

Beneficial tax treatments: Depreciation Is tax deductible. Interest Is tax deductible. Rental income tax regulations on vacation homes. Capital gains are taxed at reduced rates. Tax-free exchanges Copyright ©Houghton Mifflin Company. All rights reserved.

Pricing and Financing Real Estate Investments
Pay the right price. Discounted cash-flow method Financing a real estate investment Seller financing (or owner financing) Sweat equity property Copyright ©Houghton Mifflin Company. All rights reserved.

Disadvantages of Real Estate Investing
Business risk Complexity Large initial investment Dealing with tenants Time-consuming management demands Copyright ©Houghton Mifflin Company. All rights reserved.

Investing in Collectibles, Precious Metals, and Gems
Collectibles: cultural artifacts that have value because of their beauty, age, scarcity, etc. Making a profit on collectibles is not easy. Buying and selling collectibles on the ‘Net: easy and convenient, but not always safe! Copyright ©Houghton Mifflin Company. All rights reserved.

Investing in Collectibles, Precious Metals, and Gems
Gold and other metals Gold bullion, gold coins Gold stocks and mutual funds Silver, platinum, palladium, rhodium Precious stones and gems: diamonds, sapphires, rubies, etc. Copyright ©Houghton Mifflin Company. All rights reserved.

Investing in Options and Future Contracts
Derivative (or Derivative Security) Options allow you to buy or sell an asset at a predetermined price. Stock Option Expiration Date Copyright ©Houghton Mifflin Company. All rights reserved.

Options are created by an option writer. Option premium Option holder Call option Put option Conservative writers profit by selling covered calls. Covered Option, Naked Option Copyright ©Houghton Mifflin Company. All rights reserved.

Conservative investors reduce risks by purchasing covered puts. Speculative investors try to profit with options. Speculative investors buy calls to create tremendous leverage. Copyright ©Houghton Mifflin Company. All rights reserved.

Commodities Futures Contracts
Economic need creates futures markets. Speculators may trade in futures markets. Futures are a zero-sum game. Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps In Real Estate and Investing
People slip up in investing in real estate and high risk investments when they do the following: 1. Fail to factor in income lost due to vacancies and collection costs for tenants who do not pay. Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps In Real Estate and Investing
2. Fail to set enough money aside for maintenance, repairs, unanticipated capital improvements, and rising real estate taxes. 3. Assume that real estate prices will go up and interest rates will not increase. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Real Estate and High-Risk Investments
Consider the disadvantages before investing in real estate. Invest only in real estate properties that have a positive cash flow. Copyright ©Houghton Mifflin Company. All rights reserved.

Finance real estate investments with conventional mortgages, not mortgages with adjustable interest terms. Use the discounted cash-flow method to help determine the right price to pay. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 17: Retirement Planning PPT slide program prepared by Amy Forgue and Ray Forgue.

Learning Objectives Recognize that you are solely responsible for funding your retirement and must sacrifice some current spending and invest for your future lifestyle. Estimate your Social Security retirement income benefit. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Calculate your estimated retirement savings needs in today’s dollars. Understand why you should save for retirement within tax-sheltered retirement accounts. Distinguish among the types of employer-sponsored retirement plans. Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives Explain the values of the various types of personally established tax-sheltered retirement accounts Recognize that professional investment advice for retirement assets is available, including Monte Carlo simulations. Describe techniques for living in retirement without running out of money. Copyright ©Houghton Mifflin Company. All rights reserved.

Retirement Planning Is Your Responsibility
Retirement: The time in life when the major sources of income changed from earned income to employer-based retirement benefits, private savings and investments, Social Security, etc. Copyright ©Houghton Mifflin Company. All rights reserved.

Understanding Your Social Security Retirement Income Benefits
FICA Taxes: Social Security taxes withheld from wages. Your contributions to Social Security and Medicare: taken out of maximum taxable yearly earnings (or MTYE) Copyright ©Houghton Mifflin Company. All rights reserved.

How you can become qualified for Social Security benefits: Social Security Credits Being fully insured requires 40 credits. You are currently insured if you have earned 6 credits in the most recent 3 years. Copyright ©Houghton Mifflin Company. All rights reserved.

How you can become qualified for Social Security benefits: Traditionally insured: retired workers who reach age 72 without accumulating 40 credits Worker younger than 72 who have not accumulated 6 credits are not insured. Copyright ©Houghton Mifflin Company. All rights reserved.

How to Estimate Your Social Security Retirement Benefits
Indexing: adjusting earnings to account for changes in wages since the year the earnings were received. Basic Retirement Benefit (or Primary Insurance Amount) Full-benefit retirement age: 67 for those born after 1960 Copyright ©Houghton Mifflin Company. All rights reserved.

Begin receiving benefit at your full-benefit age. Begin receiving reduced benefits at a younger age. Begin receiving larger benefits at a larger age. Copyright ©Houghton Mifflin Company. All rights reserved.

How to Calculate Your Estimated Retirement Needs in Today’s Dollars
Retirement Savings Goal (or Retirement Nest Egg) Projecting your annual retirement expenses and income. Expenses Current nest egg Do you have greater current deposits? Additional deposits needed Copyright ©Houghton Mifflin Company. All rights reserved.

Why Invest in Tax-Sheltered Retirement Accounts?
Funds put into regular investment accounts are after-tax money. A tax-sheltered retirement accounts is one for which contributions are not subject to income taxes. Copyright ©Houghton Mifflin Company. All rights reserved.

Employer-Sponsored Retirement Plans
Employer-sponsored retirement plan (or Qualified Plan) Employee retirement income security act (or ERISA) Copyright ©Houghton Mifflin Company. All rights reserved.

Defined-contribution retirement plan: today’s standard It is a self directed, noncontributory plan. Contributory plans accept employee and employer contributions. Can potentially be an automatic enrollment plan. Copyright ©Houghton Mifflin Company. All rights reserved.

Matching contributions: employers fully or partially match employee contributions Limits on contributions: $15500 for 401(k), 403(b), and 457; $10500 for SIMPLE IRAs Copyright ©Houghton Mifflin Company. All rights reserved.

Catch-up provision: Workers over the age of 50 can contribute and extra $5000 to retirement plan. Vesting gives you rights to your benefits. Cliff vesting, graduated vesting Copyright ©Houghton Mifflin Company. All rights reserved.

Retirement plan contribution tax credit for low-income and moderate-income savers. For singles with adjusted gross incomes of less the $25000 and joint filers with adjusted gross incomes less than $50000. Copyright ©Houghton Mifflin Company. All rights reserved.

How to Avoid Rollover Penalties When Changing Employers or Retiring
Leave it, transfer it to a retirement account with new employer, transfer it to an IRA, take it in cash. Options 2-4 result a rollover penalty. Avoid the 20 Percent Withholding Rule by using a trustee-to-trustee rollover. Copyright ©Houghton Mifflin Company. All rights reserved.

You Can Also Contribute to Personal Retirement Accounts
Individual Retirement Account (or IRA) Traditional (or regular) IRA Roth IRAs Keoghs and Simplified Employee Pension-Individual Retirement Account (SEP-IRAs) Copyright ©Houghton Mifflin Company. All rights reserved.

Use Financial Advice and Monte Carlo Simulations
When starting out, try investing in a low-fee target-date retirement fund. Use Monte Carlo simulations to help guide retirement investment decisions. Copyright ©Houghton Mifflin Company. All rights reserved.

Living in Retirement Without Running Out of Money
Figure out how many years your money will last in retirement and make monthly withdrawals accordingly. Buy an annuity (or immediate annuity) and receive monthly checks. There are immediate, deferred, and variable annuities. Often offered by employers Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps In Retirement Planning
People slip up in investing in retirement planning when they do the following: 1. Never start to save for retirement. 2. Put away too little money. 3. Use high-expense mutual funds for your 401(k) or IRA accounts. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Retirement Planning
Save early and often by beginning early in life to invest in mutual funds through tax-sheltered retirement accounts and continuing to invest every year. Take enough risk to increase the likelihood that you will have enough money in retirement. Copyright ©Houghton Mifflin Company. All rights reserved.

Save within an employer-sponsored retirement plan at least the amount required to obtain the full matching contribution from your employer. Diversify your investments and limit company stock to no more than 10 percent of your portfolio. Copyright ©Houghton Mifflin Company. All rights reserved.

Contribute to Roth IRA and traditional IRA accounts to supplement your employer-sponsored plans. Keep your hands off your retirement money. Do not borrow it. Do not withdraw it. When charging employers, roll over the funds into the new employer’s plan or a rollover IRA. Copyright ©Houghton Mifflin Company. All rights reserved.

Chapter 18: Estate Planning PPT slide program prepared by Amy Forgue, University of Kentucky.

Learning Objectives Identify the ways that your estate can be transferred through contracts and a will. Determine how trusts can be used to transfer assets and reduce estate taxes. Summarize the benefits of preparing advance directive documents. #3: on p 541, “features” is singular – OK as is here? Copyright ©Houghton Mifflin Company. All rights reserved.

Learning Objectives (cont.)
List the questions and documents needed to simplify the settlement and transfer of your estate. Explain the potential impact of estate and inheritance taxes. Copyright ©Houghton Mifflin Company. All rights reserved.

Introduction Estate: your worldly possessions and financial wealth less any debts you owe. Estate Planning: definite arrangements made during your lifetime that are consistent with your wishes for the administration, disposition, and transfer of your wealth and worldly possessions to your dependents and others when you die. Copyright ©Houghton Mifflin Company. All rights reserved.

How Your Estate is Transferred
Probate Probate Court: special court specifically charged to conduct the distribution of assets of people who have died. Probate court-supervised process that allows creditors to present claims against an estate and ensures the transfer of a decedent’s assets to the rightful beneficiaries. Copyright ©Houghton Mifflin Company. All rights reserved.

Transfer Your Estate by Contracts
Transfers by beneficiary contract designation Beneficiary: A person or organization designated to receive a benefit. Copyright ©Houghton Mifflin Company. All rights reserved.

Beneficiary designation: legal form signed by the owner of an asset providing that the property goes to a certain person or organization in the event of the owners death. Contingent (or Secondary) Beneficiary: The beneficiary in case the first-named beneficiary has died. Copyright ©Houghton Mifflin Company. All rights reserved.

Transfers by property ownership contract designation Joint Tenancy with Right of Survivorship (or Joint Tenancy): each person owns the whole of the asset, and can dispose of it without the approval of the other owner. Copyright ©Houghton Mifflin Company. All rights reserved.

Transfers by payable-at-death contract designation Payable-at-Death Designation: status granted to individuals who are not joint tenants and who might need to access accounts without going through probate. Copyright ©Houghton Mifflin Company. All rights reserved.

Wills Transfer the rest of your estate by will.
Transfers with a will go to your desired heirs Testator: writer of a will and owner of the estate. Copyright ©Houghton Mifflin Company. All rights reserved.

Wills Codicil: legal instrument with which one can make minor changes to a will. Executor (or Personal Representative): Person responsible for carrying out the provisions of a will and managing the assets until the estate is passed on to heirs. Copyright ©Houghton Mifflin Company. All rights reserved.

Wills Guardian: Person responsible for caring for and raising any child under the age of 18 and for managing the child’s estate. Letter of Last Instructions: Nonlegal instrument that may contain suggestions and recommendations useful to the survivors. Copyright ©Houghton Mifflin Company. All rights reserved.

Wills Without a will, your property may not go to the desired heirs.
Without a will, an estate transfers to various relatives according to the law in that state, e.g. spouse, children, parents Right of Escheat: law by which an estate transfers to the state if no surviving relatives exist. Copyright ©Houghton Mifflin Company. All rights reserved.

Trusts Trust: legal arrangement between you as the creator of the trust and the trustee, the person designated to manage any assets in the trust. Used to transfer assets and reduce estate taxes Copyright ©Houghton Mifflin Company. All rights reserved.

Trusts Grantor (or Settler, Donor, or Trustor): creator of a trust.
Trustee: Person charged with carrying out the trust for the benefit of the grantor(s) and heirs. Copyright ©Houghton Mifflin Company. All rights reserved.

Trusts Living Trust: a trust that takes effect while the grantor is still alive. Testamentary Trust: a trust that takes effect only upon the grantor’s death. Copyright ©Houghton Mifflin Company. All rights reserved.

Trusts Revocable Living Trust: grantor maintains the right to change the trust’s terms or cancel it at any time, for any reason, during his or her lifetime. Copyright ©Houghton Mifflin Company. All rights reserved.

Trusts Irrevocable Living Trust: arrangement in which the grantor permanently gives up ownership and the right to control of the property, to change the beneficiaries, and to change the trustees. Copyright ©Houghton Mifflin Company. All rights reserved.

Trusts Testamentary Trusts: become effective upon the death of the grantor according to the terms of the grantor’s will or a revocable living trust. Copyright ©Houghton Mifflin Company. All rights reserved.

Estate Rights Spouses have legal rights to each other’s estates
Partnership Theory of Marriage Rights: Presumes that wedded couples intend to share their fortunes equally. Copyright ©Houghton Mifflin Company. All rights reserved.

Estate Rights Community Property Laws: assume that the surviving spouse owns half of everything that both partners earned during the marriage. Community Property: consists of property acquired during marriage, except for separable property. Copyright ©Houghton Mifflin Company. All rights reserved.

Durable Power of Attorney: a document in which you appoint someone, called an attorney-in-fact, to handle your legal or business matters and sign his or her name to documents. Copyright ©Houghton Mifflin Company. All rights reserved.

Limited (or Special) Power of Attorney: narrower in scope and could be restricted to one specified act or a certain time period. Springing Power of Attorney: “jumps” into effect when a specified event occurs. Copyright ©Houghton Mifflin Company. All rights reserved.

Advance Medical Directive: a medical guideline that pertains to treatment preferences. Health Care Proxy: legal document in which individuals designate another person to make health care decisions if they are rendered incapable of making his or her wishes known. Copyright ©Houghton Mifflin Company. All rights reserved.

Living Will: instructs health care providers of your wishes should you become terminally ill with no hope of survival and unable to express your wishes. Copyright ©Houghton Mifflin Company. All rights reserved.

Estate and Inheritance Taxes
Federal Estate Tax: Assessed against a deceased person’s estate before property is transferred to heirs or assigned according to terms of a will or state intestacy laws. Copyright ©Houghton Mifflin Company. All rights reserved.

Exclusion Amount: The value of assets that may be transferred to heirs without incurring an estate tax. The first $2.0 million of a taxable estate is exempt from the federal estate tax. Copyright ©Houghton Mifflin Company. All rights reserved.

Marital Deduction: allows an estate to pass on an unlimited amount of assets to a surviving spouse free of estate taxes. Inheritance Tax: based on how much the beneficiaries get and their right to receive it. Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps In Estate Planning
People slip up in investing in estate planning when they do the following: 1. Not having a will. 2. Not having signed advance directive documents. Copyright ©Houghton Mifflin Company. All rights reserved.

The Top 3 Financial Missteps In Estate Planning
3. Forgetting to update forms you have signed that contractually award assets, like life insurance and retirement and checking accounts, to ex-spouses, parents, siblings and others because those instructions override your will. Copyright ©Houghton Mifflin Company. All rights reserved.

Good Money Habits in Estate Planning
Every three years or whenever you family situation changes, review the beneficiary and ownership designations in your life on insurance policies, retirement plans, bank accounts, and other assets to make certain they will transfer the property according to your wishes. Copyright ©Houghton Mifflin Company. All rights reserved.

Always have both an up-to-date will and a letter of last instructions, and revise them as major life events occur. Prepare and regularly update advance directive documents so others can make the right decisions for you if you become incapacitated. Copyright ©Houghton Mifflin Company. All rights reserved.

Once a year, discuss with your spouse or significant other your family’s financial and estate plans. Be positive that certain family members or friends know where you keep financial records, advance directives, your will, and an estate planning checklist. Copyright ©Houghton Mifflin Company. All rights reserved.

Personal Finance Garman/Forgue Ninth Edition

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