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PERSONAL FINANCE PRIMER Covering Your Bases!
DEBT:  Using Debt Wisely <ul><li>CREDIT CARDS </li></ul><ul><ul><li>1.  Advantages: </li></ul></ul><ul><ul><li>Interest Fr...
Debt (cont…) <ul><ul><li>2.  Disadvantages </li></ul></ul><ul><ul><li>Tendency to Overspend </li></ul></ul><ul><ul><ul><li...
INTEREST RATES <ul><li>Interest rates on credit cards are the highest of any form of consumer credit. </li></ul><ul><li>Ra...
HOW MUCH CREDIT? <ul><li>Be sure your monthly repayment burden does not exceed 20% of your monthly take-home pay. </li></u...
<ul><li>Average credit card holder has 11 cards </li></ul><ul><li>Approximately $3,300 in annual charges </li></ul><ul><li...
Risk Management <ul><li>Generally we deal with Risk Exposure by Aquiring Related Insurance Products </li></ul><ul><li>Heal...
Life Insurance <ul><li>Two Purposes for Life Insurance Coverage </li></ul><ul><li>Primary Purpose </li></ul><ul><ul><li>Pr...
Types of Life Insurance <ul><ul><li>1.  WHOLE LIFE </li></ul></ul><ul><ul><li>Includes an insurance feature and a savings/...
Saving Vs. Investing <ul><li>Saving:  Primarily for funds we may need in a short period of time. </li></ul><ul><li>Major C...
<ul><li>HOW MUCH SHOULD I HAVE IN SAVING? </li></ul><ul><li>3 Months to 6 months take home Pay </li></ul><ul><li>WHY? </li...
Inflation <ul><li>What is it? </li></ul><ul><li>Why do you have to be concerned about it? </li></ul><ul><li>Example: </li>...
Inflation (cont…) <ul><li>What if you invested your $100 and Received a 5% Rate of Return, equal to the Inflation? </li></...
Investing <ul><li>Taking prudent, reasonable risks with your money in order to earn the higher returns that may be necessa...
Four Issues to Address Before Beginning An Investment Program <ul><li>Determine your financial goals </li></ul><ul><li>Det...
Individual Stocks Vs. Mutual Funds <ul><li>Limited Funds to Invest? </li></ul><ul><ul><ul><li>Do not invest in individual ...
What Are Mutual Funds And How Do They Work? <ul><li>The idea behind Mutual Funds Is Simple: </li></ul><ul><li>Many people ...
Advantages of Mutual Funds <ul><li>Diversification </li></ul><ul><li>Professional Management </li></ul><ul><li>Liquidity <...
Disadvantages of Mutual Funds <ul><li>No Guarantees </li></ul><ul><li>Diversification “Penalty” </li></ul><ul><li>Potentia...
General Risk Levels & Types of Investments <ul><li>Lowest Risk:  </li></ul><ul><ul><li>Money Market Mutual Funds </li></ul...
General Risk Levels and Types of Investments (cont…) <ul><li>Higher Risk: </li></ul><ul><ul><li>Growth & Income Funds </li...
Morning Star Style Boxes  For Equity Funds VALUE BLEND   GROWTH LARGE CAP MID CAP SMALL CAP Small Cap Growth Index America...
Morning Star Style Boxes  For Bond Funds <ul><li>  </li></ul><ul><li>  SHORT   MEDIUM   LONG </li></ul><ul><li>High – Trea...
What to Look For Before Buying Any Particular Mutual Fund <ul><li>The Investment Company that Manages the Fund </li></ul><...
What to Look For Before Buying Any Particular Mutual Fund – cont… <ul><li>The Fund Manager </li></ul><ul><ul><li>One Indiv...
What to Look For Before Buying Any Particular Mutual Fund – cont… <ul><li>Volatility </li></ul><ul><ul><li>Equity Funds </...
Asset Allocation <ul><li>How you allocate your investment portfolio between different classes of financial assets. </li></...
Asset Allocation cont… <ul><li>Diversification spreads the risk around.  A good performance in one area can temper a sub p...
Individual Retirement Accounts (IRA) <ul><li>Roth </li></ul><ul><ul><li>Earnings grow tax-free </li></ul></ul><ul><ul><li>...
IRA (cont…) <ul><li>Contributions </li></ul><ul><li>Who can contribute: </li></ul><ul><ul><li>Anyone with earned income an...
IRA (cont…) <ul><li>Distributions </li></ul><ul><ul><li>Withdraw contributions anytime penalty-free </li></ul></ul><ul><ul...
Roth IRA <ul><li>Contributions allowed each year,  </li></ul><ul><ul><ul><li>2008 - $5000 </li></ul></ul></ul><ul><li>Assu...
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PERSONAL FINANCE PRIMER Covering Your Bases!

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Transcript of "PERSONAL FINANCE PRIMER Covering Your Bases!"

  1. 1. PERSONAL FINANCE PRIMER Covering Your Bases!
  2. 2. DEBT: Using Debt Wisely <ul><li>CREDIT CARDS </li></ul><ul><ul><li>1. Advantages: </li></ul></ul><ul><ul><li>Interest Free Loan </li></ul></ul><ul><ul><ul><li>Know your billing date </li></ul></ul></ul><ul><ul><ul><li>Grace period: 25-30 days </li></ul></ul></ul><ul><ul><li>Simplified Record Keeping </li></ul></ul><ul><ul><li>Convenience </li></ul></ul><ul><ul><li>Simplifies return of goods and resolution of purchase disputes </li></ul></ul><ul><ul><li>Emergencies </li></ul></ul>
  3. 3. Debt (cont…) <ul><ul><li>2. Disadvantages </li></ul></ul><ul><ul><li>Tendency to Overspend </li></ul></ul><ul><ul><ul><li>Undisciplined sense of buying power not supported by available income </li></ul></ul></ul><ul><ul><li>High Interest costs </li></ul></ul><ul><ul><ul><li>12% Annual Percentage Rate </li></ul></ul></ul><ul><ul><ul><li>Minimum Payment: $30/month </li></ul></ul></ul><ul><ul><li>Assume $1000 Credit Card balance </li></ul></ul><ul><ul><li>It will take 41 months to pay off your $1000 credit card balance with a total payment of $1223.00 </li></ul></ul>
  4. 4. INTEREST RATES <ul><li>Interest rates on credit cards are the highest of any form of consumer credit. </li></ul><ul><li>Rates, 10.6-13.5% </li></ul><ul><ul><li>National average nearly 12% </li></ul></ul><ul><ul><li>Variable rate, tied to prime leading rate </li></ul></ul><ul><ul><li>Rates will vary from Bank to Bank, so shop around </li></ul></ul><ul><ul><li>If you are carrying a balance, interest will be charged on your old balance purchases </li></ul></ul><ul><ul><li>On cash advances, interest begins on the day the advance is taken </li></ul></ul><ul><li>OTHER FEES: </li></ul><ul><ul><li>Annual Fees </li></ul></ul><ul><ul><li>Late Payment Fees </li></ul></ul><ul><ul><li>Over-the-Limit Fees </li></ul></ul><ul><ul><li>Transaction Fees – Typically on Cash Advances </li></ul></ul>
  5. 5. HOW MUCH CREDIT? <ul><li>Be sure your monthly repayment burden does not exceed 20% of your monthly take-home pay. </li></ul><ul><li>Recommended debt safety ratio </li></ul><ul><ul><li>10% to 15% of your take-home pay </li></ul></ul><ul><li>Debt Safety Ratio = Total Monthly Consumer Credit Payments @ </li></ul><ul><li>Monthly Take-Home Pay </li></ul><ul><li>@ excludes monthly mortgage payment </li></ul><ul><li>Remember, if credit is used properly, it can help you manage your finances. Misuse it and it is big-time trouble. </li></ul>
  6. 6. <ul><li>Average credit card holder has 11 cards </li></ul><ul><li>Approximately $3,300 in annual charges </li></ul><ul><li>Average unpaid balance of about $1,700 </li></ul><ul><li>Danger Signs of Using Too Much Credit: </li></ul><ul><li>Regular Impulse buying </li></ul><ul><li>Postdating checks to keep them from bouncing </li></ul><ul><li>Regularly exceeding borrowing limit </li></ul><ul><li>Taking 60-90 days to pay bills that should be paid in 30 days </li></ul><ul><li>Borrowing to meet normal living expenses </li></ul><ul><li>Using one credit card to make payments on another </li></ul><ul><li>Using more than 20% of take home pay on consumer debt, credit card bills </li></ul><ul><li>Dodging collection agencies </li></ul><ul><li>Having zero savings </li></ul>
  7. 7. Risk Management <ul><li>Generally we deal with Risk Exposure by Aquiring Related Insurance Products </li></ul><ul><li>Health Insurance – employer provided </li></ul><ul><li>Disability Insurance – employer provided </li></ul><ul><li>Home Owner’s Insurance </li></ul><ul><li>Auto Insurance </li></ul><ul><li>Life Insurance </li></ul>
  8. 8. Life Insurance <ul><li>Two Purposes for Life Insurance Coverage </li></ul><ul><li>Primary Purpose </li></ul><ul><ul><li>Provide funds for our dependent beneficiaries in the event of death </li></ul></ul><ul><li>Secondary Purposes </li></ul><ul><ul><li>Estate planning to provide needed liquidity to our estate and our heirs </li></ul></ul>
  9. 9. Types of Life Insurance <ul><ul><li>1. WHOLE LIFE </li></ul></ul><ul><ul><li>Includes an insurance feature and a savings/investment feature </li></ul></ul><ul><ul><li>Premium costs are fixed and high </li></ul></ul><ul><li> 2. TERM LIFE </li></ul><ul><ul><li>Remains in existence for a certain term (period) and then expires </li></ul></ul><ul><ul><li>This is ‘pure’ insurance coverage and is less expensive than whole life </li></ul></ul><ul><ul><li>You can get the most insurance coverage for the lowest premium cost </li></ul></ul><ul><ul><li>Negative – premium costs will continue to rise as we age </li></ul></ul><ul><ul><li>***IMPORTANT: Before you buy an insurance coverage check the financial stability rating of the insurance company. Look for an A.M. Best rating of A++ </li></ul></ul>
  10. 10. Saving Vs. Investing <ul><li>Saving: Primarily for funds we may need in a short period of time. </li></ul><ul><li>Major Concern: Preservation of principle </li></ul><ul><li>Selection: choose saving investments of low risk </li></ul><ul><ul><ul><ul><ul><li>Savings Accounts </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Money Market Accounts </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Short Term Certificates of Deposit </li></ul></ul></ul></ul></ul>
  11. 11. <ul><li>HOW MUCH SHOULD I HAVE IN SAVING? </li></ul><ul><li>3 Months to 6 months take home Pay </li></ul><ul><li>WHY? </li></ul><ul><li>To cover unanticipated Financial Shocks </li></ul><ul><ul><li>e.g.: </li></ul></ul><ul><ul><li>Employer downsizing – lost our job </li></ul></ul>* WARNING: BE CAREFUL OF INFLATION
  12. 12. Inflation <ul><li>What is it? </li></ul><ul><li>Why do you have to be concerned about it? </li></ul><ul><li>Example: </li></ul><ul><li>Assume </li></ul><ul><li>We have $100 </li></ul><ul><li>Pizza (only consumer item available) costs $5 each. Therefore we can purchase 20 pizzas. </li></ul><ul><li>We can invest $100 @ 15.5% </li></ul><ul><ul><li>We will have $115.50, 1 year from now </li></ul></ul><ul><li>The inflation rate is 5%, so </li></ul><ul><ul><li>Pizza will cost $5.25 1 year from now. </li></ul></ul><ul><li>Therefore $115.50 - $5.25 = 22 pizzas </li></ul><ul><li>Notice: We have a 15.5% return on our financial assets, however, the number of pizzas we can consume only increased from 20 to 22 pizzas. </li></ul>
  13. 13. Inflation (cont…) <ul><li>What if you invested your $100 and Received a 5% Rate of Return, equal to the Inflation? </li></ul><ul><ul><li>1 year later you have $105 </li></ul></ul><ul><ul><li>Pizza also increased 5% $5.25/each </li></ul></ul><ul><ul><li>You can buy 20 pizzas </li></ul></ul><ul><li>This is exactly the same number of Pizzas you could have purchased a year earlier for your $100. </li></ul><ul><li>You now have more dollars $105, but the quantity of Pizzas you could purchase has remained the same. </li></ul><ul><li>STAGNATION! </li></ul><ul><li>Your standard of living has not changed. </li></ul>
  14. 14. Investing <ul><li>Taking prudent, reasonable risks with your money in order to earn the higher returns that may be necessary to achieve your financial goals. </li></ul><ul><li>Warning: </li></ul><ul><li>All investments involve some risk </li></ul><ul><li>The Value of Your Investment Portfolio may decline </li></ul><ul><li>No guarantee that you will have gains </li></ul>
  15. 15. Four Issues to Address Before Beginning An Investment Program <ul><li>Determine your financial goals </li></ul><ul><li>Determine your time horizon </li></ul><ul><li>Determine your risk tolerance level </li></ul><ul><li>Determine your personal financial situation </li></ul>
  16. 16. Individual Stocks Vs. Mutual Funds <ul><li>Limited Funds to Invest? </li></ul><ul><ul><ul><li>Do not invest in individual stocks! </li></ul></ul></ul><ul><li>Diversification </li></ul><ul><ul><ul><li>Easier to achieve by buying mutual funds </li></ul></ul></ul>
  17. 17. What Are Mutual Funds And How Do They Work? <ul><li>The idea behind Mutual Funds Is Simple: </li></ul><ul><li>Many people pool their money together into a fund </li></ul><ul><li>The investment advisor invests their money in various securities </li></ul><ul><li>Each investor shares proportionality in the fund’s investment returns </li></ul><ul><li>The investment returns consist of the dividend or interest income paid on the Securities, and any capital gains or losses caused by sales of the securities </li></ul>
  18. 18. Advantages of Mutual Funds <ul><li>Diversification </li></ul><ul><li>Professional Management </li></ul><ul><li>Liquidity </li></ul><ul><li>Convenience: </li></ul><ul><ul><li>Fund shares can be bought/sold (mail, telephone, internet) </li></ul></ul><ul><ul><li>Easy to move money from one fund to another </li></ul></ul><ul><ul><li>Automatic Investing </li></ul></ul><ul><ul><li>Automatic Transfers from a fund to your bank account </li></ul></ul><ul><ul><li>Record Keeping Services </li></ul></ul>
  19. 19. Disadvantages of Mutual Funds <ul><li>No Guarantees </li></ul><ul><li>Diversification “Penalty” </li></ul><ul><li>Potentially High Costs </li></ul><ul><li>Tax Impact </li></ul>
  20. 20. General Risk Levels & Types of Investments <ul><li>Lowest Risk: </li></ul><ul><ul><li>Money Market Mutual Funds </li></ul></ul><ul><ul><ul><li>Large Certificates of Deposit, US Treasury Bills, Commercial Paper </li></ul></ul></ul><ul><li>Low Risk: </li></ul><ul><ul><li>Short Term Bond Funds </li></ul></ul><ul><ul><ul><li>Gov’t and Corporate </li></ul></ul></ul><ul><li>Medium Risk: </li></ul><ul><ul><li>Mid-Term Bond Funds </li></ul></ul><ul><ul><ul><li>Gov’t and Corporate (Investment Grade) </li></ul></ul></ul><ul><ul><li>Balanced Funds </li></ul></ul><ul><ul><li>Equity Income Funds </li></ul></ul><ul><ul><li>Index Funds </li></ul></ul>
  21. 21. General Risk Levels and Types of Investments (cont…) <ul><li>Higher Risk: </li></ul><ul><ul><li>Growth & Income Funds </li></ul></ul><ul><ul><li>Growth Funds </li></ul></ul><ul><ul><li>Long-Term Bond Funds </li></ul></ul><ul><li>Highest Risk: </li></ul><ul><ul><li>Aggressive Growth Funds </li></ul></ul>
  22. 22. Morning Star Style Boxes For Equity Funds VALUE BLEND GROWTH LARGE CAP MID CAP SMALL CAP Small Cap Growth Index American Funds - Small Cap World Fund Small Cap Value Index Mid Cap Growth Index American Funds - Capital Income Builder Mid Cap Value Index American Funds - Euro Pacific Growth - Growth Fund of America S & P 500 Index Meridian Value Fund
  23. 23. Morning Star Style Boxes For Bond Funds <ul><li> </li></ul><ul><li> SHORT MEDIUM LONG </li></ul><ul><li>High – Treasury & </li></ul><ul><li>Agency </li></ul><ul><li>Medium – Corporate </li></ul><ul><li> Investment </li></ul><ul><li> Grade </li></ul><ul><li>Low – Below Investment Grade </li></ul>CREDIT QUALITY American Funds - Capital World Bond Fund American Funds - Bond Fund of America American Funds S-T Bond Fund Of America American Funds - US Gov’t Securities Fund Money Market Mutual Fund
  24. 24. What to Look For Before Buying Any Particular Mutual Fund <ul><li>The Investment Company that Manages the Fund </li></ul><ul><ul><li>Examples: The three largest Fund Companies </li></ul></ul><ul><ul><ul><li>Fidelity </li></ul></ul></ul><ul><ul><ul><li>Vanguard </li></ul></ul></ul><ul><ul><ul><li>American Funds </li></ul></ul></ul><ul><li>Long-Term Track Record </li></ul><ul><ul><li>5 yr, 10 yr, Life of the Fund </li></ul></ul><ul><ul><li>How they performed through both up and down markets </li></ul></ul>
  25. 25. What to Look For Before Buying Any Particular Mutual Fund – cont… <ul><li>The Fund Manager </li></ul><ul><ul><li>One Individual </li></ul></ul><ul><ul><ul><li>Longevity </li></ul></ul></ul><ul><ul><li>Committee </li></ul></ul><ul><li>Loads and/or Fees </li></ul><ul><ul><li>Front end or Backend Load (Sales Charges) </li></ul></ul><ul><ul><li>No Loads </li></ul></ul><ul><ul><li>Operating Expense </li></ul></ul><ul><ul><ul><li>Investment Advisory Fees, Legal Frees, Accounting Fees, Administrative Expenses </li></ul></ul></ul><ul><ul><ul><li>Marketing (12b.1 Fees) </li></ul></ul></ul>
  26. 26. What to Look For Before Buying Any Particular Mutual Fund – cont… <ul><li>Volatility </li></ul><ul><ul><li>Equity Funds </li></ul></ul><ul><ul><ul><li>Beta </li></ul></ul></ul><ul><ul><ul><li>R – Squared </li></ul></ul></ul><ul><ul><li>Bond Funds </li></ul></ul><ul><ul><ul><li>Duration </li></ul></ul></ul>
  27. 27. Asset Allocation <ul><li>How you allocate your investment portfolio between different classes of financial assets. </li></ul><ul><li>Various studies have found that the asset allocation is more important than the actual selection of securities/investments in determining your overall investment results. </li></ul><ul><li>Experts argue you should hold a mix of investments from among the asset classes to help reduce the volatility of your portfolio. </li></ul>
  28. 28. Asset Allocation cont… <ul><li>Diversification spreads the risk around. A good performance in one area can temper a sub par performance in another. </li></ul>EQUITY BONDS CASH STRATEGY #1 STRATEGY#2 STRATEGY #3 100% 100% 100% 10% 10% 5% 40% 30% 15% 50% 60% 80 %
  29. 29. Individual Retirement Accounts (IRA) <ul><li>Roth </li></ul><ul><ul><li>Earnings grow tax-free </li></ul></ul><ul><ul><li>Retirement withdrawals are free of federal </li></ul></ul><ul><ul><li>income taxes </li></ul></ul><ul><ul><li>Your contributions are not tax deductible </li></ul></ul><ul><ul><li>You can continue to make contributions after age 70.5. </li></ul></ul>
  30. 30. IRA (cont…) <ul><li>Contributions </li></ul><ul><li>Who can contribute: </li></ul><ul><ul><li>Anyone with earned income and spouses of wage earners who don’t have any insurance of their own </li></ul></ul><ul><li>Income limitation, Single filers - $101000 and under. Married Filing Jointly - $159,000 and under. Contribution amounts are phased out at Modified Adjusted Gross Income Levels above these amounts </li></ul>
  31. 31. IRA (cont…) <ul><li>Distributions </li></ul><ul><ul><li>Withdraw contributions anytime penalty-free </li></ul></ul><ul><ul><li>Withdraw earnings beginning at age 59.5 penalty-free </li></ul></ul><ul><ul><li>Income tax on earnings does apply if you’ve held account for less than 5 years </li></ul></ul><ul><ul><li>No required minimum distributions </li></ul></ul>
  32. 32. Roth IRA <ul><li>Contributions allowed each year, </li></ul><ul><ul><ul><li>2008 - $5000 </li></ul></ul></ul><ul><li>Assumptions </li></ul><ul><ul><ul><li>Monthly Contributions $416.66 </li></ul></ul></ul><ul><ul><ul><li>Term 40 yrs or 480 months </li></ul></ul></ul><ul><ul><ul><li>Rate of Return 10%/yr or .8333%/month </li></ul></ul></ul><ul><ul><ul><li>Future Value = $2,634,991 </li></ul></ul></ul><ul><li>Change the Assumptions </li></ul><ul><ul><ul><li>Monthly Contributions $250.00 </li></ul></ul></ul><ul><ul><ul><li>Term 40 yrs or 480 months </li></ul></ul></ul><ul><ul><ul><li>Rate of Return 10%/yr or .8333%/month </li></ul></ul></ul><ul><ul><ul><li>Future Value = $1,581,020 </li></ul></ul></ul><ul><li>Remember </li></ul><ul><ul><ul><li>Withdrawals from your Roth IRA are free from Federal Income Taxes </li></ul></ul></ul>
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