Personal Finance

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  • Personal Finance

    1. 1. Personal Finance
    2. 2. What is Money? <ul><li>What is Money clip </li></ul>
    3. 3. What is money? <ul><li>A form of legal tender that is an accepted form of payment in exchange for goods and services. </li></ul><ul><ul><ul><li>Coins </li></ul></ul></ul><ul><ul><ul><li>Paper Bills </li></ul></ul></ul><ul><li>Cheques and credit cards are not legal tender! </li></ul><ul><li>Stores are not required to accept them as payment. </li></ul>
    4. 4. Cool Fact…… <ul><li>On average Canadian currency </li></ul><ul><li>stays in circulation for : </li></ul><ul><li>$5 bill for 1 to 2 years </li></ul><ul><li>$10 bill for 1 to 2 years </li></ul><ul><li>$20 bill for 2 to 4 years </li></ul><ul><li>$50 bill for 4 to 6 years </li></ul><ul><li>$100 bill for 7 to 9 years </li></ul>
    5. 5. Functions of Money <ul><li>Medium of Exchange </li></ul><ul><ul><li>No need to barter </li></ul></ul><ul><li>Standard of Value </li></ul><ul><ul><li>Measured in dollars </li></ul></ul><ul><li>Store of Value </li></ul><ul><ul><li>Can be used at a later date </li></ul></ul>
    6. 6. How do we earn money? <ul><li>Allowances </li></ul><ul><ul><li>Money paid for performing certain tasks (usually at home) </li></ul></ul><ul><li>Employment Income </li></ul><ul><ul><li>Money paid for work performed on the job </li></ul></ul><ul><li>Savings and Investment Income </li></ul><ul><ul><li>Interest and Capital Gains </li></ul></ul>
    7. 7. Types of Income <ul><li>Gross pay: the total amount of money earned </li></ul><ul><li>Net pay: the total amount received after deductions </li></ul><ul><li>Disposable Income: Amount of income left after taxes have been paid. </li></ul><ul><li>Discretionary income: The amount of an individual's income available for spending after the essentials (such as food, clothing, and shelter) have been paid. </li></ul>
    8. 8. Introduction <ul><li>Don't buy stuff </li></ul>
    9. 9. Spending <ul><li>Fixed expenses: Those bills you have to pay and that tend to be the same amount month-to-month or year-to-year. </li></ul><ul><li>Variable expenses: The amounts that vary from month to month and over which you have some control. </li></ul><ul><li>Spending may be planned or impulsive </li></ul>
    10. 10. Budgeting <ul><li>Phase 1: Assess your personal and financial situation (needs, values, life situation). </li></ul><ul><li>Phase 2: Set personal and financial goals. </li></ul><ul><li>Phase 3: Create a budget for fixed and variable expenses based on projected income. </li></ul><ul><li>Phase 4: Monitor current spending (saving, investing) patterns. </li></ul><ul><li>Phase 5: Compare your budget to what you have actually spent. </li></ul><ul><li>Phase 6: Review financial progress and revise budgeted amounts. </li></ul>
    11. 11. Goal Setting <ul><li>Be Realistic </li></ul><ul><ul><li>A student working part-time is not likely to be able to afford a new car every couple of years. </li></ul></ul><ul><li>Be Stated in Specifics </li></ul><ul><ul><li>“ I plan/want to save $5,000 for a down payment to buy a house.” </li></ul></ul><ul><li>Have a Time Frame </li></ul><ul><ul><li>“ I plan/want to pay off my credit card within the next 18 months.” </li></ul></ul><ul><li>State the Action to be Taken </li></ul><ul><ul><li>“ I plan/want to start an automatic deposit savings account with monthly withdrawals from my checking account.” </li></ul></ul>
    12. 12. Taxes <ul><li>Canada has a progressive income tax system – the more money you make, the higher percentage of your income you pay in taxes </li></ul><ul><li>People pay both federal and provincial income taxes </li></ul><ul><li>CPP Contributions: 4.95% to a maximum of $2,118.60 </li></ul><ul><li>EI Contributions: 1.73% to a maximum of 731.79 </li></ul>
    13. 13. Tax calculations
    14. 14. Housing – Renting vs. Buying <ul><li>How often do you expect to move in the future? </li></ul><ul><ul><li>If you plan on moving a lot, renting is a better idea </li></ul></ul><ul><li>How stable is you employment situation? </li></ul><ul><ul><li>If you employment is not stable, don’t buy a house </li></ul></ul><ul><li>How much can you afford to pay for housing? </li></ul><ul><ul><li>most mortgage companies will only allow your housing costs to equal 33% of your gross income. </li></ul></ul><ul><ul><li>Housing costs may include your rent or mortgage payment, property taxes, utilities, and 50% of condo fees if applicable. </li></ul></ul><ul><ul><li>In addition, if your total debt servicing costs (housing costs plus all of your other monthly debt payments) exceed 40% of your gross income you won't qualify for a mortgage. </li></ul></ul>
    15. 15. Why do people save? <ul><li>People save money so that they can: </li></ul><ul><ul><li>Buy large items, such as a home or a car. </li></ul></ul><ul><ul><li>Handle surprises and emergencies. </li></ul></ul><ul><ul><li>Retire in comfort. When you stop working, you may live mostly on your savings. Most people need to save many years to have enough money. </li></ul></ul><ul><ul><li>Help family and loved ones. </li></ul></ul><ul><li>Remember: Saving is a habit </li></ul>
    16. 16. How much should I save? <ul><li>Your amount of savings depends on your family situation, amount of debt (particularly high interest debt) and future plans </li></ul><ul><li>Experts recommend having, at minimum, enough money saved to cover one month of essential expenses (fixed expenses, food, etc.) </li></ul><ul><li>If you have high interest debt, aim for the minimum savings amount and use the rest to pay off debt. </li></ul><ul><li>If you have little to no debt, other than mortgage debt, save three to six months worth of expenses. </li></ul>
    17. 17. Where should I store my money? <ul><li>You want your savings to be liquid enough to access in an emergency but not too easily accessed or you might spend it. </li></ul><ul><li>Your savings account should: </li></ul><ul><ul><li>Pay decent interest, </li></ul></ul><ul><ul><li>Be devoid of fees, </li></ul></ul><ul><ul><li>Not be too easy to access, and </li></ul></ul><ul><ul><li>Not be too difficult to access. </li></ul></ul><ul><li>Pay yourself first – create an automatic withdrawal from you chequing account at least once a month. </li></ul>
    18. 18. Simple Interest <ul><li>Simple interest is interest which is computed only on the principle balance . </li></ul><ul><li>I=Prt </li></ul>Interest Principal Rate Time
    19. 19. Compound Interest <ul><li>Compound interest is paid on the original principal and on the accumulated past interest. </li></ul>Principal Interest Rate Number of Years Amount accumulated A=P(1+i) n
    20. 20. Simple Vs. Compound Interest <ul><li>John invested $1000 at a 5% interest rate for 6 years. </li></ul>Year Simple Interest Compound Interest 1 1050 1050 2 1100 1102.50 3 1150 1157.63 4 1200 1215.51 5 1250 1276.28 6 1300 1340.10
    21. 21. Simple Vs. Compound Interest <ul><li>Jill invested $2500 for 20 years at 6% interest. </li></ul><ul><li>With simple interest, her investment is worth… </li></ul><ul><li>I = 2500*0.06*20 </li></ul><ul><li>I = 3000 </li></ul><ul><li>Total investment = 2500 + 3000 </li></ul><ul><li>= 5500 </li></ul><ul><li>With interest compounded annually, her investment is worth… </li></ul><ul><li>A = 2500(1+0.06) 20 </li></ul><ul><li>A = 8017.84 </li></ul>
    22. 22. Savings Vs. Investing <ul><li>Saving is preserving your money for a later time. </li></ul><ul><ul><li>Short-term </li></ul></ul><ul><ul><li>Safety net for emergency expenses </li></ul></ul><ul><li>Investing is t he act of using money to make more money. </li></ul><ul><ul><li>Long-term </li></ul></ul><ul><li>Each investment has a different level of risk and different type of return </li></ul><ul><li>Advantages of investing over saving: </li></ul><ul><ul><ul><li>Investments often produce a higher rate of return than savings plans </li></ul></ul></ul><ul><ul><ul><li>Investments can grow at or exceed the rate of inflation </li></ul></ul></ul><ul><li>Disadvantages of investing over saving: </li></ul><ul><ul><ul><li>There is some degree of risk (you can lose all of your money if the investment fails) </li></ul></ul></ul><ul><ul><ul><li>Your rate of return is not guaranteed </li></ul></ul></ul>
    23. 23. Investment Alternatives <ul><li>When choosing between different investment alternatives, you normally have the following goals: </li></ul><ul><ul><li>Safety of the principal  how safe is your original investment? </li></ul></ul><ul><ul><li>A good return  either through interest or buying low and selling high </li></ul></ul><ul><ul><li>An increase in capital  this occurs if the price of your stock or bond becomes more than what you paid for it </li></ul></ul><ul><ul><li>Avoiding unnecessary taxes  Remember that all income is taxed! </li></ul></ul><ul><ul><li>In most cases, when you mix different classes of investments or different investments, you reduce the risks of investing. </li></ul></ul>
    24. 24. Investment Pyramid
    25. 25. Credit <ul><li>The privilege of using someone else’s money for a period of time </li></ul><ul><li>“ Buy now, pay later” </li></ul><ul><li>A creditor is any person or business who grants a loan or sells on credit </li></ul><ul><li>A debtor is any person or business that buys on credit or receives a loan </li></ul>
    26. 26. Learning About Credit <ul><li>Credit Video </li></ul>
    27. 27. Credit Responsibilities <ul><li>Borrow only what you can repay. </li></ul><ul><li>Read and understand the credit contract. </li></ul><ul><li>Pay debts promptly. </li></ul><ul><li>Notify creditor if you cannot meet payments. </li></ul><ul><li>Report lost or stolen credit cards promptly. </li></ul><ul><li>Never give your card number over the phone unless you initiated the call or are certain of the caller’s identity. </li></ul>
    28. 28. How much can you borrow? <ul><li>Never borrow more than 20% of your yearly net income </li></ul><ul><li>Monthly payments shouldn’t exceed 10% of your monthly net income </li></ul>
    29. 29. Advantages and Disadvantages of Credit <ul><li>Advantages: </li></ul><ul><li>Able to buy needed items now </li></ul><ul><li>Don’t have to carry cash </li></ul><ul><li>Creates a record of purchases </li></ul><ul><li>More convenient than writing checks </li></ul><ul><li>Consolidates bills into one payment </li></ul><ul><li>Builds a credit history </li></ul><ul><li>Disadvantages: </li></ul><ul><li>Interest (higher cost of items) </li></ul><ul><li>May require additional fees </li></ul><ul><li>Financial difficulties may arise if one loses track of how much has been spent each month </li></ul><ul><li>Increased impulse buying may occur </li></ul>
    30. 30. How Credit Cards Work <ul><li>Credit Card Debt </li></ul><ul><li>http://www.ic.gc.ca/epic/site/oca-bc.nsf/en/ca01812e.html </li></ul>
    31. 31. Types of Credit <ul><li>Charge Accounts </li></ul><ul><ul><li>A contract between a consumer and a retailer for sales in the retailer’s stores </li></ul></ul><ul><ul><li>Can only use the cards at the issuing store </li></ul></ul><ul><li>Credit Cards </li></ul><ul><ul><li>Revolving credit accounts with a set credit limit </li></ul></ul><ul><ul><li>Monthly payments are required </li></ul></ul><ul><ul><li>Interest is paid on the balance </li></ul></ul>
    32. 32. Types of Credit <ul><li>Installment Sales Credit </li></ul><ul><ul><li>A credit plan that requires the purchaser to make a down payment and fixed regular payments with financing (interest) charges added to the purchase price </li></ul></ul><ul><ul><li>The seller retains ownership until the product is paid in full </li></ul></ul><ul><ul><li>Eg. Purchasing a car </li></ul></ul>
    33. 33. Types of Credit <ul><li>Consumer Loans </li></ul><ul><ul><li>Loans from financial institutions </li></ul></ul><ul><ul><li>Term Loans – the borrower agrees to make fixed monthly payments over a set period of time including interest Includes leasing </li></ul></ul><ul><ul><li>Demand Loans – the borrower can repay the loan at any time before the due date with interest </li></ul></ul><ul><ul><li>Mortgage Loans </li></ul></ul><ul><ul><li>A long-term credit plan for buying property </li></ul></ul><ul><ul><li>20-25 years for re-payment </li></ul></ul><ul><ul><li>The property is the collateral for the loan </li></ul></ul><ul><ul><li>Student Loans – Granted by the government to help with the rising cost of college / university </li></ul></ul>
    34. 34. What to do when you have debt <ul><li>You must face the enemy:   Tell others about your debt. </li></ul><ul><li>If you're in &quot;over your head&quot; with credit-card debt, cut up your cards now. If necessary, keep one card for emergencies. </li></ul><ul><li>Call your one remaining credit card company and ask them to lower your limit to a level that's adequate for emergencies — and nothing else. </li></ul><ul><li>Pay as much as you can each month — and always pay more than the minimum. </li></ul><ul><li>Pay off the card with the highest interest rate first, and the rest in descending order. </li></ul><ul><li>Always manage your cards to provide the lowest interest rates, switching cards every six months if necessary. </li></ul><ul><li>Make a point to understand all the inner workings of your card(s) − fees, grace periods, everything. </li></ul><ul><li>Honour all debts equally − whether you owe the money to Mastercard or a family member. </li></ul><ul><li>Once you pay off one card, you must apply that card's payment toward your next highest-rate card. </li></ul><ul><li>If you really cannot accomplish this yourself, enlist the aid of outside agencies. </li></ul><ul><li>Make sure to never let this happen again </li></ul><ul><li>Once all debts are paid off, apply the payment money toward your future. </li></ul>
    35. 35. Building a Credit History <ul><li>Establish a steady work record. </li></ul><ul><li>Pay all bills promptly. </li></ul><ul><li>Open a checking account and don’t bounce checks. </li></ul><ul><li>Open a savings account and make regular deposits. </li></ul><ul><li>Apply for a local store credit card and make regular monthly payments. </li></ul><ul><li>Apply for a small loan using your savings account as collateral. </li></ul><ul><li>Get a co-signer on a loan and pay back the loan as agreed. </li></ul>
    36. 36. The Three Cs of Credit <ul><li>Character - will you repay the debt? </li></ul><ul><ul><li>refers to an individual’s personal reliability </li></ul></ul><ul><ul><li>is capable of holding a regular job for a reasonable length of time </li></ul></ul><ul><ul><li>has been reliable at that particular job </li></ul></ul><ul><ul><li>has a particular job skill </li></ul></ul><ul><ul><li>is willing to accept financial responsibility </li></ul></ul><ul><ul><li>has a bank account </li></ul></ul><ul><ul><li>has stability in current address </li></ul></ul>
    37. 37. 3 Cs of Credit <ul><li>Capacity - can you repay the debt? </li></ul><ul><ul><li>refers to the applicant’s ability to repay the loan </li></ul></ul><ul><ul><li>can offer assurance his or her present job and income level are likely to last into the future </li></ul></ul><ul><ul><li>is able to meet all other debts and obligations – household bills, food, car payment, mortgage, rent, etc. </li></ul></ul>

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