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Chapter one Person finance 1 website.ppt
- 1. Discuss: Dream Boards What were some of your goals? What is on your bucket list? What is it going to take to see these things become reality? 1
- 2. I give you $100, what will you spend it on?
- 3. The Financial Plan Its your future, dont screw it up.
- 4. What is a Financial Plan? A personal financial plan involves specifying financial goals including the spending, financing, and investing plans needed to reach your goals. The plan should spell out how to accumulate wealth and provide for emergencies.
- 5. Your goals are what drive your financial plan! Having clear goals is important in making a plan that works for you. 5
- 6. What is a Financial Plan? A good financial plan includes 7 key components: Budget Managing liquidity (your cash) Financing large purchases Managing risk Investing Planning for retirement Communication and record keeping
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- 9. Component One: A Plan for Your Budgeting 9
- 10. A Plan for Your Budgeting A budget helps you plan your spending and saving, so you can meet your needs and wants. Creating a budget involves several steps: 1. Determining your net worth 2. Establishing your income 3. Identifying your expenses
- 11. Net Worth 11
- 12. Step 1: Determining Your Net Worth Assets are anything we own, such as cars or baseball cards Liabilities are what we owe, or our debt Net Worth = Assets Liabilities (Equity means ownership)
- 13. Calculating net worth 13 Asset = Car worth = $5000 Liability = Amount owed on the car = -$2000 Net worth = Car value minus amount owed = $3,000 The equity would also be $3000
- 14. As you save money, you will accumulate more assets (including cash) You will also have the chance to reduce your liabilities Both of these will lead to increasing your net worth
- 15. What is your net worth? 15
- 16. Step 2: Establishing Your Income (Cash inflow) Having an income is the major means by which a person saves money, builds wealth, acquires assets, and fulfills wants and needs. Your income often depends on decisions you make about education and career choices In general, more education or specialized training translates into more income
- 17. Math for Personal Finance A Jamaal makes $9 an hour and works about 15 hours a week. He also gets a $25 per week allowance What is his total annual income?
- 18. Math for Personal Finance A $9 an hour x 15 hours per week = $135 per week x 52 weeks per year = $7,020 per year income from his job. $25 per week x 52 weeks per year = $1,300 per year income from his allowance. His total annual income is equal to $7,020 + $1,300 = $8,320
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- 20. On average 23% of your paycheck is taken out for taxes, Social security etc. The more you make, the more they take. 20
- 21. What will your monthly income be? (after taxes) 21
- 22. Step 3: Identifying Your Expenses (Cash outflow) When creating a budget, estimate how much money you have going out every month. (Fixed and variable expenses) Typical expenses include food, clothing, gas, utilities, entertainment
- 24. What will be your estimated expenses given the goals you laid out in your padlet? 24
- 25. 25
- 26. Your budget Go to the personal finance webpage. Open the Financial Planning Worksheet Do some independent research to complete the worksheet. Consider your ACTUAL life goals. Open the Budget Excel Sheet Use the information from the worksheet to complete this budget ledger. 26
- 27. Do not print off your budget excel sheet when finished. Keep it open and ready for the next step. 27
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- 29. Complete February considering the following Your friend desperately needs some quick cash and convinces you to lend him $100. 29
- 30. Complete March considering the following You wreck your car and have to pay a $1,000 deductible. 30
- 31. Complete April considering the following A close friend/relative has decided to have a last minute destination wedding to Ireland. You are elected best man/ maid of honor. Trip cost $4,000 $100 for the gift $200 for the dress/suit 31
- 32. Complete May considering the following You have lost your job. You pick up part time work at home depot. 32
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- 34. The ODonnell Budget Process 34
- 35. 35
- 36. Tell your money where you want it to go rather than having the money tell you what you can do. 36
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- 42. How many of you had extra cash after completing your budget? What did you do with it? 42
- 43. Component 2: A Plan for Managing Your Liquidity 43
- 45. Component 2: A Plan for Managing Your Liquidity Liquidity assets include cash and assets that can be quickly and easily turned into cash. You may have a number of valuable assets, but if they are not liquid, they will be of little use to you when facing a short- term financial need.
- 46. How many of did not have enough liquidity for the friends wedding? 46
- 47. Component 2: A Plan for Managing Your Liquidity Money management involves making decisions about how much cash or liquid assets to keep in reserve and how much to invest in less liquid assets, such as real estate (buildings and land) helps determine how much money to keep liquid to avoid cash shortfalls
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- 49. Credit Management Credit Management involves making decisions about getting credit and using credit Credit is commonly used to cover immediate cash shortfalls, so it increases liquidity
- 50. Credit 50
- 51. 51
- 52. Credit Cards Some lenders charge higher interest (rent) on money than others It is not wise to rely on credit cards if you are not able to pay back the borrowed money quickly. A financial plan should contain a credit management plan.
- 53. Types of Credit Noninstallment Installment Revolving-Credit 53
- 54. Noninstallment Short term loan 30 90 days, or a year term. No interest charged if paid within the time period. Large interest if not paid in full OR late payment received. Dont get duped into paying interest up front. Items usually a few hundred dollars. 54
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- 57. Installment Credit Credit on a specific purchase (such as furniture, boat, etc.) Repayment can be stretched over years. Interest is charged to the principal. Principal is the amount you owe on the item. Note that the cost of the item is MORE due to the interest. 57
- 58. 12 months = 12 payments for $266.55 = $3,198.60 $198.60 more 24 months = 24 payments for $141.22 = $3,389.29 $389.29 more 36 months = 36 payments for $99.64 = $3,587.04 $587.04 more 58 $3,000 Couch 12% interest
- 59. Revolving Credit Credit Cards Credit limit (the amount available to borrow) can be thousands. You can use it for POS (point of sale) purchases. Can repay all at once or spread out over time. Repay it all at once! 59
- 60. Study for a Quiz 60
- 61. Quiz 1. Why is it important to create (and stick to) a budget? 2. What is Liquidity? 3. Describe the Envelope System for budgeting. 4. List and define the three forms of credit discussed in class? 5. What are the potential risks of Same as Cash offers from merchants? 61
- 62. Credit Card $4,000 on a credit card 21% interest rate $100 a month bill It would take 70 months to repay It would cost $2,940 in interest!!!! 62 That debt sucks
- 63. 63
- 64. Pros of using credit You can purchase large ticket items faster. Eliminates the need to carry cash. Helps you to establish a good credit history! This will increase your chances for obtaining credit in the future. It will decrease interest rates offered to you from lenders. 64
- 65. Dangers of using credit Its easier to get credit than it is to pay it back. Mismanaged, it can lead to a bad credit history. Credit cards tempt us to purchase items today that we could pay less for if we just saved and paid cash. Interest rates on credit cards is VERY HIGH! (16 24%) It can take YEARS to pay off small balances with high interest rates. 65
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- 69. Credit History Credit Bureaus keep track of your credit history and make that information available for lenders. 69
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- 71. WHAT MAKES UP A TYPICAL CREDIT SCORE?
- 72. How to establish credit Bank accounts Employment history Residence history Utilities in borrowers name Department store or gas credit card
- 73. How to maintain a good credit rating Establish a good credit history. Pay monthly balances on time. Use credit cards sparingly and stay within the limit. Do not move balance to other cards. Check credit report regularly.
- 75. The Cost of Using Credit SCENARIO: Interest Rate 17% Minimum Payment 2.5% or $10.00 Balance Time to Pay Off Interest Charged Total Pay $1,000.00 12 years $979.00 $1,979.00 $2,500.00 19 years $2,941.00 $5,441.00 $5,000.00 24+ years $6,210.00 $11,210.00
- 76. The Cost of Using Credit SCENARIO: Interest Rate 24% Minimum Payment: 4% of current balance or $10 Balance Time to Pay Off Interest Charged Total Pay $2,000.00 9 yrs & 9 mo $1,774.96 $3774.96 $6,000.00 14 yrs & 4 mo $5,775.08 $11,775.08 $10,000.00 16 yrs & 5 mo $9,774.89 $19,774.89
- 77. Warning Signs of Credit Abuse Delinquent Payments Default Notices Repossession Collection Agencies Judgment Lien Garnishment
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- 80. QUESTIONS TO ASK WHEN APPLYING FOR CREDIT 1. What is the annual fee? 2. What is the annual percentage rate (APR)? 3. When are payments due? 4. What is the minimum payment required each month? 5. Is there a grace period? 6. Are there other fees associated with the credit, such as minimum finance charges? 7. What is the credit limit? 8. What are the penalties for late or missed payments? 9. What are the terms and conditions of the credit? What else is included in the fine print?
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- 82. Which is the best credit card? 82
- 83. Test on Wednesday All things covered in the ppt. online. Material from the text chapters 1, 2, 3, 9 and 11 83