PERSONAL FINANCE PRIMERPERSONAL FINANCE PRIMER

Covering Your Bases!Covering Your Bases!

DEBT: Using Debt WiselyDEBT: Using Debt Wisely

I.I. CREDIT CARDSCREDIT CARDS1. Advantages:1. Advantages:– Interest Free LoanInterest Free Loan

• Know your billing dateKnow your billing date

• Grace period: 25-30 daysGrace period: 25-30 days

– Simplified Record KeepingSimplified Record Keeping– ConvenienceConvenience– Simplifies return of goods and Simplifies return of goods and

resolution of purchase disputesresolution of purchase disputes– EmergenciesEmergencies

Debt (cont…)Debt (cont…)2. Disadvantages2. Disadvantages– Tendency to OverspendTendency to Overspend

• Undisciplined sense of buying power not Undisciplined sense of buying power not supported by available incomesupported by available income

– High Interest costsHigh Interest costs• 12% Annual Percentage Rate12% Annual Percentage Rate• Minimum Payment: $30/monthMinimum Payment: $30/month

– Assume $1000 Credit Card balanceAssume $1000 Credit Card balance– It will take 41 months to pay off your It will take 41 months to pay off your

$1000 credit card balance with a total $1000 credit card balance with a total payment of $1223.00payment of $1223.00

INTEREST RATESINTEREST RATESInterest rates on credit cards are the Interest rates on credit cards are the highest of any form of consumer credit.highest of any form of consumer credit.

Rates, 10.6-13.5%Rates, 10.6-13.5%– National average nearly 12%National average nearly 12%– Variable rate, tied to prime leading rateVariable rate, tied to prime leading rate– Rates will vary from Bank to Bank, so shop Rates will vary from Bank to Bank, so shop

aroundaround– If you are carrying a balance, interest will be If you are carrying a balance, interest will be

charged on your old balance purchasescharged on your old balance purchases– On cash advances, interest begins on the day On cash advances, interest begins on the day

the advance is takenthe advance is takenOTHER FEES:OTHER FEES:

– Annual FeesAnnual Fees– Late Payment FeesLate Payment Fees– Over-the-Limit FeesOver-the-Limit Fees– Transaction Fees – Typically on Cash AdvancesTransaction Fees – Typically on Cash Advances

HOW MUCH CREDIT?HOW MUCH CREDIT?Be sure your monthly repayment burden Be sure your monthly repayment burden does not exceed 20% of your monthly does not exceed 20% of your monthly take-home pay.take-home pay.Recommended debt safety ratioRecommended debt safety ratio- 10% to 15% of your take-home pay10% to 15% of your take-home pay

Debt Safety Ratio = Debt Safety Ratio = Total Monthly Consumer Credit Payments Total Monthly Consumer Credit Payments @@

Monthly Take-Home PayMonthly Take-Home Pay

@ excludes monthly mortgage payment@ excludes monthly mortgage payment

• Remember, if credit is used properly, it Remember, if credit is used properly, it can help you manage your finances. can help you manage your finances. Misuse it and it is big-time trouble.Misuse it and it is big-time trouble.

Average credit card holder has 11 cardsAverage credit card holder has 11 cardsApproximately $3,300 in annual chargesApproximately $3,300 in annual chargesAverage unpaid balance of about $1,700Average unpaid balance of about $1,700

Danger Signs of Using Too Much Credit:Danger Signs of Using Too Much Credit:Regular Impulse buyingRegular Impulse buyingPostdating checks to keep them from bouncingPostdating checks to keep them from bouncingRegularly exceeding borrowing limitRegularly exceeding borrowing limitTaking 60-90 days to pay bills that should be paid Taking 60-90 days to pay bills that should be paid in 30 daysin 30 daysBorrowing to meet normal living expensesBorrowing to meet normal living expensesUsing one credit card to make payments on Using one credit card to make payments on anotheranotherUsing more than 20% of take home pay on Using more than 20% of take home pay on consumer debt, credit card billsconsumer debt, credit card billsDodging collection agenciesDodging collection agenciesHaving zero savingsHaving zero savings

Risk ManagementRisk Management

Generally we deal with Risk Exposure by Generally we deal with Risk Exposure by Aquiring Related Insurance ProductsAquiring Related Insurance Products

1.1. Health Insurance – employer providedHealth Insurance – employer provided

2.2. Disability Insurance – employer providedDisability Insurance – employer provided

3.3. Home Owner’s Insurance Home Owner’s Insurance

4.4. Auto InsuranceAuto Insurance

5.5. Life InsuranceLife Insurance

Life InsuranceLife Insurance

Two Purposes for Life Insurance Two Purposes for Life Insurance CoverageCoverage

1.1. Primary PurposePrimary PurposeProvide funds for our dependent beneficiaries Provide funds for our dependent beneficiaries in the event of deathin the event of death

2.2. Secondary PurposesSecondary PurposesEstate planning to provide needed liquidity to Estate planning to provide needed liquidity to our estate and our heirsour estate and our heirs

Types of Life InsuranceTypes of Life Insurance1. WHOLE LIFE1. WHOLE LIFE

Includes an insurance feature and a savings/investment Includes an insurance feature and a savings/investment featurefeaturePremium costs are fixed and highPremium costs are fixed and high

2. TERM LIFE2. TERM LIFERemains in existence for a certain term (period) and then Remains in existence for a certain term (period) and then expiresexpiresThis is ‘pure’ insurance coverage and is less expensive This is ‘pure’ insurance coverage and is less expensive than whole lifethan whole lifeYou can get the You can get the mostmost insurance coverage for the lowest insurance coverage for the lowest premium costpremium costNegative – premium costs will continue to rise as we ageNegative – premium costs will continue to rise as we age

***IMPORTANT: Before you buy an insurance coverage check the financial stability rating ***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++of the insurance company. Look for an A.M. Best rating of A++

Saving Vs. InvestingSaving Vs. Investing

Saving: Primarily for funds we may Saving: Primarily for funds we may need in a short period of time.need in a short period of time.

Major Concern: Preservation of Major Concern: Preservation of principleprinciple

Selection: choose saving investments Selection: choose saving investments of low riskof low risk

Savings AccountsSavings Accounts Money Market AccountsMoney Market Accounts Short Term Certificates of DepositShort Term Certificates of Deposit

HOW MUCH SHOULD HOW MUCH SHOULD I HAVE IN SAVING?I HAVE IN SAVING?

3 Months to 6 3 Months to 6 months take home months take home PayPay

WHY?WHY?

To cover To cover unanticipated unanticipated Financial ShocksFinancial Shocks e.g.: e.g.:

Employer downsizing Employer downsizing – lost our job– lost our job

* WARNING: BE CAREFUL OF INFLATION

InflationInflation What is it?What is it? Why do you have to be concerned about it?Why do you have to be concerned about it?

Example:Example:AssumeAssume- We have $100We have $100- Pizza (only consumer item available) costs $5 each. Therefore Pizza (only consumer item available) costs $5 each. Therefore

we can purchase 20 pizzas.we can purchase 20 pizzas.

- We can invest $100 @ 15.5%We can invest $100 @ 15.5%- We will have $115.50, 1 year from nowWe will have $115.50, 1 year from now

- The inflation rate is 5%, soThe inflation rate is 5%, so- Pizza will cost $5.25 1 year from now. Pizza will cost $5.25 1 year from now.

Therefore $115.50 - $5.25 = 22 pizzasTherefore $115.50 - $5.25 = 22 pizzas

Notice: We have a 15.5% return on our financial assets, however, Notice: We have a 15.5% return on our financial assets, however, the number of pizzas we can consume only increased from 20 the number of pizzas we can consume only increased from 20 to 22 pizzas. to 22 pizzas.

Inflation (cont…)Inflation (cont…)What if you invested your $100 and Received a 5% What if you invested your $100 and Received a 5% Rate of Return, equal to the Inflation?Rate of Return, equal to the Inflation?- 1 year later you have $1051 year later you have $105- Pizza also increased 5% $5.25/eachPizza also increased 5% $5.25/each- You can buy 20 pizzasYou can buy 20 pizzas

This is exactly the same number of Pizzas you could This is exactly the same number of Pizzas you could have purchased a year earlier for your $100.have purchased a year earlier for your $100.

You now have more dollars $105, but the quantity of You now have more dollars $105, but the quantity of Pizzas you could purchase has remained the same.Pizzas you could purchase has remained the same.

STAGNATION!STAGNATION!- Your standard of living has not changed.Your standard of living has not changed.

InvestingInvestingTaking prudent, reasonable risks with Taking prudent, reasonable risks with your money in order to earn the your money in order to earn the higher returns that may be necessary higher returns that may be necessary to achieve your financial goals. to achieve your financial goals.

Warning:Warning:

- All investments involve some riskAll investments involve some risk

- The Value of Your Investment Portfolio may The Value of Your Investment Portfolio may declinedecline

- No guarantee that you will have gainsNo guarantee that you will have gains

Four Issues to Address Four Issues to Address Before Beginning An Before Beginning An Investment ProgramInvestment Program

1.1. Determine your financial goalsDetermine your financial goals

2.2. Determine your time horizonDetermine your time horizon

3.3. Determine your risk tolerance levelDetermine your risk tolerance level

4.4. Determine your personal financial Determine your personal financial situationsituation

Individual Stocks Vs. Mutual Individual Stocks Vs. Mutual FundsFunds

Limited Funds to Invest?Limited Funds to Invest?- Do not invest in individual stocks!Do not invest in individual stocks!

DiversificationDiversification- Easier to achieve by buying mutual fundsEasier to achieve by buying mutual funds

What Are Mutual Funds And What Are Mutual Funds And How Do They Work?How Do They Work?

The idea behind Mutual Funds Is Simple:The idea behind Mutual Funds Is Simple: Many people pool their money together into a Many people pool their money together into a

fundfund The investment advisor invests their money in The investment advisor invests their money in

various securitiesvarious securities Each investor shares proportionality in the fund’s Each investor shares proportionality in the fund’s

investment returnsinvestment returns The investment returns consist of the dividend or The investment returns consist of the dividend or

interest income paid on the Securities, and any interest income paid on the Securities, and any capital gains or losses caused by sales of the capital gains or losses caused by sales of the securitiessecurities

Advantages of Mutual FundsAdvantages of Mutual Funds

DiversificationDiversification Professional ManagementProfessional Management LiquidityLiquidity Convenience:Convenience:- Fund shares can be bought/sold (mail, Fund shares can be bought/sold (mail,

telephone, internet)telephone, internet)- Easy to move money from one fund to anotherEasy to move money from one fund to another- Automatic InvestingAutomatic Investing- Automatic Transfers from a fund to your bank Automatic Transfers from a fund to your bank

accountaccount- Record Keeping ServicesRecord Keeping Services

Disadvantages of Mutual Disadvantages of Mutual FundsFunds

No GuaranteesNo Guarantees

Diversification “Penalty”Diversification “Penalty”

Potentially High CostsPotentially High Costs

Tax ImpactTax Impact

General Risk Levels & Types of General Risk Levels & Types of InvestmentsInvestments

Lowest Risk: Lowest Risk: - Money Market Mutual FundsMoney Market Mutual Funds

- Large Certificates of Deposit, US Treasury Bills, Large Certificates of Deposit, US Treasury Bills, Commercial PaperCommercial Paper

Low Risk:Low Risk: - Short Term Bond FundsShort Term Bond Funds

- Gov’t and CorporateGov’t and Corporate

Medium Risk: Medium Risk: - Mid-Term Bond FundsMid-Term Bond Funds

- Gov’t and Corporate (Investment Grade)Gov’t and Corporate (Investment Grade)- Balanced FundsBalanced Funds- Equity Income FundsEquity Income Funds- Index FundsIndex Funds

General Risk Levels and Types General Risk Levels and Types of Investments (cont…)of Investments (cont…)

Higher Risk:Higher Risk:- Growth & Income FundsGrowth & Income Funds- Growth FundsGrowth Funds- Long-Term Bond FundsLong-Term Bond Funds

Highest Risk:Highest Risk:- Aggressive Growth FundsAggressive Growth Funds

Morning Star Style Boxes Morning Star Style Boxes For Equity FundsFor Equity Funds

Meridian Value Meridian Value FundFund

S & P 500S & P 500

IndexIndex

American FundsAmerican Funds

- Euro Pacific - Euro Pacific GrowthGrowth

- Growth Fund of - Growth Fund of AmericaAmerica

Mid Cap Value Mid Cap Value IndexIndex

American FundsAmerican Funds

- Capital Income - Capital Income BuilderBuilder

Mid Cap Growth Mid Cap Growth IndexIndex

Small Cap Value Small Cap Value IndexIndex

American FundsAmerican Funds

- Small Cap - Small Cap World FundWorld Fund

Small Cap Small Cap Growth IndexGrowth Index

VALUE BLEND GROWTH

LARGE CAP

MID CAP

SMALL CAP

Morning Star Style Boxes Morning Star Style Boxes For Bond FundsFor Bond Funds

SHORTSHORT MEDIUM MEDIUM LONG LONG

High – Treasury & High – Treasury & AgencyAgency

Medium – CorporateMedium – Corporate

InvestmentInvestment GradeGrade

Low – Below Low – Below InvestmentInvestmentGradeGrade

Money Money Market Market Mutual FundMutual Fund

American American FundsFunds

- US Gov’t - US Gov’t Securities Securities FundFund

American American FundsFunds

S-T Bond S-T Bond FundFund

Of AmericaOf America

American American FundsFunds

- Bond Fund - Bond Fund of Americaof America

American American FundsFunds

- Capital - Capital World Bond World Bond FundFund

CR

ED

IT Q

UA

LIT

Y

What to Look For Before What to Look For Before Buying Any Particular Mutual Buying Any Particular Mutual

FundFund1.1. The Investment Company that Manages The Investment Company that Manages

the Fundthe Fund– Examples: The three largest Fund Examples: The three largest Fund

CompaniesCompanies• FidelityFidelity

• VanguardVanguard

• American FundsAmerican Funds

2.2. Long-Term Track Record Long-Term Track Record – 5 yr, 10 yr, Life of the Fund5 yr, 10 yr, Life of the Fund– How they performed through both up and How they performed through both up and

down marketsdown markets

What to Look For Before What to Look For Before Buying Any Particular Mutual Buying Any Particular Mutual

Fund – cont…Fund – cont…3.3. The Fund ManagerThe Fund Manager

– One IndividualOne Individual• LongevityLongevity

– CommitteeCommittee

4.4. Loads and/or FeesLoads and/or Fees– Front end or Backend Load (Sales Charges)Front end or Backend Load (Sales Charges)– No LoadsNo Loads– Operating ExpenseOperating Expense

• Investment Advisory Fees, Legal Frees, Accounting Investment Advisory Fees, Legal Frees, Accounting Fees, Administrative ExpensesFees, Administrative Expenses

• Marketing (12b.1 Fees)Marketing (12b.1 Fees)

What to Look For Before What to Look For Before Buying Any Particular Mutual Buying Any Particular Mutual

Fund – cont…Fund – cont…5.5. VolatilityVolatility

– Equity FundsEquity Funds• BetaBeta

• R – SquaredR – Squared

– Bond FundsBond Funds• DurationDuration

Asset AllocationAsset Allocation

How you allocate your investment portfolio How you allocate your investment portfolio between different classes of financial assets.between different classes of financial assets.

Various studies have found that the asset Various studies have found that the asset allocation is more important than the actual allocation is more important than the actual selection of securities/investments in selection of securities/investments in determining your overall investment results.determining your overall investment results.

Experts argue you should hold a mix of Experts argue you should hold a mix of investments from among the asset classes to investments from among the asset classes to help reduce the volatility of your portfolio.help reduce the volatility of your portfolio.

Asset Allocation cont…Asset Allocation cont…

• Diversification spreads the risk around. A Diversification spreads the risk around. A good performance in one area can temper good performance in one area can temper a sub par performance in another.a sub par performance in another.

80 %80 % 60%60% 50%50%

15%15% 30%30% 40%40%

5%5% 10%10% 10%10%

100%100% 100%100% 100%100%

EQUITY

BONDS

CASH

STRATEGY #1 STRATEGY#2 STRATEGY #3

Individual Retirement Individual Retirement Accounts (IRA)Accounts (IRA)

RothRothEarnings grow tax-freeEarnings grow tax-free

Retirement withdrawals are free of federalRetirement withdrawals are free of federal

income taxesincome taxes

Your contributions are not tax deductible Your contributions are not tax deductible

You can continue to make contributions You can continue to make contributions after age 70.5.after age 70.5.

IRA (cont…)IRA (cont…)

ContributionsContributions

Who can contribute:Who can contribute:- Anyone with earned income and spouses of wage Anyone with earned income and spouses of wage

earners who don’t have any insurance of their earners who don’t have any insurance of their ownown

Income limitation, Single filers - $101000 Income limitation, Single filers - $101000 and under. Married Filing Jointly - $159,000 and under. Married Filing Jointly - $159,000 and under. Contribution amounts are and under. Contribution amounts are phased out at Modified Adjusted Gross phased out at Modified Adjusted Gross Income Levels above these amountsIncome Levels above these amounts

IRA (cont…)IRA (cont…)

DistributionsDistributionsWithdraw contributions anytime penalty-Withdraw contributions anytime penalty-freefree

Withdraw earnings beginning at age 59.5 Withdraw earnings beginning at age 59.5 penalty-freepenalty-free

Income tax on earnings does apply if Income tax on earnings does apply if you’ve held account for less than 5 yearsyou’ve held account for less than 5 years

No required minimum distributionsNo required minimum distributions

Roth IRARoth IRA Contributions allowed each year, Contributions allowed each year,

2008 - $50002008 - $5000

AssumptionsAssumptions Monthly ContributionsMonthly Contributions $416.66$416.66 Term 40 yrs or 480 monthsTerm 40 yrs or 480 months Rate of Return 10%/yr or .8333%/monthRate of Return 10%/yr or .8333%/month

Future Value = Future Value = $2,634,991$2,634,991

Change the AssumptionsChange the Assumptions Monthly ContributionsMonthly Contributions $250.00$250.00 Term 40 yrs or 480 monthsTerm 40 yrs or 480 months Rate of Return 10%/yr or .8333%/monthRate of Return 10%/yr or .8333%/month

Future Value = Future Value = $1,581,020$1,581,020

RememberRemember Withdrawals from your Roth IRA are free from Federal Income Withdrawals from your Roth IRA are free from Federal Income

TaxesTaxes