your fiscal fitness: an introduction...personal finance handbook your fiscal fitness: an...

Personal Finance Handbook

Your Fiscal Fitness: An IntroductionIf you start investing $20 a week at a 5 percent rate of return, you will have accumulated

$35,713 in 20 years. If you get a higher return, say 7 percent, then you would have $331,116

by the time you retire in 45 years.

Think Long Term If you’re thinking retirement is too far in the future to worry about since you still live at home with your parents, you’re not alone. A great many high school students do not think much about their financial future. But let’s face it, free room and board doesn’t last forever. And often, it comes to an end soon after you earn your high school diploma. At some point in the not-so-distant future, the bills in the mail will all be yours and you will need a plan to pay for them.

The fact is that responsible financial citizens were not born that way. Even your parents had to become financially literate, which is the ability to manage money. This includes learning how to budget, invest, manage debt, and make financially responsible decisions. Your parents also had to learn how to comparison shop, avoid impulse buying, and put money aside that they would much rather spend on nonessential things. Chances are they made mistakes along the way and they want you to

Comparison Shop One way to be financially responsible is to look for sales. Comparison shopping can help people find the best deals and meet a budget.

PF Personal Finance Handbook

35%

Teen Spending

24%

19%

16%9%

8%

7%8%

9%

Food

Clothing

Music, Movies, and Events

Cars

Cosmetics and Accessories

Shoes

Video Games

Electronics

SOURCE: www.businessinsider.com, “Teens have a favorite new restaurant—and it’s not Starbucks,” April 2017

avoid the same pitfalls. Economic principles you will study in this course will help you understand your place in economics and help inform your personal finance decisions.

Do a Checkup Start by taking a good look at your own money habits. Are you a big spender? Moderate saver? Do you save anything at all? The answer is easy to figure out. If you have an unexpected windfall, for example, a bigger-than-expected birthday check or an opportunity to earn extra money, what would you do with that money? Save it all? Save half? Look to see what you can buy now?

Think Discipline It comes down to fiscal fitness. Developing a solid, fiscal muscle also involves training or budgeting, short- and long-term goal setting, and most of all, patience. Personal finance, like athletics, requires discipline and practice. Discipline is one of the qualities that defines a winner. If you want to come out on top, learn the rules of good financial citizenship and put them into action:

• Keep a budget in order to live within your means.

• Understand credit uses and costs.

• Shop wisely and know your rights as a consumer.

• Develop short- and long-term financial goals.

Preparing for a long race often involves delayed gratification. An athlete will sacrifice fast food because it’s bad for her health, and healthy eating will pay off in the long run. The same is true of investing in your future. It may mean putting off purchases today for financial security sometime later.

That’s easy to say but hard to do, especially if you want to keep up with your peers. You and your dollars are the target of marketers and advertisers.

The Long Race The challenge is that the impulse to get what we want now is far stronger than the motivation to save for something that is months or even years down the road. You may have to inspire yourself to save by promising yourself a reward when you have met certain goals.

What else could slow down your progress? One speed bump for many is credit card abuse. You don’t want to struggle to pay your credit card balance

Where Does All the Money Go? According to a national survey, teens spend the largest part of their money on food and clothing.

Your Fiscal Fitness: An Introduction PF 1

$25

20

25

30

35

40

45

50

55

$228,563

151,277

99,402

64,582

41,211

25,524

14,995

7,928

$571,408

378,193

248,504

161,456

103,028

63,811

37,487

19,819

$1,142,817

756,385

497,008

322,911

206,056

127,621

74,975

39,638

$2,285,634

1,512,770

994,016

645,822

412,111

255,242

149,950

79,277

$10 $100$50

Weekly Savings

AGE

SOURCE: www.osu-tulsa.okstate.edu/financialaid, Savings Growth Chart


Start Saving Starting a savings plan early in life can result in a substantial amount of money at retirement age. This table shows how much money a saver will have at the age of 65 (with an annual rate of return of 8 percent) if he or she saves certain amounts each week and starts saving at a certain age.

It’s Your Turn1. Why is it important to start thinking about budgeting and

saving now?

in full each month or miss payment due dates. Therefore, it is important to keep an eye on your bank balance to make sure you can afford to buy what you need or want. It’s also important to check your credit card statements and read the fine print about bank fees and interest rates. Often, missing a payment due date results in extra fees and higher interest rates. Developing this fiscal awareness now will keep you out of trouble later. As you study economics, the principles you learn will help guide you to build your financial future.

Grow Your Money Despite the difficulty of thinking long term, 65 percent of teens admit that they want to learn how to grow their money. This

is good news. Even better news is that 84 percent of teens have savings, with an average amount of $1,044.

Savings could translate into a car and college expenses in the short run and a secure life and retirement in the years to come. In no time at all, the following words will be part of your vocabulary: budgeting—how to spend your income in such a way that there’s something left over to invest; compounding—how saving a little now can translate into more money later in life; and investing—how putting money in the stock market can be a tool for saving. Over the last 50 years or more, the stock market has averaged a higher return rate than bank accounts or bonds. Ready, set, grow!

Save consistently throughout your life. You can use your savings to make large purchases and avoid accumulating debt.

TIPSave as much as possible!

PF 2 Personal Finance Handbook

Housing

Transportation

Food

Insurance and Pensions

Healthcare

Other

Entertainment

Apparel

Cash Contributions

Education

Average American Family Budget

SOURCE: Bureau of Labor Statistics, Consumer Expenditures, 2015

13%

11%

8%

5%

5%

3%2%3%

33%

17%

Budgeting 101 A budget is a plan for spending and saving. The word may conjure up images of driving a junk car or eating canned spaghetti every night, but the reality can be just the opposite. In fact, most millionaires use a budget to manage their money. And most of them started early.

Spending Awareness Surveys show that almost one-half of Americans between the ages of 13 and 18 know how to budget their money. That’s the good news. The bad news is more than half of Americans do not.

You can become more aware of your personal spending habits by taking this quick quiz to find out which group you fall into. If you can answer these questions without much trouble, you’ve already taken the first steps to good money management. If you don’t have

any idea how you would answer them, then maybe it’s time to think about making a budget.

• How much money did you spend on beverages—from soda to water to energy drinks—last week?

• How much money will you spend on gas next week?

• How long will it take you to save up for the expensive thing you’d like to buy?

Now here’s another question. Have you ever asked for money to spend on concert tickets, a piece of jewelry, or a ski trip, only to hear: “You don’t need it, and we can’t afford it”? Odds are you didn’t think of it as an economics lesson. But according to surveys, students who learned about money management at home scored higher on financial literacy assessments than those who learned about it only in school.

BudgetingDo you keep track of how you spend your money so that you will have

enough to meet your needs? If so, you have already met one of the

fundamentals of personal finance: budgeting.

Why Personal Budgets Vary Budgets will vary based on lifestyle and income. Developing a budget that includes all of the categories of spending will help determine how much money to set aside for each category.

Budgeting PF 3

Budget Boosters

Keep a spending journal for one week. Include every latte, vending-machine snack, and music download.

Record spending

Identify needs

Spend wisely

Prioritize saving

Save weekly

Plan for thelong-term

Pay down debt

Use cash

Work more

Spend less

Identify needs: bills, car payment, and so on.

Downsize or eliminate impulse buys such as co�ee and soda.

Add to your savings weekly, even if just a small amount.

Identify a long-term want and start saving for it. (You’ll be surprised how fast those fast-food outings diminish when you set your mind on something.)

Prioritize and pay down any outstanding debt—including that $5 you owe your sister.

Use cash for daily spending.

During vacations or the summer, pick up some extra hours at work.

Make saving a priority and a habit.

Live within your means. Spend less than you make.


Income and Expenses Each person has an economic identity. Your income—the money you make—and your expenses—the money you spend—define that identity. Therefore, you will face money scarcity. Budgeting is the balancing act to deal with this scarcity. Effective budgeting will help you control your expenses so that they do not exceed your income. As you develop your budget, you will weigh your needs against your wants. To begin creating a budget, follow these steps in order.

• Make a list of your earnings per month from all sources. Add these together to calculate your expected monthly income.

• For one month, keep a record of every-thing you spend, from chewing gum to car payments. Collect receipts, write everything in a notebook, or better yet, use a budgeting tool online or an app of your choice. Make sure you don’t leave anything out. (And that includes savings!)

• At the end of the month, organize your spending into categories such as food,

entertainment, and car payments. Total the amount in each category. If you are using an app, you will be categorizing as you go.

• On a sheet of paper or using your app, list your income and expenses.

If your total expenses are less than your total income, you’re doing fine. If not, you need to take a hard look at where your money is going.

Needs and Wants Right now, many of your basic needs are probably part of the household budget. Still, some of your personal funds may be going toward needs such as car insurance, lunches, or college savings. So, if you are looking to cut down on expenses, you should focus first on the wants.

Consider the example of Michelle, a high school senior. She works 20 hours a week at a department store, where she earns $10 an hour. Her net income—that is, her take-home pay after taxes—is $150. Her monthly necessities include $40 for her cell phone bill, $60 on average for gas, and $65 a month on

Be Budget Smart Follow these tips to stay on track with your spending and saving.

Find a mentor who consistently makes a budget and sticks to it. Observe how little stress he or she has about money matters.

TIPLearn from others.


Rewards of Planning You can achieve financial goals, such as renting a limousine for prom with your friends, when you make a plan and stick to it.

car insurance. Michelle has already set aside $300 for her prom and hopes to have $500 by the time prom rolls around. To stay within her budget, she gives up her daily soda habit, saving almost $30 a month. She and her friends also decide to watch movies at home rather than go out. This trade-off will allow them to rent a limousine to go to their prom. Michelle has planned for a long-term goal and budgeted correctly. She has drawn a fine line between needs and wants.

If you find you’re having a difficult time staying within your budget, ask a friend or family member to review your expenditures each week to help keep you on track. Try not to rationalize impulse buys. Consider them your sworn budget enemies.

Long‐Term Rewards Err on the side of thrift and responsibility. Live within your means and try to save a set percentage of your income. Some budget counselors suggest allotting 80 percent for needs, 10 percent for wants, and 10 percent for savings. Do that and you might find yourself with a tidy savings within a few short years. Spend without

a plan and you might end up like many Americans—deep in debt.

About $607 billion, or 4.8 percent of outstanding debt, is in some stage of delinquency, or late in payment, with $412 billion 90 days late in payment. The 90-day delinquency rate on credit card balances was 7.1 percent of the total credit card debt in 2016, while 11.2 percent of student loans in 2016 were in 90-day delinquency or in default. Learning how to budget now may spare you from being part of these grim statistics later.

It’s Your Turn2. Using the information your teacher supplies you, develop a

monthly budget for a typical high school student. Notice that several of the expenses are fixed amounts. You can decide to increase, decrease, or eliminate other expenses, but be realistic. Now think of something this particular student would like to buy, or spend money on, in six months. Build that goal into the budget. How much does he or she already have saved toward that goal? How much more does he or she need to save? What trade-offs might he or she be willing to make to reach that goal?

Budgeting PF 5


Banking and CheckingBanks are everywhere. Often they face each other at busy intersections in a community and

are even sometimes located in the front sections of supermarkets. These banks, as well as

other financial institutions, are vying for your business. How do you choose among them?

The Right Bank You want to choose a bank that is insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC protects your money and the interest that it has earned—up to the insurance limit—in the event that your bank fails. For an account held by a single individual, the FDIC-insured limit is $250,000.

Though banks are generally considered to be financially sound, failures do occur. The insurance protects you and your investment up to the limit. The insurance covers many products used by individuals such as checking accounts, savings accounts, and CDs (certificates of deposit).

Services offered by banks have expanded in recent years, especially

with the growth of electronic and online services. Although banks may look very similar, their services are not one-size-fits-all. The best bank for you will be the one that meets your needs at a reasonable cost. First, you have to figure out what you need and then do some research to find it.

Checking Accounts One universal need is convenient and safe access to your money. Checking accounts and debit cards provide both convenience and financial security. To open a checking account, you will need identification, such as a birth certificate or a driver’s license, and a Social Security number. You will also need a deposit, or money to leave with the bank.

Protecting Accounts Banks offer FDIC services that protect consumers from loss.


Which checking account meets your needs?

• Basic checking Basic checking is the best bet for customers who use a checking account to pay some bills and use a debit card for daily expenses. Drawback: Monthly main-tenance fees may apply unless you retain a minimum balance or enroll in direct deposit. Some banks may limit the number of checks you can write each month and charge you a per-item fee if you exceed the limit.

• Free checking The operative word here is “free,” meaning a no-strings-attached account with no monthly service charges or per-item fees, regardless of the balance or activity. Drawback: These are harder to find and the “free” part may be an intro-ductory offer that expires in a certain amount of time.

• Checking with overdraft protection You should only write checks if you have the money in your

account to cover them. However, poor record keeping and other errors could result in making the costly error of writing a check without sufficient funds to cover it. This will incur a fee from your bank and your payee’s bank. Overdraft protection insures that this will not happen. In effect, if you write a check for more than the balance of your deposits, the bank will honor the check by lending you the money you need, up to a preset limit. Drawback: This service usually comes with hefty fees.

Debit Cards Most banks offer you a debit card with a checking account. With a credit card logo, it has the look and feel of a credit card, but there is a major difference. The money you spend is deducted from your checking account balance. Debit cards are also used to withdraw money from ATMs, giving you 24/7 access to your money. If you use an ATM from a bank other than your

Use words to write the payment amount.

Write the name of the payee.

Write the current date.

Sign your check.

Use numerals to enter the payment amount.

Write additional information about the payment or payee, such as a reason or an account number.

Writing a Check All bank checks have the same basic layout and require the same information. To avoid problems with checks:• Write clearly. • If you have to cross

something out or make a change, initial it.

• Shred or tear up a check with major errors and write “Void” next to the check number in your check register.

• Do not write a check for more than your account balance.

Banking and Checking PF 7


own, you will likely be charged a fee. You could pay $2 to get access to your own $20. Debit cards are convenient, but convenience often comes with a price.

Direct Deposit Banks and employers encourage people to take advantage of direct deposit. It is a safe, reliable way to receive your pay. An employer will ask for your bank’s routing number and your account number. Using this information, the employer sets up the transfer. Each payday, your pay is deposited directly into your account, saving you time and giving you faster access to your money.

Keeping Track When you open a checking account, you will receive a checkbook that includes sequentially numbered checks and a check register, or a booklet in which you’ll record your account transactions. Every time you write a check, make a deposit, or use an ATM, you should take a few seconds to write it down and deduct that amount from your balance. It is also important to hold onto your ATM receipts. They are the only proof that you withdrew $40, not $400.

Although the bank gives you a check register, you may prefer to use an app to maintain the details of your check register. However, a paper or electronic system is only as good as your willingness to keep close track of your banking transactions.

Each month, the bank will make available a statement of the activity on your account. Most banks post your statements online. Your statement lists deposits, withdrawals, ATM transactions, interest paid, and fees charged. You can also view any checks you have written that have been cashed.

Reconcile your bank statement by comparing the transactions on the bank statement to your own records to make sure they agree. By taking the time to be a good record keeper, you will make life a lot easier and protect yourself from mistakes and fraud. For more banking tips, go to fdic.gov.

Online Banking For many years, people had to go to the bank to deposit money, to transfer money from one account to another, or to withdraw money from an account. They had to write a check or use cash to pay bills. Most banks still perform all of these tasks, but many banks today allow you to send and receive money electronically. For example, with online banks, you can deposit your checks with an app on your mobile device by signing the check and taking pictures of it. Increasingly, brick-and-mortar banks are being supported, and in some cases replaced, by online banks. People like the convenience of banking online, though safety concerns still crop up from time to time. If you opt to use an online bank, make sure it is FDIC-insured so that your deposits up to $250,000 are safe.

Online Benefits As an online banking customer, you can access your accounts, pay your bills, and transfer funds from one account to another 24 hours a day. Internet banks also offer the environmentally friendly option to go paperless, allowing you to access your statements, canceled checks, and notices online. You can even arrange automatic bill payment. Although you receive a bill in the mail or in your email, the amount you owe is automatically deducted from your bank account on a predetermined date. You save time,

Find out what services several financial institutions offer and the fees they charge. Compare all available options to find the one that best meets your needs.

TIPResearch to compare options.

Protect Yourself!1 Online banking transactions should be done

through the bank’s website only.

2 Never respond to emails from your “alleged” bank that request sensitive personal or financial information.

3 If you suspect fraud, contact your bank by phone to determine if it’s a legitimate communication from the bank. If not, alert them to the scam.


postage, and the possibility of missing a payment and incurring late fees.

There can be other advantages to using online banks. Internet bank fees can be as much as 80 percent less than those charged by traditional banks. They may also offer checking, savings, or money market and CD accounts that yield higher interest rates than those offered by traditional banks.

A major benefit to the consumer is the ability to find good deals on banking services by comparison shopping online. In the wise words of Benjamin Franklin, “A penny saved is a penny earned.” By getting in the habit of looking for the lowest interest rates on loans and the highest interest rates on savings, the wise consumer will slowly pull ahead of the pack. Add a little compound interest into the mix and the pace of progress will pick up.

Be Responsible Even though you may choose to bank online, every month you will get a statement from your financial institution either electronically or through the mail. It is your responsibility to check this against your check register or app and report any discrepancies to your bank. Laws regulating an Electronic Funds Transfer (EFT), a system for transferring money from one bank to another, protect you in case of fraud. You, however, have to do your part. In order to be protected by law, you must report any errors in transactions within 60 days of the receipt of your bank statement. No matter how careful banks are not to make errors, no one is perfect.

If you use automatic bill pay, it is your responsibility to have sufficient funds in the account to cover the transactions. Some procedures of online banking are still affected by the business hours of the bank. If you are transferring funds to cover your bills, the money may not show up in your account unless you have made the transfer the previous day before a specific cutoff time. For example, a deposit made at 1 a.m. may not show up on your account until the next business

day. Plan your transactions accordingly, particularly if you wait until the last moment to pay your bills.

Gone Phishing Phishing is a scam in which a fraudulent website is used to gain personal and financial data to commit fraud. Phishing scams cost U.S. businesses more than $500 million a year. It’s good to examine the risks of using a computer to maintain accounts at financial institutions.

If you think you can’t be fooled, think again. Phishing techniques can be highly elaborate. Many even set up mirror web pages intended to look like your financial institution’s website to trick you into thinking it is actually your bank.

Online Banking TipsFollow these tips to develop good habits that will help keep you protected when banking online. Online banks offer layers of encrypted protection to safeguard your transactions and privacy.

1 Make sure your computer is protected with the latest version of antivirus and antispyware software.

2 When banking online, ALWAYS double check that the website is a secure site. You can tell this by looking for “https:” before the address.

3 When creating a password, avoid using personal information, including first names, birthdates, addresses, and so on. Use a combination of numbers and letters (both lowercase and uppercase) for increased security. Change your password on a routine basis.

4 Use an online service like PayPal if your bank doesn’t offer online bill pay. PayPal lets you make payments, receive payments, and send money fee-free to registered clients.

5 Don’t forget to log out of the banking or financial services site and close the browser window.

6 Visit the U.S. government’s website onguardonline.gov for further tips to protect yourself against online fraud.

Banking and Checking PF 9


Traditional Banking You might be wondering why anyone would still use a brick-and-mortar bank. There are a number of reasons that make some consumers reluctant to drop traditional banking altogether:

• To fund an account with an online bank, you can’t just walk into the bank to deposit a check. You will have to mail a check, deposit it online with the bank’s mobile app, arrange for direct deposit, or make a transfer from another bank. This is not a problem, of course, with banks that also operate a physical branch.

• Not having the option of being able to speak with someone face to face is another inconvenience. Some cus-tomers prefer to interact with people

who know them personally. Making a phone call or communicating by email is not to everyone’s liking.

• Another drawback is the difficulty of finding fee-free ATMs, although online banks often have ATM networks for their customers to use for a minimal or no cost.

• Lack of paper checks is a fourth issue. Some Internet-only banks only offer a bill-pay service, though some do issue traditional checks. While bill pay can be convenient, payments have to be scheduled ahead of time and can take several days to process. As a result, you have to keep close tabs on your account to ensure that you have money to cover the payments.

It’s Your Turn3. Make a list of the checking account services you would most

likely need. Research two traditional and two online banks to determine which one best meets your needs. Be sure to check if the bank is waiving fees only for the first few months.

Easy Deposits Depositing checks into a savings or checking account using a mobile device is a beneficial service that many people prefer.


Accumulating Personal WealthLook in the mirror and the face of a future millionaire may be staring back at you. More than

80 percent of millionaires are self‐made, first‐generation rich. But forget the lottery and other

get‐rich‐quick schemes. You have to set your own goals and work toward them.

Pay Yourself First In order to start accumulating personal wealth, you have to remember one simple rule: Pay yourself first. A good rule of thumb is to set aside 10 to 15 percent of your income. We will talk later about how to achieve this goal, but for the time being, accept the fact that you need to pay yourself first. The lifestyle you choose to live now will determine the lifestyle you will be able to have in the future. But don’t forget about others as well. Giving to charitable organizations that work to help the less fortunate are good investments in everyone’s future.

Let Your Money Work for You Let’s assume that you have made the decision to save. The positive news is that your savings will work for you. Banks pay you interest for using your money. Interest rates are expressed as percentages and indicate how much money an account will earn on funds deposited for a full year. Interest is compounded when it is added to your principal and you earn interest on both amounts. In effect, compound interest is interest on interest.

Most first-generation millionaires accumulate their wealth over a lifetime. Their road to riches has more to do with budgeting, compound interest, and careful investing than with salary and inheritances.

Basic Investing Putting money into a savings account is very safe. The only danger to the money in a savings account is that the rate of inflation will be greater than the interest rate. Over time, the money in your savings account could lose

value—it will buy less and less. But you will not lose your principal, the amount of money you put into the account.

Investing money is not the same as “saving” money. Investors take more risk—even possibly losing money—in the hopes of getting a higher return on their money.

Investing your money can give your dollars a greater opportunity to grow. Bonds, stocks, and mutual funds are among the many investment choices that you have. Of course, with the possibility of greater growth comes the risk of greater loss. If you invest in a corporate bond, stock, or mutual fund, you risk losing some or all of the money you invested. This risk is offset by the possibility of greater gain, allowing your money to grow at a faster rate than the rate of inflation.

Investing in Bonds A bond is an IOU issued by a corporation or by some level of government. When you buy a bond, you are lending money in return for a guaranteed payout at some later date. Government-issued bonds are the safest because governments rarely go into bankruptcy.

You can get U.S. government bonds, known as savings bonds, through your bank, and they can be bought in small denominations. Many corporate bonds carry a low-to-moderate risk to investors and take anywhere from 5 to 30 years to mature.

The value of some bonds varies. For example, if you buy a bond when interest rates are 6 percent but you want to sell it before it matures, then the bond’s value will be affected by current interest

Be disciplined and pay yourself first by saving and investing part of every dollar you earn.

TIPBeing self‐disciplined pays off.

Accumulating Personal Wealth PF 11

1Financial Security

2Safety and Income

3Growth

4Speculation

Lowest RiskU.S. savings bonds, CDs, bank accounts, money market accounts

Low Riskcorporate bonds, preferred stocks, treasury bonds, government bonds

Moderate Riskreal estate, mutual funds,growth stocks, blue chip stocks

High Riskjunk bonds, speculative stocks,collectibles, futures, options

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rates. If rates have gone up since you bought the bond, then you will have to discount the price to sell it. Why else would anyone want it if they could get a higher rate of interest elsewhere? But if interest rates have gone down, then that 6 percent rate will seem much more inviting. In this case, you could sell the bond for more than you paid for it.

Because the value of bonds is relatively stable, bonds are a good investment for people who cannot tolerate much risk. Families saving to send children to college may find bonds attractive because they generally earn higher interest than a savings account and aren’t likely to fall sharply in value the way stocks can.

Building Wealth with Stocks Stocks represent ownership in a public company. If you buy shares in a corporation, you become a part owner. You will make money if the price of the stock goes up and if you receive dividends, which are a portion of the profits paid to the owners. There are two kinds of stock—preferred stock and common stock. Preferred stockholders get a set dividend and are paid from the

corporate profits before the common stockholders.

Stocks are generally a riskier investment than bonds. During the stock market crisis in the early 2000s, American household wealth fell from $65.8 trillion in early 2007 to $49.4 trillion in early 2009—a drop of 25 percent. Historically, however, stocks have rewarded their owners with higher returns than bonds or savings accounts. By knowing about the types of stocks, understanding how returns are generated, and weighing the risk factors, you can assess ways to be a wise investor in the stock market.

Stock markets are a reflection of the sum of the buying and selling of all stocks in that market. Investors use what they know about the companies, industries, business in general, and world events to make their buying and selling decisions. Investing is tied directly to what is known about the investments. Investors are, however, just people, and people do not always act rationally; nor do they always have all the information they need to make a decision. Many investors make poor decisions because they don’t consider their own biases,

How Much Risk? Risk means the chance that an investment will lose value. A pyramid is sometimes used to demonstrate the riskiness of various investments. At the top are very risky investments like futures in precious metals. At the bottom are the least risky investments like savings accounts.


* as of 9/1SOURCE: http://www.wikinvest.com/stock/Google; http://www.wikinvest.com/stock/Yahoo!

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like being more influenced by losses in the values of their investments than by the gains, or in investing in the familiar, like family businesses or domestic stocks rather than international stocks. To be a smart investor, you should learn as much as you can about your investments and learn about human nature to avoid costly mistakes.

What About Mutual Funds? A mutual fund is an investment in a company that buys and sells stocks and bonds in other companies. By combining your money with that of other investors, the managers of the mutual fund can buy a wide variety of stocks and bonds.

When you buy a mutual fund, you are buying a part ownership of the stocks or bonds owned by the investment company. The biggest advantage of investing in this way is that you instantly have a diversified portfolio. Your risk is spread out.

Mutual fund companies are required by law to register reports and statements with the U.S. Securities and Exchange Commission (SEC). You can check up on them through the SEC’s database at www.sec.gov/edgar/searchedgar/mutualsearch.htm. Morningstar and Standard & Poor’s (S&P) are two

companies that rate mutual funds, stocks, bonds, and other investments.

Investment Strategy Many first-time investors think that the way to make money is to buy low and sell high. But trying to time the stock market or pick the next big winner has proven elusive to even the most savvy investors. When all is said and done, it’s best to use common sense. Dollar cost averaging is one simple investment strategy that rewards the patient investor.

Google vs. Yahoo From 2004 to 2013, Google’s stock showed steady growth, but the stock declined some in value starting in 2014. Meanwhile, Yahoo’s stock has leveled off at a low price. As much as they try, it is not possible for investors to predict a sure thing.

Choosing a Risk LevelThree kinds of mutual funds have three levels of risk.

• Money market funds, which are not the same as money market accounts at a bank, are short‐term, low‐risk investments. The money you invest is used to make short‐term loans to businesses and governments.

• Bond funds are investments in bonds. Though riskier than money market funds, they have a higher potential return.

• Stock funds are made up of a variety of stocks. Over the long term, they have provided higher returns than either market funds or bond funds.


SHARES YOU BUY

January $10 50

February $8 62.5

March $6 83.3

April $8 62.5

May $10 50

TOTAL 308.3

PRICE PER SHARE

The Case for Dollar Cost Averaging

MONTH


Dollar Cost Averaging The strategy of investing on a regular schedule over a period of time is known as dollar cost averaging. In this way, you capture both the lower and higher prices as prices rise and fall. In the long run, you hope to get a better average price for the purchase or sale of stocks and mutual funds.

People use dollar cost averaging because they know they can’t predict the market. It is especially useful for common stocks, which can be very volatile—that is, the price can swing far above and below the average price. Dollar cost averaging is an attempt to hedge against the ups and downs of the stock market. It does not guarantee gains or eliminate all possible losses, but it improves your odds of coming out ahead.

Other Options The risk and payout on investments cover a range from the most secure to the very, very risky. Junk bonds didn’t get their name because they were a secure place to park money. Speculative stocks have the possibility of paying substantial returns but also come with a high degree of risk. Some people invest in collectibles, such as fine art, baseball cards, and Civil War memorabilia. If the market remains strong, people who can part with what they have bought stand to make a lot of money. But if no one is

interested in your stamp collection, you may end up using it for postage.

Real estate investing can build wealth over a longer time horizon. Buying a home is the first real estate investment many people make. As you pay down the mortgage, you build a future income-generating resource. However, as with other investments, you must let common sense rule over emotions. Long before you begin to search for a house, you should save a down payment of 10 to 20 percent of the purchase price of your home. You should also decide the maximum amount you can spend. When you begin searching for houses, look for those at or below your maximum. Remember to factor in repairs and remodeling that you will do during the first couple of years that you own the home. Your first home will likely not be your dream home. But if you make a good investment, it will be a stepping-stone to your future.

Complex investment vehicles such as options and futures are not good choices for first-time investors. They are too risky except for those with the knowledge and time to make the investments work for them. Options allow you to set the price at which you will buy or sell a certain stock. They are most commonly used by people who are actively buying and selling stocks. You pay a small fee for an option and lose that money if

Cost Averaging Let’s say you put $500 into a mutual fund each month for five months. The price of a share goes from $6 to $10. You own 308.3 shares, worth $3,083. You invested $2,500 over five months. You made $583 at an average price per share of $8.11.


SOURCE: *Based on the Iowa Public Employees’ Retirement System calculator (www.ipers.org)

86% 72%

17%

11%

Age 20 Age 35 Age 50 Age 75

22%

58%

25% 17%43%

35%

9% 5%

Stocks Cash Bonds

Portfolios: Where Do You Stand?

the option is not exercised. However, in uncertain markets, options act as a form of insurance. Futures are similar, but they involve contracts to buy or sell commodities, such as cattle, precious metals, and farm crops.

At the end of the day, your investment choices depend on the risk you are willing to accept. You also need to consider the length of your investments and any tax burdens the investment may carry. If your scheme is to count on “sure things,” or use tips from the cousin of your neighbor’s son-in-law, you are likely going to be very disappointed. Making informed decisions and careful planning are your best strategies for successful investment in the long run.

Investing and Taxes The federal government encourages investment. Even though the government taxes interest and dividends at the same rate as earned income, the profits from the sale of stocks or property are capital gains. In recent years, the tax rate on long-term capital gains has been lower than the tax rate on the interest from bonds and savings accounts. As an added bonus, interest earned on U.S. government bonds is exempt from state and local taxes.

Know Your Financial Needs Every few years, it’s a good idea for you to think about the risk you are willing to take. As you begin working, you are often anxious to see your investments grow quickly so that you can achieve some of your goals. You may be willing to accept more risk as a younger investor than someone who is retired and needs to make sure his or her investments generate enough income to meet his or her needs. As you make major life changes, such as getting married or having a family, look at your investments and make adjustments for risk.

It’s Your Turn4. Suppose that three years ago you got a promotion and raise

at your job. You decided to invest $200 per month in the stocks related to the information technology and healthcare industries. Select two companies, one from each industry. Create a spreadsheet to track your investments over the last three years. What is the value of each investment at the end of 36 months? What was the average share price? Compare your results with other classmates. Evaluate your decisions.

Portfolios Age is often a factor in investment strategy. Experience suggests that a good strategy is focused on a mix of investment assets. The allocations should change as a person’s circumstances change. Note that younger investors can often take greater risks than older investors.


Compound Interest in Action

5-YEAR INVESTMENT 10-YEAR INVESTMENT

Year PrincipalInterest

at 7%Total

Interest PrincipalInterest

at 7%Total

Interest123456789

1011

$10,00010,70011,44912,25013,10814,026

$700749801858918

$7001,4492,2503,1084,026

$10,00010,70011,44912,25013,10814,02615,00716,05817,18218,385

$700749801858918982

1,0511,1241,2031,287

$7001,4492,2503,1084,0265,0076,0587,1828,3859,672

19,672


Compounding Notice that by allowing the investment to grow for five more years, the amount of interest earned more than doubles. This shows you the magic of compounding and the time value of money at work!

Planning Is Key Spending less than you earn is a critical step to financial independence. But it’s only the beginning.

Meet Ben. Ben is a recent college graduate with a decent entry-level job. He has developed good financial habits and got through college without building up a huge credit card debt. He budgets carefully for rent, food, car insurance, and so on. Only after he has paid all necessary expenses does Ben use what’s left over for the things he enjoys, such as a trip or a new jacket. This may seem like a good plan—UNTIL he

• decides to buy a house.

• starts a family.

• loses his job.

• gets hit with a long-term illness.

• retires.

Ben’s habit of living within his budget month to month does not allow for life changes and emergencies. On his list of people to pay, Ben has left someone out. He has forgotten to pay himself.

Get in the Habit What does it mean to pay yourself? It simply means to make personal savings a regular part of your budget, just like rent and food. Everyone has the potential to save, even if it means sacrificing a few immediate wants. You’d be surprised where the savings can come from. Cut out the daily $2 for soft drinks at the vending machine and you’ve just saved $14 a week. Multiply that by 52 and you’ve pocketed a tidy sum in just one year.

Saving is a habit and takes discipline. You can get into the habit of saving money every month by taking a percentage of your monthly income and

Saving and Planning for the FutureYou have already learned about the advantages of making a budget. Once you have created

your own budget, you must learn the importance of sticking to it.


then paying yourself first. For example, you can have your bank automatically deposit money from your checking account into your savings account each month. But the key is to not access this money unless you have an emergency.

People who have trouble saving tend to manage their money in reverse. They spend first and then save what is left. But what if there is nothing left? Then there’s nothing left to save. Saving doesn’t mean you don’t get to spend your money. It means you get to spend it later.

Why Save? Not many young people think about saving for long-term goals, especially for retirement. They think, “Retirement? I haven’t even started working!” Yet, when it comes to saving, time is money. There are many benefits to thinking now about the day you finally stop working. The biggest benefit is compound interest.

The Magic of Compound Interest The earlier you start saving, the faster your money will grow. The reason: compound interest. Compound interest is interest you earn, not only on the money you put into an account but also on all the interest you have previously built up. Today’s interest earnings will start earning interest tomorrow. The more you save today, the more interest you will gain tomorrow. And that savings will add up at a faster rate. For every year that you put off saving, you could lose thousands of dollars in the long haul.

Time Value of Money As a result of compound interest, money is said to grow over time. It is easiest to see this growth by comparing the amount of interest earned on a fixed amount of savings. For example, a $10,000 investment today, earning 7 percent annually, will earn $4,026 in interest and be worth $14,026 at the end of five years. If you allow the investment to grow for five more years, you will have earned $9,672 in interest, and the value of the

investment will be $19,672. In another example, you turn 18 and invest $10,000 into an account that pays 7 percent and is compounded annually. By the time you turn 65, you will earn $240,457.

What Are Your Savings Goals? An important goal for all savers is to develop an emergency fund, or backup plan. This is the fund you turn to when life doesn’t go as planned. Facing a job loss, a long illness, or major car repairs are realistic emergencies that require easy, quick access to money reserves. Experts recommend that you have between three and six months of your income in this emergency fund. Most emergencies are stressful, but you can reduce the stress by planning ahead for your financial needs.

Once your emergency fund is in place, you can save for other long-term needs. Some common savings goals are a down payment on a house, other major purchases, international or domestic travel, college funds for children, and saving for retirement.

Emergency Fund TipsSix ways to jump‐start your emergency fund:

1 Set up an automatic deposit into a savings account that is just for emergencies.

2 Discipline yourself to put all cash gifts and windfalls into your emergency fund.

3 Place all your coins in a jar. Deposit this “loose change” into your savings account every few months.

4 Cut down on impulse buys, and put that cash toward your emergency fund.

5 Reduce your debts to free up funds to add to your emergency fund.

6 Purchase savings bonds and reserve them for your emergency fund.

Saving and Planning for the Future PF 17

Tale of Two Savers

$400,000

$200,000

$0

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

18 38

Age of Saver

Am

oun

t S

aved

28 48 6858

Saver oneSaver two


Parking your savings doesn’t mean forgetting about it. You should regularly examine your savings and investments and make changes to maximize your return.

TIPMonitor your accounts.

How Much Will You Need? Saving for retirement requires long-term planning. So how much money will you need in retirement? That depends on mountains of variables, including your health, your lifestyle, and where you will be living when you retire. Everybody has different needs. Let’s look at some current general estimates.

Many financial advisers estimate that you will need 70 percent of your pre-retirement income in order to retire comfortably. By “comfortably,” they mean you will be able to keep up your pre-retirement lifestyle. Your needs are lower because you do not have to buy clothes for work or pay for commuting and eating out as much. You also won’t have to put as much money into your retirement investments. It is time for your investments to pay you.

No one is average, however. Some people spend more money when they first retire because they have more time for travel and entertainment. As they age, they travel less, and those costs go down. But in many cases, the cost of healthcare goes up.

Where Does Retirement Money Come From? One source of retirement income is Social Security. Each year the Social Security

Administration sets the minimum amount of earnings you need to have to be entitled to Social Security benefits. You can begin to collect reduced benefits at age 62 and full benefits at age 67. As the population ages, the point will come when Social Security will pay out more in benefits than it collects each year in payroll taxes. There have been ongoing debates about how long Social Security will last and what it will provide in the future. The message here is that you have to prepare now to take care of yourself after you retire.

You might also have a defined pension, a set amount of money paid by your previous employer based on your wages and length of employment. Defined pensions, however, are disappearing in private industry. The rest of your retirement income depends on what you have done to save for retirement—putting your money into 401(k)s, Individual Retirement Accounts (IRAs), other investments, and savings.

Make Tax Laws Work for You There are big tax benefits when you save money for retirement. If you put funds into an Individual Retirement Account (IRA), the money may escape taxation until you retire—or at least until you reach age 59 1/2. That cuts your tax bill now. Even better, when you

Timing Matters Both savers start with $200 and put away $200 a month. Both earn 8 percent interest compounded annually. Saver 1 starts at age 18. Saver 2 starts at age 36. The difference in the amount they have at retirement is more than $1 million!


withdraw your money from a special IRA (called a Roth IRA), the money you make—the appreciation—may not be taxed at all.

Although IRAs and other retirement plans such as 401(k)s have many restrictions on when you can withdraw your money, government rules allow you to dip into your retirement funds for other reasons. For example, you can use retirement funds to make the down payment on your first home or to meet large medical expenses without incurring a penalty. In this way, these retirement plans can also be considered part of your long-term savings for other needs.

Whether your dream is a comfortable retirement, a nice home, or international travel, you’re going to need a savings plan to make it come true. As you’ll see, there are many options to choose from. But it all starts with developing a saving habit—with paying yourself first.

Three Savers—Different Plans So you’ve decided to take a portion of your income every week and put it toward your financial future. Your goal is to achieve financial freedom, meet emergencies, and have a comfortable retirement—maybe even to “get rich.” But not all paths are equal.

Let’s look at three young adults: Sophia, Jayden, and A.J. Each of them is making about the same amount of money. Each of them decides to take $10 per week and dedicate it to their financial future.

Sophia takes her $10 and puts it in a shoebox under her bed. Jayden takes his $10 and puts it in a simple savings account paying 1 percent interest. A.J. takes his $10 and invests in lottery tickets in the hopes of winning a million dollars.

Three Savers, Three Different Results Each of the three keeps this up weekly for 20 years. Each of them would say, “I’m paying myself first.” But see how different the results are:

• Sophia has paid herself a total of $10,400. She now has $10,400.

• Jayden has paid himself a total of $10,400. With the interest earned, he now has $11,564.

• A.J. has paid himself a total of $10,400. He now has $0 after spending it on lottery tickets.

The fact is that the odds of winning a state lottery are something like one in 18 million. So what sounds better to you: a 100 percent chance of increasing your savings by more than $1,000 or a 99.9 percent chance of losing it all? That’s a no-brainer. Jayden’s savings account is also clearly more profitable than Sophia’s shoebox. But even the savings account may not be the best option of all.

Park Your Savings In making a personal savings plan, the first question you have to ask yourself is, how much can I save? You’ve seen how putting aside even a small amount can build up as long as you do it regularly. The amount you save per week should be one that you can reasonably commit to for a year. Setting up direct deposit into your savings account is one of the best ways to make sure you are meeting your savings goals.

Banking Services In addition to savings accounts, many banks offer money market accounts and CDs.

Saving and Planning for the Future PF 19


It’s Your Turn5. Suppose someone received an unexpected inheritance of

$5,000 and asked you for advice. Use the information your teacher supplies you about four investment possibilities. Calculate the potential value of each investment at the end of each year for five years using a spreadsheet or compound interest calculator app. Then create a poster showing the results and recommending the type of person who should consider each investment.

Savings Account Usually, saving starts with setting up a basic savings account that has no monthly fee. But when you are choosing a place to park your savings, shop around. Make sure the bank is FDIC-insured. Some banks will charge you excessive fees just for the privilege of having your money. Websites such as bankrate.com show you the interest rates different banks are currently paying for their savings accounts. Interest rates for savings and investments can be expressed in different ways that tell you different things. The annual percentage rate (APR) tells you the yearly rate of interest paid on the account without considering the effect of compounding. The annual percentage yield (APY) tells you the rate you will earn if you keep your investment in place for one year. APY is slightly higher than APR because it takes into account the compounding that occurs throughout the year.

CDs Once you’ve grown your savings account, think about moving some cash into a certificate of deposit, or CD. Like a savings account, a CD is insured and therefore has a very low risk. CDs generally offer higher interest rates than savings accounts. The catch is, once you put your money in, you can’t take it out for a fixed period of time. CDs vary in length from three months to five years. Only invest amounts you know you will not need for the term of the CD because there are penalties for early withdrawal.

As with savings accounts, you can compare CD rates online. Here are the details for one available CD:

• Initial deposit: $1,000

• Length of CD: 18 months

• Interest rate: 1.76% compounded daily

• Annual percentage yield (APY): 1.776%

• Ending balance: $1,026.75

Another CD offers the following terms and rates:

• Initial deposit: $1,000

• Length of CD: 60 months

• Interest rate: 2.35% compounded daily

• Annual percentage yield (APY): 2.378%

• Ending balance: $1,124.68

By comparing CD rates, you can determine how long you want to wait for your CD to mature.

Money Markets Another vehicle to help you save is a money market account. A money market account is a low-risk option that sometimes offers higher interest rates than a basic savings account, but requires a minimum deposit and for you to keep a certain balance. With a money market account, you can also write checks. Money market rates have historically fallen between savings account and CD rates, though they have slipped in recent years. That’s why it’s important to research to find the best interest rates and other terms when investing your money.


Credit and DebtYou got great grades. Congratulations! You’re one step closer to getting into the

college of your choice and maybe even getting lower car insurance rates—all for being

responsible. Believe it or not, your credit history will have a similar impact.

Establishing Your Credit As a first-time borrower, you may find it tough to get a credit card or a car loan on your own. Without a credit history to check, lenders often will require a cosigner to guarantee that the loan will be repaid if you fail to repay. This person could be your parent or another relative with a good credit history.

The rest is up to you. How can you prove to future lenders that you are a good credit risk? The most important step is simple: Pay your bills on time. Every late or missed payment will end up on your credit report and will hurt your credit score.

Your Credit Report Your credit report is your financial report card. In addition to your payment history, it includes the details of your bank and credit card accounts. Lenders can see how much debt you are already carrying. They can also see if you have had any bankruptcies or judgments against you or if you owe back taxes.

National credit-reporting agencies create a FICO score, which is a credit score most lenders use to gauge credit risk. It is based on your credit history. The score falls in a range from about 300 to 900. Usually, a score of at least 700 gives you access to reasonable credit. There are three national credit-reporting companies: Experian, TransUnion, and Equifax. For a fee, you can find out your credit score from these companies at MyFico.com.

A bad credit report can sink more than a loan. It also affects your chances of getting insurance, an apartment, a mortgage, and even a job. Like lenders, many landlords and employers check

credit histories. They see on-time bill paying as an indication of whether you will be a responsible tenant or worker. The Fair Credit Reporting Act sets the terms by which credit information about you can be gathered and used.

Protecting Your Credit Federal law allows you to get a free copy of your credit report from each credit-reporting agency every 12 months. Review your credit report for errors, such as the number of late payments, and for possible fraud.

Suppose there are mistakes in your credit report or you have made poor credit choices. What can you do? If you find an error in your credit report, send a separate letter to each agency where the mistake is found as soon as possible. Include a copy of the credit report with the misinformation highlighted. The credit-reporting agency is required by law to investigate with the creditor in question. It should remove from your credit report any mistakes a creditor admits. The Fair Credit Billing Act requires creditors to correct errors without lowering your credit rating.

Are You a Good Credit Risk?Whether or not you are judged to be a good credit risk depends on the three Cs.

• Capacity Your expenses, your job, and how long you have had it

• Character Financial history and payment record

• Capital The assets you have to back up a loan, like a savings account, property, or investments

Credit and Debt PF 21

Calculating a Credit Score

35%

30%

15%

10%

10%

Payment history

Amounts owed

Length of credit history

New credit

Types of credit used

SOURCE: www.myfico.com


Clean It Up No matter how careful you might be with your finances, circumstances may get the better of you. The loss of a job or a medical emergency could leave you in a world of financial difficulty.

Here are some steps to take if you have trouble paying your bills on time.

• Reassess your needs and wants. Be prepared to make hard choices.

• Stop using credit until you are out of trouble.

• Contact your lenders to negotiate a different payment schedule or interest rate.

Contact nonprofit credit counseling organizations that, for a small fee, can provide debt management assistance and intervene with card issuers. Make sure the service is affiliated with a third party such as the Financial Counseling Association of America or National Foundation for Credit Counseling.

The Lure of Credit “Buy now—pay later.” Those four words sum up the attraction of credit, or deferred payment. Credit comes in many forms, from car loans to mortgages—and most popular of all, the credit card.

Credit Convenience Credit cards make buying easy. With a piece of plastic, you can walk into nearly any store and walk out with merchandise. As for buying online, it would be almost unthinkable without credit cards.

A credit line is assigned to your credit card based on your credit score and the credit card company’s goals and policies. When you make purchases, you are borrowing against the available balance on your credit line. When you receive your monthly statement, you may pay the full balance due or pay less. If you pay less, you will owe interest on the entire

Build a Strong Credit ReportThe chart shows the factors in your credit report that are used to create your credit score. Paying your bills on time has the greatest influence.

Credit ReportsFree credit reports are available once every 12 months from each of the three national credit-reporting agencies. Sample credit reports can be found on their websites. To get a free credit report, go online to www.AnnualCreditReport.com; call (877) 322-8228; or send a request to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348. Be aware that a credit report is not the same as a credit score.


outstanding balance. The rates of interest vary, but the average annual percentage rate (APR) in March 2017 was 15.59 percent.

Teens and Credit Cards Americans under age 21 can have a credit card if a parent or other individual over age 21 cosigns the account or if they can prove that they have the income to make the monthly payments. About one-third of all high school students use credit cards linked to the account of a parent or relative.

Student Loans As the cost of a university education continues to increase, a majority of today’s college students rely on student loans to cover part of their cost of higher education. In 2014, about 70 percent of bachelor degree graduates had student loan debt to repay.

Many people view student loan debt as a helpful kind of debt for several reasons. First, you are paying for something that will continue to benefit you throughout your life. College graduates will earn more over their lifetimes than those with only a high school education. Student loan debt can be viewed as an investment in that future earning potential.

Second, student loans can help you build your credit score. But remember that late payments on your student loans will have a negative effect on that score.

Lastly, federal student loans have some flexibility in their repayment provisions, including debt elimination. However, be sure you understand the terms of any loan before you sign the loan papers.

Despite the potential benefits of student loan debt, you should still plan carefully not to borrow more than you can pay back in a reasonable amount of time. You must consider the income potential of the types of careers for which you are training.

Teen Spending Consumers ages 12 to 19 spend well over $100 billion a year of their own and their parents’ money. Credit card companies want to tap into this spending power.

Benefits of Federal Student Loans1 Fixed interest rate

2 No cosigner needed

3 No credit history required

4 Repayment delayed until graduation

5 Possible loan forgiveness with public service


100

64

35

25

$1,994

$1,193

$619

$424

NUMBER OFMONTHS TO PAY

$40

$50

$75

$100

MINIMUMPAYMENT AMOUNT

TOTAL INTERESTPAYMENT

Repayment Schedule on a $2,000 Credit Card Loan at 19 Percent Interest

SOURCE: Government Accounting Oce: “College Students and Credit Cards”


Accept only a small credit line, such as $500, on your first credit card. You can learn to manage your debt without accumulating too much.

TIPStart slow.

Credit Traps and Tips Suppose you decide to take on student loan debt or you decide to sign up for a credit card the day you turn 21. Unless you learn how to use credit responsibly, you could find yourself in a deep hole. You won’t be there alone. It is estimated that a majority of Americans between the ages of 18 and 24 spend nearly 30 percent of their monthly income on debt repayment.

Ideally, you’ll want to pay off your credit card balance in full every month. True, you are required to make only a small minimum payment. But for every dollar you don’t pay this month, you’ll pay interest on it next month. Even worse, first-time cardholders without an established credit rating are paying a higher-than-normal APR.

What if you pay late or miss a payment entirely? You’ll be subject to a late penalty. The finance charges, which include the APR and any related fees, can quickly add up to more than your initial purchase.

Suppose a credit card company requires a $10 minimum payment on a $290 game system. If your payment is late by even one day, you’ll get hit with a late fee and more than likely a significantly higher APR. And if your balance goes over the credit limit set by the issuer, there’s a charge for that, too. Suddenly, the $290 “bargain” can turn into a $600 headache.

The Cost of Cash Fees mount up even faster if you use your credit card to get cash. A cash advance carries an upfront fee of 2 to 4 percent, plus a higher interest rate than that charged for regular purchases. And the charges start the second the ATM coughs out the cash.

Read the Fine Print The importance of reading the fine print of a credit card’s terms of agreement should not be lost on any cardholder. The Truth in Lending Act requires banks to provide complete information on the APR, fees, and surcharges. Credit card companies are also required to tell you how long it will take to pay off your balance if you make only minimum payments. Companies must also notify customers before interest rates increase or terms change. You can opt out of the changes, which will close the account. You can then pay off the balance under the old terms. The time it takes to review these terms could save you headaches and money.

Credit or Debit? The surest way to avoid the debt trap is to keep credit card use to a minimum. For lower-cost purchases, you are better off using a debit card, a check, or cash. A debit card offers the same convenience as a credit card, but because the money comes straight out of your bank account, there

Cost of Credit This table shows the cumulative effect of a 19 percent interest rate on a $2,000 credit card debt. A person paying only $40 a month would incur $1,994 in interest charges by the time the loan was repaid—paying nearly double the amount of the original debt.


is no interest rate and no risk of going over your limit. The danger of debit cards is that since they are so easy to use, you may lose track of your spending. Also, if you are a victim of identity theft, your bank account could quickly be drained and it could be some time before the bank replaces the funds. For online purchases, it’s wisest to use a credit card. It offers greater security.

Types of Loans Once you have decided to make a purchase using credit, you must decide what type of loan to use. While credit cards are super convenient, they may not be your best choice.

There are two general types of loans—secured and unsecured. A secured loan is one where the borrower puts up some type of collateral, usually a piece of property, in order to qualify for the loan. The lender can sell the collateral if the borrower fails to pay back the loan. An unsecured loan, which includes credit cards, is one without any collateral. Lenders view secured loans as less risky because they have something they can use to recoup their losses if the borrower fails to repay them. As a result, secured loans tend to have lower interest rates than unsecured loans. Similar to secured loans, lenders also view loans where the borrower has made a down payment—a cash payment to the seller of a good that the loan is for—as less risky and will offer lower interest rates for loans with a down payment.

Loan Repayments Both secured and unsecured loans can be repaid in different ways. The lender generally sets the repayment terms. Single-payment loans are short-term loans paid off in one lump sum. The lump sum will include the principal and the interest. Installment loans, such as home mortgages and auto loans, are repaid at regularly scheduled intervals. Each payment is divided between principal, or the amount borrowed, and interest. (The earlier you are in the life of the loan, the higher the

proportion of each payment that goes toward interest.) A third kind of debt is revolving credit, where the amount borrowed and paid changes each month. The best example is a credit card.

How Much Is Too Much? Carrying some debt is not a problem—almost everybody does it. But you need to stay within safe limits and you need to keep in mind your obligation to repay borrowed money. A general rule is that your debt payments, including a mortgage, should not be more than 36 percent of your gross income (income before taxes and deductions). You can estimate your own debt-to-income ratio by dividing the amount of money that you owe by the amount of money that you earn. If the result is higher than 36 percent, you probably owe too much money.

Getting Out One reason people take on too much debt is that they want stuff now and ignore the fact that credit is a promise to pay later. They don’t adequately plan for the fact that the repayment of principal and interest begins to eat into money that is needed for necessities. Practicing discipline to purchase only what you can afford will save you many headaches in the future. However, if you do dig a deep hole of debt, there are ways to climb out of trouble.

Too Much Debt?Here are some warning signs:

• Inability to make minimum payments

• Relying on credit cards out of necessity and not convenience

• Borrowing from one credit card in order to pay another

• Tapping retirement savings or other investments to pay loans


LIAM

Two Borrowers

BELLA

Monthly salary: $2,500

She has two roommates. Her portion of the rent is $400.

She uses public transportation and does not own a car.

School loan payment: $200

Other debt payments: $150

Monthly salary: $2,800

He lives at home and pays rent of $250.

His car payment is $315.

School loan payment: $260

Other debt payments: $220


A Tale of Two Borrowers Bella and Liam both have applied for a credit card. Review their current financial situations described in the “Two Borrowers” table. Based just on their debt-to-income ratio, which borrower is more likely to be approved for additional credit?

Caught in the Debt Spiral Take Andy. His entry-level job had an entry-level salary. The debt he ran up in college soared as he depended more and more on “plastic” to cover the basics. Paying just the minimum spared his credit temporarily, but he was racking up high finance charges. Once he started missing payments, creditors began calling. Now what?

Payday Lending Trap Andy often passes a payday loan store. Could it solve the problem of how to pay his rent, which is due before he gets his next paycheck?

He asks a friend and discovers that he can pay a fee and quickly get a loan of up to $300. But there is a catch. The whole amount will be due in two weeks, when he gets his next paycheck.

In fact, payday lending is one of the biggest consumer debt traps around. The fee for the loan basically amounts to a high rate of interest on the loan—much higher than interest rates allowed on credit cards and other forms of debt. Also, it is a single payment loan, so you must repay the entire amount when it comes due. This can be a great hardship to those already burdened by debt. Unlike other states, California law does not allow payday lenders to make you a second loan in order to pay off a current loan.

Does Andy have other choices?

Credit Counseling Andy hated to admit it, but he needed help. He tried credit counseling. A credit counseling agency will negotiate on your behalf with the creditors, trying to get you an extension of time and lower interest rates. For a small service fee, it will take over your monthly payments. Andy checked with the National Foundation for Credit Counseling and the Financial Counseling Association of America to find a reputable agency. He now writes one check per month to the agency, instead of three to his creditors.

Debt-to-Income Ratio Potential lenders will calculate Bella and Liam’s debt‐to‐income ratio. If the ratio is too high, additional credit will likely be denied.

More than 19 million U.S. households resort to

payday loans.


Other Options If you find yourself in Andy’s shoes, there are other options to consider—with caution. You could swallow your pride and ask a relative or friend for a loan. If you go this route, though, make sure that you have a written repayment plan and offer to pay interest.

You could also try taking out a loan from a credit union. Credit unions usually offer more lenient credit terms than banks. You may, however, need a cosigner.

Bankruptcy: The Last Resort Bankruptcy is truly your last option. Common reasons for bankruptcy are large hospital and medical bills, uninsured losses, or high credit card bills. Some of these are unavoidable, but many people get into serious debt because of poor decisions and lack of foresight.

Once you declare bankruptcy, it will be harder for you to obtain credit. Nearly every credit application asks: Have you ever declared bankruptcy? So take this step only with the help of a lawyer who specializes in bankruptcy and can explain the options and consequences.

One option is known as Chapter 7, or liquidation. You give up your assets in

exchange for your debts. The cash value of your assets is paid to the creditors.

To reduce fraud and make it harder to declare bankruptcy, the federal government passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Debtors must prove that their income is below their state’s median income and complete financial counseling and financial management education. Also, the government randomly audits debtors to check up on the accuracy of the bankruptcy documents.

A second option is known as Chapter 13, or debt adjustment, which involves temporarily suspending foreclosures and collection actions while you draft and execute a plan to repay some or all of the debts in three to five years. The amount to be repaid depends on how much you have versus how much you owe. Just be aware that any form of bankruptcy will make it far more difficult to rebuild a secure financial future.

It’s Your Turn6. What is the difference between helpful and harmful debt? List

examples of each type of debt.

Debt Concerns Getting yourself deep into debt, especially through the overuse of credit cards, can cause significant financial worries down the road.



What Is Insurance? Insurance is the key part of a risk management plan that will protect you against financial losses. With insurance, you are paying for the protection if something were to happen to you, such as illness or a car accident. The insurance company is spreading its risk over many people, hoping that not everyone will need to make a claim.

Some people tend to underestimate their chances of something bad happening because they have an “it can’t happen to me” mindset. Other people tend to overestimate the chances of bad things happening if they have heard of or seen similar things happen to other people recently.

Having insurance can also have an unexpected effect on some people’s behavior. Having the security and peace of mind of having insurance can cause some people to engage in riskier behavior than they might if they did not have insurance. Insurers are aware of this and have measures in place to encourage their policyholders to reduce the frequency or size of their claims through measures such as deductibles and copayments.

What Does It Cost? The payment you make to an insurance company is called a premium. The cost of insurance is high and getting higher. So does it pay to buy it? Absolutely. You may never file a claim. But if you do, the amount you collect could be many times what you paid in premiums. Even a brief stay in a hospital, for example, can cost thousands of dollars.

Besides, in many cases, insurance is not optional. You can’t register a car without proof of auto insurance. Nor can you get a mortgage without homeowners insurance.

Deductibles Insurance companies spread out their risk by collecting premiums from a lot of customers. They also reduce their costs by requiring copays and deductibles.

A deductible is an amount you have to pay before your coverage kicks in. Deductibles are used for auto, property, and health insurance. For example, if your car insurance policy has a $1,000 deductible, and you have an accident, you’ll have to pay the first $1,000 in damages. The insurance company pays the rest. The higher the deductible you have on your policy, the lower your premium.

Copays If you have a copay on your health insurance policy, you are responsible for a portion of the total cost of a service covered by the policy. Every time you go to a doctor, you pay a small amount of the bill and your insurance company pays the rest. Generally, you can keep copays to a minimum if your medical provider—a doctor, hospital,

Risk ManagementYou just got a ticket for speeding. You were only going a few miles per hour over the speed

limit, but your parents are not happy. They have you covered on their insurance policy, but a

moving violation could raise their rates—and yours—through the roof.

The average daily cost of care in a nonprofit hospital in

California is $3,533.


WHAT IT INSURES

Types of Insurance

INSURANCETYPE

�Auto

�Health

�Property

Life

�Disability

• Liability covers damage to others and their property. It is required to register your vehicle.

• Personal injury covers medical expenses in case of injury to driver or passengers.

• Collision covers repairs to your vehicle if it is in an accident.

• Comprehensive covers damage to your vehicle not caused by an accident.

• Uninsured or underinsured motorist covers you in case the person who hits you is not insured.

• Treatment in case of illness or injury

• Routine medical and preventative care

• Hospitalizations and surgery

• Prescriptions

• Dental care

• Homeowners insurance covers damage to the house and damage or loss of its contents due to water, fire, wind, or theft. It is required to obtain a mortgage. It can cover liability if someone is injured in your home and sues you for damages.

• Renters insurance covers damage or theft of the personal property in a rental.

Pays a set amount to your beneficiary in case of your death. The beneficiary is the person or entity, such as a charity, that you name as the recipient of the benefit of your life insurance policy.

Pays you a portion of your salary if you are unable to perform your job for an extended period of time. The disability can be full or partial, temporary or permanent.

Coverage Types There are five basic types of insurance coverage most adults should have. Your age, family situation, and income are major factors in deciding the type and amount of coverage you should get.

or specialist—is part of your insurance company’s healthcare network.

It’s All About Trade-offs You wind up in the hospital for an emergency appendectomy. Your house is broken into. An uninsured driver hits you from behind. You get to pick up the pieces—and, unless you’re insured, the bill.

Insurance is all about avoiding risk. But avoidance comes at a cost. For you, insurance means paying now to avoid a gigantic cost later. For the insurance company, it means identifying people who are likely to cost them a bundle.

Insurers set rates based on risk factors, hard statistics that predict the likelihood of them having to pay out claims. Do you plan to become a pilot or take up mountain climbing? That will make you a higher risk than a lawyer who spends leisure time doing crossword puzzles. A smoker must pay higher life insurance premiums than a nonsmoker. The higher premium cost is the trade-off for their risky behavior. In the worst case, a risky lifestyle may make you uninsurable.

You may also be required to purchase different types of insurance by some

As your income increases, consider raising your deductibles to lower your insurance costs.

TIPRaise your deductibles.

Risk Management PF 29

INSURANCE NEEDS

Changing Insurance Needs

AGE

20s

30s

40s

50s

60s

Basic auto insurance, renters insurance, and health insurance are often sucient.

As your family grows, so will your insurance needs. Homeowners, life, and disability insurance, and a family health insurance plan will become essential.

Review coverage limits to make sure you are adequately insured. If you have teenagers, add auto coverage for them. Your premiums will likely rise sharply.

Review coverage as your children become independent. Make sure disability insurance coverage has kept pace with your income. Consider investing in long-term care insurance.

As you make decisions about retirement, review all insurance coverage. You can likely eliminate disability insurance but should consider having long-term care insurance if you don’t have it already.


contracts or by governments. To qualify for a home mortgage, the lender will require you to purchase homeowners insurance to protect that property in case of a loss to the property. If you live in an area prone to flooding, the government may require you to take out flood insurance before you can buy the home to protect you against property loss in the event of a flood and to protect public agencies from having to support very large numbers of people who might be victims of a flood. Similarly, many states require people to have auto insurance before they can register their vehicle to be driven on public roads.

Who’s Got You Covered? Right now, insurance costs are probably not your concern. Most teens are covered for most of their insurance needs—life, health, and property—by a parent or guardian. However, some teens must pay for their own auto insurance. And that’s expensive. Statistically, new drivers are high risk. But if you want wheels, you have no choice but to purchase auto insurance.

Health Insurance No matter how healthy your lifestyle, you are going to face illness or an accident. A bout of pneumonia or a broken leg may cost hundreds, even thousands of dollars. Even with health insurance, you’ll have to pay something. But it’s better than paying it all.

Employer Plans Most young people are covered under their parents’ health insurance, whether they are in school or not, up to age 26. Once you enter the working world, it’s up to you.

If you work for a company that offers health insurance, you can usually choose from a variety of group plans.

Some cover you from day one. With others, there is a waiting period. Your share of the premium is deducted from your paycheck each pay period. Just as with car insurance, the higher the deductible, the lower the premium.

The least expensive health insurance plan is generally a Health Maintenance Organization (HMO). An HMO allows you to pick a primary care physician to

Changing Needs Your insurance needs will change throughout your lifetime. Everyone’s path through life will be different, and this is one example of how those needs could change as you age.


whom you pay a copay. If you need to see a specialist, your primary doctor will refer you to an in-network doctor. This is a doctor who has agreed to accept the payment level paid by the insurance company.

Get Insured Can’t get insurance through your job or your parents? As of 2014, you can purchase private health insurance from an exchange in your state. The healthcare reform law passed in 2010 also prevents insurance companies from denying you coverage for preexisting conditions. Healthcare reform is an ongoing political issue, so be sure to keep up with current events to learn of any changes that affect you.

Cut Your Costs The rising number of claims, plus increasing cases of fraud, have caused insurance premiums to skyrocket. But there are a number of steps you can take to get the best coverage for your buck.

• Comparison shop. Compare the rates of different companies. Check with the local Better Business Bureau. And don’t forget word of mouth. For example, if you’re shopping for auto insurance, talk to people with similar driving records. Don’t just ask about premium costs. Ask about customer service as well. Low price is no bargain if an insurer takes forever to service your claim.

• Make yourself a better risk. If you get speeding tickets or have an accident, it’s going to cost you higher premiums. But insurers also reward behavior that lowers risk. A good driving record can keep costs in check, so drive carefully and don’t text and drive. And while good grades won’t reduce health or life insurance

premiums, they might get you a dis-count on car insurance.

• Cover yourself. You and your insurer may not always see eye to eye on a claim. It’s up to you to provide evi-dence of loss or damage. Take pictures of that busted headlight. And keep receipts. That way, you’ll be more likely to be covered for everything you’ve paid.

• Know your policy. Being smart about insurance involves keeping your policies updated. Talk to your insurer to make sure you have the cover-age you need. Review your coverage before filing a claim. You’ll avoid nasty surprises that way.

Covering Medical Care Insurance plans help people get the medical care they need, whether it’s a basic checkup or special treatment related to an illness or accident.

It’s Your Turn7. How is insurance a trade-off between risk and cost? Use

examples to explain your answer.

Risk Management PF 31


Opportunity Costs Every choice you make means you choose not to do something else. The choice you give up is known as the opportunity cost of the choice you make.

Let’s first look at this idea with a common choice you face. You can study for the test or you can watch a movie with friends. You know that studying will help you get a better grade on the test. But you give up time with your friends when you make the choice to study.

The idea also applies to how you spend your money. The reality is that you cannot have everything, so you must make choices. And every choice you make means you didn’t choose something else.

Think about your last trip to the mall or your favorite store. What five things were you tempted to buy? Before you pull out that credit card, think before you buy. Analyze the costs and benefits of the

purchase. The benefits seem obvious. You will have something that you like that you didn’t have before. The purchase may also be something you absolutely need.

But are the costs worth it? Did you budget for this expenditure? Will this purchase keep you from paying a bill on time? What will the purchase do to your future buying power? Can the purchase wait? Do you already have something else that you could use instead?

Major Purchases Major purchases usually require some advance planning. They require a large chunk of your available cash, reduce your savings, or require you to borrow. A car, furniture, electronics, and appliances are examples of major purchases.

Buying a home is another example of a major purchase. For most individuals, buying a home means many years of budgeting for repayment of a home loan. Before buying a home, people analyze the costs and benefits of homeownership.

Like most young people, your first major purchase may be a car. Having your own car gives you the freedom to make decisions on where and when you’d like to travel. It also provides a sense of pride in ownership. But you need to do your homework and spend some time and effort to get a good deal.

The Costs of Car Ownership Step one is to determine what kind of car you can afford to buy and adequately insure and maintain.

Since you likely have no credit history, you may have to search around for a bank or credit union that will lend you money. Often, car dealers can arrange the

Consumer SmartsWhat are you willing to give up today to get something you want in the future? For example,

can you pass up buying a new T‐shirt and save that money to put toward the new video

gaming system you really want?

Should You Buy a New Car?There are many money issues to consider before you take the step of buying a car. Ask yourself these important questions before you buy:

• How much money can I put down?

• How much money do I need to borrow?

• How much are my monthly car payments?

• How much are my insurance premiums?

• How much will car maintenance cost?

• How much will gasoline, parking, and tolls affect my budget?


The salesperson’s job is to make the sale, whether it’s a car or a piece of furniture. Don’t be pressured into buying something you can’t afford.

TIPAvoid sales pressure!

financing, but their main goal is to sell you a car. Their financing terms may not be the best, so it pays to shop around. To get a vehicle loan, you may need a cosigner, a person who is responsible for paying the loan if you default.

New or Used? If you are going to buy a new car, you want to determine the invoice price of the model you want, and then get at least two or three competitive bids from dealers. Request bids in writing and then try to negotiate. Will the dealer closest to you match the price of the dealer who is less conveniently located? You can use websites such as cars.com and autobytel.com as online resources for researching and getting bids.

Perhaps you have a car you would like to sell or trade. This will give you some additional money to use for your new purchase.

If you’re buying a used car, get a history of the Vehicle Identification Number (VIN) and have a mechanic inspect the car. That way you can determine how well the car has been cared for. There are also online sites that help people buy used cars. The sites offer reviews of online used car classifieds, as well as tips on how to buy a used car from dealers or private sellers and how to negotiate with

tough sellers. They can also include lists of scams to avoid and questions for you to print out to ask the seller.

New automobiles depreciate, or lose value, quickly. A new car loses half its value in the first three years. But buying a new car can make sense if you plan to keep the car for a long time. Used cars are less expensive to buy and insure, but maintenance costs will likely be higher. There are two things that will influence which car you choose—what you like and what you can afford to buy based on your savings and income. Put some thought into making a decision that best meets your needs based on your available resources, and budget accordingly.

Leasing a Car Those who don’t want to take out a loan or drive the same vehicle for more than a few years might opt for a lease. Leasing means the automaker or third-party lender owns the vehicle and, after paying an initial down payment, you pay a monthly payment for the term of the lease. The catch is if you go over the mileage allowed for the term of the auto lease, generally 12,000 miles per year, you have to pay a substantial fee for each additional mile. If you have a long drive to college or a job, the commute could eat up the mileage limit in no time.

Car Shopping Buying a new car involves finding the right car for the amount of money you can spend. Take the time to shop around and compare pricing before making your final decision.

Consumer Smarts PF 33


Negotiating with Car Dealers You might want to consider taking a more experienced person along with you when you buy your first car. It pays to have an ally. People in business have experience with purchasing, using, and selling property. Their advice may prove to be very helpful to you in making your purchase.

In many cases, salespeople hold the upper hand when it comes to negotiating car prices. You can take a few steps, however, to level the buying field and avoid being pressured into spending more money than you want or can afford.

• Be prepared. Know what you want, and get bids based on the invoice price.

• Don’t be talked into unnecessary options.

• Don’t discuss a trade-in until after you’ve settled on a sale price. A dealer might want to consider the trade-in

vehicle as a reduction to the sticker price. In fact, any trade-in should have nothing to do with the price of the new car.

• Don’t be pushed into a quick decision, no matter what one-day specials are dangled before you.

• Get the sale offers in writing. If a dealer is not willing to put all agree-ments in writing, walk away.

Warranties Dealers are required by federal law to post a Buyer’s Guide on the used cars they offer for sale. This guide must specify whether the vehicle is being sold “as is” or with a warranty, or guarantee to repair or replace, and what percentage of the repair costs the dealer will pay. Most new and some used cars come with a manufacturer’s warranty that covers certain repairs for a set period of time or up to a certain mileage limit. Extended warranties increase the amount of time or mileage that repairs will be covered. No warranty covers basic maintenance, like oil changes, tire rotation, or new tires.

If you happen to buy a car and the next day the engine falls out, you’re protected by federal and state lemon laws. First, however, you should go back to the dealer if you think you’ve bought a lemon. If you cannot reach an agreement, check the law to see what recourse you have.

Preparing for Your First Home You’ve been looking forward to living under your own roof and by your own rules. Independence. Rent. Bills. Cooking and cleaning. Yes, life is full of both ups and downs.

The first reality check is figuring out what you can afford. A general rule of thumb is that your rent and utility payments should not cost more than one week’s take-home pay. How can you figure the average monthly cost of utilities? Ask the landlord or the previous tenant.

Tips on Buying a CarTo get a taste of what it is like to plan for a major purchase, follow these steps:

1 Determine how much money you need to buy the car of your choice. Taxes and fees will be lower on a less expensive car.

2 Look at your overall budget and determine what you can afford to pay monthly.

3 Decide how much of a down payment you can make. You can lower your monthly payments by putting more money down.

4 Determine the length of time you want to have a loan. The longer you have a loan, the more interest you pay.

5 Choose two differently priced cars that you like from ads in the newspaper or online. Go to a website with a loan calculator, such as Bankrate.com, and estimate how much you would have to pay per month with various down payments, interest rates, and loan payment plans.


You will have to plan ahead. Many landlords require that you pay the first and last months’ rent up front. In addition, you may have to pay a security deposit. This money is set aside for repairs of any damage you may do to the apartment beyond normal wear and tear.

Finding the Right Place Finding the right apartment or rental home takes more than a little time, effort, and money. It also takes evaluating the costs and benefits of any rental option. Remember that the opportunity cost of the apartment you rent is the next best apartment you did not rent.

Like lenders, landlords evaluate your character and capacity to pay the rent in deciding to accept you as a tenant. Landlords should not use other criteria in renting to you. Under California law, a landlord cannot discriminate against a potential tenant because of race, color, religion, gender, sexual orientation, marital status, national origin, ancestry, familial status, source of income, or disability.

You can make the rental process easier by defining your needs and wants. Usually, a lease term is 12 months. So while the cheap one-bedroom with high ceilings and walk-in closets may seem like a steal, the fact that it’s near the firehouse could make it a case of home, sleepless home.

Websites are a good place to begin your apartment hunting. You can also look for apartments in the real estate section of a local newspaper. If you’re hiring a realtor to search on your behalf, keep in mind that they will charge you a fee based on the rental price. So do your homework, and make a list of priorities for both what you want and do not want in your new apartment.

What if you find the ideal apartment, but the monthly rent is beyond your means? It might be time to consider getting a roommate to share the costs.

Roommates Can two live more cheaply than one? More often than not, a two-bedroom apartment in many locales is not much more expensive than a one-bedroom place. Plus, you can split the utilities and rent. The sources for finding a roommate are the same as those for finding an apartment—websites like roommates.com, newspaper classifieds, and word of mouth. You want someone who has a compatible lifestyle and who can pay their share of the bills on time. Your search for the right roommate is just as important as your search for the right place to live.

Furnishings If you have decided to rent an unfurnished apartment, you will need to be resourceful to avoid major

Key Questions for RentersFinding the right apartment can be hard. Before you sign a lease, be sure you get the answers to these questions.

• How long is the term of the lease?

• When is the rent due?

• What are the penalties for paying late?

• Are utilities included in the rent?

• Are there working smoke detectors?

• Is parking available?

• How much advance notice is required before moving?

• Are there laundry facilities?

• Are pets allowed?

• Is the neighborhood safe?

• What happens if you break the lease?

• How are repairs handled?

• Is there public transportation nearby?

• Can you make cosmetic changes such as painting or hanging a picture?


• You can get your new item right away rather than saving over time.

• You can rent to own, meaning you own the item at the end of the contract.

• If you can’t make the next payment, you can return the item without a�ecting your credit report.

• If you choose the shortest payment terms, the total you pay may be similar to someone who borrowed from a bank for the same purpose.

• Some stores o�er repair services and delivery.

• Rent-to-own contracts are not loans and do not technically charge interest rates, but totaling the payments over the life of the contract shows hidden rates of 60 to 100 percent.

• Some plans have hidden fees.

• Customers pay much more than the actual value of the item by the time they own it.

• Store employees may pressure customers to rent things they can’t a�ord.

• Some stores might deliver used or damaged goods that are not what was promised.

ADVANTAGES DISADVANTAGES

Rent-to-Own Businesses: Advantages and Disadvantages


expenses. An unfurnished apartment is not only empty, it will probably also be bare, right down to the windows and shower—not to mention the cupboards. After you have tapped family and friends, yard sales and thrift shops are potential gold mines. Recycling and reusing are two ways to keep your costs of furnishing to a minimum.

Protect Yourself Learn from others’ mistakes. Many apartment complex websites are chock-full of comments posted by current or previous tenants. You might even ask a passerby in the parking lot. To protect yourself from being charged for preexisting conditions, assess and photograph any existing damage before you sign a lease.

The Lease You, as the tenant or “lessee,” and the property owner, as the landlord or “lessor,” enter into a contract called the lease or rental agreement. Here are some tips to make it a positive experience.

• Be prepared with the documents you will need to provide. These items

include proof of income and identity, letters of reference, and a check for any required deposit.

• Get the lease in writing! Never take an apartment on the basis of a handshake with the landlord.

• If you don’t understand something in the lease, don’t sign it!

Renters Insurance Even if you furnish with hand-me-downs or thrift store treasures, be sure to consider renters insurance. Maybe your roommate has a brand new flat-screen television. Should it disappear, you’d be left footing the bill. The benefits can far outweigh the costs.

Rights and Responsibilities This is your money and your home, and you have rights. For example, you have the right to privacy. A landlord or maintenance worker is prohibited from entering your apartment without your permission. Renters’ rights and responsibilities vary according to location, but most states provide a tenant-landlord bill of rights. Check with

Should You Rent to Own? Rent‐to‐own businesses offer a way for those with no or poor credit histories to get new furniture and other items. But the total cost could be significantly more than saving your money and purchasing new furniture later.


ANNUALNECESSITIES

MONTHLYNECESSITIES

Average Living Expenses in Select U.S. Metropolitan Areas

METROPOLITANAREA

Houston, TX

Miami, FL

Chicago, IL

Los Angeles, CA

Boston, MA

New York, NY

$5,051

5,709

6,000

7,149

8,227

$60,608

68,503

71,995

6,157 73,887

85,793

98,722

SOURCE: Economic Policy Institute, www.epiorg.com, 2015 Family Budget Calculator

the California Department of Consumer Affairs for a clear understanding of your rights as a renter.

Tenants also have responsibilities, such as paying the rent on time and keeping the apartment clean. There may also be quiet hours, a policy imposed on most apartment dwellers. As always, a tenant’s rights come with certain responsibilities.

Homeownership Some individuals may wish to transition from renting to homeownership. If this is your goal, budgeting for the transition is critical. It often takes several years to save enough for the down payment on the house. The larger your down payment, the lower your monthly mortgage cost will be. Before you make this major financial commitment, consider the costs and the benefits.

There is a lot to know before making the transition from renting to homeownership. Ask good questions. Will you be able to make the monthly mortgage payment? How will homeownership impact your ability to change jobs or locations? Do you have the time and financial resources to take care of needed upkeep and repair, such as a new roof or furnace? Seek professional advice to help you answer these questions.

Home Loans Home loans, known as mortgages, are often considered a helpful form of debt. Most people cannot purchase a home without borrowing. As long as you purchase a home that will maintain or grow in value, mortgage loans are a great way to build wealth because you are purchasing an asset with long-lasting value.

There are different types of home loans available to consumers. Some people choose a fixed-rate mortgage. In this type of loan, the interest rate stays the same over the life of the mortgage, which could be up to 30 years. Some homebuyers opt for a variable rate. In this case, the interest rate may change over the life of the loan. A rise in interest rate means a rise in the monthly loan payment. A balloon mortgage usually comes with an initial low interest rate, but the loan balance is due within a short time, perhaps at the end of five years. Other loans, such as VA (Veterans Affairs) loans, FHA (Federal Housing Administration) loans, interest-only loans, or reverse mortgages, are special types of homeownership options available to individuals who qualify. It is good to analyze all options before securing a home or other consumer loan.

Expenses Vary by Location Geography has an impact on living expenses such as food, housing, healthcare, child care, and transportation. In cities like New York, Boston, and Los Angeles, living expenses are much higher than those in smaller cities or rural areas.


Costs and Benefits of Homeownership

BENEFITSCOSTS

• Responsibility for all maintenance costs

• Responsibility for all home-related costs from property taxes and insurance to landscaping

• Inability to quickly move for new job opportunity or life change; it could take a long time to sell your home.

• Late payments will damage your credit score.

• Foreclosure for nonpayment means you would lose the equity you have in the house.

• Value of the property could decline.

• More space and privacy

• A place you own and can customize as you like

• An investment in your future; you may receive a substantial amount when you sell your home depending on the market.

• Some tax breaks

• Stable monthly payments for the life of the mortgage

• Ability to build equity

• A place of security and stability

• A sense of pride in homeownership


Identity Theft Question: What do going to the beach, taking out the garbage, and answering your email have in common? Answer: They can all leave you vulnerable to identity theft. Chances are you know someone who has been a victim of identity theft. You may be a victim yourself—without even knowing it.

A thief can raid your wallet while you’re splashing in the water. A dumpster diver can retrieve old bank statements. Or an innocent-looking email could be a phishing scam to get your personal information. Most people don’t realize they’ve been victimized until it’s too late. You might not find out until you’re denied a student loan because you’ve missed several car payments—and you don’t even own a car.

The Cost of Identity Theft Once they have your identity, thieves can use it to commit a wide variety of fraud, such as making purchases with your credit card, obtaining other credit cards, or even getting a mortgage in your name. Worse yet, if the crook who stole your identity gets arrested for any crime, you could get stuck with the criminal record.

In too many cases, the burden of proof is on the victim. According to the Identity Theft Resource Center, it can take 600 hours to repair the damage. Some victims need up to 10 years to fully clear their records. If your identity is stolen, you could face higher insurance costs, credit card fees, and interest rates for loans—and may even have trouble finding a job.

A Prime Target: You So should you be worried? Identity theft topped the list of all complaints filed with the U.S. Federal Trade Commission (FTC) in 2012, with more than 369,000 complaints. California had more than 55,000 identity theft complaints filed with the Federal Trade Commission in 2015. About 1 in every 40 households experienced identity theft of a minor. About 27 percent of child ID theft cases are caused by individuals known to the minor. Child ID theft is

Cost-Benefit Analysis All investments have trade-offs, including the purchase of a home. Make sure the benefits outweigh the costs for you.

An estimated 9 million Americans have their

identities stolen every year.


19 and Under

20 – 29

30 – 39

40 – 49

50 – 59

60 – 69

70 and Over

0 2 4 6 8 10Percent

12 14 16 18 20 22 24 26

SOURCE: www.ftc.gov; Federal Trade Commission, Consumer Sentinel Network Data Book for January–December 2015

Identity Theft Complaints by Victims’ Ages, 2015

difficult to resolve. It is important to always keep information about a child’s identity in a safe place. This includes a child’s Social Security number.

Why Me? Why are young people so vulnerable? One reason is that most teens have not established credit records that can be monitored. Studies show that teens

• are less likely than adults to check their credit card records.

• are more likely than adults to provide personal information on the Internet.

• take greater risks relative to older age groups.

• often have an “it won’t happen to me” mindset.

Finally, many Americans do not use their Social Security number until around the age of 15, when they apply for driver permits or first jobs. As a result, identity thefts against them may go unnoticed for years. Sadly, there have even been babies that were the victims of identity theft.

At College Over half of all personal information security breaches take place at universities, experts say. Part of the reason may be that nearly half of all college students have had their grades posted using a Social Security number. It’s within your rights to tell a college administrator not to post your personal information.

For more information on identity theft and what you can do to protect yourself, check out the government website www.ftc.gov/bcp/edu/microsites/idtheft.

Lower Your Risk Although there is no foolproof way to safeguard your identity, there are a number of common-sense steps you can take to protect yourself against fraud.

• Be alert online. Think twice before sharing personal information. Users on social networking sites often post personal statuses, favorite music, addresses, cell phone numbers, and former employers. All of this informa-tion could be used to create a credit card account or take out a loan in your name.

• Use passwords. Always use a pass-word to protect your cell phone, lap-top, and tablet. Do not store personal information on these electronic devices. Create passwords that contain upper-case and lowercase letters, numbers, and special characters such as !, $, *, #, and &.

• Check and shred your statements. Always check your bank and credit card statements for anything unusual. Use a paper shredder to get rid of any documents containing personal infor-mation. Simply tearing up documents isn’t enough to keep thieves from reas-sembling them.

Identity Theft In 2015, the Federal Trade Commission received more than 410,000 complaints of identity theft. About 19 percent fell into the under‐30 age bracket.

Don’t respond to any unsolicited requests for your personal information that you receive by phone, mail, or online.

TIPProtect your personal information.



• Watch your mailbox. If you don’t have a credit card, be suspicious of any unsolicited credit card offers in the mail addressed to you.

• Protect your reputation. Loss of one’s reputation could be worse than loss of one’s identity. Be careful what you write about others online and check what is posted about you. Online postings are testing the limits of libel and slander laws.

Buying Online Online shopping may already be a regular part of your life. You don’t have to drive anywhere, stand in line, or haul the stuff home. A few clicks will do it all. And you can shop 24/7.

If you have ever gone from store to store looking for a hard-to-find item, you will appreciate the ease of shopping online. Who has the item in stock? Who has the lowest price? Free shipping? Quickest delivery? You can get the answers to all these questions with a click of your mouse. For starters, you can check price comparison sites such as nextag.com, shopzilla.com, or pricegrabber.com.

Read the Reviews All right, so you can’t try on shoes or a shirt online. Online buyers trade that advantage for

online customer reviews. A recent study of online buyers shows that nine out of ten Americans read reviews posted by other customers online before they make a purchase. You can access detailed customer-driven product reviews. Just be sure to take each review with a grain of salt. Some reviewers might not write about the product itself, but about their shipping or other experience.

E‐Buyer Be Aware Along with its unique benefits, online shopping includes some unique challenges. How do you really know if the online retailer you’re dealing with is reputable and your information will be secure? For the most part, you have a higher degree of confidence if there is a brick-and-mortar backup to the online stores. Major retailers devote a lot of resources to ensuring that their customers have a satisfying and secure online shopping experience. But that does not mean you should not deal with online-only vendors. You just need to be sure the sites you use are legitimate and trustworthy.

Bidding Online The biggest and best deals often exist beyond the big stores. Two of the most widely used alternatives are the relatively free classifieds and auction sites, such as eBay. These offer shopping alternatives that come with a different set of rules tailored for the online marketplace.

Local appeal can be a major advantage. Online classifieds provide access to backyard buyers and sellers at relatively no cost. Your next entertainment center might very well be three towns or three blocks away. In its attempt to keep you scam- and worry-free, these services encourage buyers to deal locally with folks you can meet in person. The site also includes detailed safety guidelines. On Internet auctions, buyers can quickly and easily comparison shop for just about anything, from used cars and leather bomber jackets to concert tickets and even private jets. In this auction format, shoppers can engage in competitive bidding wars.

Online Shopping Tips1 Check out the reviews written by other buyers.

2 Look for a padlock icon in the browsers and “https” for security.

3 Check for endorsements from rating agencies such as the Better Business Bureau (BBB).

4 Steer clear of sellers who offer low prices, only to squeeze you on shipping costs.

5 Use a credit card, as it offers the best safeguard against fraud. But never email a credit card number, bank account information, password, or PIN.


So how are buyers and sellers protected? Buyers rate the reliability and service provided by sellers and eBay makes these ratings available to you. Sellers can leave a short comment and positive ratings only for their buyers.

Fighting Fraud There is a new charge on your credit card bill! But where is the merchandise? You never got it, or even worse, you never ordered it. Many credit card companies will investigate suspected cases of fraud on your behalf, limiting your liability to $50. Also, the Fair Credit Billing Act allows you to withhold payment if you believe that someone has stolen your card number.

You also have the option of filing complaints with the Federal Trade Commission (FTC) at www.ftc.gov.

The FTC website offers you advice on how to protect against fraud, identity theft, and questionable business practices. The site guides you step by step through the process of filing a consumer complaint.

It’s Your Turn8. When you graduate from either high school or college, you will

likely have a full-time job and some key financial decisions to make as you read about in this section. Write a narrative that describes your financial picture and explains why you need to make a major purchase, such as a car. Be sure to include the costs and benefits of the choices and provide alternatives, such as leasing versus buying. In addition, write a conclusion that identifies your final decision and why, as well as how you plan to pay for it.

Online Buying Make sure the online sites you use when making purchases are secure and reputable.



After High SchoolAfter high school, you will continue to develop your own economic identity. What is the economic

value of the skills you have? How will increasing your skills add to your economic value throughout

your adult life?

Almost Priceless It’s hard to put a price on a college education. The personal and career rewards last a lifetime. Unfortunately, paying off the costs of a four-year degree can seem almost as long. The hard facts about paying for college are these: In constant dollars (real dollars after being adjusted for inflation), the average cost of tuition, or money charged for instruction, and fees at two-year and four-year institutions increased steeply from 2009 through 2013. The good news is that increases posted from 2014 through 2017 were below the average rate increase for the preceding five years.

If rapidly rising costs continue, in 2020, a four-year public university education will cost more than $158,510 (in constant dollars) for incoming freshman. This includes tuition, fees, room and board, supplies, transportation, and other personal expenses. A private university will be about twice that amount.

Paying for College The thought of paying for college might send you into panic mode. But there is help. It comes in three forms: (1) grants and scholarships;

(2) work-study programs; and (3) loans. The idea is to reduce the amount you’re going to owe by applying for as many sources of aid as possible.

Most students will qualify for some type of assistance. The biggest financial aid error is not to apply at all. Many colleges are substituting loans for grants, and some are experimenting by waiving tuition for certain income levels altogether.

Types of Lenders Financial aid comes in many packages, and regardless of income, you can qualify for a government loan. Carefully analyze and compare student loan options, whether the loans are offered by the private sector or federal government. Determine the interest rate, when the loan needs to be repaid, and whether there are any other obligations associated with the loan. For example, you may need to have your parents cosign for a student loan. Remember, these loans are investments in your future. You are developing your human capital—skills, knowledge, and experiences that will make you valuable in the job market.

Federal Government Aid When it comes to government aid, the Department of Education offers three basic loans: Direct Loans, Stafford Loans for parents or students, and the Parent Loan for Undergraduate Students (PLUS).

For those in financial need, there is the Federal Perkins Loan. These loans have a fixed interest rate and are made available through the college. Students who go on to take teaching jobs in certain areas or who volunteer in the

By 2025, a four-year public university education

is projected to cost $212,123.


SOURCE: trends.collegeboard.org, Table 2B: Average Tuition and Fee and Room and Board Charges in 2016Dollars, 2006–07 to 2016–17

Ave

rag

e A

nnua

l Co

st

of

Att

end

ance

Year

Average Undergraduate Tuition, Fees, Room, and Board for Full-Time Students

2012–13

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

2013–14 2014–15 2015–16 2016–17

U.S. Private InstitutionsU.S. Public Institutions

College Costs Between 2006 and 2017, costs of undergraduate tuition, fees, room, and board increased for private and public institutions. Though these costs continue to rise, a college education greatly increases earning potential over a lifetime.

AmeriCorps, Peace Corps, or VISTA programs may be eligible to have their federal loans partially repaid or even canceled.

To help qualifying graduates, the government limits loan payments to 10 percent of their discretionary income. Any person who makes their payment on time will have the balance forgiven after 20 years.

Private Sources If money from government loans does not cover all your college expenses, private lending sources could fill the gap. Compared to government loans, however, regular commercial loans typically have higher interest rates, fees, and credit requirements. Trade organizations and educational institutions also offer lending aid. Check with your guidance counselor or access the California Student Aid Commission (www.csac.ca.gov) to find out more information about financing your college education.

Other Sources There are other ways to obtain financial aid without taking out loans. Many students can qualify for financial aid that does not have

to be repaid. You do not need to be a valedictorian or an all-state basketball star to get financial aid. Other sources of financial aid include grants, scholarships, work-study programs, and more.

Selecting a CollegeAs you make the decision about where to attend college, here are a few questions to consider:

• What school do you want to attend, and why? Examine your goals. Look for the educational resources you need at less-expensive public schools. Private schools generally are more costly but can be more generous with their financial aid offers.

• Does location matter? Tuition costs vary considerably from region to region. It is also more expensive to attend a public university out of state. Also, room and board costs vary greatly.

• How much debt can you tolerate? If your career goal is to be a freelance artist rather than a brain surgeon, you might want to choose the less-expensive college to cut down on your post-graduation debt.

After High School PF 43


Grants A no-strings-attached grant is one of the best options for financial aid if you qualify. Available from the federal government, state governments, and higher education institutions, grants are usually awarded according to financial need and tuition rates.

California offers the Cal Grant program, which provides college money that you don’t have to repay. Funding is available for four-year colleges as well as for technical, vocational, or career education. Other grant options may be available to you. Analyze and compare each grant option to see which one is best for you.

All students should complete the FAFSA, even if they believe they will not qualify for aid. FAFSA is the Free Application for Federal Student Aid, available at www.fafsa.ed.gov. You need to complete this form if you want to be considered for federal aid, such as the Pell Grant and Supplemental Educational Opportunity Grant. These grants are given to students with “exceptional financial need.” Most grant organizations require FAFSA as part of their qualification process.

You will need some basic information in order to complete the FAFSA. This includes your date of birth, income information for yourself and possibly for your parent(s), and basic information on available assets that could be used to pay for college. It’s good to work with someone who is familiar with the FAFSA before completing the application, in

order to learn more about the process. Find out more by checking out the U.S. Department of Education website at www.ed.gov, the California Student Aid Commission website at www.csac.ca.gov, or your high school guidance counselor’s office.

Scholarships, Work Study, and More Options Schools offer various scholarship opportunities. Besides aid from the school itself, there are scholarships available from individuals, local community initiatives, and civic groups. Check with local organizations such as the Kiwanis and Lions Clubs. Some companies also offer scholarships to children of their employees. Likewise, you might evaluate scholarship opportunities offered by state governments. Take time to research and evaluate scholarships offered by professional organizations, state governments, individuals, and from the schools you would like to attend.

Work-study programs are a win-win situation for the student, college, and community. This type of aid based on financial need allows students to work part-time in some capacity at a college and earn money to offset their educational expenses. Contact the schools you are interested in attending to ask about the types of work-study opportunities they offer. Researching and evaluating work-study and scholarship opportunities will help you determine constructive ways to fund your college education.

In addition, investigate nontraditional methods of paying for college or post-secondary education and training, such as becoming a resident assistant, or RA, who is trained to be a mentor and supervisor in a residence hall. RAs are often paid a certain amount per semester and have room and board covered.

Your parents or grandparents might also have set up a special investment fund called a 529 plan for you when you were young. The money can later be used for education.

In 2015–2016, full-time undergraduate students received an average of

$14,460 in financial aid.


Job Application

Name*First Last

Email*

How do you prefer to submit your resume?*

Upload your resume

Upload file

Upload

Provide URL

Phone*

Spread the word that you are looking for a job. Many job opportunities come from word of mouth.

TIPPromote yourself!

Time spent in comparing and contrasting other sources of funding may lead you to some excellent possibilities to help pay for your college education.

Getting a Job You may already have had your first job—after school, on weekends, or during the summers. But for most of us, finding a full-time, long-term job doesn’t come until after we graduate from high school or college.

Your Resumé The first step is to prepare a resumé, a written summary of your educational and work experience. Think of it as an advertisement to market yourself to an employer. For entry-level jobs, employers have human capital gaps that they need to fill. They are looking for people who will add value to their organization. Your resumé should identify you as a person who could add that value.

You might be thinking, “That’s fine if I have a lot of experience to list. But this is my first real job.” True, but that doesn’t mean you don’t have skills and qualities that employers are interested in. For example, suppose you worked the same job every summer for three years in a row. That shows that somebody valued your work enough to keep hiring you back. Your service in school clubs or volunteer organizations could indicate desirable

qualities such as leadership, planning abilities, and a strong work ethic. Academic honors can count for a lot, too. Consult a resumé guide to make sure you are presenting yourself professionally. Your resumé is your best chance to make a positive first impression.

References Some employers may ask for references. If you’ve been applying to colleges, you know the drill. Choose people other than family who can tell potential employers about your character and work ethic, such as a former boss, a colleague from an internship, a professor, or an adviser. Be sure to check with potential choices in advance to make certain they are willing to serve as your references. If they are, confirm their job titles, employers, business addresses, email addresses, and phone numbers.

Know Where to Look So you’re ready to look for a job. Where should you start? A good starting point is on job search websites, such as LinkedIn.com, indeed.com, or monster.com. You can search for available jobs on these sites using keywords. Make a list of positions that seem most promising. Research the company before you apply there. Browse the company’s website to get a sense of the corporate culture and whether or not you would be a good fit.

Apply Online Today, many companies allow you to apply for a job by completing an online application form.



Interviewing for a Job Always dress and act professionally throughout the entire interview process. This will go a long way in making a good impression.

Consider a variety of factors when looking for jobs, including required skills, whether the position is contract or full-time, how much independence you would have on the job, and how satisfied you would be with the work. Looking for a job that is a good fit for you and your life can go a long way in helping you excel in the workplace.

The Interview That very first job interview can be an exciting but nerve-wracking experience. But you can prepare for it. Hold a mock interview with family members or friends. Have them ask you possible questions and then critique your responses and your delivery. This will help you evaluate your readiness for the interview and give you confidence as you prepare to enter the job market.

Make a Good Impression The minute you step into a potential employer’s office, the person or people interviewing you are trying to decide if you are a good fit for the company and position. Posture, eye contact, and a firm handshake go a long way in making a positive impression. A popular maxim that is attributed to William Triesthof, a 20th-century author, says: “You never get a second chance to make a first impression.”

Believe it or not, dressing the wrong way can be a deal-breaker. For this reason, you might consider investing in a professional outfit for interviewing. Even a company that allows business casual attire expects you to look professional and not sloppy. Let the employer tell you that you don’t have to dress up as much—after you get the job.


Turn Off Your Cell Phone The person interviewing you may have to interrupt the interview to take a phone call, but you do not get the same privilege. Before you step into the building, make sure to turn off your cell phone. Nothing will ruin a good interview or give a bad impression faster than a ringing cell phone.

Ask the Right Questions Where do you see yourself in five years? Why did you choose your particular college major? Why are you the best candidate for this position? Expect to be peppered with questions such as these. But be equally as prepared to ask your own questions. Research the company ahead of time and prepare questions that show you are truly interested in the position and have done your homework. Questions like these show you’re interested in the job:

• What are the company’s goals for the next year or so?

• How does this job fit in with the com-pany’s goals?

• Describe a typical day here in this department.

Steer clear of questions about pay, benefits, hours, and vacation time. All of that will be covered if you are asked back for a second interview or offered the job.

Tips for Asking Questions During Interviews Part of planning for an interview is preparing questions to ask the interviewer. Use these handy tips to guide you.

• Avoid “me” questions, including ques-tions about pay and benefits.

• Ask one question at a time.

• Avoid “yes” or “no” questions. Your goal is to create a dialogue with the interviewer.

• Ask questions on a variety of topics related to the company and position. This will demonstrate your interest in the opportunity.

• Avoid asking personal questions of the interviewer. While you want to estab-lish a connection with the interviewer, limit your question to areas that are public information. For example, if the interviewer has a diploma displayed in the office, you can ask about his or her college experience.

After the Interview Follow up with a handwritten or emailed thank-you note. This shows your professionalism and reaffirms your interest. If you’re not offered the position, try not to get discouraged. It’s part of the interview process. And remember, rejection can work either way. You’re under no obligation to accept the first offer that comes along. Factor in benefits, commuting costs, work environment, and the possibility of career advancement. Look for the best fit for you.

It’s Your Turn9. Research and describe the hiring process used by two local

employers who hire teens. Prepare a series of mock interview questions that one of the employers might ask. Work with a partner to conduct and critique a mock interview.


Computer Science

Math and Sciences

Business

Social Sciences

Communications

Humanities

Agriculture and Natural Resources

51,925

48,733

53,459

54,364

54,803

$66,097

59,368

65,540

Engineering

Average Salaries by Discipline, 2017

SOURCE: www.naceweb.org, National Association of Colleges and Employers, Figure 1: Average Salaries by Discipline/Bachelor’s Degrees

ENTRY-LEVEL PAYJOB CATEGORY


Taxes and IncomeYou have big plans for spending your first paycheck. But you are surprised and disappointed

that the amount is less than you expected. Why is it less? Your employer has withheld taxes and

perhaps other payments from your pay. And you have no choice about it.

What’s in a Paycheck? You’ve got your first job—and your first paycheck. Attached to your check is a pay stub, also known as an earnings statement, which includes your identification information and the pay period you worked. But there’s a lot more to it than that.

Wages and Salary It all begins with your wages or salary. Wages refer to hourly pay and can change based on how much time you worked. Salary is monthly or yearly pay, which is not dependent on the number of hours worked.

Your pay stub shows your gross pay, the total amount of income you earned during the pay period. If you are paid hourly, it should be equal to the number of hours you worked times your hourly wage. (It will also show if you worked overtime at a higher rate.) If you are on an annual salary, it’s your salary

divided by the number of pay periods in the year.

Withholdings You will immediately notice that your net pay—the amount the check is made out for—is far less than your gross pay. Where did the rest of the money go?

Your pay stub lists all your payroll withholdings, the earnings that come out of your check before you get it. Some of these withholdings are voluntary. For example, if you join a company medical or insurance plan, your share of these benefits comes out of your check. Other withholdings, however, are for state and federal, and sometimes local, taxes.

Federal and State Deductions Most workers have federal and state taxes deducted from their earnings. Your employer is also required to pay the federal government a certain percentage of your earnings.

Social Security and Medicare Social Security (FICA) and Medicare taxes are based on a percentage of your earnings. FICA stands for Federal Insurance Contributions Act. It is a U.S. payroll tax on employees and employers to fund programs that provide benefits for retirees, the disabled, and children of deceased workers. Medicare provides hospital insurance benefits.

The W-4 Form Federal and state taxes are deducted based on an estimate of how much you will owe in yearly taxes. Most workers are required to fill out a W-4 form when they start a new job. It includes guidelines to help you

Comparing Salaries Level of education, skill, and supply and demand are factors that determine entry-level pay. Typically, college graduates with technical, medical, or business degrees will command higher salaries.


XYZ Corporation100 Corporation Crt.New Town, NY 10000

Social Security Number: 999-99-9999Taxable Marital Status: SingleExemptions/Allowances: Federal: 1 State: 1 Local: 1

EarningsRegularOvertimeHoliday

rate 20.00 30.00 30.00

hours40.001.008.00

this period800.0030.00

240.00

year-to-date16,640.00

780.001,200.00

18,620.00

this period year-to-date40.0016.00

Period ending: 00/00/0000Pay date: 00/00/0000

Other Benefitsand InformationVac Hrs LeftSick Hrs Left

Earnings Statement

TOMÁS Q. PUBLIC123 MAIN STREETANYWHERE, USA 12345

Gross Pay $ 1,070.00B

B Gross PayThe total amount of income that you earned during the pay period.

Year-to-date(for pay and deductions) The year-to-date shows the total amount withheld for a particular deduction at any point in the calendar year.

A

A

A

Leave TimeIncludes vacation hours or sick hours. Many employers will detail how many hours have been used to date, and how many hours are remaining for the calendar year.

C

C

Summarizing Earnings Earnings statements show figures such as pay rate, gross pay, net pay, and deductions for insurance and other benefits. This portion of a sample earnings statement shows how gross pay is calculated.

do the calculations needed to estimate how much will be withheld from each paycheck. The W-4 gives you the option of taking certain personal allowances that will lower the amount of tax withheld from your income. For example, you may take an allowance for yourself and your spouse. You can also take an allowance for anyone who is dependent on your income, such as a child. Young people who are not married and have no children will generally claim one allowance. The IRS offers an online withholding calculator (www.irs.gov/individuals) to help you avoid having too much or too little income tax withheld from your pay.

Taxes and You Welcome to the workforce! You have joined the ranks of taxpayers. But why do you have to pay taxes? Governments have expenses. They have to pay salaries for thousands of employees and provide services for millions of citizens. The biggest source of government revenue is taxes. And you are required by law to pay your share.

Don’t Mess with the IRS The Internal Revenue Service (IRS), an agency within the Treasury Department, applies federal income tax laws passed

by Congress. The agency generates tax forms and collects taxes. The IRS will notice if you don’t pay what you owe and impose hefty financial penalties for any misdeeds.

The federal income tax is a progressive tax, so people with the highest income have the highest tax rates. The system also includes hundreds of tax breaks for people with special financial burdens, such as people paying for college or starting a business, as well as deductions for actions like making a donation to charity.

Other Taxes Most state governments collect income tax, too. In addition, states and local communities levy other kinds of taxes, such as sales tax and property tax. Sales taxes vary from state to state, but they generally involve paying a fixed percentage on most items you buy. Essentials of life—such as food and medicine—are generally exempt from sales tax. Property taxes are based on the value of privately owned homes and land.

Taxes are also collected on income you didn’t work for. If Aunt Bessie leaves you money in her will, you have to pay an inheritance tax. If you buy stock and you make a lot of money when you sell it, that gain is also taxed.

Taxes and Income PF 49

Copy C, for employee recordsa Employee’s social security number

1 Wages, tips, other compensation

3 Social security wages

5 Medicare wages and tips 6 Medicare tax withheld

7 Social security tips 8 Allocated tips

9 Verification code 10 Dependent care benefits

11 Nonqualified plans

15 State

14 Other

16 State wages, tips, etc. 17 State income tax 18 Local wages, tips, etc. 19 Local income tax 20 Locality name

13 12b

12a See instructions for box 12

2 Federal income tax withheld

4 Social security tax withheld

OMB No. 1545-0008This information is being furnished to the Internal Revenue Service. If youare required to file a tax return, a negligence penalty or other sanctionmay be imposed on you if this income is taxable and you fail to report it.

b Employer identification number (EIN)

c Employer’s name, address, and ZIP code

d Control number

e Employee’s first name and initial

f Employee’s address and ZIP code

Last name

Employer’s state ID number

Su�.

Statutoryemployee

Retirementplan

Third-partysick pay

Code

Code

12cCode

12dCode

Form W-2 Wage and Tax Statement 2017


Forms, Forms, Forms Sometime during the “tax season,” which runs from January 1 to April 15, you need to fill out and file the appropriate tax forms. Filing is the only way to get a refund, or return of excess taxes paid. Some years, you might have to pay if you didn’t pay enough taxes throughout the year. But whether you’ve got a refund coming or not, it’s against the law not to file an income tax return.

The W-2 Form The most common federal tax form is the W-2, which reports wages paid to employees and taxes withheld from them. The form also reports FICA taxes to the Social Security Administration. Employers must complete and send out a W-2 to every employee by January 31. Save these documents! Your W-2s must be attached to your tax return when you file.

1040 and Beyond When you file your income tax return, which is due by April 15, you’ll use Form 1040, the Individual Income Tax Return. By filling it out properly, you will learn if you owe more money to the government or if the government owes you a refund.

To make life easier, the government introduced the Form 1040EZ, which is the simplest tax form. Its use is

limited to taxpayers with taxable income below $100,000 who take the standard deduction instead of itemizing deductions, that is, listing them separately. Many unmarried people with no children also qualify to use this form.

If you have income other than wages, salaries, and tips, Form 1099 comes into play. It’s a statement you receive from payers of other types of income, such as interest income on savings accounts.

You may have deductions that you can claim. A common deduction is charitable donations. Many people enjoy the satisfaction of helping charitable organizations and donate some of their income or other items, such as clothing and household goods, each year. Those donations may be deductible from your income on your federal taxes. Deductions help reduce your income taxes.

Don’t Guess—Get Help! You want to make sure you get all the tax deductions that the IRS allows. Each form has step-by-step instructions, but they might not answer all your questions.

If you prepare your return on paper, you must send it to the IRS Service Center listed in the instruction booklet and at the IRS website. Most people today use tax preparation software, such as TurboTax. It is an easy way to make sure

W-2 Form People in the U.S. must pay federal taxes on their job earnings. Employers provide W-2s to all employees who will then use these forms to file their taxes.

The IRS website includes fillable forms that you can e-file for free if you made less than $64,000 during the tax year.

TIPE-file for free.


TAX RATES HOW IT COMPARES

California’s Taxes, 2017

TYPE OF TAX

Sales tax

Gasoline tax

Personal income tax

Corporate income tax

Property tax

7.25% statewide, with cities and counties allowed to charge up to 2% more

38.13 cents per gallon

Highest rate is 13.3%

8.84%

$1,365 per capita (for each person)

Highest in the U.S.

7th highest in the U.S.

Highest in the U.S.

Highest in the western U.S.

22nd highest in the U.S.

SOURCE: California Taxpayers Association, www.caltax.org, California Tax Facts

you’re not missing anything as it walks you through your tax return step by step. Then you can e-file your return online. Filing in this way will get you a faster tax refund. But of course you have to buy the software. You can also pay an accountant to prepare and file your taxes for you.

Case Studies Now that you know all the pieces that make up a person’s economic identity, let’s bring all the pieces together to develop personal budgets for Evan and Maya. Both are single and have full-time jobs.

Case Study 1: Evan Evan went to a technical school and became a welder. Now on his first job, he is earning $16.30 per hour. He has been able to work some overtime (OT) each week, which pays him $24.45 per hour. He and a roommate share a furnished apartment nine miles from Evan’s job. He bought a car in order to drive to work, but the payments are higher than he’d like. Evan has decided to save so that he can pay off his car faster.

To help him figure out how much he can save, he makes a budget showing his income and expenses. By paying himself first, Evan estimates that he can save $100 a month or $1,200 a year. He hopes to increase his savings by the amount of his car payment as soon as his car is paid off to save for future expenditures.

Case Study 2: Maya Does Maya’s budget look any different? Maya plans to be a nurse practitioner. Her career goal will take some time to achieve. Maya has completed a two-year degree without accumulating any student loan debt, but she ran up quite a bit of credit card debt during that time. Maya works as an emergency medical technician (EMT). She is continuing her education by taking online classes to complete her bachelor’s degree. She may eventually return to school full-time to complete her master’s degree. But for now, she is enjoying her work.

High Taxes Californians pay some of the highest taxes in the United States. As a voter, you have a say in future changes to tax rates in the state.

Tax AdviceHere are some other places to get advice:

• The IRS has a user-friendly website with lots of information. It can be found at www.irs.gov.

• Call the IRS at (800) 829-1040. You can talk to a tax specialist, or even schedule an appointment for help at IRS service centers. But don’t delay. The closer you get to April 15, the harder it may be to get timely help.

• Tax-preparation services and tax accountants will prepare your tax return for a fee. Some will file your return for you. However, you will need to supply them with all the correct information.



Comparing Budgets Evan and Maya are both paying debts for past decisions. Both are trying to save for future expenditures. Their budget plans show how they can manage their scarce resources and still enjoy a good quality of life.

Maya’s Monthly Pay and Budget

EARNINGSGross PayRegular earningsOvertime earningsTotal earnings

TaxesFederal (income and FICA)State income taxTotal taxes NET PAY (Take-Home Pay) (Gross pay minus taxes)

BUDGETFixed ExpensesRentUtilitiesCell phoneCredit card debtOnline classesTotal fixed expenses

Savings

Discretionary SpendingFoodRide sharingHousehold goods and furnishingsEntertainmentPersonal care itemsClothingCharitable donationsTotal discretionary spending TOTAL BUDGET

$3,051$211

$3,262

$621$78

$699

$2,563

$450$250$105$250$300

$1,355

$300

$220$245$108$175$87

$170$50

$1,055$2,710

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BEARNINGSGross PayRegular earningsOvertime earningsTotal earnings

TaxesFederal (income and FICA)State income taxTotal taxes NET PAY (Take-Home Pay) (Gross pay minus taxes)

BUDGETFixed ExpensesRentUtilitiesCell phoneStudent loanCar paymentCar insuranceTotal fixed expenses

Savings

Discretionary SpendingFoodGas and car maintenanceEntertainmentPersonal care itemsClothingCharitable donationsTotal discretionary spending TOTAL BUDGET

$2,771$489

$3,260

$620$78

$698

$2,562

$525$310$155$50

$300$95

$1,435

$100

$180$160$125$55$75$40

$635$2,170

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B

Evan’s Monthly Pay and Budget

Rent

Savings

Utilities

Food

Cell Phone

Entertainment

Clothing

Personal Care Items

Charitable Donations

Gas and Car Maintenance

Car Payment

Car Insurance

Student Loan

Online Classes

Credit Card Debt

Ride Sharing

Household Goods

Evan’s Budget Maya’s Budget

24%17%

4%

9%

11%

9%

8%7%

6%3%

2%

11%

9%

4%

14%

7%14%4%

8%

7%

3%

6%

4% 2%

5%

2%

Sample Budgets


Maya is earning $17.60 per hour. She occasionally accepts overtime shifts, which pay her $26.40 per hour. However, she limits her overtime because of her online classes. She has two roommates, and they share an urban apartment two blocks from Maya’s job. She does not own a car and uses ride-sharing services whenever she needs to shop or visit family. Her minimum payment on her credit card is $120, but she wants to pay at least $250 a month to pay the debt off more quickly. She is also hoping to save something toward her future education.

Comparing Expenditures One effective way to look at your budget and compare it with others is to make a circle graph, or pie chart, that shows how you spend and save the money you earn. As you look at the circle graphs for Evan’s and Maya’s budget plans, what similarities and differences do you see?

In what ways did decisions they made in the past affect their current budgets?

Budgeting Scarce Resources You may dream of the day when all your needs are met and you have more money than you will ever need. That reality is unlikely. However, you can live without constant stress of being able to pay the bills if you develop a personal budget and live within it. Budgets help you manage your scarce resources effectively.

It’s Your Turn10. You have already developed a budget that is realistic for a

high school student. Now you will create a more complex monthly budget that pulls together all of the information you have learned in this handbook and is realistic for your near future. Make sure you include your income and expenses. Also, identify how to meet a longer-term savings goal, such as purchasing your first home.


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