financial planning
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Financial Planning. Unit 1: Banking & Credit RECAP. What’s the BIG DEAL about MONEY?. It allows us to move beyond the barter (good for good) system. Characteristics of Money: Durability Portability Divisibility Uniformity Limited Supply Acceptability. What’s the BIG DEAL about MONEY?. - PowerPoint PPT PresentationTRANSCRIPT
Financial PlanningUnit 1: Banking & Credit RECAP
What’s the BIG DEAL about MONEY?
It allows us to move beyond the barter (good for good) system
Characteristics of Money:– Durability– Portability– Divisibility– Uniformity– Limited Supply– Acceptability
What’s the BIG DEAL about MONEY?
US first created lawful money (backed by silver and gold). We currently use a fiat money system – LEGAL TENDER (backed by the confidence in its value)
How can you buy
stuffwithout CASH?
The Emergence of a Cashless Society:
All the ways we DON’T use CASH:
• Gift Cards• Debit Cards• Checks• Money orders• Credit Cards• Electronic Transfers
How do YOU Make Money?
• You will spend approximately 86,000 hours of your life working (about 10,000 days)
• Your CAREER Choice should be based on values and beliefs, not necessarily money (A LABOR OF LOVE)
How do YOU Make Money?
• Take the following into account as well:–Education Requirements–Job Trends–Job Outlooks
US Income at a Glance…Criteria Overall Less than
9th grade
High school
drop-out
High school
graduate
Some college
Associates degree
Bachelor's degree
Bachelor's degree or
more
Master's degree
Professional degree
Doctorate degree
Median ind.
income
Male, age 25+ $33,517 $15,461 $18,990 $28,763 $35,073 $39,015 $50,916 $55,751 $61,698 $88,530 $73,853
Female, age 25+ $19,679 $9,296 $10,786 $15,962 $21,007 $24,808 $31,309 $35,125 $41,334 $48,536 $53,003
Both sexes,
age 25+
$32,140 $17,422 $20,321 $26,505 $31,054 $35,009 $43,143 $49,303 $52,390 $82,473 $70,853
Median household income $45,016 $18,787 $22,718 $36,835 $45,854 $51,970 $68,728 $73,446 $78,541 $100,000 $96,830
US Income at a Glance…
The median income in New York State for a person with less than 1 year’s experience is:
$47,000*www.payscale.com
3.05 million
30.5 million
274.5 million
305,000
30,500
Finding the Job for YOU• Research• Internships and Job
Shadowing• Part-time jobs early in life
–Most successful people worked part-time as teenagers
Other SOURCES OF INCOME
• Investments• Self-Employment• Rental Income• Windfall Income
What Factors Influence Income?
• Capacity to earn, knowledge, skills, level of education
• Job Opportunities• Employment benefits (monetary and
non-monetary)• Inflation and Deflation• Taxation
HOW MUCH WILL YOU MAKE?
TAXES! TAXES! TAXES!
The goal of tax planning is to arrange your financial affairs so as to minimize your taxes and keep the most of your money.
TAXES! TAXES! TAXES!
GROSS INCOMEAll income before taxes and
deductionsWhat your employer pays you to
work
TAXES! TAXES! TAXES!MANDATORY Deductions:• Federal, State (maybe
local) TAXES• Social Security (FICA)• Medicare (FICM)
NON-MANDATORY:• Automatic savings
(Contributions to retirement plans that are taken out of gross pay)
• Health Insurance Premiums
• Life Insurance Premiums• Union dues• Charitable Contributions,• and more…
TAXES! TAXES! TAXES!ADJUSTED GROSS INCOMEGross income minus allowable
deductionsTAXABLE INCOMEIncome amount used to calculate
taxes owed (may include income other than paycheck)
TAXES! TAXES! TAXES!TAKE-HOME PAYWhat you get to take home
(sometimes called NET Pay)
How to pay LESS in Taxes:
1. Increase your tax DEDUCTIONS (standardized vs. itemized)
2. Take advantage of TAX CREDITS
3. Increase your withholdings
1. Increase your TAX DEDUCTIONS
• There are standard deductions for singles ($6,100), married couples ($12,200) & heads of households ($8,950)
• Itemized deductions include:• Expenses for healthcare• Mortgage interest• Gifts to charity• Job-related expenses• State/local/property taxes
2. Take advantage of TAX CREDITSTax credits
reduce your tax. Straight up - $ for $ reduction
There are tax credits for:• Earned Income Tax (for
low income families)• Child Tax• Education• Retirement Savings
Contribution• 1st Time Homebuyer• Dependent Care• Energy Efficient Home
3. Increase your WITHHOLDINGSIncrease the amount of money taken out
of each paycheck throughout the year – you’ll get a bigger refund at the end.
CLAIM 0 – More money is taken out of each paycheck and you are more likely to get a refundCLAIM 1 – Less money will be taken out of each paycheck, but you may end up owing money at tax time
THANKS UNCLE SAM!
Tax Practice More Tax Practice
My (possible) Future Plans
The Financial Planning PROCESS
1. Set SMART Goals
2. Analyze Information
3. Create a Plan
4. Implement the Plan
5. Monitor & Modify the Plan
BUDGETING
CREDIT BASICSFinancial Planning RECAP
Credit•Money you borrow to pay for things, with a promise to pay it back later
Advantages of Credit
• Allows for large purchases
• Use it well & it builds a good credit score
• Useful in emergencies (CC)
• More convenient than carrying cash
Disadvantages of Credit
• Fees and interest can make credit expensive
• Chance of identity theft increases
• Hard to resist the “impulse buy”
• Poor use may affect your ability to get:
– Employment – Housing – Insurance
The Role of the FED• WATCH VIDEO• Set Monetary Policy• Regulate Financial
Institutions• Act as a BANK for
Banks and Cus• Set the PRIME
INTEREST RATE Affects the rate they charge US
SOURCES of CREDIT1. Financial Institutions
• Banks/Credit Unions/Savings and Loan Associations
2. Credit Card Companies3. Retailers4. **Predatory Lenders” (aka) Loan
Sharks”
LOAN SHARKS AND PREDATORY LENDING
•Payday Lending• Borrower gives lender a postdated check, lender
gives $$, borrower pays back $$ with fee
•Rent-to-Own Services• More expensive than a consumer installment
loan
•Refund Anticipatory Services• Get refund money upfront (but it is minus a fee)
Catch Phrases of Abusive Lenders
“125 percent of your home/car’s value”
“Incredibly low monthly payment”
“No upfront fees”
“Even if you have a bad credit history…”
“It’s free and you have nothing to lose”
“Act now, this is a limited-time offer”
Four Major Types of CREDIT
• Secured Loans• Unsecured Loans• Credit Cards• Consumer Installment Loans• Lines of Credit
SECURED LOANSIs backed by collateral• Usually has a lower
interest rate• Bank/CU can take
collateral if you don’t pay
• Examples: Auto Loan, Mortgage
UNSECURED LOANSIs NOT backed by
collateral• Usually has a higher
interest rate because it is riskier for the bank/cu
• Examples: Personal Loan, some Student Loans
CREDIT CARDS• Allow you buy now
and pay later• Only get charged
interest if you DO NOT pay your bill off in full when it comes
the united states of credit
how did it all begin?• 1949, New Yorker Frank McNamara
finished dinner and realized he left his cash at home
• Came up with an idea about a card that could be used in place of cash at restaurants
• Diners Club was born
how did it all begin?• 1958, American Express issued its first
charge card, used primarily for travel and entertainment
• Eight years later, BankAmericard became first to let you carry a balance
Today*…• Nearly 54 million US households carry
some form of credit card• On average, they carry a balance of
$10,115
*Brooke Nevils, Womansday article
$792 Billion
total national credit card debt as of February 2011
CONSUMER INSTALLMENT LOANS
Money you borrow to pay for specific items (like a car, computer, furniture)
• Pay a little each month (with interest)
• Examples: Home Depot, Pottery Barn
LINES OF CREDIT• Can borrow up to a certain
amount (from a bank, CU or a business), but only pay interest on what you actually take out and use.
• Example: Home Equity Line of Credit (HELOC)
Which type of loan would be best for the following situations?
1. To finance a college education2. To make small purchases in a
retail store3. To make home improvements4. To consolidate debts
ANSWERS:1. To finance a college education
• Student loan (sec/unsec)• HELOC• Installment Loan (payment plan from college)
2. To make small purchases in a retail store• Credit Cards
3. To make home improvements• Installment or HELOC
4. To consolidate debts • Unsecured (personal loan), HELOC
THE COST OF CREDIT• FEES• INTEREST• RISK OF USING CREDIT
FEES• Annual
maintenance fees
• Service charges• Late fees
INTEREST
ANNUAL PERCENTAGE RATE (APR):– The cost of credit on a yearly
basis, expressed as a percentage
Financial institutions charge money at a certain rate to let you use their money:
INTERESTFixed
– Interest rate stays the same during the term of the loan
Variable– Interest rate may change during
the loan’s term
SIMPLE Interest Calculation
PRINCIPLE X RATE X TIME = INTEREST– Principle = amt borrowed– Rate = APR (decimal)– Time = in years (months are X/12)– Interest = amt of interest you owe
Cathy Buys a Car!!
Amount Borrowed: $15,000APR: 4.5%Term: 3 years
PRT = I15000*.045*3 = $2,025
Car really costs: $17,025
RISKS OF USING CREDIT• Will affect your credit score• May affect:
–Employment–Ability to get future credit–Mental health
Borrowing Money Responsibly
Would you…1. Use credit to pay overdue bills?2. Use credit to make a purchase
even if you have the cash?3. Use credit if you really wanted
something but could not afford the monthly payments?
4. Borrow money to invest in something?
SAVING TO MEET GOALS
SAVE EARLY AND SAVE OFTEN!!!
EXPERTS RECOMMEND YOU PYF 10%
SAVING TO MEET GOALSLIQUIDITY• Ability to turn your
savings (or investment) asset into cash quickly and easily (example – a savings/checking account)
ILLIQUIDITY• An asset than
CANNOT be sold quickly without substantial loss (example – stocks that have decreased in value)
COMMON SAVINGS PRODUCTS
IRAs Traditional & ROTH
US Savings BONDS
Regular Savings Regular Checking
Money Market Accounts
CDs
SIMPLE SAVINGS MATHSIMPLE INTEREST
PRT = IP = PrincipleR = Interest RateT = Time in yearsI = Interest EarnedJohn puts $1,000 into a 1 year CD at Meridia earning .45%. How much interest does he earn when the CD matures?
COMPOUND INTEREST
A = P(1+R)nA = Amount in accountP = PrincipleR = Interest RateN = Number of yearsJohn puts $1,000 into a money market account at Meridia earning .25%. If the rate does not change at John leaves his money alone for 10 years, how much will he earn?
SIMPLE SAVINGS MATHAPR
Annual rate that is charged for
borrowing (or made by investing),
expressed as a single percentage number that represents the
actual (YEARLY COST OF FUNDS) over the
term of a loan.
APY
The effective annual rate of
return taking into account the
effect of compounding
interest
WATCH VIDEO!