Personal Finance

Budgeting

• Organize your information– Make a spreadsheet

• List Net Income– Consider all sources

• List Monthly Expenditures• Keep track and adjust monthly

• Failing to plan is planning to fail

Budget SpreadsheetCategory January February March

(+) Net Income

(-) Savings

(-) Rent/Mortgage

(-) Auto

(-) Food

(-) Phone

(-) Utilities

(-) Insurance

(-) Clothing

(-) Entertainment

(-) Charity

(-) Miscellaneous

Savings

• Pay Yourself First!– How much would you like to save?– Four categories (next slide)

• Savings is linked to expenses– Save what you don’t need to spend

• Find out where it goes– Monitor your expenditures

• Cut your expenses• Be a smart shopper

Savings Categories

• Everyday savings– Minor, unplanned expenses, charities

• Short-term savings– Emergencies

• Long-term savings– Car, house, etc.

• College savings– Tuition, books & fees, room & board, misc.

• Maintain separate savings accounts/venues

Types of Savings/Investments

• Depends on personal goals– Make lots of money quickly, long-term security, etc.– Varies by Safety (risk), Liquidity, Return on the investment

• The higher the potential return (based on rate), the higher the risk and vice versa

• Liquidity = ability to withdraw money fairly quickly • Diversification is the best strategy• Savings Accounts & Certificates of Deposit (CD)• Stocks & Bonds• Money Market Accounts (MMA) & Mutual Funds• Whole Life Insurance

Types of Savings/Investments

• Low Risk/Low Potential Return:– Bank products (Savings accounts, CD, MMA), Cash

• Medium Risk/Medium Potential Return:– Government Bonds

• Higher Risk/Higher Potential Return:– Stocks, Bonds, Mutual Funds

• Greatest Risk/Greatest Potential Return:– Collectibles

Savings Account

• Common method of storing cash in banks or credit unions– Highly liquid

• Generally low rate of return– 1-3%

• Low risk– FDIC insured up to $250,000

• Financial institutions use to issue loans to borrowers

Certificate of Deposit

• Form of savings in which the bank issues a certificate stating how much was invested, what the interest rate is, and how long the money must stay in the account– The longer the time, the greater the interest rate– The greater the investment, the greater the rate

Money Market Account

• Can be issued by a bank or a brokerage company

• No fixed interest rate—the rate fluctuates daily but generally pays more than a savings account

• Usually comes with limited number of checks but a minimum amount must be maintained

Savings Bonds

• Bonds are a way of loaning money to the U.S. Government (or a company)– Backed by the full faith and credit of the government

and are therefore low risk• Two types– EE bonds: AKA discount bonds; you pay half of face

value and interest accrues each year– I bonds: sold at face value; tax-free; interest rates

change every six months• Long-range investing—money is tied up for years

Stocks

• Owning a share of a corporation’s profits• Value changes daily can appreciate or

depreciate thereby changing the price• Dividends can be paid in cash or as additional

stock in the company• Stocks are highly liquid– Can be sold at any time but,– You don’t know precisely what it’s worth until

you’ve sold it (end of closing day)

Mutual Funds

• Combine the money of many investors to buy many investments

• Safety– High-risk; no one insures them– safer than individual stock because of diversification

• Liquidity– Can cash in any time but you are paid what they’re worth at end of

closing day• Return

– A professional fund manager handles the buying and selling of the stock• Their judgment is the key to buyer’s success or failure

Collectibles

• Highly coveted items that are no longer in production

• As they get older and rarer, their value appreciates– Should be professionally appraised

• Examples: antiques, paintings, cars, wine, coins, stamps, baseball cards, comic books

• High-risk due to fraud, difficulty in validating value, variable demand

Types of Interest

• Simple Interest– Calculated on the amount deposited

• Compound Interest– Calculated on the amount deposited plus interest

earned so far• Power of 72– Ability to calculate how long it takes money to grow

based on interest rate & amount deposited• Divide 72 by interest rate to get years, OR• Divide 72 by years to get the interest rate

Checking Accounts

• Convenient way of storing cash• Should not be used for savings– Does not bear interest– Highly likely to be depleted quickly

• Transactions should be recorded in and monitored by a bankbook/check register

• Ways of controlling:– ATM/Debit card– Online banking– Checkbook

Insurance

• Pays for circumstances or contingencies that clients cannot pay all at once by themselves

• Coverage is based on what you need (or project needing) to pay for

• Premiums (or monthly payments) may vary based on deductible (your share of the bill or co-pay) and total coverage

Types of Insurance• Life

– Whole: no time limit on policy; can be used for savings– Term: temporary; only pays in event of death during life of policy

• Health; Disability/Long-Term Care– Covers medical & hospital bills– Covers living expenses when you can’t work

• Homeowners/Renters– Covers theft or damage to property (fire, natural disaster, etc.)

• Flood Insurance is separate– Property Liability (Covers claims of negligence filed against you)

• Auto– Liability: Coverage if you are responsible for an accident– Collision: Damage to your vehicle– Personal Injury: Medical treatment for you or passengers– Uninsured Motorists: If other driver has no insurance

Income Tax Returns

• Must be filed every year by April 15th

• Every year your employer will send you a W-2 – You complete a W-4 for them when you start– Self-employed people file their own taxes quarterly

• Keep all financial data in a safe place– pay stubs ( to compare to your W-2s)– Receipts; records of charitable donations; and

work-related, child-care, & medical expenses • May be tax-deductible

Borrowing Money

• Principal– Initial amount borrowed

• Interest– Fee for borrowing the loan (lender’s profit)

• Finance Charges– Total dollar amount of loan plus interest & service charge

• Methods– Mortgage, sales credit, cash loans, revolving credit

• Credit Ratings– A record of your debt and payment history– If it’s bad or doubtful, you may be denied a loan– Data is reported by lenders to credit bureaus

References

• Clayton, G.E. (2005). Economics: Principles and Practices. New York: Glencoe.

• www.mint.org