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Chapters 10 and 12 Personal Finance

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Chapters 10 and 12 Personal Finance Powered By Docstoc
					Chapter 10 & 12
  Personal Finance
  “THERE ARE SO MANY
INVESTMENT STRATEGIES!
 WHAT IS THE BASIC RULE
    GOVERNING MOST
      INVESTING?”
           Stock Trading Strategy

Tips:
  Patience!!!!
  There is no formula that predicts success!
  Not all data is accurate because it does not
    take into account qualitative factors of a
    company (reputation, emotions, etc.)
  Reports issued by companies of there
    projected future profits are important, but
    maybe skewed from reality slightly.
Now that I am thoroughly confused…. is
there any single basic strategy?

                                         Personal Video File: Basic Investing
WHEN INVESTING IS STOCKS,
WHAT ARE SOME THINGS TO
       LOOK FOR?”
      Stock Trading Terms




TAKE SOME NOTES FOR THIS SLIDE




                                 Personal Video File: DOW
 “BEFORE YOU INVEST YOU
NEED TO SEE WHAT YOU CAN
   AFFORD TO INVEST.”
       HOW TO BALANCE
     SPENDING AND SAVING?

      GENERATE A BUDGET
          GENERATING A BUDGET
1. Creating a budget generally requires three steps.
     1)   Identify how you're spending money now.
     2)   Evaluate your current spending and set
          goals that take into account your long-term
          financial objectives.
     3)   Track your spending over time to make sure
          it stays within those guidelines.

2. Don't drive yourself nuts. Budgeting is a skill that
  comes with time. You MUST practice it on a
  daily/monthly basis in order for the rewards to
  surface.

3. Be disciplined in your practice of budgeting and
  you will live a richer and more rewarding life.
“ARE ANY INVESTMENTS
  INSURED (SAFE)?”
                      FDIC
      (Federal Deposit Insurance Corporation)

 An independent deposit insurance agency
  created by Congress in 1933 to maintain
  stability and public confidence in the nation's
  banking system.
 It insures consumer deposits in a bank for up
  to $250,000 per account.
 Deposits include checking and savings
  accounts and certificates of deposit (CD).
RISK AND RETURN:
   WHAT’S THE
 RELATIONSHIP?
 (Investments and Loans)
The Investor’s Relationship Between Risk & Return
                                                                       Stocks
                      Real Estate


                                                        Stock-based
                                                        Mutual Funds
     Rate of Return




                                       Bond-based
                                       Mutual Funds

                      Certificates
                      of Deposit

                      U.S. Savings
                         Bonds




        Savings
       Accounts                      Risk to Investor
The Banker’s Relationship Between Risk & Return
 When you borrow money it is required that you
 have some collateral.

Collateral is an asset that the bank has some EQUITY
in (they could sell it and get some of their money back)
    It is required just in case you DEFAULT on your
     loan (can’t pay loan back).
    The bank will repossess the collateral that you
     put on the loan.
                                                If you can’t
EXAMPLE:                                        repay it…
                   +                 =
                                                   …you are
           BANK                          LOAN      going to be
                        Collateral
                                                   walking.
  The Banker’s Relationship Between Risk & Return
                             A Banker’s Dilemma

Interest Rates
(percent per year)                      The interest the bank charged its
                                                   customers.
               15
                          Nominal
                        interest rate                        The interest the bank
               10                                           actually received after
                                                            factoring out inflation.


                 5


                 0

                                            Real interest rate
               -5
                 1965     1970    1975      1980     1985     1990     1995 1998
Bankers’ Relationship Between Risk and Interest Charged

                                                                            No collateral
                                                                                loan

                                                                     Mortgage on a
                                                                     mobile home

                                                              Loan for a boat
     Interest Charged




                                                     Loan for a used car

                                                Loan for a new car

                                          Loan for a new business

                                                                 Depends on the
                              Mortgage on a house               projected success
                                                                 of the business

                        Loan for buying land




                                               Risk to Bank
 “WHO MONITORS THE
STOCK MARKET IN THE
       USA?”


        They are not insured but
         at least they have been
                reviewed.
                Regulating Investing
Investments are regulated by the:

Securities and Exchange Commission
                             (SEC)

1. The SEC regulates all trading of all securities in
  America.

2. They help ensure that the Stocks, Bonds, & Mutual
  Funds that are for sale are legitimate and from a
  company that shows (or could show) a profit.

3. They also establish ethics for stock brokers, which
  reduces the amount of unethical and illegal activities in
  the business of trading securities. (Such as insider trading.)
                    Common Investments
This is known as Equity Financing:
 Stocks: money given by stockholders that they are
 willing to risk in the hopes of a return on their investment.
      There is no guarantee of a return on your investment.
      At least the company has been reviewed by the
       Securities and Exchange Commission (SEC).

           Two types of Stock:
Common Stock: many shares of this and it does
 not have benefits, like paying a dividend.

    Dividend is a regular payment written
     to the stockholder.
Preferred Stock: fewer shares of this offered to the
 public and it generally does pay a dividend.          Personal Video File:
                                                           Dividends
              Common Investments
This is known as Debt Financing:
 Bonds: bondholders become the lender.
     When a bond is issued the
      corporation or government is
      borrowing money from a bondholder
      with the promise that it will repay the
      debt + interest.
     Generally you only make money on a
      bond after a long period of time (5
      years, 10 years, 30 years)

                                         Personal Video File:
                                          Stocks & Bonds
Government Savings Bonds:

                                           Series I: $50, $75, $100, $200, $500,
                                                      $1,000, and $5,000.
                                           $5,000 is the maximum purchase in
                                                one calendar year.
                                           If you redeem I Bonds within the
                                                first 5 years, you'll forfeit the 3
                                                most recent months' interest;
                                                however after 5 years, you won't
                                                be penalized.




Series EE: $50, $75, $100, $200, $500,
           $1,000, $5,000, $10,000.
Only difference is that you can withdraw
    these early for educational expenses
    without a penalty.
                     HOW BONDS WORK

       INVESTOR

                                                               After 5 years, the
Buys a $500, 5 year Bond at 5% interest                        company has to
         (Compounded monthly over 60 months)
(You can buy it directly from the company or                      repay bond
        you can go through a bank)
                                                                  (+ interest)
                                                              Estimated return of
          COMPANY / GOV                                              $635

                                                         Problem: Is $635 going to
                                                          be worth the same in 5
                                                                  years?
                                                                    NO
                                                        INFLATION: the steady rise
                                                          of prices for goods and
                                                                  services.
        Improve factories            Purchase Capital
Common Investments

Mutual Funds
(Key Word: Diversity)




                        Personal Video File:
                           Mutual Funds
              Common Investments

Mutual Funds: mutual funds are not sold by
the corporation directly. They are sold by
banks and investment firms.
   A mutual fund is a combination of hundreds of
    pieces of different stocks from many different
    corporations.

   The benefit of a mutual fund is that it is a
    diversified investment (not all your eggs are in
    one basket)...

   …and a mutual fund is controlled by a investment
    firm, which means when you buy a mutual fund
    you benefit from professional management.
                Common Investments
                                            Investment Providers
        INVESTOR




               MUTUAL FUND                  Medical Stock
                COMPANY
                                Diversify


  Team of
professional
management                                      Oil Stock
                                                     Personal Video File:
                  Automotive Stock                 Mutual Funds (RealPlayer)
    “HOW CAN THIS
 INFORMATION HELP ME
TO DEAL WITH RISK AND
SAVE FOR RETIREMENT?”
  (IRAs, 401ks, & Mutual Funds)
                       I.R.A.
Individual Retirement Account
                     (Setup by you)
For Corporate                         For Government
 Employees
                           &            Employees




 401K, 457 (b), or 403 (b)
                (Setup by your employer)

                ALL ARE FUNDED WITH
                   MUTUAL FUNDS
              Saving for the Far Future
                   IRAs & 401Ks
401Ks: In 1978, Congress amended the Internal Revenue
   Code, later called section 401(k), whereby employees
   are not taxed on income they choose to save for
   retirement…
    …however, in order to qualify an employer must set up
       this account on behalf of a employee and contribute to
       the employee’s retirement and…
      …money cannot be withdrawn from the 401k until age 60.
       If money is taken out for emergencies then the employee
       must surrender 10% of the withdrawn amount as a
       penalty for early withdrawal.

IRAs: The only difference is that these are set up by
  individuals and employers do not contribute to the
  account.                             So, how much can one make
                                           on these accounts?
                                                        Personal Video File: 401K
                                                    REQUIREMENTS:
                      IRA & 401k                WITHDRAW WITHOUT PENALTY
                                                 AFTER 60 YEARS OLD. MUST
                                                   WITHDRAW BY AGE 70.
          EMPLOYEE
                                                  10 % EARLY WITHDRAW
                                                  PENALTY (401K & IRA).

                                                 MAX YOU CAN PUT IN PER
                                                   YEAR IS $5000 PER
                                                      INDIVIDUAL.
     Employer (or you) places %
      of your paycheck in the                        TRADITIONAL IRA:
                                                 DEPOSITS ARE TAXED WHEN
       401K on your behalf.                            YOU RETIRE.
                                                        ROTH IRA:
                                                DEPOSITS ARE TAXED DURING
                                                   YOUR WORKING YEARS.
           INVESTMENT COMPANY
               (BUYING MUTUAL FUNDS)



                                    Diversify
                                                          Medical Stock
  Team of
professional
mutual fund                                           Oil Stock
 managers                                                Personal Video File: Roth
                      Automotive Stock                           vs Trad
 HOW CAN I SAFEGUARD
  MY FINANCIAL LIFE?
TYPES OF INSURANCE: HEALTH, LIFE, & LIABILITY
 (Ways to protect yourself against the unthinkable)




                                        Personal Video File: Insurance 1min
                Types of Insurance
1. Life Insurance: designed to provide loved-ones
   with a source of income to pay for funeral,
   housing, and children’s education expenses.
          Becomes more expense as you get older.
There are 2 types:

      WHOLE LIFE: Usually more expensive premiums,
       but the money in the policy gains an amount of
       interest and you can take out money as a loan.
      TERM LIFE: Usually much less expensive
       premiums. Bought in lengths of 10, 20, 30 year
       terms. Price is fixed for length of term.
          Money in the policy does NOT gain interest and you
           can NOT take out money as a loan.
              Types of Insurance
2. Health Insurance: provides payments for
  regular and emergency healthcare procedures.
  Without this one can find that a single trip to the
  doctor can cost $600 to $2000. Emergency
  services can run $10,000 - $120,000.
        Becomes more expense as you get older.
3. Liability Insurance: designed to provide
  protection incase you (or your property) injures
  someone.
“FIGHTING INFLATION:
TYPES OF INTEREST”
Simple & Compound Methods



         What is the most
        powerful force in the
            universe?



                                Video
“HOW CAN INFLATION TAKE AWAY
     FROM RETURNS ON
       INVESTMENTS?”




                  Personal Video File: Compound Interest Intro (2 min)
                        Simple Interest


      $100                         $105                               $110
                                                                                 APR =10%
      Period 0                    Period 1                            Period 2
                 The above example is an investment simple interest
Notation:           semi-annually (twice a year) at 10% interest.

                                                             I = PV × i × n
   I = interest earned

   PV = present value
   i = effective periodic rate (APR / # periods in 1 year)

   n = total number of periods to invest
                 I = Prt         OR       I = PVin
                Compound Interest


    $100                       $110                              $121
                                                                            APR =10%
    Period 0                   Period 1                          Period 2
               The above example is an investment compounded
Notation:        semi-annually (twice a year) at 10% interest.


   FV = future value                                  FV = PV (1 + (r/n))nt
   PV = present value
   r = interest rate
   n = number of periods per year
   t = total number of years
                                                     FV
 FV = PV (1 +        (r/n))nt OR              PV =
                                                   (1 + (r/n))nt
   Is credit a threat or addition
        to my investments?
CREDIT CARDS & YOUR
   CREDIT SCORE



             WHO KNOWS MORE
            ABOUT MY FINANCES
                THAN ME?
                        Credit Cards
                     www.creditcards.com
   Shopping for credit cards is the same as shopping for a car
     or picking the college you want to go to.

                  THINGS TO KNOW
1. With most cards you are NOT charged interest if you pay
   off the balance within 25 days of making the purchase.

2. You must shop for the lowest interest rate, and the
   LEAST FEES but still try to find the card that gives
   rewards, such as cash-back or miles for plane tickets.

3. By having a credit card and paying the balance on a regular
   basis, you will improve your credit history and FICO Score.
   (named after the Fair Issac Corp, the company that pioneered
   credit scoring. Scores average between 300 and 850, the higher
   the better)


                        Personal Video File: Spoof on Card Fees   Personal Video File: Card Game Show
FICO Score/Credit Ratings
                               Credit Reporting
                                  Agencies




                    Personal Video File: What is in the FICO (2 min)
                     Personal Video File: Condition a FICO (2 min)

                     Personal Video File: Quest for Credit (8 min)
END PERSONAL FINANCE


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          QUESTIONS

				
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