Bonus
Chapter D
Managing
Personal
Finances
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Bonus Chapter
D
LEARNING GOALS
1. Outline the six steps for controlling your assets.
2. Explain how to build a financial base, including
investing in real estate, saving money, and
managing credit.
3. Explain how buying the appropriate insurance
can protect your financial base.
4. Outline a strategy for retiring with enough
money to last a lifetime.
D-2
Profile
NATHAN MYHRVOLD
• As a former Microsoft
executive, Myhrvold is not
your typical millionaire.
• Typical millionaires tend to
have modest homes and
buy used cars.
• Millionaires are educated,
work hard, save money,
make purchases carefully,
and own their own
businesses.
D-3
Bonus Chapter
D
NAME that COMPANY
One way to save money is to use your credit cards
wisely. There are organizations that can help
you compare credit cards to get the most out of
them.
Name one of those organizations!
D-4
Financial
Planning Begins
with Making
Money
LG1
FINANCIAL PLANNING BEGINS
with MAKING MONEY
• An investment in education pays the best interest
rate:
- A typical full-time worker with a four-year degree earns
about $50,000, 62% more than a person with a high
school diploma.
- The lifetime earnings of a family with bachelor’s degrees
will be about $1.6 million more than a family with high
school diplomas.
D-5
Six Steps to
Controlling Your
Assets
LG1
SIX STEPS to CONTROL YOUR
FINANCES
1. Take an inventory of your
financial assets
2. Keep track of all your
expenses
3. Prepare a budget
4. Pay off your debts
5. Start a savings plan
6. Borrow only to buy assets
that increase in value
D-6
Prepare a
Budget
LG1
MANAGING YOUR HOUSEHOLD
BUDGET
• A household budget generally
includes:
- Mortgage or rent
- Food and clothing
- Vehicles and furniture
- Insurance needs
- Other expenses
D-7
Prepare a
Budget
POSSIBLE COST-SAVING
CHOICES
LG1
First Choice
Alternative
Starbucks latte
QuikTrip cappuccino
$3.00 X 20 days = $60.00
$.60 X 20 days = $12.00
McDonald’s
lunch
New
CD
$4.00 X 20 = $80.00
$15.00
Evian water
Lunch from home
$2.00 X 20 = $40.00
Generic bottled water
$1.50 X 20 = $30.00
$.50 X 20 = $10.00
New CD
Listen to your old music
$15.00
$0.00
Banana Republic shirt
Old Navy shirt
$34.00
$10.00
Total savings per month
Total savings after 4 years of
college
Total Savings
per Month
$48.00
$40.00
$20.00
$15.00
$24.00
$147.00
$7,056.00
D-8
Prepare a
Budget
HOW MONEY GROWS
LG1
Annual Rate of Return
Time
2%
5%
8%
11%
5 years
$5,520
$6,381
$7,347
$8,425
10 years
6,095
8,144
10,795
14,197
15 years
6,729
10,395
15,861
23,923
20 years
7,430
13,266
23,305
40,312
25 years
8,203
16,932
34,242
67,927
D-9
Prepare a
Budget
EASY-ish BUDGET CUTS
LG1
1. Cut back on gourmet
groceries and use coupons.
2. Cut down your cell phone bill.
3. Cut out the cable television.
4. Cut down on nights out.
5. Cut the clutter in your house.
Source: Kiplinger’s Personal Finance, October 2010.
D-10
Prepare a
Budget
BILLIONAIRE’s TAB
Insights into a Lux Lifestyle
LG1
Perk
New York Billionaire
Los Angeles Billionaire
Dinner for Two
$550 at Per Se
$700 at Urasawa
Hotel for Two
Nights
$70,000 at Four Seasons
$30,000 at Four Seasons
Haircut
$200 at Sally Hershberger
$750 at Fekkai
Club Table
Service
$525+ at The Box
$1,200+ at Voyeur
Massage
$225 at Four Seasons
$215 at Beverly Hills
Hotel
Source: Forbes, March 29, 2010.
D-11
Building Your
Financial Base
LG2
BUILDING YOUR
FINANCIAL BASE
• Live frugally. If married,
try to live on one
income.
• Your first major
investment might be a
low-priced home.
• Buy for the long term
and don’t live beyond
your means.
D-12
Building Your
Financial Base
FIVE RULES of FRUGALITY
LG2
1. Don’t give up what you love.
2. Find inexpensive forms of entertainment.
3. Cut back on non-crucial things.
4. Never go shopping
without knowing
exactly what you’re
buying.
5. Shop around for good
deals!
Source: AARP, October 2010.
D-13
Real Estate:
Historically, a
Relatively Secure
Investment
LG2
FINANCIAL BENEFITS of
BUYING a HOME
• A home is an investment you can live in.
• Paying for a home is a good way of forcing
yourself to save.
• Interest paid on your
home loan is tax
deductible.
• Three keys to optimal
return on your home are:
location, location, location.
D-14
Real Estate:
Historically, a
Relatively Secure
Investment
LG2
HOW MUCH HOUSE CAN YOU
AFFORD?
Interest Rate
Income
Monthly
Payment
5%
6%
7%
11%
$30,000
$700
106,263
$98,303
$91,252
$56,870
50,000
1,167
180,291
167,081
155,376
98,606
80,000
1,867
287,213
266,056
247,308
155,916
100,000
2,333
361,240
334,832
311,433
198,013
D-15
Where to Put Your
Savings &
Learning to
Manage Credit
SAVING and MANAGING CREDIT
LG2
• Contrarian Approach -- Buying stock whenever
everyone else is selling or vice versa.
• Credit cards serve useful purposes and are
important to own but must be used discriminately.
• Not all credit cards are equal.
Check sites like
CardRatings.com or
CreditCards.com to find a fit.
D-16
Learning to
Manage Credit
CREDIT CARDS and DEBT
LG2
• 50% of college students have four or more credit
cards.
• Only 17% report paying off their balance each
month.
• If you feel managing
a credit card would
be too difficult, try a
debit card.
D-17
Learning to
Manage Credit
CREDIT CARD ACT of 2009
LG2
• Created new consumer credit card protections
and went into effect in February 2010.
• New law allows card issuers to increase interest
rates for only a limited number of reasons.
• People must be over
21 or have an adult
cosigner to get a credit
card.
D-18
Learning to
Manage Credit
AMERICA’S CREDIT CARD DEBT
LG2
Source: The Nilson Report.
D-19
Learning to
Manage Credit
LG2
CLEAN CREDIT
Steps to Keep a Good Credit Score
1. Always pay your bills on time!
2. Keep small balances on
multiple cards.
3. Don’t shift balances.
4. Don’t apply for too many
cards at once.
5. Don’t file for personal
bankruptcy.
Photo Courtesy of: Robert Scoble
Source: Money, October 2010.
D-20
Learning to
Manage Credit
LG2
WHAT’s YOUR SCORE?
How You Might Rate on a Credit Score
Range
Rating
760 to 850
Excellent
700 to 759
Great
660 to 690
Fair
620 to 659
Poor
619 and under
Very Poor
Source: Money, October 2010.
D-21
Progress
Assessment
PROGRESS ASSESSMENT
• What are the six steps you can take to control
your finances?
• What steps should a person follow to build
capital?
• Why is real estate a good investment?
D-22
Protecting Your
Financial Base:
Buying Insurance
INSURING YOUR LIFE
LG3
• Term Insurance -- A pure insurance protection for a
given number of years that typically costs less the
younger you buy it.
• Whole Life Insurance -- Combines pure insurance
with savings, so you buy both insurance and a
savings plan.
• Variable Life Insurance -- A form of whole life
insurance that invests the cash value of the policy in
stocks or other high-yielding securities.
D-23
Protecting Your
Financial Base:
Buying Insurance
PURCHASING ANNUITIES
LG3
• Annuity -- A contract to make
regular payments to a person
for life or for a fixed period; an
annuity guarantees an income
until you die.
• Two types of annuities:
1.
Fixed annuities
2.
Variable annuities
D-24
Health & Other
Insurance
LG3
OTHER INSURANCE
PROTECTION
• Disability Insurance -- Insurance that pays part of
the cost of a long-term sickness or an accident.
• Homeowner’s or renter’s insurance covers the
cost of things you own if they are destroyed.
• Umbrella Policy -- Combining all your insurance
(life, health, homeowner’s, auto) from one company
is less costly.
D-25
Health
Insurance
WHO PAYS for HEALTHCARE?
LG3
Method
Amount
Private insurance
41%
Medicare
19%
Medicaid
15%
Public
13%
Patient, out of pocket
12%
Source: Center for Medicare and Medicaid Services, National Venture Capital Assn.
D-26
Health
Insurance
LG3
WHERE HEALTHCARE
MONEY GOES
Where
Amount
Hospital care
31%
Physicians
21%
Medicines
10%
Administration
7%
Nursing homes
6%
Other
25%
Source: U.S. Department of Health and Human Services.
D-27
Health
Insurance
LG3
WHAT to KNOW ABOUT
HEALTH SAVINGS ACCOUNTS
1. Your employer is likely to
offer HSA options.
2. The plans can be costly but
withdrawal for medical bills is
tax-free.
3. They’re not for everyone.
4. HSA accounts can double as
retirement accounts.
Source: Money, October 2010.
D-28
Social
Security
SOCIAL SECURITY
LG4
• Social Security -- The Old-Age, Survivors, and
Disability Insurance Program established by the
Social Security Act of 1935.
• Social Security benefits are paid through social
security taxes paid by workers currently earning
wages in the market.
• The Social Security fund is expected to be hard
pressed because of the growing number of older
adults.
D-29
Individual
Retirement
Accounts (IRAs)
LG4
INDIVIDUAL
RETIREMENT ACCOUNTS
• Individual Retirement Accounts (IRAs) -- Taxdeferred investment plans that enable a person to
save part of their income for retirement.
• Tax-Deferred Contributions -- Contributions in
which you pay no current taxes, but earnings gained
in the IRA are taxed as income after withdrawal.
• Roth IRA -- Doesn’t give an up-front tax deduction
but earnings grow tax-free and are tax-free when
they are withdrawn.
D-30
401(k) Plans
401(k) PLANS
LG4
• 401(k) Plan -- An
employer-sponsored
savings plan that
allows you to deposit
a set amount of
pretax dollars and
collect compounded
earnings tax-free until
withdrawal.
D-31
401(k) Plans
BENEFITS of 401(k) PLANS
LG4
• Three benefits of
401(k) plans:
1.
Contributions
reduce your
present taxable
income
2.
Tax is deferred
on the earnings
3.
Many employers
will match your
contributions.
D-32
Keogh Plans
KEOGH PLANS
LG4
• Keogh plans allow self-employed people to
establish their own retirement plans.
• Keogh plans are like IRAs for entrepreneurs.
• Keogh plans can be withdrawn in a lump sum or
spread out over years.
D-33
Estate
Planning
LG4
PLANNING for THOSE
WHO WILL INHERIT
• Estate planning for those who will inherit money
from you may start with life insurance.
• Will -- A document that names the guardian for
minor children, states how you want your assets
distributed and names the executor for your estate.
• Executor -- Person who assembles and values your
estate, files income and other taxes, and distributes
assets.
D-34
Progress
Assessment
PROGRESS ASSESSMENT
• What are three advantages of using a credit
card?
• What kind of life insurance is recommended for
most people?
• What are the advantages of investing through an
IRA? A Keogh account? A 401(k) account?
• What are the main steps in estate planning?
D-35