PERSONAL FINANCE
Banking Faculty
University of Economics
The University of Danang
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TEXTBOOK
Personal finance,
E. Thomas Garman,
Raymond E. Forgue,
11th Edition, 2012.
Personal finance
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Chapter 1:
UNDERSTANDING PERSONAL FINANCE
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LEARNING OBJETIVES
1.
Recognize the keys to achieving financial success
2.
Understand how the economy affects your personal
financial success
3.
Apply economic principles when making financial
decisions
4.
Perform time value of money calculations in personal
financial decision making
5.
Make smart decisions about your employee benefits
Personal finance
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L.O.1: RECOGNIZE THE KEYS TO FINANCIAL SUCCESS
❖ What is personal finance?
▪ What is finance? What is personal?
Personal finance is the study of personal and family
resources important for achieving financial success
❖ Why do we have to study PERSONAL FINANCE?
To have FINANCIAL LITERACY: The knowledge of
facts, concepts, principles, technological tools that are
fundamental to being smart about money.
An important area that affects almost every other areas.
If you do it right, everything else will run smoothly.
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L.O.1: RECOGNIZE THE KEYS TO FINANCIAL SUCCESS
❖ What does PERSONAL FINANCE involve?
▪ Imagine the whole life of a person
SAVE THE PRESENT FOR THE FUTURE
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L.O.1: RECOGNIZE THE KEYS TO FINANCIAL SUCCESS
❖ What does PERSONAL FINANCE involve?
▪ Earning money
▪ Spending
▪ Saving
▪ Protecting
▪ Investing resources
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L.O.1: RECOGNIZE THE KEYS TO FINANCIAL SUCCESS
❖ 5 parts of personal finance
▪ Financial planning
▪ Money management
▪ Income and asset protection
▪ Investment
▪ Retirement and estate planning
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L.O.1: RECOGNIZE THE KEYS TO FINANCIAL SUCCESS
❖ Keys to achieve financial success
▪ Spend less to save and invest!
▪ Distinguish savings and investments?
▪ Savings:
income
not
spent
on
current
consumption.
▪ Investments: assets purchased with the goals
of providing additional income from the asset
itself.
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L.O.1: RECOGNIZE THE KEYS TO FINANCIAL SUCCESS
❖ Standard of living vs. Level of living
▪ Level of living: where you are now – your
actual financial situation.
▪ Standard of living: where you want to be –
the level of living to which you aspire.
▪ Saving and investing help you achieve your
standard of living.
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L.O.1: RECOGNIZE THE KEYS TO FINANCIAL SUCCESS
❖ How do you know you get FINANCIAL SUCCESS?
▪ Financial Success: achievement of financial
aspirations.
▪ Financial Happiness: Satisfaction about money
matters.
▪ Financial security: The comfortable feeling that
your resources will be sufficient to meet your
needs and most wants.
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Concept Check L.O.1
❖ What is personal finance? What does personal finance
involve?
❖ Describe financial success.
❖ What is financial happiness?
❖ What are the keys to achieving financial success?
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L.O.2: UNDERSTAND THE ECONOMY
❖ Economy: System of managing the productive and
employment resources of a country, state, or community.
❖ Economic Growth: Increasing production and
consumption in the economy.
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Where Are We in the Business Cycle?
❖ The economy grows and contracts over time:
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What is the Future Direction of the Economy?
❖ An Economic Indicator is a statistic that suggests how
well the economy is doing now and in the future.
❖ The Gross Domestic Product is a procylical indicator.
❖ The Unemployment Rate is a countercyclical indicator.
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INFLATION AND DEFLATION
❖ INFLATION: a steady rise in the general level of prices.
❖ DEFLATION: a steady decline in the general level of
prices.
❖ How inflation and deflation affects your income?
▪ Real income?
▪ Purchasing power?
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Concept Check L.O.2
❖ Summarize the phases of the business cycle.
❖ Describe two statistics that help predict the future
direction of the economy.
❖ Give an example of how inflation affects income
and consumption.
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L.O.3: APPLY ECONOMICS PRINCIPLES IN DECISION-MAKING
Opportunity cost and trade-offs
❖Opportunity Cost: Cost of decision measured by the value
of the next best alternative that must be foregone.
❖Trade-off: Giving up one thing for another.
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L.O.3: APPLY ECONOMICS PRINCIPLES IN DECISION-MAKING
Identify marginal benefits and costs
❖Marginal: the next one of something
❖Marginal benefits: the benefits of the next one of something
❖Marginal costs: the cost of the next one of something.
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L.O.3: APPLY ECONOMICS PRINCIPLES IN DECISION-MAKING
Identify marginal benefits and costs
Micah has spent $30 for a taxi ride to attend a Colts game.
When he arrives at the stadium, he discovers that he left
his ticket at home. He doesn’t have time to return home to
get it. He paid $60 for his ticket, but can buy another one
for $80. In deciding whether he should buy another ticket,
Micah should compare the value he places on attending the
game (the benefit of attending the game) to
1.
2.
3.
4.
$30.
$80.
$90.
$170.
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L.O.3: APPLY ECONOMICS PRINCIPLES IN
DECISION-MAKING
❖ Be rational
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Concept Check L.O.3
❖ Define opportunity cost and give an example of
how opportunity costs might affect your financial
decision making.
❖ Explain and give an example of how marginal
analysis makes some financial decisions easier.
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L.O.4: PERFORMING TIME VALUE OF MONEY
❖ Time value of money addresses two
questions about money.
▪ What will an investment (or a series of
investments) be worth after a period of time?
▪ How much has to be put away today (or as a
series of investments) to provide some dollar
amount in the future?
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L.O.4: PERFORMING TIME VALUE OF MONEY
❖ Future value of a lump-sum
❖ Future value of an annuity
❖ Present value of a lump-sum
❖ Present value of an annuity
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Concept Check L.O.4
❖ Calculate the future value of (a) $2000 at 5 percent for
four years, (b) $4500 at 9 percent for eight years, and
(c) $10,000 at 6 percent for ten years.
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Concept Check L.O.4
Exercise 1:
As a graduating senior, Harry is eager to enter the job
market at an anticipated annual salary of $34000.
Assuming an average inflation rate of 3% and an equal
cost-of-living raise, what will Harry’s salary be in 10
years? To make real economic progress, how much of a
raise (in dollars) does Harry need to receive next year?
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Concept Check L.O.4
Exercise 2: Calculate the following:
1.The future value of $400 in two years that earns 5%
2.The future value of $1200 saved each year for ten years
that earns 7%
3.The amount a person would need to deposit today with a
5% interest rate to have $2000 in three years.
4.The amount a person would need to deposit today to be
able to withdraw $6000 each year for 10 years from an
account earning 6%.
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Concept Check L.O.4
Exercise 2: Calculate the following:
5.A person is offered a gift of $5000 now or $8000 five
years from now. If such funds could be expected to earn
8% over the next 5 years, which is the better choice?
6.A person wants to have $3000 available to spend on an
overseas trip 4 years from now. If such funds could be
expected to earn 7%, how much should be invested in a
lump sum to realize the $3000 when needed?
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Concept Check L.O.4
Exercise 2: Calculate the following:
7.A person who invests $1200 each year finds one choice
that is expected to pay 9% per year and another choice
that may pay 10%. What is the difference in return if the
investment is made for 15 years?
8.A person invests $50000 in an investment that earns
6%. If $6000 is withdrawn each year, how many years
will it take for the fund to run out?
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L.O.5: MAKE SMART DECISIONS ABOUT YOUR
EMPLOYEE BENEFITS
❖ Cafeteria plan / flexible benefits plan
❖ Health care plan
❖ Flexible spending account
❖ Employer insurance plan
❖ Employer’s retirement plan
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L.O.5: MAKE SMART DECISIONS ABOUT YOUR
EMPLOYEE BENEFITS
❖ Cafeteria plan / flexible benefits plan: a
menu of benefits from which you may select
❖ Possible benefit plans: health care, life
insurance, vacation days, sick leave, medical
expense reimbursement, dependent care,…
❖ Cafeteria plan may offer tax-free or
tax-sheltered benefits.
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L.O.5: MAKE SMART DECISIONS ABOUT YOUR
EMPLOYEE BENEFITS
❖ Flexible spending account (FSA account): an
employer-sponsored account that allows
employee-paid expenses for medical or
dependent care to be paid with pretax
dollars rather than after-tax income.
❖ Pretax dollars: money income that has not
been taxed by the government
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Making Decisions About Health Care Plans
❖ Health Care Plans may be fully or partially paid by
an employer.
❖ Traditional plan: high premium, low deductibles,
little out-of-pocket expenses
❖ High-Deductible Health Care Plans may cost less:
low premium, high deductibles, high out-of-pocket
expenses.
❖ Health Savings Accounts (or HSAs) provide
tax-sheltered savings for health expenses,
❖ HSA can only be opened with high-deductible plan
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Making Decisions About Employer Insurance Plans
❖ Participating in employer
▪ life insurance,
▪ disability insurance, and
▪ long-term care insurance plans.
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Making Decisions About Retirement Plans
❖ Workers are covered by an employer-sponsored,
defined contribution retirement plan, also called a
tax-sheltered retirement plan.
▪ 401(k) plan
▪ 403(b) plan
▪ 457 plan
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Making Decisions About Retirement Plans
❖ First advantage: tax-deductible contributions
❖ Second advantage: employer’s matching contribution
❖ Third advantage: tax-deferred growth
❖ Fourth advantage: starting early really pays off big
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Part 1 - Chapter 2:
FINANCIAL STATEMENTS, TOOLS,
AND BUDGETS
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LEARNING OBJETIVES
Financial success requires paying attention to the details of
your personal finances and keeping track of your
financial progress.
1.Identify your financial values, goals, and strategies
2.Use balance sheets and cash-flow statements to measure
your financial health and progress
3.Evaluate your financial strength and progress using financial
ratios
4.Achieve your financial goals through budgeting
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L.O.1: IDENTIFY YOUR FINANCIAL GOALS
❖ What is FINANCIAL PLANNING?
Financial Planning: the process of developing and
implementing a coordinated series of financial plans.
To succeed in financial planning: set up goals and
follow steps to achieve goals
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L.O.1: IDENTIFY YOUR FINANCIAL GOALS
❖ The starting point, the basis for setting goals: VALUE
Values are fundamental beliefs that define your financial
success.
❖ What is FINANCIAL GOALS?
Specific long, intermediate and short term objectives
to be attained through financial planning and management
efforts.
SMART goals: Specific, Measurable, Attainable,
Relevant, Time-bound
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L.O.1: IDENTIFY YOUR FINANCIAL GOALS
❖ Financial strategies are pre-established action
plans that guide your financial success.
❖ For example, if a goal is to have $10,000 for the
down payment on a house in 3 years, your strategy
might be to have $275 per month taken out of your
paycheck and deposited directly into a savings
account. With 2 percent interest you should be
able to reach your goal.
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Concept Check 3.1
❖ Summarize the financial planning process.
❖ Explain the relationships among financial values,
goals, and strategies.
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L.O.2: FINANCIAL STATEMENTS
❖ Financial Statements describe an individual’s or
family’s financial condition.
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Financial Statements
❖ Balance sheets: describe an individual or family’s
financial condition on a specified date by showing
assets, liabilities, and net worth.
❖ Components of the balance sheet:
Assets – Liabilities = Net Worth
▪Asset: what you own
▪Liabilities: what you owe
▪Net worth: net results would be if you paid off all
your debts.
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Financial Statements
❖ Assets: What Is owned
▪ Monetary Assets (or liquid assets
or cash equivalents)
▪ Tangible (or use) assets
▪ Investment (or capital) assets
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Financial Statements
❖ Liabilities: What Is owed
▪ Short-term (or current) liability
• Personal loans owed to other people
• Credit card and charge account balances
• Professional services unpaid (doctors, dentists,
lawyers,…)
• Taxes unpaid
• Bills, insurance premiums
▪ Long-term liability
• Automobile loans
• Real estate mortgages
• Home loan
• Education loan
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Financial Statements
❖ Net Worth: What is left
❖ Net Worth Formula
Assets – Liabilities = Net Worth
❖ To increase net worth:
▪ Increase Assets.
▪ Decrease Liabilities.
▪ or both!
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Net Worth By Age
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Cash-Flow Statement
❖ The Cash-Flow Statement tracks where your
money came from and went.
▪ Income
▪ Expenses
▪ Surplus (or Net Gain or Net Income)
or Deficit (or Net Loss)
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Cash-Flow Statement
❖ Expenses
▪ Fixed Expenses stay much the
same from month to month.
▪ Variable Expenses change from
month to month.
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L.O.3: TRACK YOUR FINANCIAL STRENGTH USING RATIOS
❖ Liquidity ratio
▪ Do I have enough liquidity to pay for emergencies?
❖ Asset to debt ratio
▪ Do I have enough assets to meet my debt obligations?
❖ Debt service-to-income ratio
▪ Is my total debt burden too high?
❖ Debt payment to Disposable Income ratio
▪ Is my non-mortgage debt too stressful?
❖ Investment assets to total assets ratio
▪ Am I saving/ investing enough?
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Financial Ratios
❖
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Financial Ratios
❖
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Financial Ratios
❖
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Financial Ratios
❖
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Financial Ratios
❖
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Concept Check 3.3
❖ Distinguish between the liquidity ratio and the asset
– to – debt ratio
❖ Distinguish between the debt service-to-income
ratio and the debt repayment to disposable income
ratio?
❖ What can changes overtime in your investment
assets-to-total assets ratio tell you about your
progress in reaching financial goals?
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L.O.4: BUDGETING
❖ Financial Statements describe an individual’s or
family’s financial condition.
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Budgeting
❖ Budget: A paper or electronic document used to
record both planned and actual income and
expenditures over a period of time.
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Budgeting – Action Before the Budgeting Period
❖ Set financial goals.
▪ Long-term goals
▪ Intermediate goals
▪ Short-term goals
❖ Make and reconcile budget estimate
❖ Plan cash flow: cash flow calendar &
revolving saving funds
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Budgeting – Action During the Budgeting Period
CONTROL SPENDING
❖Budget for shopping trips.
❖Record the purpose of expenditures.
❖Keep track of credit transactions.
❖Monitor unexpended balances to control overspending.
❖Justify exceptions.
❖Use a subordinate budget.
❖Use the envelope system.
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Budgeting – Action After the Budgeting Period
❖ EVALUATE budgeting progress to make
needed changes
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Part 2 - Chapter 4:
MANAGING INCOME TAX
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Introduction
There is no obligation to pay any more
in taxes than legally required.
• Tax Planning: Seeking legal ways to
reduce, eliminate, or defer income
taxes
• The key is to reduce taxable
income--the income upon which
income taxes are levied—not total
income
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LEARNING OBJETIVES
1.
Explain the nature of progressive income taxes and the
marginal tax rate.
2.
Differentiate among the eight steps involved in
calculating your federal income taxes.
3.
Use appropriate strategies to avoid overpayment of
income taxes.
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L.O.1: PROGRESSIVE INCOME AND MARGINAL TAX
RATE
● The progressive nature of the federal
income tax.
• A Progressive Tax is one that requires a
higher tax rate as income increases
• A Regressive Tax is one that demands a
decreasing proportion of one’s income
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L.O.1: PROGRESSIVE INCOME AND MARGINAL TAX
RATE
❖ Marginal tax bracket (or MTB): bracket of income
which is taxed at a specific rate
❖ Marginal tax rate is the rate at which your last
dollar of income is taxed.
❖ Indexing adjusts the tax brackets each year for
inflation.
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L.O.1: PROGRESSIVE INCOME AND MARGINAL TAX
RATE
❖ Bill is single and his taxable income is $100000. How
much is his tax liability?
= 9275*10%+(37650-9275)*15%+(91150-37651)*25%
+(100000-91150)*28%= $21036.5
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L.O.1: PROGRESSIVE INCOME AND MARGINAL TAX
RATE
❖ Tax bracket of Vietnam system (applied from 2018)
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L.O.1: PROGRESSIVE INCOME AND MARGINAL TAX
RATE
• Your marginal tax rate helps you make financial decisions.
• Decreasing your taxable income saves you more in taxes as
your marginal tax rate goes up
• Additional taxable income costs you more in taxes as your
marginal tax rate goes up
• The amount saved or added is equal to your marginal tax rate
times the amount the taxable income goes down or up
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L.O.1: PROGRESSIVE INCOME AND MARGINAL TAX
RATE
Your average tax rate is lower than marginal
tax rate
• Average tax rate: Percentage of total income
paid in income taxes.
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Concept Check 4.1
1. Distinguish between a progressive and a
regressive tax.
2. What is a marginal tax bracket, and how does
it impact taxpayers making tax-advantaged
contributions to their retirement plans?
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L.O.2: 8 Steps in Calculating Your Income Tax
1. Determine your total income.
2. Determine and report gross income after subtracting exclusions.
3. Subtract adjustments to income to arrive at your adjusted gros
income (AGI).
4. Subtract either the IRS’s Standard Deduction for your tax status
or itemize your deductions
5. Subtract the value of your personal exemptions.
6. Determine your preliminary tax liability.
7. Subtract tax credits for which you qualify.
8. Calculate the balance due the IRS or the amount of your
refund.
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The Process of Income Tax Calculation
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Concept Check 4.2
1. How are long-term and short-term capital
gains treated differently for income tax
purposes?
2. Describe the process of tax calculation
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Learning Objective 3
Use appropriate strategies to avoid
overpayment of income taxes.
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Strategies to Reduce Income Taxes
• Practice legal tax avoidance, not
tax evasion.
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Strategies to Reduce Income Taxes
• Reduce taxable income through
your employer.
• Premium only plan
• Transportation reimbursement plan
• Flexible Spending Account (or FSA
or Expense Reimbursement
Account)
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Strategies to Reduce Income Taxes
• Reduce taxable income through
your employer.
• Defined Contribution Retirement
Plan
• 401(k) Retirement Plan
• Matching Contributions
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Strategies to Reduce Income Taxes
• Prune taxable investments that
have lost value before the end of
the year to take the tax loss as a
reduction to other taxable
investment income.
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Strategies to Reduce Income Taxes
• Make tax-sheltered investments.
• Tax-Sheltered Investments are investments that yield
returns that are tax advantaged
• Investing with pretax income rather than after-tax dollars
• Tax-deferred investment growth
• Traditional IRA: pretax investment
• Roth IRA: after-tax investment
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Strategies to Reduce Income Taxes
• Make tax-sheltered investments.
• Tax-Sheltered Investments are
Investments that yield returns that are tax
advantaged
• Coverdell Education Savings Account
• Qualified Tuition (Section 529)
Programs
• Government Savings Bonds
• Tax-exempt municipal bonds
• Capital gains on housing
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Strategies to Reduce Income Taxes
• Defer income.
• Accelerate deductions.
• Shift income to a child.
• Buy and manage a real estate
investment.
• Take all of your legal tax deductions.
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Concept Check 4.3
1. Distinguish between two types of tax-sheltered
investment returns.
2. Explain how to reduce income taxes via your
employer, and name three employer-sponsored
plans to do so.
3. Summarize the differences between an individual
retirement account (IRA) and a Roth IRA.
4. Identify three strategies to avoid overpayment of
income taxes (different from above), and
summarize the essence of each.
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Conclusion
The key to effective tax
management is to reduce your
taxable, rather than your gross
income, through all appropriate and
legally available opportunities.
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Part 2 - Chapter 5:
MANAGING CHECKING AND SAVINGS
ACCOUNTS
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REVIEW QUESTIONS
1.
2.
3.
Distinguish checking and savings account
What is NOW account?
Explain shortly 3 tools of managing monetary assets:
checking account, savings account and money market
account.
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LEARNING OBJETIVES
1.
IDENTIFY the tools of monetary asset management
and sources of such financial services
2.
CHECKING ACCOUNT
3.
SAVING ACCOUNT
4.
MONEY MARKET ACCOUNT
5.
Electronic money management
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Introduction
MONETARY ASSET
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Introduction
The goal of managing checking and
savings accounts is to obtain the
appropriate banking services for no or
very low fees and with maximized
interest.
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Learning Objective 1
Identify the goals of monetary
asset management and sources of
such financial services.
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L.O.1. Monetary Asset Management
• Monetary assets include cash
and low-risk, near-cash items
that can quickly be converted
into cash.
• Checking Accounts
• Savings Accounts
• Money market account
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L.O.1. Monetary Asset Management
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L.O.1. Monetary Asset Management
• Monetary asset management encompasses how you
handle all of your monetary assets
• cash on hand
• checking accounts
• savings accounts
• certificates of deposit
• money market accounts.
• Successful monetary asset management: earn
interest while maintaining liquidity and safety.
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Learning Objective 2
Understand and employ the
various types of accounts
available to meet the goals of
monetary asset management.
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Checking Accounts
• Checking accounts are used for day-to-day
spending with easy withdrawals and deposits.
• Checking account are accessed through
•
Checks: write checks and transfer money from
your account to others
•
Debit (or Check) Cards: ATM or POS
•
Electronic transfers
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Checking Accounts
• Types of checking accounts:
– Interest-Earning Checking Account [NOW Account]:
checking account that pays interest
– Share draft account (at Credit Unions): credit union version
of NOW account, lower costs than those issued by a bank
– Tiered Interest: combination of base rate and higher rate
(lower rate for lower balances, higher rate at higher balances)
– Lifeline Banking Account: account for lower-income
customers, extremely low cost, no interest
Savings account
• Savings accounts are “time deposits” meaning that the
intent is for the money to stay on deposit rather than be
available any time as with “demand deposits” in
checking accounts.
• Savings account: readily accessible funds for
emergency and temporarily holding place for funds
in excess of those needed for daily living expenses.
• How to save: “pay yourself first”
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Savings account
• The first savings goal should be to have an emergency fund
for unexpected expenses. Experts recommend an amount
equal to three months worth of expenditures.
• Savings are a great place initially to put funds when saving for
long-term goals. Simply break the goal down into monthly
goals. Then when larger amounts build up you can move
them into more investment oriented accounts.
99
Savings Accounts
• Types of savings accounts:
– Statement savings accounts
– Certificate of deposits
Savings Accounts
• Types of savings accounts:
• Certificates of Deposit (or CDs) are
purchased in a specified dollar amount at a
specified interest rate and are expected to
stay on deposit for the specified time period.
•
•
•
Thus, they are a fixed time deposit
Typically there is a penalty for early withdrawal
Thus, higher interest rates
Money Market Accounts
• Money Market Accounts: provide both
checking and savings tools at a higher
interest rate than other accounts
• However, limited check-writing privileges:
limit on the number of withdrawals (checks)
per month.
102
Money Market Accounts
• Types of money market accounts
• Super Now account
• Money market deposit account
• Money market mutual fund
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Asset Management Accounts
❖ Central Asset Management Account (or AMA or
Central Asset Account)
❖ The most flexible type of money market account is
the asset management account. This all-in-one
account combines checking, money market and
credit card accounts. Funds are kept in the high
interest paying money market account until needed
to cover a check or make a payment on the credit
card.
104
Concept Check 5.2
1. Distinguish among the time-frame differences
for checking, savings, and investment accounts.
2. Explain why there is no such thing as free
checking and list two checking account fees or
penalties that you could easily avoid by using your
account appropriately.
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Concept Check 5.2
3. Describe reasons to keep money in a savings account
rather than a checking account.
4. Explain the benefits of a pay-yourself first approach to
saving.
5. Explain the benefits of and drawbacks of certificates of
deposit.
106
Conclusion
Effective monetary asset
managers place their money
where it earns the best interest
and generates low costs. They
also are effective financial
communicators.
107
Part 2 - Chapter 6:
BUILDING AND MAINTAINING GOOD CREDIT
108
LEARNING OBJETIVES
1.
Explain reasons for and against using credit
2.
Describe the common sources of consumer credit
3.
Establish your own debt limit
4.
Achieve a good credit reputation
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Introduction
❖ Credit is any arrangement in which goods, services or
money is received in exchange for a promise to repay at
a later date with or without interest.
❖ Credit is an agreement between the lender and the
borrower, in which the lender gives the borrower the right
to use their money, goods and services. The borrower
has to repay in the future with or without interest.
❖ To succeed financially you need establish and maintain a
good credit reputation.
110
Learning Objective 1
The advantages and
disadvantages of using credit
111
L.O.1. Advantages of using credit
• Good uses of credit include
• convenience,
• emergencies,
• reservations,
• owning expensive items sooner,
• taking advantage of free credit,
• for protection against fraud,
• to obtain an education.
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L.O.1. Disadvantages of using credit
• The downside of credit:
• Use of credit reduces financial flexibility and privacy
Slows progress towards reaching financial goals
• It Is tempting to overspend.
• possibility of becoming “overstretched”
financial stress
• High interest (finance charge or APR)
• Overuse can affect one’s credit score leading to reduced
access to credit when needed
• Can have a negative impact on relationships
113
Concept Check 6.1
1. Distinguish between the APR (annual percentage rate) and
the finance charge on a debt.
2. Which five advantages of credit seem appropriate to you?
3. Which five disadvantages of credit seem appropriate to
you?
114
L.O.2. establish your own debt limit
❖ Credit limit: the maximum amount of money you can
borrow from the financial institutions, established by the
lender.
❖ Debt limit: overall maximum you believe you should owe
based on your ability to meet repayment obligations
❖ Credit utilization ratio: percentage of your total credit
limit that you actually owe.
Personal finance
115
Learning Objective 3
Obtain credit and build a good
credit reputation.
116
L.O.3. Obtaining credit
Personal finance
117
LO3. Making Sense of Your Credit Scores
118
LO3. Your Credit Reputation
❖ Building a credit history:
▪ Establish both a checking account and a savings account.
▪ Have your telephone and other utilities billed in your
name.
▪ Request, acquire, and use an oil-company credit card.
▪ Apply for a bank credit card.
▪ Ask a bank for a small, short-term cash loan.
▪ Pay off student loans.
119
Concept Check 6.3
1.
Summarize the basic steps that occur when someone
applies for credit.
2.
What is a credit history, and what role do credit
bureaus play in the development of it?
3.
What is a credit score, and what five major factors go
into its calculation?
4.
Identify five actions you can take to build a good credit
reputation.
120
Conclusion
In order to obtain credit at all and at
the possible lowest rates, you must
build and maintain and rebuild if lost,
your good credit reputation.
121
Part 2 - Chapter 7:
CREDIT CARDS AND CONSUMER LOAN
122
LEARNING OBJETIVES
1.
Compare the common types of consumer credit,
including credit cards and installment loans
2.
Describe the types and features of credit card accounts
3.
Manage your credit card accounts to avoid fees and
finance charges.
4.
Describe the main features of consumer installment
loans
5.
Know how to repay principal and interest
Personal finance
123
Introduction
•
You cannot borrow your way to financial success, and
using any kind of credit requires deliberate thinking and
planning. You must understand:
•
consider whether the reason you are borrowing is
sound,
•
how you will repay the debt,
•
the rules of credit card and consumer loan accounts
•
how the fees and interest are calculated on your
credit cards and loans
124
Learning Objective 1
Compare the common types of
consumer credit, including credit
cards and installment loans.
125
L.O.1. Common types of consumer credit
• Consumer credit
• Secured credit: loan with collateral, normally for
medium and long-term credit, large amount of money
borrowed
• Unsecured credit
• Trust loan: for short-term and small credit
• Credit cards
• Overdraft: excess withdrawal on debit account
126
L.O.1. Common types of consumer credit
• Consumer credit
• Installment loan: pay an equal or unequal amount of
money each period, including both principal and
interest
• Non-installment loan:
• Single-payment
• Open-ended credit (revolving credit)
127
Learning Objective 2
Manage your credit card accounts
wisely.
128
Managing Credit Card Accounts
• A key to managing credit card accounts is understanding
the information in your credit or billing statement.
•
The statement date/ the billing date: ngày sao kê
•
The payment due date: ngày đến hạn thanh toán
•
Transaction and posting dates: ngày thực hiện giao dịch
• Grace period: thời gian ân hạn (khoảng thời gian không phải trả lãi)
•
Previous unpaid balance: số dư chưa trả của các tháng trước
•
Minimum payment due: khoản thanh toán tối thiểu mỗi tháng
129
Managing Credit Card Accounts
• You have to pay your credit card in full, if you pay
only the minimum payment, your balance will go up
overtime, and you have to pay higher interest.
130
Managing Credit Card Accounts
• Fees on credit cards
• Annual fee
• Transaction fee
• Foreign Exchange fee
• Cash withdrawal fee
• Late-payment fee: interest rate
• Over-the-limit fee
131
Method to pay interest and principal
1. Equal principal and interest on declining balances: trả gốc
đều nhau, lãi trả trên số dư giảm dần
2.
Equal principal and interest installment: lãi và gốc đều
nhau qua các kỳ
3.
1.
Add-on single interest: lãi tính trên tổng vốn gốc vay, lãi đơn
2.
Add-on compound interest: lãi tính trên tổng vốn gốc vay, lãi kép
3.
Interest on declining balances: lãi tính trên số dư giảm dần
Equal interest installment, final principal payment: trả lãi
đều nhau, nợ gốc trả một lần vào cuối kỳ
4.
Discount method: phương pháp chiết khấu
Personal finance
132
Part 3 - Chapter 10:
MANAGING LIABILITY AND PROPERTY RISK
133
Introduction
• All of your hard work and financial planning can be
destroyed by a fire, accident, ill health or untimely
death. Fortunately, insurance can be purchased to
reduce these risks to a manageable level.
134
LEARNING OBJETIVES
1.
Apply the risk-management process to address the risks
2.
Explain how insurance works to reduce risk
3.
Design a homeowner’s or renter’s insurance programs to
meet your needs
4.
Design an automobile insurance program to meet your
needs
5.
Other types of property and liability insurance
Personal finance
135
Learning Objective 1
Apply the risk-management
process to address the risks to
your property and income.
136
L.O.1. Risk and risk management
• What is the nature of risk?
• Risk is the uncertainty about the outcome of a
situation or event.
• Risk is not the same as “odds”.
• Speculative risk involves situations where
there is the potential for gain as well as loss.
• Pure risk involves situations when there is only
the possibility of loss.
insurance
137
L.O.1. Risk management process
138
The Risk-Management Process
❖ Step 1: Identify your risk exposures.
▪ Peril: Any event that can cause a financial loss.
❖ Step 2: Estimate risk and potential losses.
▪ Loss frequency
▪ Loss severity
139
The Relationship Between Severity and Frequency of Loss
140
The Risk-Management Process
❖ Step 3: Choose how to handle risk.
▪ Risk Avoidance (tránh né rủi ro): unpractical
▪ Risk Retention: chấp nhận rủi ro
▪ Loss Control: kiểm soát rủi ro
▪ Risk Transfer: chuyển giao rủi ro
▪ Risk Reduction: giảm thiểu rủi ro
141
The Risk-Management Process
❖ Step 4: Implement the risk-management
program.
▪ Large-Loss Principle: Insure the losses
that you cannot afford, and pay the small
losses out of your own pocket.
❖ Step 5: Evaluate and adjust the program.
142
The Large-Loss Principle
❖ Insure the risks that you cannot afford and retain the
risks that you can reasonably afford.
❖ Insure for the highest possible loss.
❖ Choose a higher deductible to make the coverage more
affordable.
143
Concept Check 10.1
1.
Distinguish between pure risk and speculative risk.
2.
Explain the distinctions between risk and odds.
3.
List, describe, and give an example of each of the five
ways to handle risk of loss.
4.
Describe the five steps of risk management.
5.
When considering likelihood of loss and severity of loss,
explain which one of these concepts is more important
when deciding whether to buy insurance and why.
144
Learning Objective 2
Explain how insurance works to
reduce risk.
145
Understanding How Insurance Works
❖
❖
❖
Insurance reduces risk.
Premium is the fee paid for insurance protection.
Insurance Policy is the insurance contract
between the insured and the insurer.
146
Understanding How Insurance Works
❖ Hazards make losses more likely to occur.
▪ Hazard: Any condition that increases the probability that a
peril will occur.
• Physical hazard: a particular characteristics that
increases the chances of loss
• Morale hazard: when a person buying insurance
doesn’t care about the risk. Example: paying home
insurance makes the insured less careful in locking
doors.
• Moral hazard: when the insured wants the peril to
occur to receive the insurance policy.
147
Understanding How Insurance Works
❖ Only certain losses are insurable.
▪ Fortuitous losses: unforeseen (không thể thấy trước)
▪ Financial loss: measurable in dollars (có thể đo lường
bằng tiền)
148
Understanding How Insurance Works
❖ Factors that reduce the cost of insurance (reduce premium):
▪ Deductibles: an amount of loss that you will cover yourself
before asking for insurance reimbursement
▪ Coinsurance: when you agree to pay a percentage of the
loss yourself. You and the insurance company pay for the
loss together.
▪ Hazard reduction
▪ Loss reduction
❖ Selecting higher deductibles and coinsurance percentages is in
keeping with the large-loss principle.
149
Understanding How Insurance Works
❖ The nature of insurance
▪ Sharing of losses through the workings of the
law of large numbers.
▪ The larger the number of people in a group
the more accurate the prediction of losses
suffered by the group
150
Understanding How Insurance Works
❖ The nature of insurance
•
Accurate predictions reduce risk
•
You benefit from buying insurance even
if you do not suffer a loss
•
The benefit is the reduction in risk
151
Understanding How Insurance Works
❖ Insurance is applied for, not “bought”, and insurance
companies decide through underwriting which
applicants to accept.
▪ Preferred applicants pay lower rates
▪ Standard applicant pay standard rates
▪ Substandard applicant pay higher rates
▪ Unacceptable applicants are denied coverage
152
Concept Check 10.2
1.
Define insurance.
2.
Distinguish among the three types of hazards.
3.
Why is the principle of indemnity so important to
insurance sellers?
4.
Identify four key points to review when reading an
insurance policy.
5.
Summarize how to use deductibles, coinsurance,
hazard reduction, and loss reduction to lower the cost
of insurance.
153
PROPERTY AND LIABILITY INSURANCE
❖ Property Insurance
▪ Protects you from financial losses resulting
from damage to or destruction of your
property or possessions.
❖ Liability Insurance
▪ Protects you from financial losses suffered
when you are liable for others’ losses.
❖ The common property and liability
insurance are homeowner’s insurance
and automobile insurance.
154
Part 3 - Chapter 11:
MANAGING HEALTH EXPENSES
155
Introduction
There are three finance burdens related to health
issue:
1. Direct medical care costs
2. Long-term rehabilitative and custodial care
costs
3. Lost Income when you cannot work due to
illness or injury
156
LEARNING OBJETIVES
1.
Identify ways that people can manage the financial burdens
resulting from illness or injury
2.
Distinguish among the types of protection for direct health
expenses
3.
Describe the benefits and limitations of health care plans
4.
Develop a plan to protect your income when you cannot work
due to disability
5.
Explain how to protect yourself from the long-term care
expenses
Personal finance
157
Learning Objective 1
Identify ways that people can
manage the financial burdens
resulting from illness or injury
158
Types of Types of protection from health-related
Long-term
L.O.1.
cost
Direct health care
Lost
income
expenses
care
Provider
of
coverage
• Health
maintenance
organizations
(HMO)
• Medicare for
those aged 65 or
more
• Medicaid for
low-income
• Traditional
health
insurance
• Medicare
• Medicaid
• Consumer
-driven
health
insurance
plans
• Long-term • Disability
care
income
insurance
insurance
• Medicaid • Social
Security
for eligible
workers
and their
families
Services
provided
Hospital, surgical,
medical services
directly through
their own hospital
and physicians or
under contract with
such providers
Reimburses or
pay for
hospital,
surgical,
medical, and
other health
care costs
Reimburses
or pay for
hospital,
surgical,
medical, and
other health
care costs
that exceed a
high
deductibles
Reimbursem
ents for costs
associated
with
custodial
care (not
direct
medical care)
Provides a
monthly
income to
replace that
lost when the
insured is
unable to
work due to
accident or
injury159
L.O.1. Types of protection from health-related cost
Types of
expenses
Direct health care
Long-term
care
Lost income
Payment
mode
Monthly fee and Monthly
prepaid basis
premiums
on the
insurance
coverage
Monthly
premiums
on the
insurance
coverage
Purchased
by
Individual or
employers as
employee
benefits
Individual Individual Individual or
or
employers as
employers
employee
as
benefits
employee
benefits
Individual
or
employers
as
employee
benefits
Monthly Monthly
and
premium
annual
premiums
160
L.O.2. PROTECTING FROM DIRECT HEALTH CARE COST
❖ Health care plan: a generic name for any program that
pays or provides reimbursement for direct health care
costs
161
L.O.2. HEALTH MAINTENANCE ORGANIZATIONS
❖ Health maintenance organizations (HMO): health
insurance plans that provide a broad range of health
care services for a set monthly fee on a prepaid basis
❖ HMO subscribers are assigned/ choose a primary
physicians within HMO
choose health service
providers within HMO
▪
it helps to identify any health problems early, which
helps keep overall costs low by reducing the
probability of high-cost treatment
162
L.O.2. TRADITIONAL HEALTH INSURANCE
❖ Traditional Health insurance is based on the concept
of reimbursement for losses, with the patient choosing
the type of care based on the advice of his/her physician
indemnity plan / fee-for-service plan
❖ Preferred provider organization (PPO): a group of
health care providers who contract with a health
insurance company to provide services at a discount
If choosing PPO, Policy holder received the discount in
the form of reductions or eliminations of deductibles,
coinsurance
163
L.O.2. CONSUMER-DRIVEN HEALTH CARE PLANS
❖ Consumer-driven health care: an approach to
health care protection where the customer selects a
health care plan with a high deductible and high
overall policy limits.
Consumers will be more careful in spending money
Give the consumers the opportunity and responsibility
to manage their health care costs.
164
L.O.2. CONSUMER-DRIVEN HEALTH CARE PLANS
Types of Consumer-driven health care:
❖High-deductible health care plan: a tax-exempt account
created to pay for qualified medical expenses of the account
holder and their dependents.
• Lower premiums, Higher deductible, higher out-of-pocket
expenses, Higher policy limit
▪
to cover the high deductibles, holders of high-deductible health
care plan are allowed to open Health Savings Account (HSA).
▪ HSA is a tax-deductible savings account in which account holder
or their employers can deposit pretax income to use for health
services later.
165
L.O.2. CONSUMER-DRIVEN HEALTH CARE PLANS
Types of Consumer-driven health care:
❖Health Reimbursement Arrangements: funds set aside by
employers to reimburse employees for qualified medical
expenses.
❖Flexible spending arrangements: an employer-sponsored
account that allows employee-paid expenses for medical or
dependent care to be paid with an employee’s pretax dollars
rather than after-tax income.
166
Learning Objective #4
Explain the basics of planning for long-term
custodial care.
167
Planning for Long-Term Custodial Care
❖ Injuries, severe illnesses and certain conditions often require a
long period of custodial care in a nursing home or at home.
Because this care is custodial and not directly medical in
nature it is not covered by health care plans.
❖ Long-term care cost can be reimbursed by long-term care
insurance or Medicaid (for low income)
❖ Long-term care insurance provides reimbursement for costs
associated with custodial care in a nursing facility or at home.
Long-term care insurance is the most useful to
middle-income people.
168
Planning for Long-Term Custodial Care
There are some factors to consider when buying
long-term care insurance
1.The degree of impairment required for benefits to begin
▪
Activities of Daily Living (ADLs)
2.The level of care covered
▪
Skilled nursing care
▪
Intermediate care
▪
Custodial care
169
Planning for Long-Term Care
3.
The person’s age
4.
The benefit amount
5.
The benefit period: the time period you will receive benefit
6.
The waiting period: the time you have to wait/pay by yourself
before the insurance company pay for you
7.
Inflation protection
You will also want to trade-off the benefit period and the
waiting period. Selecting a longer waiting period will
allow you to pay lower premium and afford a longer
benefit period.
170
Concept Check 11.5
❖ Describe the protections provided by long-term care
insurance.
❖ Distinguish between the benefit period and the waiting
period for a long-term care policy.
❖ List three aspects of long-term care insurance that
affect the cost of a policy.
171
Learning Objective #5
Develop a plan for protecting your income when you
cannot work due to disability.
172
Protecting Your Income During Disability
❖ Disability income insurance
❖ Social Security disability insurance
173
Protecting Your Income During Disability
❖ What is your level of need?
▪ Long-term care policies will typically only cover about 60-80
percent of the insured’s after-tax income.
174
Protecting Your Income During Disability
❖ What is your level of need?
▪ Calculation of needs starts with current after-tax income and
then subtracts Social Security disability benefits,
employer-based disability benefits, and any other existing
disability insurance.
175
Protecting Your Income During Disability
❖ Important disability income insurance policy
provisions:
▪ Waiting period (or elimination
period)
▪ Benefit period
▪ A longer waiting period will help you
afford a longer benefit period.
176
Protecting Your Income During Disability
❖ Consider the degree of disability.
▪ An own-occupation policy will
provide benefits if you can no longer
perform the occupation you had
before becoming disabled.
▪ A residual clause allows for reduced
benefits when a partial disability
occurs.
177
Protecting Your Income During Disability
▪ An any-occupation policy will provide
full benefits only if you cannot perform
any occupation. Typically, it will provide
the difference in income between your
prior and after-disability occupation.
178
Protecting Your Income During Disability
❖ Important disability income insurance policy provisions:
▪ Social Security rider
▪ Cost-of-living adjustments
179
Concept Check 11.5
❖ Explain how you determine your level of need for
disability income insurance.
❖ Identify the major policy provisions to consider when
purchasing disability income insurance.
180
Concept Check 11.5
❖ Distinguish between any-occupation and own-occupation
disability income insurance plans.
❖ Describe how you might adjust the waiting period on a
disability income insurance policy in order to affordably
obtain a longer benefit period.
181
Part 3 - Chapter 12:
LIFE INSURANCE PLANNING
182
Introduction
❖ There are two primary risks related to longevity
and finances:
▪ Risk of dying too soon
▪ Risk of living too long
183
Learning Objective #1
Understand why you might need life insurance
and calculate the appropriate amount of
coverage.
184
How Much Life Insurance Do You Need?
❖ The primary reason for buying life insurance is to allow the
family members of the deceased to continue with their lives
free from the financial burdens that death can bring.
❖ Needs are high for a parent with young children
❖ Young, single professionals may need little life
insurance
185
What Needs Must Be Met?
❖ Final expenses: One-time expenses occurring just
prior to or after a death.
❖ Income-replacement needs
❖ Readjustment-period needs
❖ Debt-repayment needs
❖ College expense needs
❖ Other special needs
186
What Needs Must Be Met?
❖ Existing insurance and assets reduce the level of need.
❖ Government benefits can reduce the level of need.
▪ Social Security survivor’s benefits
▪ Social Security blackout period
❖ Life insurance can close any remaining gap in needs.
❖ Beneficiary: The person named in the policy to receive
the funds.
187
What Dollar Amount Do You Need?
❖ The Multiple-of-Earnings Approach: easy but
flawed.
❖ The Needs-Based Approach: a better method
188
Concept Check 12.1
1.
Distinguish between the dying-too-son problem and the
living-too-long problem and the best ways to address
each.
2.
List five types of needs that can be addressed through life
insurance.
3.
Explain why the multiple-of-earnings approach is less
accurate than a needs-based approach to life insurance
planning.
4.
Identify two periods in a typical person’s life cycle when
the need for life insurance is low and one when it is high
189
Learning Objective #2
Distinguish among the types of life insurance.
190
There Are Only Two Basic Types of Life Insurance
❖ Term Life Insurance (or Pure Protection)
▪ Face amount
▪ Time period
▪ With term-life insurance, you pay premiums for a specific period
of time. When you die during that time, your beneficiary will
receive a face amount. When you do not die, the insurance expires
and you have to renew it with higher premiums.
▪ Premium goes up with each renewal as you get older
❖ Cash-Value Life Insurance
▪ Cash-Value: Represents the value of the investment element in the
life insurance policy.
191
Term Life Insurance
❖
❖
❖
❖
❖
❖
Guaranteed Renewable Term Insurance
▪
Protects you against the possibility of becoming uninsurable.
Level-Premium Term Insurance
▪
Covers for five, ten or more years with the annual premiums
set at the average over that time span.
Decreasing Term Insurance:
▪
the premium stays the same each year and the amount of
coverage declines to reflect the age of the insured.
Convertible Term Insurance:
▪
allows the insured to convert a term policy to a cash-value
policy with a commensurate increase in the annual premium.
Group Term Life Insurance:
▪
is sold through a group with the individual insured being
covered based on the amount selected.
▪
Group insurance is best for those who due to health reasons
cannot find affordable life insurance individually.
Credit Term Life Insurance/ Mortgage Term Life Insurance
192
Figure 12-1: Comparison of Premium Dollars for Life
Insurance
193
Cash-Value Life Insurance
❖ Some forms of cash-value life insurance pay a
fixed return:
▪ Permanent Insurance
▪ Whole (or Straight) Life Insurance
194
Figure 12-2: The Fundamental Nature of Cash-Value
Life Insurance
Overtime, while
the amount of
benefit remains
the same, the
amount of actual
life insurance
reduces and the
amount of
cash-value
195
Cash-Value Life Insurance
▪ Limited-Pay Whole Life Insurance: allows the insured
to pay higher premiums for a set period of time after
which coverage will continue for life.
▪ Adjustable Life Insurance
▪ Modified Life Insurance
▪ Endowment life insurance: allows you or your
beneficiary to receive the benefit either on a specific
date or on the date you die (whichever is sooner)
196
Concept Check 12.2
❖ Distinguish between term life insurance and cash-value
life insurance.
❖ Explain why the premiums for term insurance are so
much lower than those of cash-value life insurance.
❖ Describe the benefit of buying guaranteed renewable
term insurance.
❖ Explain why the amount of “insurance” declines over
time under a cash-value life insurance policy.
❖ Distinguish between cash-value life insurance with a
fixed return and with a variable return.
197
Step-by-Step Strategy for Buying Life Insurance
❖
Buy term and invest the rest.
The best way to buy life insurance is to buy term and
invest the rest. This means that you buy term life
insurance for the major portion of your needed life
insurance and take the money you would have
spent buying cash-value life insurance and invest it
through a tax-sheltered retirement plan at work or
an IRA. This is the most economical and effective
way to protect financially against dying too soon
and living too long.
• The term insurance solves the dying too soon problem most
efficiently
• The investment program will be your retirement accounts
• These will generate a much higher return than cash-value
life insurance thereby helping you solve the living too long
problem
198
Part 4 - Chapter 13:
INVESTMENT FUNDAMENTALS
199
Introduction
Building real wealth requires earning a good rate of
return on your money. The difference in the return
is a major distinction between mere savings and
investing.
200
Learning Objective #1
Explain how to get started as an investor.
201
Starting Your Investment Program
❖ Investing is more than saving.
▪ Savings: setting money aside when you spend less than
you earn
▪ Investing: taking the money you have saved and making it
work for you. You want to earn money on your money not
just accumulate money that is set aside.
▪ Securities: stocks, bonds, mutual funds
▪ Real estates
▪ Portfolio: Together all of your investments are referred to
as your portfolio. It should be a broad mix of investments.
202
Starting Your Investment Program
❖ Are you ready to invest?
▪ Live within your income
▪ Save regularly
▪ Use credit wisely
▪ Carry adequate insurance
203
Starting Your Investment Program
❖ Decide why you want to invest.
▪
▪
▪
▪
▪
To achieve goals
To gain wealth and security
To increase current income
To meet retirement needs
To maximize enjoyment of life
204
Getting Started As an Investor
•
Where to get money to invest:
•
Set up a pay yourself first plan to accumulate enough savings
to make an investment
•
Save your net raise after income taxes to use for investments
•
Invest any found money (such as tax refunds, bonuses, gifts and
inheritances)
•
When a debt is repaid continue debt payments to yourself into an
investment
•
Go on a budget diet for one month a year to save money to
invest
•
Take on second job
205
Starting Your Investment Program
❖ What investment returns are possible?
▪ Return is based on Financial Risk
• The higher risk, the higher potential return – and
higher potential loss
▪ Total Return from current income and capital gains
• Current Income: the return you get while you own
the asset (Interest, Rent, Dividends)
• Capital gain: the gain you receive when you sell the
asset at a higher price than when you buy.
206
Concept Check 13.1
❖ What are the two parts of an investor’s total
return?
❖ What stock market returns can be anticipated in
the near- to mid-term, and why?
207
Learning Objective #2
Identify your investment philosophy and invest
accordingly.
208
Your Investment Philosophy
❖ How to handle investment risk
▪ Pure risk: the only possibility is a loss
▪ Speculative risk: both gains and loss
are possible
▪ Investment risk: the uncertainty that
the yield on an investment will differ from
what is expected
•Investment risk is speculative risk
209
Your Investment Philosophy
❖ Investors demand a risk premium
▪ The risk on a T-bill is near zero and, thus, the rate of
return is near zero, as well.
▪ people demand a risk premium for their willingness
to make riskier investments for which there is no
guarantee of future success.
• The difference between the desired return on an
investment and the current T-bill rate is the risk
premium
• Higher risk investments carry a higher risk premium
210
Figure 13-2: The Risk Pyramid Reveals the
Trade-Offs Between Risk and Return
211
What is your Investment Philosophy?
❖ Are you a conservative Investor?
▪ Risk-averse
❖ Are you a moderate investor?
▪ Risk neutral
❖ Are you an aggressive investor?
▪ Risk seeker
212
What is your Investment Philosophy?
❖ Are you a conservative Investor?
▪ Risk-averse investor
▪ Expecting moderate current income and Preservation
of capital
▪ Avoid loss, rarely sell assets
▪ Purpose: retirement, the need to withdraw money in
short time
▪ Investing in T-bill, note, bonds, municipal bonds,
213
What is your Investment Philosophy?
❖ Are you a moderate investor?
▪ Risk-neutral investor
▪ Accept risk as a part of investing
▪ Expecting slow and steady growth in the value of investment and
with some current income
▪ Spreading assets among many types, often trade assets once a
year
▪ High-quality corporate bond and stocks, balanced mutual funds,…
214
What is your Investment Philosophy?
❖ Are you an aggressive investor?
▪ Risk-seeker investor
▪ Accept high risk to get very much higher return from capital gain
▪ Short-term approach
▪ Do not spread assets among many types, invest in only one type
of asset and expect high return from it
▪ Investing in stocks of new fast growing companies, high-yielding
junk bonds, aggressive-growth mutual fund
215
Identify the kinds of investments you want to make.
❖ Do you want to lend or own?
▪ Lend = Bonds
• Fixed maturity
• Fixed income
▪ Own = Equities
216
Identify the kinds of investments you want to make.
❖ Making Short-, Intermediate-, and Long-term
Investments
❖ Choose investments for their components of total
return.
217
Concept Check 13.2
❖ Summarize your investment philosophy and
general approach to tolerance for risk.
❖ Indicate whether you view yourself as an active or
passive investor, and explain why.
❖ Summarize your personal views on lending or
owning investments.
❖ Which type of investment return—current income
or capital gains—seems more attractive to you?
Why?
218
Learning Objective #3
Describe the major risk factors that affect the rate
of return on investments.
219
Random and Market Risk
❖ Random (or unsystematic) risk: risk involved in
one investment.
▪ Diversification can reduce random risk
❖ Market (or Systematic) risk: the risk that the
entire market might do well- or poorly.
▪ Market risk is difficult to avoid
220
Other Types of Investment Risk
❖ Business failure risk
❖ Inflation (or purchasing power) risk
❖ Time horizon risk
❖ Business-cycle risk
❖ Market-volatility risk
❖ Liquidity risk
❖ Marketability risk
221
Concept Check 13.3
❖ Distinguish between random risk and market risk.
❖ Summarize three other risks that may affect
investment returns.
❖ Explain how transactions costs and leverage
increase or decrease investment returns.
222
Learning Objective #4
Decide which of the four long-term investment
strategies you will utilize.
223
Establish Your Long-Term Investment Strategy
❖ Long-term investors avoid trading mistakes:
▪
▪
▪
▪
They do not practice market timing.
They avoid herd behavior.
They avoid trading too much.
They avoid buying high and selling high.
❖ There are 4 long-term investment strategy:
▪
▪
▪
▪
Buy and hold
Dollar average cost
Portfolio diversification
Asset allocation
224
Establish Your Long-Term Investment Strategy
❖ Strategy 1: Buy and hold anticipates long-term
economic growth.
▪ Buy and Hold (or Buy to Hold)
▪ Make sound choices in a diversified portfolio and stay
invested (hold the assets and do not sell it)
225
Establish Your Long-Term Investment Strategy
❖ Strategy 2: Dollar-cost averaging buys at “below-average”
costs.
▪ Dividend-reinvestment plans
❖ Strategy number two is to dollar-cost average. This means
that you invest a set dollar amount on a regular basis rather
than buy a specified number of shares each time.
▪ Monthly deposits into a tax-sheltered retirement plan at
work or an IRA with dividend-reinvestment is the best
example of such a technique. The result is that you pay a
lower average share cost over time.
226
Table 13-1: Dollar-Cost Averaging for a Stock or
Mutual Fund Investment
227
Establish Your Long-Term Investment Strategy
❖ Strategy 3: Portfolio diversification reduces portfolio volatility.
Figure 13-3: Diversification Via Asset Allocation
Averages Out an Investor’s Return
228
Establish Your Long-Term Investment Strategy
❖ Strategy 4: Asset allocation keeps you in the right
investment categories for your time horizon.
▪ With asset allocation you not only put money in multiple
markets but you identify a set ratio for the mix. An example
might be to have 60 percent in stocks, 30 percent in bonds
and 10 percent in money market investments.
229
Figure 13-4: Model Portfolios and Time Horizons
230
Figure 13-5: Rebalancing Assets in Your Portfolio
231
Concept Check 13.4
❖ Summarize what the buy-and-hold strategy is all about.
❖ Explain the concept of dollar-cost-averaging including
why one invests at below-average costs.
❖ What is the goal of portfolio diversi-fication and how is
this accomplished?
❖ What is asset allocation and why does it work?
❖ What happens to a worker’s 401(k) retirement account
if he or she signs up for a limited management account
service?
232
Part 4 - Chapter 14:
INVESTING IN STOCKS AND BONDS
233
Introduction
When you invest in stocks and bonds, you can increase
returns significantly while increasing risk only slightly.
Stocks and bonds provide opportunities for conservative,
moderate, and aggressive investors alike.
234
Learning Objective #1
Explain how stocks and bonds are used as
investments.
235
Common Stock
❖ Stocks are shares of ownership in a business
corporation’s assets and earnings.
❖ Cash Dividends: earnings paid out to shareholders
❖ Market Price: the price of the company stock on the
market
❖ Shareholder (or Stockholder): the owner of the stock
236
Common Stock
❖ Residual Claim: the owner of common stock has the
right to income and asset of the company after bond
holders and preferred stock holders,
❖ Limited Liability: Their liability is limited to their
original investment and no more.
❖ Voting Rights: The stockholders elect a board of
directors that, in turn, hires the professional managers
of the corporation.
❖ Professional Management
❖ Preemptive right: the right to purchase additional
shares before new shares are offered to the public
237
The Major Characteristics of Common Stocks
❖ Income Stocks: not grow too quickly, higher cash
dividend
❖ Growth Stocks: higher profit, rapid growth in earnings,
increase in share price, low/no dividend
▪ Well-known growth stocks
▪ Lesser-known growth stocks
❖ Value Stocks: lower market price than its intrinsic value
❖ Speculative Stocks: accept risk to get much higher profit
❖ Tech Stocks
❖ Blue-Chip Stocks
❖ Large-cap, Mid-cap, Small-cap, and Microcap Stocks
238
Preferred Stock
• Preferred stock is a fixed-income ownership
security in a corporation.
• Dividends must be paid before dividends to common
stockholders
• Preferred stock prices are subject to interest rate risk
• Preferred stockholders rarely have voting rights
239
Preferred Stock
❖ Noncumulative Preferred Stock: Occasionally, a
company will be unable to pay a scheduled
dividend. With noncumulative preferred stock there
is no guarantee that the dividend will be paid in the
future before dividends are paid to common stock
holders.
❖ Cumulative Preferred Stock: With cumulative
preferred stock, the unpaid dividend will be paid in
the future before dividends are paid to common
stock holders.
❖ Convertible Preferred Stock
240
Bonds
● Bonds are interest-bearing, negotiable certificates of
long-term debt.
● Principal is the face value of the bond
● Maturity Date is the date on which the face value of the bond
will be paid to the current bond owner
● Bonds can be bought and sold many times before maturity
241
Concept Check 14.1
❖ Distinguish between common stocks and bonds.
❖ How do public corporations use stocks and bonds?
❖ Why do individuals invest in stocks and bonds?
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Reserved. May not be copied, scanned,
or duplicated, in whole or in part, except
for use as permitted in a license
distributed with a certain product or
242
Learning Objective #2
❖
Describe ways to evaluate stock prices, and
calculate a stock’s potential rate of return.
243
How to Evaluate Stock Values
❖ Use fundamental analysis to evaluate the financial
strength of the company.
❖ Use technical analysis to predict the success of a
stock based on indicators of the workings of the
market as a whole.
244
Evaluating Common Stocks
❖ Use Beta to Compare a Stock to Similar Investments
▪ Beta (or Beta Value or Beta Coefficient):
Measure of stock volatility.
❖ Beta measures the volatility of a stock as compared to the
entire stock market.
▪ A Beta of 1.0 indicates that the stock goes up and down in exact
tandem with the market as a whole.
▪ A Beta greater than 1.0 indicates that the stock moves with the
market but is more volatile than the entire market.
▪ A Beta above zero but below 1.0 indicates a stock that moves with
the market but with less volatility.
▪ A stock with a negative Beta will move in the opposite direction to
the market as a whole.
245
How to Evaluate Stock Values
❖ Corporate earnings are most important.
▪ Earnings per share
▪ Price/Sales ratio
246
Evaluating Common Stocks
❖ Match your investment choices to your goals using P/E
ratio and Beta.
❖ Price/Earnings (or P/E) Ratio
▪ Earnings Yield
▪ Trailing P/E Ratio
▪ Projected P/E (or Forward P/E) Ratio
❖ Low P/E: higher dividend yield, less
risk, lower price, slower earnings
growth
247
Numerical Measures to Evaluate Stock Prices
▪ Cash Dividends
▪ Dividends Per Share
▪ Dividend Payout Ratio
▪ Dividend Yield
248
Numerical Measures to Evaluate Stock Prices
▪ Book Value
▪ Book Value Per Share
▪ Price-to-Book Ratio
249
Calculating a Stock’s Potential Rate of Return
❖
❖
❖
❖
Use beta to estimate the risk of the investment.
Estimate the market risk (or systematic risk).
Calculate your required rate of return.
Calculate the stock’s potential return.
250
Calculate the Stock’s Potential Rate of Return
❖ Add up projected income and price appreciation.
▪ Potential Rate of Return
▪ Approximate Compound Yield (or
ACY)
❖ Compare the required rate of return with the potential
rate of return on the investment.
251
Concept Check 14.2
❖ Distinguish between the terms income stocks and
growth stocks.
❖ Explain how a stock with a beta of 1.0 differs from
ones with a beta of 1.2 and 2.5.
❖ What is the focus of fundamental analysis?
❖ Summarize the meanings of the terms trailing and
projected price/earnings ratio.
252
Buying and Selling Stocks: Types of stock orders
(executing an order):
▪ Market order: The simplest form of order is a market order
which specifies you want the transaction to occur at whatever
market price is available.
▪ Limit order: Limit orders instruct the stockbroker to buy or
sell a stock at a specific price. It may include instructions to
buy at the best possible price but not above a specified limit,
or to sell at the best possible price but not below a specified
limit.
▪ Stop order (or stop-loss order): A stop order instructs a
stockbroker to sell your shares of stock at the market price if a
stock declines to or goes below a specified price.
▪ Time limits: fill-or-kill order, day order, open order
253
Buying and Selling Stocks
❖ Margin buying and selling short are risky trading
techniques.
❖ Margin trading is buying stocks on credit (using a
margin account).
▪ Buying long
▪ Selling short
254
Concept Check 14.4
❖ Summarize the differences among discount, online,
and full-service brokers.
❖ Summarize the differences among types of stock
orders: market, limit, and stop order.
❖ Explain what selling short is and how it can go wrong
for an investor.
255
Learning Objective #5
Describe how to invest in bonds.
256
Investing In Bonds
❖ Investment-Grade Bonds
❖ Speculative Grade (or Junk) Bonds
❖ Default Rate
257
Figure 14-3: Higher Returns Requires Greater Risk
258
Investing In Bonds
❖ Bonds are issued by:
▪ Government
▪ Municipal
▪ Corporate
❖ Bonds in the order of reducing risk: corporate
bonds, municipal bonds, then government bonds
259
Evaluating Bond Prices and Returns
❖ Interest rate risk results in variable value.
▪ Market interest rates
▪ Interest rate risk: When interest rates are rising the
value of existing bonds will decline and conversely.
▪ Fixed yield versus variable value
▪ Premiums and discounts
260
Evaluating Bond Prices and Returns
❖ Present value of a bond
❖ Current yield
❖ Yield to maturity
261
Part 4 - Chapter 15:
INVESTING THROUGH MUTUAL FUNDS
262
Introduction
Mutual funds pool the invested funds of many
investors and use them to invest in a diversified
portfolio. Investing through mutual funds is easy
and provides instant diversification of one’s
portfolio.
263
Learning Objective #1
Describe the features, advantages, and unique
services of investing through mutual funds.
264
Figure 15-1: How a Mutual Fund Works
265
Why Invest in Mutual Funds?
❖ Net Asset Value (or NAV): Per-share value of a mutual
fund.
▪ Assets of the fund less its liabilities
▪ Divided by the number of shares outstanding
❖ Net asset value increases when the value of underlying
securities increases
❖ When buying shares of a mutual fund, the price of the
share is Net Asset Value
266
Why Invest in Mutual Funds?
❖ Current Income from
▪ Ordinary income dividend distributions
▪ Capital gains distributions
❖ Capital Gains: when you sell your shares for a higher
price than when purchased.
267
Investor Returns from Mutual Funds
268
Advantages of Investing Through Mutual Funds
❖ Most mutual funds are open-end funds.
❖ Diversification to protect from
▪ Random (or nonsystematic) risk
❖ Affordability
❖ Professional management
❖ Liquidity
❖ Low transaction costs
❖ Uncomplicated investment choices
269
Unique Mutual Fund Services
❖ Convenience, Ease of buying and selling shares
❖ Check writing and electronic transfers
❖ Distribution of or automatic reinvestment of income and
capital gains
❖ Telephone and internet exchange privileges
▪ Exchange (or switching, conversion, or transfer) privilege
❖ Automatic investment
❖ Effortless establishment of retirement plans
❖ Beneficiary designation
❖ Multiple income withdrawal options
270
Concept Check 15.1
❖ Explain how net asset value is calculated and how it is
used by mutual funds.
❖ List five advantages of investing in mutual funds.
❖ Name five services that are unique to mutual funds.
271
Learning Objective #2
Differentiate mutual funds by investment
objectives.
272
Mutual Fund Objectives
❖ Managed Funds
❖ Mutual fund objectives:
▪ Income,
▪ Growth
▪ growth and income.
273
Fund Objectives, Types, and Characteristics
❖ Funds with a Growth Objective
▪
▪
▪
▪
▪
Aggressive growth (or maximum capital gains) funds
Growth funds
Growth and income funds
Value funds
Large-cap, midcap, small-cap, and microcap funds
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or duplicated, in whole or in part, except
for use as permitted in a license
distributed with a certain product or
274
Fund Objectives, Types, and Characteristics
❖ Funds with a Growth Objective
▪
▪
▪
▪
▪
▪
Sector funds
Regional funds
Precious metals and gold funds
Global funds
International funds
Emerging markets funds
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or duplicated, in whole or in part, except
for use as permitted in a license
distributed with a certain product or
275
Fund Objectives, Types, and Characteristics
❖ Funds with a Growth and Income Objective
▪ Stable-value funds
▪ Balanced funds
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or duplicated, in whole or in part, except
for use as permitted in a license
distributed with a certain product or
276
Fund Objectives, Types, and Characteristics
❖ Funds with a Growth and Income Objective
▪ Asset allocation funds
▪ Target-date retirement funds or Life-cycle funds
▪ Mutual fund funds
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or duplicated, in whole or in part, except
for use as permitted in a license
distributed with a certain product or
277
Concept Check 15.2
❖ What are the three basic types of mutual fund
objectives?
❖ Distinguish among mutual funds with an income
objective, growth objective and growth and income
objective, and give two examples of each.
278
Part 4 - Chapter 16:
REAL ESTATE AND HIGH-RISK INVESTMENT
279
Learning Objective #1
Demonstrate how you can make money investing
in real estate.
280
How to Make Money Investing in Real Estate
❖ Real Estate: property consisting of land,
structures attached to the land, and
accompanying rights and privileges
❖ Direct Ownership: actual legal title to a property
281
Making Money Investing in Real Estate
❖ Current income and capital gains
• Know the price-to-rent ratio.
• Current income results from positive cash flow.
•
Rental yield is rate of return based on
rent.
❖ Capital gains when property is sold.
282
Concept Check 16.1
❖ What are the two key questions to consider before
investing in real estate?
❖ Distinguish between the price-to-rent ratio and the
rental yield as measures of current income.
283
Learning Objective #2
Recognize how to take advantage of beneficial
tax treatments in real estate investing.
284
Tax Advantages of Investing in Real Estate
❖
Beneficial tax treatments:
▪
Depreciation is tax deductible.
▪
Interest is a tax deduction.
• Leverage can increase an investor’s return.
• Loan-to-value ratio represents the degree of leverage.
▪
Capital gains are taxed at very low rates.
▪
Exchange of properties can be tax-free.
• Tax-free (1031) exchange
▪
Taxes can be lower on vacation home rental income.
285
Table 16-1: Depreciation Reduces Income Taxes and
Increases Investor’s Return
286
Table 16-2: Additional Effect of Interest Paid on Income
Taxes on Return
287
Concept Check 16.2
❖ Summarize how depreciation is used to reduce the
income from a real estate investment.
❖ Briefly explain how the interest paid on the mortgage of
a real estate investment reduces one’s income taxes.
❖ Summarize the special income tax regulations on
renting out vacation homes.
288
Learning Objective #3
Calculate the right price to pay for real estate and
how to finance your purchase.
289
Pricing and Financing Real Estate Investments
❖ Pay the right price.
▪ Use the Discounted cash-flow method
❖ Financing a real estate investment
▪ Conventional, fixed-rate mortgage
▪ Seller financing (or owner financing)
▪ Sweat equity property
290
Concept Check 16.3
❖ Summarize how the discounted cash-flow method
helps determine the right price to pay for a real estate
investment.
❖ List the three ways to finance a real estate investment.
291
Learning Objective #4
Assess the disadvantages of investing in real
estate.
292
Disadvantages of Real Estate Investing
❖
❖
❖
❖
❖
❖
Business risk
Foreclosures
Illiquidity
Complexity
Large initial investment
Lack of diversification
293
Disadvantages of Real Estate Investing
❖
❖
❖
❖
❖
❖
❖
Dealing with tenants
Time-consuming management demands
Low current income
Unpredictable costs
Interest rate risk
Legal fees
High transfer costs
294
Concept Check 16.4
❖ Summarize why foreclosures and illiquidity are
disadvantages in real estate investing.
❖ Comment on why real estate investors often have
time-consuming management demands.
2015 Cengage Learning. All Rights
Reserved. May not be copied, scanned.
or duplicated, in whole or in part, except
for use as permitted in a license
distributed with a certain product or
295
Learning Objective #5
Summarize the risks and challenges of investing
in collectibles, precious metals, and gems.
296
Investing in Collectibles, Precious Metals, and Gems
❖ Collectibles: cultural artifacts that have value
because of their beauty, age, scarcity, etc.
❖ Making a profit on collectibles is not easy.
❖ Profit from collectibles: capital gain highest
risk
❖ Buying and selling collectibles on the Internet:
easy and convenient, but not always safe!
297
Investing in Collectibles, Precious Metals, and Gems
❖ Gold and other precious metals
▪ Fear pushes up gold prices
▪ Gold prices are highly volatile.
▪ Invest in several ways:
• Gold bullion, gold bullion coins
• Collectible gold coins
• Gold stocks, mutual funds, and ETFs.
❖ Silver, platinum and rhodium
❖ Precious stones and gems
298
Concept Check 16.5
❖ Identify one collectible that might be an interesting
investing, and explain why it might be difficult to make a
profit.
❖ Explain why some investors buy gold and other precious
metals, and tell why that type of investment might be
appealing or unappealing to you.
❖ Identify some risks of investing in precious stones and
gems.
299
Learning Objective #6
Explain why options and futures are risky
investments.
300
Investing in Options and Future Contracts
❖ Derivative (or Derivative Security)
❖ Options allow you to buy or sell an asset at a
predetermined price.
▪ Stock Option
▪ Expiration Date
▪ Striking Price
❖ People invest in derivatives to
▪ Reduce risks by hedging against losses
▪ Taking on additional risk by speculating to get
higher return
301
Investing in Options and Future Contracts
❖ Options are created by an option writer.
▪
▪
▪
▪
Option premium
Option holder
Call option
Put option
302
Making Sense of Options Contracts
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or duplicated, in whole or in part, except
for use as permitted in a license
distributed with a certain product or
303
Chapter 17:
Retirement and Estate Planning
PPT slide program prepared by
Ray Forgue.
2015 Cengage Learning. All Rights
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or duplicated, in whole or in part, except
for use as permitted in a license
distributed with a certain product or
304
Part 5 - Chapter 17&18:
RETIREMENT AND ESTATE PLANNING
305
Introduction
❖ A comfortable retirement takes planning:
▪ Invest early.
▪ Invest regularly.
▪ Use tax-sheltered accounts.
▪ Diversify.
306
Introduction
❖ Retirement: The time in life when the major
sources of income changed from earned income to
employer-based retirement benefits, private savings
and investments, Social Security, etc.
❖ Estate Planning comprises the specific
arrangements you make during your lifetime for the
administration and distribution of your estate when
you die.
307
Sources of Retirement Income
308
Learning Objective #1
Estimate your Social Security retirement income
benefit.
309
Understanding Your Social Security Retirement Income Benefit
❖ FICA Taxes: Social Security taxes withheld from
wages to support income payments.
▪ 6.2 percent of your employment income up to maximum
taxable yearly earnings (or MTYE) for retirement, disability
and survivor benefits
❖ Medicare Tax: 1.45 percent of your employment
income
310
Understanding Your Social Security Retirement
Income Benefits
❖ How you can qualify for Social Security benefits:
▪ Social Security Credits are earned for every $1200 (2014)
in income for up to 4 per year.
▪ Being fully insured for retirement requires 40 credits.
311
You Can Obtain an Estimate Your Social Security
Retirement Benefits
❖ Indexing: adjusting earnings to account for
changes in wages since the year the earnings were
received.
❖ Basic Retirement Benefit (or Primary Insurance
Amount)
❖ Full-benefit retirement age: 67 for those born
after 1960.
312
How to Estimate Your Social Security Retirement
Benefits
1. Begin receiving benefits at your full-benefit age.
2. Begin receiving reduced benefits at a younger age;
62 is the earliest.
3. Begin receiving larger benefits at a later age.
313
SOCIAL SECURITY BENEFITS
❖ The social security system in Vietnam is similar:
314
Concept Check 17.1
❖ List the key financial planning actions that
individuals must take during their working life to
prepare for retirement.
❖ Summarize how workers become qualified for
Social Security benefits.
315
Concept Check 17.1
❖ Distinguish between the benefits provided under
Social Security for a worker who is fully insured
and a worker who is currently insured.
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or duplicated, in whole or in part, except
for use as permitted in a license
distributed with a certain product or
316
Concept Check 17.1
❖ Explain what happens if you choose to retire earlier
than your full retirement age, which is probably 67.
317
Learning Objective #2
Calculate the amount you must save for
retirement in today’s dollars.
318
How to Calculate the Amount You
Must Save for Retirement in Today’s
Dollars
❖ Your Retirement Savings Goal (or Retirement Nest
Egg)
❖ Build your nest egg during your working years and live
off of it during retirement.
▪ How long will you work?
▪ How long will you live in retirement?
319
How to Calculate the Amount You
Must Save for Retirement in Today’s
Dollars
❖ Projecting your annual retirement expenses and
income.
▪ Projected expenses
▪ Current nest egg
▪ Additional deposits needed
320
Concept Check 17.2
❖ List the steps in the process of estimating your
retirement savings goal in today’s dollars.
❖ In the text example, what can Erik do to save more for
his retirement?
321
Learning Objective #3
Distinguish among the types of
employer-sponsored tax-sheltered retirement
plans.
322
Investing in Tax-Sheltered Retirement Account
Makes it Easier to Reach Your Goal
❖ Funds put into regular investment accounts are after-tax
money.
❖ A tax-sheltered retirement accounts is one for which
contributions are not subject to income taxes.
❖ Your contributions may be tax deductible, i.e. pretax money.
❖ Your earnings are tax-deferred.
❖ You can accumulate more money by delaying taxes.
❖ You have ownership and portability.
❖ You withdrawals might be tax free, i.e. withdrawals are never
taxed. This is the case for “Roth” type accounts.
323
Reach Your Goal Through
Employer-Sponsored Retirement Plans
❖ Employer-sponsored retirement plans
qualify for tax-sheltering.
❖ Employer-sponsored plan include:
▪ Defined-contribution plan
▪ Defined-benefit plan
324
Reach Your Goal Through
Employer-Sponsored Retirement Plans
❖ Defined-contribution retirement plan: today’s standard.
❖ A plan can be either a noncontributory plan or a
contributory plan.
▪ Noncontributory plans are funded entirely by employer
contributions.
▪ Contributory plans are ones where the employee and, possibly, the
employer makes contributions into the plan each year.
❖ Benefits are based on the success of the investments
made with the funds.
❖ These plans are self-directed meaning that the employee
decides on the investments made with the funds.
❖ The success of the investments dictates the amount that
will be available at retirement.
325
Reach Your Goal Through
Employer-Sponsored Retirement Plans
❖ Names of defined-contribution retirement plans:
▪
▪
▪
▪
401(k) Plans (with Roth versions)
403(b) Plans (with Roth versions)
457 Plans
Savings Incentive Match Plan for Employees IRA
(SIMPLE IRA)
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Reserved. May not be copied, scanned,
or duplicated, in whole or in part, except
for use as permitted in a license
distributed with a certain product or
326
Reach Your Goal Through
Employer-Sponsored Retirement Plans
❖ Matching contributions: employers fully or partially
match employee contributions
327
Reach Your Goals Through
Employer-Sponsored Retirement Plans
❖ Defined-benefit retirement plans are yesterday’s
standard, a.k.a. Pension.
❖ Defined-benefit plans are totally employer funded.
❖ Benefits are based on a formula using salary and years
worked for the employer.
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Additional Employer-Sponsored Plans
❖
Employee stock-ownership plan (or ESOP)
❖
Profit-sharing plans
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Concept Check 17.3
❖ Distinguish between after-tax money put into
investments and pretax money.
❖ Explain what is meant by tax-sheltered investment
growth on money contributed to qualified retirement
accounts.
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Concept Check 17.3
❖ Summarize the main differences between
defined-contribution and defined-benefit pension
plans.
❖ Explain why defined-contribution retirement plans are
called self-directed.
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Concept Check 17.3
❖ Offer your impressions of working for an employer that
offers a sizable matching contribution compared with
one that does not.
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Learning Objective #4
Explain the various types of personally established
tax-sheltered retirement accounts.
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Reach Your Goal Through Personally
Established Retirement Accounts
❖ Individual Retirement Account (or IRA)
▪ Traditional (or regular) IRA
▪ Roth IRAs
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Reach Your Goal Through Personally
Established Retirement Accounts
❖ Keoghs and Simplified Employee
Pension-Individual Retirement Account
(SEP-IRAs)
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Concept Check 17.4
❖ Why should workers choose to save for retirement
through a personally established retirement account?
❖ Summarize the importance of low-cost investment fees
to long-term retirement success.
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Concept Check 17.4
❖ List two differences between a traditional IRA and a
Roth IRA.
❖ Who would use a Keogh rather than an SEP-IRA to
save for retirement?
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Part 5 - Chapter 17:
ESTATE PLANNING
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How Your Estate is Transferred
❖ ESTATE PLANNING: the arrangements you make
during your lifetime for the administration and transfer of
your assets after your death
❖ HOW YOUR ESTATE IS TRANSFERRED?
▪ NON-PROPATE ASSET
▪ PROPATE ASSET
• THROUGH WILL
• BY LAW
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How Your Estate is Transferred
❖ Probate
▪ Probate Court: special court specifically charged to conduct
the distribution of assets of people who have died.
▪ Probate court-supervised process that allows creditors to
present claims against an estate and ensures the transfer of a
decedent’s assets to the rightful beneficiaries.
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How Your Estate is Transferred
❖ Nonprobate property: property that does not go
through probate.
❖ Most of your estate can be set up as nonprobate
property and bypass the probate process.
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Figure 17-1: How to Distribute Your Estate
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Most Nonprobate Property Is Transferred by Contract
❖ Transfers by beneficiary contract designation
▪ Beneficiary: A person or organization designated to receive a
benefit.
▪ Beneficiary designation: legal form signed by the owner of an
asset providing that the property goes to a certain person or
organization in the event of the owners death.
▪ Contingent (or Secondary) Beneficiary: The beneficiary in case
the first-named beneficiary has died.
❖ Transfers by property ownership contract designation
▪ Joint Tenancy with Right of Survivorship (or Joint Tenancy):
each person owns the whole of the asset, and can dispose of it
without the approval of the other owner.
❖ Transfers by payable-at-death contract designation
▪ Payable-on-Death Designation: status granted to individuals who
are not joint tenants and who might need to access accounts without
going through probate.
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The Rest of Your Estate Can Be Transferred Via Your Will
❖ Your will provides your instructions to the probate
court.
❖ Transfers with a will go to your desired heirs.
❖ Testator: writer of a will and owner of the estate.
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The Rest of Your Estate Can Be Transferred Via Your Will
❖ Executor (or Personal Representative): Person
responsible for carrying out the provisions of a will
and managing the assets until the estate is passed
on to heirs.
❖ Codicil: legal instrument with which one can make
minor changes to a will.
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The Rest of Your Estate Can Be Transferred Via Your
Will
❖ Guardian: Person responsible for caring for and raising
any child under the age of 18 and for managing the
child’s estate.
❖ Letter of Last Instructions: Nonlegal instrument that
may contain suggestions and recommendations useful
to the survivors.
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The Rest of Your Estate Can Be Transferred Via Your
Will
❖ Without a will you have died intestate and
your property may not go to the desired heirs.
❖ Without a will, an estate transfers to various
relatives according to the law in that state, e.g.
spouse, children, parents
❖ Right of Escheat: law by which an estate
transfers to the state if no surviving relatives
exist.
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