Building Blocks to achieving financial success
1. FOUNDATION- Use of income to provide basic lifestyle and savings
2. BASE- Checking acc, savings acc, money market acc, insurance protection, employee benefits
3. ESTABLISH- Long-term goals, short-term goals, organized financial records, realistic budge
Procyclic Indicator
economic indicator that moves in the same direction as the economy (retail sales, industry, GDP, number of employees in nonagricultural payrolls)
Ex. GDP--> reports how much economic activity has occurred within U.S. borders.
2% or less= bad (not enough j
Countercyclic Indicators
economic indicator that moves in the opposite direction of the economy. (Prices of gold and silver rise as the economy gets worse)
Leading Indicators
Economic indicators that change before the economy changes and so predict what the economy will do in the future. (the stock market, consumer confidence index, index of leading economic indicators- indicates new building permits, factory orders, etc)
Inflation
steady rise in the general level of prices, often occurs when the supply of money or credit rises faster than the supply of goods and services available for purchase.
-if inflation occurs, you need a raise in income in order to maintain your purchasing po
Opportunity cost
the opportunity cost of a decision is the value of the next best alternative(s) that must be forgone--> the next best alternative of what you could have done instead of choosing to spend, save, or invest money
Marginal analysis
looking at the extra cost or benefit
Marginal utility- the extra satisfaction derived from having one or more incremental unit of a product or service
Marginal cost- the addition cost of one more unit of a product or service
*When you know both, you can c
Simple Interest vs. Compound Interest
Simple Interest: Value of some amount of money at the end of some time (involves the dollar amount called the principal, the rate of interest earned on the principal, and the time it is invested)
Compound Interest: Interest earned on interest and on the p
Time Value of Money
The idea that a dollar today is worth less than a dollar tomorrow.
*Use Future value and Present value when calculating the TVM
Benefits of participating in a high-deductible health care plan at work
High-deductible plan: lower premiums and higher deductibles than a traditional health care plan, is a form of catastrophic coverage--> people need to pay a higher deductible to cover medical expenses before insurance plan payments begin (chosen to save mo
4 ways financial planners may be compensated
1. Commission-only financial planners and brokers: live solely on commissions they receive on the financial products (investments, insurance) they sell to their clients. --> Save money if you make only a few transactions
2. Fee-based financial planners: c
*Financial Planning Process
-Set specific goals
-Put Target dates on your financial goals
-Prioritize goals
* save at least 15% of income for long-term goals
Relationships among financial values, goals, and strategies
Financial values: provide underlying support and rationale for your financial and lifestyle goals. Values are your fundamental beliefs about what is important, desirable, and worthwhile. Serve as basis for your goals.
Goals: specific long-term, intermedia
Balance Sheet
Summarizes the value of what you own minus what you owe--> individual's or family's condition on a specified date (Where are you financially right now?)
Assets lists items at FAIR MARKET VALUE= what a willing buyer would pay a willing seller
Assets
Moneta
Cash-Flow Statement
Summarizes income and expense transactions that have taken place over a specific period of time, usually one month or one year. (Where did your money go?)
Income
-income, bonuses, commissions, child support/ alimony, pension, scholarships, interests/ divi
Liquidity Ratio
Monetary Assets / Monthly Expenses
(Balance Sheet info) / (Cash-Flow info)
*DECIMALS
*Want high ratio >1
*Determines the # of months you could continue to meet your expenses using only your monetary asses if all income ceases (in emergencies can you conti
Asset-to-Debt Ratio
Total Assets / Total Debt
(Balance sheet info)/ (Balance sheet info)
*DECIMALS
*Want high ratio >1
*Measures solvency and ability to pay debts, for every $1 of debt, how many $s of assets
Debt Service-to-Income Ratio
Annual Debt repayments / Gross Income
(Cash-Flow info) / (Cash-Flow info)
(mortgage loan payments + auto loan payments+ student loans+ medical bills+ credit card bills) /
(Gross Income)
(monthly short term+ long term)12/ (monthly income) 12
* PERCENT
*Wan
Debt Payments-to- Disposable Income
(Monthly nonmortgage debt repayments) /
(Monthly disposable income)
(Cash-Flow info) / (Cash-Flow info)
[(Auto loans+ student loans+ medical bills+ credit card bills/ 12)] /
[(Total Income- Fed/State/City/SS taxes-medical insurance) /12]
*PERCENT
*Want lo
Investment Assets-to-Total Assets
Investment Assets / Total Assets
(Balance Sheet) / (Balance Sheet)
*PERCENT
*Want to be >=50%
*If one is saving/ investing enough, how well advancing toward capital accumulation and especially retirement
Debt-to- Equity Ratio
Total Debt / Total Net Worth
*PERCENT (BOTH TOP AND BOTTOM IGNORING MORTGAGE DEBT/ HOUSING ASSETS)
*Want to be <33%
*
2 Actions Before Establishing a Budget
1. Set financial goals (long-term, intermediate, short-term, prioritize goals
2. Make and Reconcile Budget Estimates (identify how you are spending money now in the process of making and reconciling budget estimates of income and expenditures
- Plan Cash
3 Suggestions for Effective Budget Controls
1. Budget for every shopping trip
2. Record the Purpose of Expenditures
3. Keep Track of Credit Transactions
Progressive vs Regressive Tax
Progressive Tax: Federal Income Tax, tax rate increases as taxpayer taxable income increases.
Regressive Tax: As income rises, decreasing proportions of income is taxed
Marginal Tax Bracket
1 of 6 income-range segments that are taxed at increasing rates as incomes go up, rates called marginal tax rates
Exclusions
1. Gifts (up to an amount)
2. Inherited money/ property (up to an amount)
3.Life insurance benefits
4. Child support payments
5. Scholarships
Adjustments
1. IRA contributions
2. Alimony
3. Student loan interests
Itemized Deduction
Made up of:
1. Medical and dental expenses
2. Taxes you paid- Real Estate, Sales
3. Interest you paid- Mortgage
4. Gifts to Charity
5. Casualty and Theft loss
Tax Credits
Reduce the amount of your tax liability
1. Lifetime Learning Credit- for tuition and expenses for post-secondary education
2. Adoption Tax Credit
3. Elderly or Disabled Tax Credit
4. Energy Saving Vehicle/ Home Improvement Credits
Tax- Sheltered Investments
Invest with Pretax income- contribute to an IRA and then invest that money in a stock or mutual fund within the IRA
Make Investments Grow Tax Deferred- shifts income or tax liability to another year
Types of Tax-Sheltered Investments:
1. IRA- Individual R
Employer Benefits
Use free tax dollars to deposit/ invest (but if withdraw then you start to pay taxes on it)
1. Premium- Only Plan: employees withhold a portion of their pretax salary to pay their premiums for employer-provided health benefits
2. Transportation Reimbursem
Monetary Asset Management
Goals: To maximize interest earnings, minimize fees while keeping funds readily available and keeping them secure.
Checking Account
Depository institution allowing you to write checks against amounts you have on deposit. Debit card.
-NOW Account: Negotiable Order of Withdrawal, is an interest-earning checking account with no or low fees= interest
-Share-Draft Account: A credit-union's
Savings Account
Readily accessible source of emergency cash and temporary holding place for excess funds not needed for daily living expenses (Time deposits b/c expected to remain for time)
Statement Savings Account-frequent deposits/ withdrawals of funds, no fees unless
Money Market Accounts
Interest earning, limited check writing but high interest rates--> if continually have more than living expenses and want higher interest and don't need continual access to money
- Super NOW accounts, Deposit Accounts: gov't insured
-Mutual Funds: pools c
Depository Institutions
Take deposits and make loans. Gov't account insurance and gov't regulated. Wide range of financial services. Commercial banks, Savings Banks, Credit Unions.
Other Monetary Asset Management services: Mutual Funds, Stock brokerage houses, insurance companie
Credit, Debit, and Stored-Value Cards
Credit Cards: repeated use allowed as long as consumer makes regular monthly payments
Debit Cards: access to bank account
Stored-Value Cards: store info about funds that have been prepaid to the card
APR
Annual Percentage Rate- cost of credit on a yearly basis as a percentage rate
Finance charge-total dollar amount pad to use credit including interest and loan application fee
Build a Strong Credit History
1. Have Checking and Savings Accounts
2. Have phone and utility bills billed in your name
3. Use oil-company credit cards-easy to obtain, use credit sparingly and pay it back promptly
4. Apply for Bank credit card
5. Get small, short-term cash loan from b
Sales Finance vs Consumer Finance companies
Sales Finance= GMAC, seller-related lender, finances sales of its parent company
Consumer Finance= small loans, CitiFinancial
Bankruptcy
Regular Income plan-designed for ppl with regular incomes who might be able to pay off debt given certain protections of the court, submits debt repayment plan, court issues an automatic stay preventing creditors from recovering claims from before the sta