financial planning
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Financial Planning. Unit 1: Banking & Credit RECAP. What’s the BIG DEAL about MONEY?. It allows us to move beyond the barter (good for good) system. Characteristics of Money: Durability Portability Divisibility Uniformity Limited Supply Acceptability. What’s the BIG DEAL about MONEY?. - PowerPoint PPT PresentationTRANSCRIPT
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Financial PlanningUnit 1: Banking & Credit RECAP
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What’s the BIG DEAL about MONEY?
It allows us to move beyond the barter (good for good) system
Characteristics of Money:– Durability– Portability– Divisibility– Uniformity– Limited Supply– Acceptability
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What’s the BIG DEAL about MONEY?
US first created lawful money (backed by silver and gold). We currently use a fiat money system – LEGAL TENDER (backed by the confidence in its value)
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How can you buy
stuffwithout CASH?
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The Emergence of a Cashless Society:
All the ways we DON’T use CASH:
• Gift Cards• Debit Cards• Checks• Money orders• Credit Cards• Electronic Transfers
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How do YOU Make Money?
• You will spend approximately 86,000 hours of your life working (about 10,000 days)
• Your CAREER Choice should be based on values and beliefs, not necessarily money (A LABOR OF LOVE)
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How do YOU Make Money?
• Take the following into account as well:–Education Requirements–Job Trends–Job Outlooks
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US Income at a Glance…Criteria Overall Less than
9th grade
High school
drop-out
High school
graduate
Some college
Associates degree
Bachelor's degree
Bachelor's degree or
more
Master's degree
Professional degree
Doctorate degree
Median ind.
income
Male, age 25+ $33,517 $15,461 $18,990 $28,763 $35,073 $39,015 $50,916 $55,751 $61,698 $88,530 $73,853
Female, age 25+ $19,679 $9,296 $10,786 $15,962 $21,007 $24,808 $31,309 $35,125 $41,334 $48,536 $53,003
Both sexes,
age 25+
$32,140 $17,422 $20,321 $26,505 $31,054 $35,009 $43,143 $49,303 $52,390 $82,473 $70,853
Median household income $45,016 $18,787 $22,718 $36,835 $45,854 $51,970 $68,728 $73,446 $78,541 $100,000 $96,830
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US Income at a Glance…
The median income in New York State for a person with less than 1 year’s experience is:
$47,000*www.payscale.com
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3.05 million
30.5 million
274.5 million
305,000
30,500
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Finding the Job for YOU• Research• Internships and Job
Shadowing• Part-time jobs early in life
–Most successful people worked part-time as teenagers
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Other SOURCES OF INCOME
• Investments• Self-Employment• Rental Income• Windfall Income
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What Factors Influence Income?
• Capacity to earn, knowledge, skills, level of education
• Job Opportunities• Employment benefits (monetary and
non-monetary)• Inflation and Deflation• Taxation
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HOW MUCH WILL YOU MAKE?
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TAXES! TAXES! TAXES!
The goal of tax planning is to arrange your financial affairs so as to minimize your taxes and keep the most of your money.
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TAXES! TAXES! TAXES!
GROSS INCOMEAll income before taxes and
deductionsWhat your employer pays you to
work
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TAXES! TAXES! TAXES!MANDATORY Deductions:• Federal, State (maybe
local) TAXES• Social Security (FICA)• Medicare (FICM)
NON-MANDATORY:• Automatic savings
(Contributions to retirement plans that are taken out of gross pay)
• Health Insurance Premiums
• Life Insurance Premiums• Union dues• Charitable Contributions,• and more…
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TAXES! TAXES! TAXES!ADJUSTED GROSS INCOMEGross income minus allowable
deductionsTAXABLE INCOMEIncome amount used to calculate
taxes owed (may include income other than paycheck)
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TAXES! TAXES! TAXES!TAKE-HOME PAYWhat you get to take home
(sometimes called NET Pay)
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How to pay LESS in Taxes:
1. Increase your tax DEDUCTIONS (standardized vs. itemized)
2. Take advantage of TAX CREDITS
3. Increase your withholdings
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1. Increase your TAX DEDUCTIONS
• There are standard deductions for singles ($6,100), married couples ($12,200) & heads of households ($8,950)
• Itemized deductions include:• Expenses for healthcare• Mortgage interest• Gifts to charity• Job-related expenses• State/local/property taxes
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2. Take advantage of TAX CREDITSTax credits
reduce your tax. Straight up - $ for $ reduction
There are tax credits for:• Earned Income Tax (for
low income families)• Child Tax• Education• Retirement Savings
Contribution• 1st Time Homebuyer• Dependent Care• Energy Efficient Home
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3. Increase your WITHHOLDINGSIncrease the amount of money taken out
of each paycheck throughout the year – you’ll get a bigger refund at the end.
CLAIM 0 – More money is taken out of each paycheck and you are more likely to get a refundCLAIM 1 – Less money will be taken out of each paycheck, but you may end up owing money at tax time
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THANKS UNCLE SAM!
Tax Practice More Tax Practice
My (possible) Future Plans
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The Financial Planning PROCESS
1. Set SMART Goals
2. Analyze Information
3. Create a Plan
4. Implement the Plan
5. Monitor & Modify the Plan
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BUDGETING
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CREDIT BASICSFinancial Planning RECAP
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Credit•Money you borrow to pay for things, with a promise to pay it back later
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Advantages of Credit
• Allows for large purchases
• Use it well & it builds a good credit score
• Useful in emergencies (CC)
• More convenient than carrying cash
Disadvantages of Credit
• Fees and interest can make credit expensive
• Chance of identity theft increases
• Hard to resist the “impulse buy”
• Poor use may affect your ability to get:
– Employment – Housing – Insurance
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The Role of the FED• WATCH VIDEO• Set Monetary Policy• Regulate Financial
Institutions• Act as a BANK for
Banks and Cus• Set the PRIME
INTEREST RATE Affects the rate they charge US
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SOURCES of CREDIT1. Financial Institutions
• Banks/Credit Unions/Savings and Loan Associations
2. Credit Card Companies3. Retailers4. **Predatory Lenders” (aka) Loan
Sharks”
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LOAN SHARKS AND PREDATORY LENDING
•Payday Lending• Borrower gives lender a postdated check, lender
gives $$, borrower pays back $$ with fee
•Rent-to-Own Services• More expensive than a consumer installment
loan
•Refund Anticipatory Services• Get refund money upfront (but it is minus a fee)
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Catch Phrases of Abusive Lenders
“125 percent of your home/car’s value”
“Incredibly low monthly payment”
“No upfront fees”
“Even if you have a bad credit history…”
“It’s free and you have nothing to lose”
“Act now, this is a limited-time offer”
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Four Major Types of CREDIT
• Secured Loans• Unsecured Loans• Credit Cards• Consumer Installment Loans• Lines of Credit
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SECURED LOANSIs backed by collateral• Usually has a lower
interest rate• Bank/CU can take
collateral if you don’t pay
• Examples: Auto Loan, Mortgage
UNSECURED LOANSIs NOT backed by
collateral• Usually has a higher
interest rate because it is riskier for the bank/cu
• Examples: Personal Loan, some Student Loans
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CREDIT CARDS• Allow you buy now
and pay later• Only get charged
interest if you DO NOT pay your bill off in full when it comes
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the united states of credit
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how did it all begin?• 1949, New Yorker Frank McNamara
finished dinner and realized he left his cash at home
• Came up with an idea about a card that could be used in place of cash at restaurants
• Diners Club was born
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how did it all begin?• 1958, American Express issued its first
charge card, used primarily for travel and entertainment
• Eight years later, BankAmericard became first to let you carry a balance
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Today*…• Nearly 54 million US households carry
some form of credit card• On average, they carry a balance of
$10,115
*Brooke Nevils, Womansday article
$792 Billion
total national credit card debt as of February 2011
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CONSUMER INSTALLMENT LOANS
Money you borrow to pay for specific items (like a car, computer, furniture)
• Pay a little each month (with interest)
• Examples: Home Depot, Pottery Barn
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LINES OF CREDIT• Can borrow up to a certain
amount (from a bank, CU or a business), but only pay interest on what you actually take out and use.
• Example: Home Equity Line of Credit (HELOC)
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Which type of loan would be best for the following situations?
1. To finance a college education2. To make small purchases in a
retail store3. To make home improvements4. To consolidate debts
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ANSWERS:1. To finance a college education
• Student loan (sec/unsec)• HELOC• Installment Loan (payment plan from college)
2. To make small purchases in a retail store• Credit Cards
3. To make home improvements• Installment or HELOC
4. To consolidate debts • Unsecured (personal loan), HELOC
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THE COST OF CREDIT• FEES• INTEREST• RISK OF USING CREDIT
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FEES• Annual
maintenance fees
• Service charges• Late fees
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INTEREST
ANNUAL PERCENTAGE RATE (APR):– The cost of credit on a yearly
basis, expressed as a percentage
Financial institutions charge money at a certain rate to let you use their money:
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INTERESTFixed
– Interest rate stays the same during the term of the loan
Variable– Interest rate may change during
the loan’s term
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SIMPLE Interest Calculation
PRINCIPLE X RATE X TIME = INTEREST– Principle = amt borrowed– Rate = APR (decimal)– Time = in years (months are X/12)– Interest = amt of interest you owe
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Cathy Buys a Car!!
Amount Borrowed: $15,000APR: 4.5%Term: 3 years
PRT = I15000*.045*3 = $2,025
Car really costs: $17,025
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RISKS OF USING CREDIT• Will affect your credit score• May affect:
–Employment–Ability to get future credit–Mental health
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Borrowing Money Responsibly
Would you…1. Use credit to pay overdue bills?2. Use credit to make a purchase
even if you have the cash?3. Use credit if you really wanted
something but could not afford the monthly payments?
4. Borrow money to invest in something?
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SAVING TO MEET GOALS
SAVE EARLY AND SAVE OFTEN!!!
EXPERTS RECOMMEND YOU PYF 10%
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SAVING TO MEET GOALSLIQUIDITY• Ability to turn your
savings (or investment) asset into cash quickly and easily (example – a savings/checking account)
ILLIQUIDITY• An asset than
CANNOT be sold quickly without substantial loss (example – stocks that have decreased in value)
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COMMON SAVINGS PRODUCTS
IRAs Traditional & ROTH
US Savings BONDS
Regular Savings Regular Checking
Money Market Accounts
CDs
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SIMPLE SAVINGS MATHSIMPLE INTEREST
PRT = IP = PrincipleR = Interest RateT = Time in yearsI = Interest EarnedJohn puts $1,000 into a 1 year CD at Meridia earning .45%. How much interest does he earn when the CD matures?
COMPOUND INTEREST
A = P(1+R)nA = Amount in accountP = PrincipleR = Interest RateN = Number of yearsJohn puts $1,000 into a money market account at Meridia earning .25%. If the rate does not change at John leaves his money alone for 10 years, how much will he earn?
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SIMPLE SAVINGS MATHAPR
Annual rate that is charged for
borrowing (or made by investing),
expressed as a single percentage number that represents the
actual (YEARLY COST OF FUNDS) over the
term of a loan.
APY
The effective annual rate of
return taking into account the
effect of compounding
interest
WATCH VIDEO!