Managing Your MoneyChapter 23

Your Income21:1

Income from WorkO Hourly Wage- there is a minimum wage

which is set by the federal governmentO Salary – a set amount of money that is paid

for all the work that goes with a job description

O Commission – in a sales job, commission is often a percentage of each sale made by a work

O Profit- some people are self employed and earn an income through their own business

Income from WorkO Gross income – the wage or salary

you make before taxes are taken outO Net income – the amount of money

left after subtracting the deductions from your gross incomeO Example: federal and state income

tax, Social Security (FICA – Federal Insurance Contributions Acts), Insurance, Retirement Program

SavingsO Money placed in a saving account earns interest.

Interest is a charge for the use of money

O Income earned on a saving account is call interest income

O Interest income on a savings account is based on:O Total savingO Length of savingO Interest rateO Type of Compounding used

O By adding to the principal it will help build your savings

SavingO Compounding is when the interest

previously earned is added to the total before new interest earnings are figured

O Interest may be compounded annually, semi-annually, quarterly or monthly

InvestmentsO Investments include stock, bonds,

mutual funds, retirement accounts and real estate

O Trading – buying and selling stocks; only recommended for experts

Income During Emergencies

O Financial experts recommend having enough savings set aside to cover living expenses for three to six months in the event of an emergency. Establishing such an account and contributing to it regularly can help you avoid financial problems

Using a Budget23:2

BudgetO A budget is a plan for the use of your

incomeO A budget will help you

O Control spending so you live within your income

O Guide decision making about purchasesO Set aside money for special purchases,

future plans, and emergenciesO Reach financial goals

Establishing Goals for Your Income

O 1st step in a budget is your needs and wants

O Your needs and wants will determine your short and long term financial goalsO Short terms goals examples are

buying a car or taking a vacationO Long-term is college education or

retirement

Estimating IncomeO Based on your net income and

include any other sources of income

Planning Expenses O Fixed expenses are expenses that are

constant each month. Fixed expenses include car payment, monthly insurance payment and mortgage or rent payment

O Variable expenses are expenses that change or vary from month to month. Example: phone bill, food, clothing cost

Planning for SavingO Treat your savings as a fixed

expense

Making a Budget Work for You

O Making Buying Decisions

O Being Realistic and Flexible

O Using a Computer for Budgeting – spreadsheets or accounting software

Banking Services23:3

O You should always choose a financial institution that is insured. The Federal Deposit Insurance Corporation (FDIC) insures most banks.

Checking AccountsO A personal checking account is safe

place to keep your money. It also offers a convenient way to pay bills and make purchases

Using Checks

Using Debit Cards and ATMs

O A debit card is used to immediately withdraw funds from your checking account to pay bills or make purchases

Managing Your Account

O You should always keep accurate recordsO Overdraft occurs when you write a check,

use your debit cared or withdraw cash form an ATM for more money than you have in your account

O Some financial institutions offer overdraft protection, which acts as an instant loan to cover overdraft to a certain limit. Usually, the bank will charge a fee for this service.

Online BankingO You can monitor you account activity

24 hours a day. You can access your statement, check your account balance, review deposits and withdrawals, and transfer funds

O Electronic funds transfer (EFT) allows you to use a computer to move money between your accounts

Savings AccountsO Convenience – Some savings

accounts allow you to withdraw money when you want

O Interest rate – The higher the interest rate, the more interest income you will earn

O Liquidity – The ability to take our your money on short notice is liquidity

Types of Savings PlansO Regular saving accountO Club accountO Certificate of deposit (CD)O Money market deposit account

Using Credit Wisely 23:4

O Main benefits of creditO You can goods and services before

paying for themO In emergencies, credit lets people

purchase needed goods or services O Credit is convenientO Using credit can be safer than

carrying large amounts of cash

O Disadvantages of using creditO Using credit can encourage

overspendingO Using credit cost moneyO Credit reduces future incomeO Misusing credit can cause serious

financial problems

Tips for Using Credit Cards Wisely

O Pay your bill in full each month and avoid interest charges

O Pay you bills on time to build your credit rating

O Paying your loans off before they are due

LoansO Loans are type of credit often used to

finance cars, homes, education or a new business

O Loans are considered installment credit, which means the loan is paid back equal installments, usually as monthly payments

O Collateral is form of security on a loan

The Cost of CreditO The Truth in Lending Act requires

lenders to disclose the exact cost of using credit, including interest and other charges, such as annual fees.

O Lenders also are required to disclose the annual percentage rate (APR), which is the annual cost of credit. They must also disclose the total interest the consumer will pay

O Experts recommend keeping credit expenses under 20% of net income

Applying for Credit O Your credit rating is a record of how

well you paid your bills in the past O To keep a good credit rating, you

need to pay bills on time

Credit Cards