Module 2 Review Guide

2.01: Is it a Want or a Need?

Wants Vs Needs & Law of Diminishing Marginal Utility

Smartphone vs Landline. A smart phone is a want; the Law of Diminishing Marginal Utility shows us

that as we become more accustomed to having access to smart phone usage, we begin to expect more

and our satisfaction with our current technology decreases. We then may desire additional technology

and risk debt to obtain said product. This module discusses how to efficiently use resources, budgeting,

understanding taxes and investments.

2.03: Sharing with Uncle Sam

Direct Taxes Indirect Taxes -paid straight to the government -paid to a third party who then sends to the

government

Examples include federal income taxes, property taxes Examples include sales tax, gas tax

Tax Progressivity- as income rises do tax rates lower, raise or stay the same? We study 3 tax systems:

Proportional, “Flat” Tax Regressive Tax-Sales Tax Progressive Tax-The U.S. -tax rate remains the same -tax rate decreases -tax rate increases

Income: Income: Income:

20,000 * 25% 60,000 * 25% 180,000*25%

20,000 * 50% 60,000 * 25% 180,000*12.5%

20,000 * 15% 60,000 * 25% 180,000*33%

How would this look on a line graph?

How would this look on a line graph?

How would this look on a line graph?

2.04: What is Stock Anyway?

Why invest? We invest for financial security. Having set goals for your money and diversifying your

portfolio is critical to ensuring you are able to maximize your potential return.

Over a period of time, inflation will affect your finances, and if you invest at a rate that is equal to or

exceeding that rate, you can grow your initial investment.

Younger people have the ability to grow their investment for a longer period of time. They can recoup

any losses they may experience from higher risk investments. Older people have less time to wait and

are more likely to be conservative-moderate investors.

How would you choose? Choices: Why? Scenario 1: Teenager wants to save for college 1 Yr CD vs. Stock

Scenario 2: Family wants to buy a new car for Christmas

Savings vs Treasury Bond

Scenario 3: Doctor plans on opening his own practice in 10 years

Money Market vs. Mutual Fund

Scenario 4: Single Mom is planning for her 3 year old daughters college education

IRA vs. Corporate Bond

Scenario 5: College graduate is planning for retirement

IRA vs. Stock

Scenario 6: Recently retired soldier wants to sail around the world for a year

Money Market vs. Futures

Investment Options Conservative-low risk Moderate –medium risk Aggressive-high risk

In order from least risk to highest risk Type: Description: Where Traditional Savings or Checking Account

Low rate of return

Liquid-money can be taken as cash easily;

Local bank

Wells fargo

Money Market Account (MMA) Better rate of return than a trad account

Bank charges a free if money is taken early

Minimum amount required to invest

Local bank

Capital One

Certificate of Deposit (CD) Fixed rate of time to invest

Better rate of return than trad account

Bank charges a fee if money is taken early

Local bank

Bank of America

Individual Retirement Account (IRA) Rate of return varies

Bank charges a fee if money is taken early

Save money on TAXES

Local bank

Brokerage firms

Etrade

Bonds- US Treasury vs Corporate Moderate rate of return

Minimum amount to purchase and hold

T-Bonds are bonds issues by the US Treasury

Corporate bonds-not as safe as T-Bonds

Directly

US Treasury

Mutual Fund Shares of ownership in a group of companies

Rate of return varies widely

Minimum amount to invest

Directly

Brokerage firms

Ameritrade

Stock Shares of ownership in one company

Potential to make a high rate of return over time

Potential to lose all money invested

Directly

Brokerage firms

Fidelity

Futures Highest risk

Speculative- betting on future price of a common product such as wheat

Legal commitment is made to buy a certain product on a certain date at a particular price.

Brokerage firms

Merrill Lynch

Wells Fargo Advisors

Read Stock data online

Google shares last traded at $1208.62 at 12:29PM, a loss of $6.17 or .51% for the day. Its previous close was at $1214.79 and it opened today at $1215.81. Currently the shares are bidding at $1208.00 by 800 and asking 1208.48 by 200. The 1 year targeted price estimate is $1320.63-this is an estimate only. If you are buying shares you would look at the ASK, if you are selling look at the BID price. If you are interested in the value of your shares check the last trade. When investing in stock you want to check the history of the stock, the stability of the company and how much it is to invest intially.

1 Day 1 Month 1 Year

Read Money Market Rates

Wells fargo has a ‘Wells Fargo Money Market Savings

SM Account’ for which

I can earn .03% APY (annual percentage yield). This is the rate of return. I would need to have $3500 in the account on a daily basis or be transferring $75 a month into it to have no monthly service fee. If I do not meet these conditions I would have to pay $10 a month. The minimum amount needed to open the acount is $50.

What is the advantage to opening a money market account? Who might be using this type of account?

2.05 How Can I Spend Money Wisely?

Things to consider before making a purchase:

The price of a good or service

The price of alternatives or substitutes

Your own income

Your personal preferences

How Much Does It Cost?

Companies can present prices in varied ways to get consumers to buy (or buy more) goods and services:

Signs listing products as two for $5.00 encourage shoppers to buy twice as much, even if the

price of one unit is still $2.50. Consumers often assume they only can get the deal by buying two

units.

A product selling for $9.99 looks more attractive to many customers than the same product for

$10.00, even though the difference is only one cent.

Dividing the price over time such as by the day, week, or month can make a larger price tag look

more manageable.

Some things to consider before making a large purchase such as a car:

Total Cost—Do you want to buy a new or used car? What makes and models are within your

budget? How much would insurance cost for those options?

Features—Does the vehicle need to have an automatic transmission? Four-wheel drive? Mp3

player?

Warranty—What types of problems are covered and for how long? Will you be able to select

your own mechanic?

Durability—What kind of reputation does the manufacturer have with regard to quality? Has the

vehicle ever been subject to a recall?

Maintenance—What will need to be done to keep the car running well? How much will it cost?

How can you avoid buyer’s remorse?

When researching an expensive product, be sure to consider the source of the information. Sources vary

in their quality and usefulness. In some cases, the information they provide may be biased or completely

false. While there are many ways to find free information about products, there are also services that

charge money for their product or service reviews. Don't waste your time or money by using unreliable

sources

Source Examples Positive Negative

Unpaid Personal Testimony

Customer reviews on a website; chat with a friend

If you know the person, you can verify their trustworthiness

Only one person's perspective

Paid Personal Testimony

Infomercials; compensated spokespeople

May answer questions you have about product or service

Likely biased; may or may not be accurate

Salesperson Telemarketer; company representative working in a store

Considerable knowledge of product or service

Biased; goal is to get you to buy product or service

Review Service Consumer Reports; Car and Driver

Likely to have data on a lot of products or services

Could be biased; usually costs money

Advertisement Television commercial; targeted email ad

May include a lot of information about product or service

Biased; designed to sell product or service

Non-Durable Good:

Goods that have a lifespan of less than 3 years.

Durable Good:

A durable good is an item that is not consumed or destroyed in use and can be used for a longer

period of time, usually three or more years.

Recall:

Notice of a product defect sent by a manufacturer with information on repair or replacement.

Fraud:

Deceptive and often illegal sales practices.

Regulations:

Government laws that control businesses

2.06 Can I get a Ride?

Types of Interest Rates:

Fixed interest rates cannot change, so you always know what you will be charged.

Variable interest rates fluctuate based on the supply and demand for bank credit. This card, though it

offers a higher credit limit, has a variable interest rate so your minimum payments could become

unpredictable if you do not pay off the card balance each month.

Types of credit:

Installment Credit: This type of credit is usually for expensive items. It allows you to purchase a good or

service and pay it back in fixed monthly payments. People will get this type of credit to purchase cars,

appliances, mortgages, and student loans.

Credit Cards: These are plastic cards with a magnetic strip, issued by stores, banks, and businesses, used

to purchase goods and services. Depending on the deposit requirements, cards are secured, like prepaid

credit cards, or unsecured.

Secured Credit: Pay a deposit upfront and can only spend that amount.

Unsecured Credit: No deposit is spent upfront. The creditor sets the limit.

Calculating Periodic APR:

APR%/12 months x balance = periodic APR

Example:

If APR is 20% and balance is 1000

.20/12 = .01667 x 1000 = 16.67

So the amount due after one month is 1016.67

Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in

interest and it will take you longer to pay off your balance.

Steps to determine if a loan is within a person’s budget:

Step 1: Determine the amount of the loan.

Step 2: Determine current interest rates.

Step 3: Determine the monthly payment at each interest rate.

Monthly payment = P(r/12)/(1-(1+(r/12)^{-m})

"P" is the loan amount, "r" is the interest rate as a decimal, and "m" is the length of the loan in

months.

Step 4: Determine total cost of the loan.

Step 5: Select the best loan for the budget.

Determining Compound Interest:

Mortgages come in two main types:

A fixed rate mortgage is simply a loan in which the interest rate and monthly payment amount do not

change over the life of the loan.

An adjustable rate mortgage (ARM) is a type of mortgage in which the interest rate can periodically

change. The initial rate will generally be lower than a fixed rate loan. Yet the lender has the option to

raise it at set intervals throughout the life of the loan. This often makes it a costlier option if you plan to

stay in your home for many years.

Credit History: A person’s record of spending habits. Lenders use a person's credit history to determine

the likelihood of that person making payments on time and paying off the loan. Borrowers with a

positive history, with no missed or late payments, receive offers of lower interest rates than those who

have had trouble with credit.

Credit Score: A number that indicates your credit-worthiness. Think of it as the grade a person receives

for how well they use credit. Scores range from 300 to 850. The higher the score the more credit-worthy

a person is. Scores are based on five categories: payment history, amounts owed, length of credit

history, new credit, and the types of credit used. Lenders use credit scores to determine whether to

grant a loan and at what interest rate. The higher the credit score, the lower the interest.

Steps to take to eliminate debt:

1. Destroy the credit cards. You will not eliminate debt if you continue using credit for purchases.

Keeping them around will only tempt you to use them again.

2. Double up on your minimum monthly payments. This will pay the debt off faster and reduce

the amount you pay in interest. A $1000 balance at 18% with a minimum payment of $20 will

take five years to pay off and cost you $431 in interest, but paying $40 cuts both the time and

interest nearly in half.

3. Change your spending habits, distinguishing wants from needs. Coffee can be made at home to

save on lattes, for example.

4. Create a budget and only spend what you earn. This is probably the most difficult step, but a

critical one.

Bankruptcy: Federal court process to eliminate debt.

Chapter 7. An individual agrees to sell all assets in exchange for debt elimination.

Chapter 13. A judge adjusts debts through elimination and reduction based on a person's

income.

Ways to protect your identity:

1. Examine your credit card bill each month and immediately report anything that seems wrong.

2. Carry credit cards in a wallet and never leave them in your car. If your car is stolen, your

identity may go with it.

3. Keep photocopies of each side of your credit card in a secure place at home. If your card goes

missing, you will have the numbers and information necessary to report it before someone else

uses it.

4. Use only secure numbers on secured sites for online shopping. Many banks will generate

alternate card numbers for online shopping so you are not typing in real information that could

get stolen.

5. Never give out credit information to someone who calls you or emails you. If you are

interested in their offer, research the business and phone number yourself and call back.

6. Shred personal mail and documents before throwing away. Make sure doctors and other

businesses you visit do the same.

7. Beware of people peering over your shoulder when at an ATM or stores where you swipe your

own card.

8. Do not carry around your social security card.

9. Get a copy of your credit report at least once a year. Examine it and report any errors.

2.07 How do I Protect my Stuff?

What Is Insurance?

Many of us take out insurance to protect ourselves from potential losses. People vary in their willingness to accept risk. Yet most are willing to pay a small premium now in order to avoid a possible larger loss later. By signing a contract, or insurance policy, with an insurance company, people are able to transfer the risk of loss to the company.

Premiums are collected regularly usually monthly, semi-annually, or annually. This creates a pool of funds. When the policy holder suffers a loss, he or she is paid out of the collected funds.

Insurance companies are profitable because they base their prices on the odds of a certain event occurring and adjust their prices to reflect those odds. Those at higher risk will pay more because the company knows that they are more likely to have a future claim..

Extended Warranty- Insurance on a large item like an appliance in the event something happens to the item.

Instead of purchasing extended warranties or other types of insurance, some people prefer to accept the risk of something happening to their property. They might "self-insure" by setting aside money, usually in a savings account, on a regular basis.

Types of insurance:

Automobile

All states require a minimum amount of automobile insurance coverage that must include liability coverage.

The following are different types of coverage that may be part of an auto insurance policy:

Bodily Injury Liability—pays for medical expenses, pain and suffering, and lost wages of another person hurt in an auto accident for which you are at fault or liable; also covers legal defense and court costs

Property Damage Liability—pays for vehicle or property like a fence, garage, etc. damaged in an auto accident for which you are at fault or liable; also covers legal defense and court costs

Collision—pays for losses to your car when in a collision with another vehicle or object Comprehensive—pays for losses to your car in a non-collision situation, such as damage caused

by theft, wind, or hail Medical Coverage—pays for medical expenses of driver and passengers, regardless of fault Uninsured/ Underinsured Motorist—pays for losses to your car when accident is caused by a

driver who has no or insufficient liability insurance Rental Reimbursement—pays for rental car if your vehicle is damaged in an accident GAP Insurance—pays for fees associated with damage to a car when the amount still owed on

the car is greater than its value

Homeowners Insurance

Insurance for private homes.

The premium for homeowner's insurance varies according to many factors, including:

Assessed Value—The more valuable the insured home, the higher the cost of the policy. Deductible—Just like with auto insurance, the higher the deductible, the lower the premium,

and vice versa. The homeowner pays the deductible once per claim. Riders—The more valuable the items added to the policy, the higher the rates. Other Factors—Examples of other factors considered are geographic location (for example, does

the homeowner live near water), distance to a fire station or fire hydrant, crime rates in the neighborhood, age of the home, overall condition of the home's construction, and the existence of a sprinkler system.

This type of coverage … Pays for …

Property Loss of or damage to home, property, and/or belongings in the event of things like fire, a storm, or theft

Liability Loss or damage caused by accidents that may occur to others while in your home or on your property, like your dog biting the mailman or your friend falling onto a glass table

Health Insurance

Health insurance helps mitigate a risk. In this case, the risk is incurring medical expenses.

Many factors have an impact on the overall cost of individual health care. A few are shown here:

A co-payment, or co-pay for short, is an out-of-pocket fee paid for individual services each time that service is rendered. For example, one health care policy may include a $10 co-pay for each doctor visit, a $20 co-pay for each emergency room visit, and an $8 co-pay for each prescription filled. Typically, lower co-pays translate to higher premiums.

Amount of coverage- The more options you choose, such as dental and vision coverage, the higher your premium will be.

Deductible- Amount to be reached by policy holder before insurance pays claims

Exclusions- As with other types of insurance, there are some things health insurance policies do not cover at all. An example might be elective surgery or teeth whitening.

Coinsurance is another way that individuals and insurance companies share the cost of health care. Not all health insurance plans have coinsurance. Often, it's specified for a particular component. An example of this would be a 15% coinsurance for hospital stays.

The Affordable Care Act (ACA), passed into law in 2010, requires most Americans to have some form of health insurance.

Those without health insurance will pay a penalty when filing their annual income tax Requires certain things from insurance companies, such as not declining individuals with

preexisting conditions and coverage for preventative care One goal is to increase preventative care to lower disease rates nationwide and stop health

problems in their early stages

Medicare is a government-sponsored healthcare program for seniors. Covers some medical expenses for those 65 and older May cover those under 65 if they are disabled and eligible for Social Security Medicaid is government-sponsored healthcare to assist those with no or low incomes. Pays medical bills for those who meet the income criteria Workers' Compensation is a government relief program for people who have lost income due to being hurt on the job.

Covers medical care for on-the-job accidents, pays benefits to families of those killed at work and benefits for temporary and permanent disabilities

Life Insurance

The purpose of life insurance is to provide financial support to family members, or other beneficiaries, at the time of your death. Individuals pay a premium to an insurance company for their coverage. The insurance company then pays a death benefit, usually a lump sum, to the designated beneficiaries (often a spouse and/or children).

There are two main types of life insurance, term and whole.

Term Life Insurance

Coverage only for a specified term, or number of years, such as 5, 10, or 25 Lower premium than whole Often chose as a way to support children in case of parent's death during children's dependent

years "Protection policy"

Whole Life Insurance

Permanent, remains in effect until death, no matter how many years Higher premium than term Often chose as part of a long-term investment strategy, because the policy builds cash value "Investment policy"

The cost of a life insurance policy, like all insurance types, is determined by many factors, including the:

Health of Insured—Information about personal health status, family health history, and lifestyle choices is used to determine if the insurance company will provide coverage and at what rate.

Type of Policy—The next consideration is the kind of policy you want or need. Are you looking for a way to ensure the financial security of your children from age 0 to 20 in the event of your death during that time? Then term life insurance may be a cost effective option. Or are you looking for a long-term investment opportunity, in which a loved one will be well provided for, even at a ripe old age? Then a whole life insurance policy may be an option to explore.

Amount of Coverage—The final question when starting a life insurance policy is how much you want the death benefit to be; $100,000? $500,000? $1,000,000?

Other types of insurance:

1. Social Security Disability Benefits is a federal program aimed at assisting those who are retired or disabled. Taxpayers support this program through a tax on their income.

Payment if you are unable to work for a year or more due to disability Must have worked in jobs covered by Social Security Benefits continue until you return to work or reach retirement age

2. Unemployment Insurance is a government relief program for those who have lost income due to losing their jobs.

Provides temporary assistance to workers unemployed through no fault of their own State laws determine eligibility and benefits

2.08: Why Budget?

A budget is a plan of income and expenses. It shows how much money is coming in and how much is going out

during a set time frame. Individuals, households, businesses, and even whole nations create budgets.

The purpose of budgeting is to plan spending so that you “live within your means." A budget gives you a

framework for what you can afford and what you cannot. Living beyond one’s means, or going into debt, is costly

in terms of interest payments, stress, reduced credit-worthiness (how risky it may seem for creditors to lend you

money), and reduced money for savings and wants

Economists recommend the following budgetary allowances:

Gifts: 9%

Savings: 9%

Housing: 25%

Utilities: 5%

Food: 10%

Transport: 11%

Medical/Health: 11%

Personal: 8%

Budget

Gifts

Savings

Housing

Utilities

Food

Transport.

Health

Personal

Recration

Debts

Recreation: 6%

Debts: 6%

Sample Questions:

What should be the largest portion of your budget?

a. Transportation

b. Housing

c. Medical/Health

d. Food

What should be the smallest portion of your budget?

a. Recreation

b. Debts

c. Savings

d. Utilities

Fixed Expenses – expenses that do not change in your budget from month to month (ex. Housing, car payment,

etc.)

Variable Expenses – expenses which may change from month to month in your budget (ex. Recreation, personal.

Etc.)

Question: If you need to make adjustments to your budget, should you look at changing your fixed or variable

expenses? Why?

Creating a Budget: The first step in creating a budget is to calculate your income.

You will need to use your gross income (amount before taxes) to determine your net income (amount you have

after taxes). You will always create your budget using the net income.

To determine net income, you must take your gross income and multiply by your tax rate. Then subtract that

number from your gross income to get the net income.

Ex. Dorothy's yearly gross income is $20,000. She falls into the 15% tax bracket. Therefore, she multiplies 20,000 by

0.85 and gets 17,000. Her net yearly income is $17,000.

The next step in creating a budget is to calculate your expenses. These will include the categories listed above and

any other categories you may need.

The final step is to add up all of your expenses and make sure that your budget balances. If you are “in the red,”

you will need to make adjustments and cut some expenses. Remember to look to your variable expenses first in

this situation.

Sample Questions:

1. You earn 25,000 a year and your tax rate is 10%. What is your gross income?

a. 2,500

b. 10,000

c. 25,000

d. 5,000

2. Which of the following categories would be considered a variable expense?

a. Rent for apartment

b. Electric bill

c. Car Payment

d. Bi-weekly manicure

Module Two Vocabulary Crossword Puzzle

*Using the module 2 glossary, complete the crossword puzzle below

Across 2. Does not require initial deposit and creditor sets balance limit

4. Mutual Funds are shares of ownership in a group of companies.

6. Involves betting on the future price of a common product

9. A limit to how much money can be deposited. Save money on taxes.

12. Spreading money among multiple accounts when investing.

15. This account will not make much money, but more than traditional savings.

Bank will charge a fee if money is taken out early.

16. No matter what happens to your income, the tax rate always stays the same

(flat tax)

17. A person's derived satisfaction from consuming a good.

18. Amount paid depends on level of consumption, like attending movies or

haircuts

20. insures bank deposits in the United States up to $100,000 for each

deposit.

21. Income AFTER taxes and fees. Gross Income - taxes & fees.

22. Fees charged on money borrowed or money gained when loaning money.

24. This is a way to borrow cash, usually through a bank or credit union.

26. Income BEFORE taxes and fees

27. Conservative – Low Risk, Moderate Risk, Aggressive- High Risk

29. Minimum investment required, can be done through bank or government.

Gives a loan to company/bank.

30. As each additional quantity of a good or service is consumed, the

relative satisfaction obtained decreases. Remember that more isn't always

better.

32. These are plastic cards with a magnetic strip issued by stores, banks,

and businesses used to purchase goods and services.

Down 1. Like sales taxes, are collected when a person pays for a good or service.

3. Calculating interest earned based on original deposited amount plus

interest already earned

5. A deposit is paid to receive a service such as utilities. You pay a fee

each month based on your consumption, such as a water or power bill.

7. Does not make money and amount placed can be taken out easily for cash

8. Easily converted to cash

10. pay a deposit and can only use card up to that amount

11. The general rise of prices over time.

12. Like federal income taxes, are paid straight to the government.

13. Distribution of investment money.

14. This type of credit is usually for expensive items. It allows you to

purchase a good or service and pay it back in fixed monthly payments.

19. a plan of income and expenses.

23. As income increases, the tax rate decreases

25. Costs paid regularly and amount does not change or only slightly

28. Ownership in a company. If the company fails, money is lost.

31. As income increases, the tax rate increase

33. Payout to stockholders of a portion of company profits, based on number

of shares owned