What do I do with my personal resources? PERSONAL FINANCE What do I do with my personal resources?

Rational Decision Making I respond to incentives Positive – a reward for making good choices/behavior (get a 10% raise for selling 80 pairs of shoes) – try to achieve these Negative – punishment/consequence for making poor choices (getting fired for failing to sell 80 pairs of shoes) – try to avoid these

I respond predictably to incentives Engage in activities that benefit me economically (increased income, profit, revenue) Avoid activities that hurt me economically (decreased income, profit, revenue)

I make rational economic decisions Define the problem – resource are scarce, I can’t have everything I want List the alternatives – what are my REALISTIC choices State the criteria – what is most important to you (or what is necessary) Evaluate the alternatives – what comes closest to what you want the most or will help you get what you want the most? Make a Decision – rationally choose the best alternative

Complete Rational Decision Making Matrix

Worker’s Earnings Worker’s earnings: pay received from an employer Determine how much a person will have to spend or save/invest for the future Earning potential: how much a person is likely to receive in pay Influenced by skills, education, training, Highly successful people invest as much time/money on education and training as possible

Effect of Taxes on Personal Finance Progressive tax – increases as income increases Tax Bracket Married (FJ) Single 10% Bracket $0 – $17,400 $0 – $8,700 15% Bracket $17,400 – $70,700 $8,700 - 35,350 25% Bracket $70,700 – $142,700 $35,350 – $85,650 28% Bracket $142,700 – $217,450 $85,650 – $178,650 33% Bracket $217,450 – $388,350 $178,650 – $388,350 35% Bracket Over $388,350 Over $388,350

Taxes Continued Regressive Tax Percentage paid in tax increases as income decreases Sales tax - most common regressive tax (7% in Effingham County) 7% of $300 = $21 Income of $10K 7% sales tax of $21 = .02 % of salary Income of $50K – 7% sales tax of $21 = .004% of salary Affect people of lower incomes more severly

Taxes Continued Proportional Tax – everyone pays the same amount proportional to their income (also known as flat tax) 10% no matter your income… $100K = $10K tax $50K = $5K tax $25K = $2.5K tax

WHAT DO I DO WITH WHAT’S LEFT AFTER TAXES? Banking, Saving, Borrowing Financial Institutions Commercial Banks – receive deposits of money, extend credit and provide loans Owned and managed by stockholders Make money by granting loans and charging interest – interest charged (amount charged to customers for borrowing money) Pays interest to customers who deposit money in savings accounts - interest earned (amount paid to customers for the use of their money) Interest charged is usually MORE than interest earned

Financial Institutions Continued Credit Unions Cooperative associations that serve only their members (only certain people can join) Offer checking and savings accounts and grant loans Technically “non-profit” do not have to pay the same taxes as commercial banks Offer higher interest earned rates than banks

Financial Institutions Continued Payday Loan Lenders Quick short terms loans High interest rates Borrow $50 on Wednesday because you do not get paid until Friday – on Friday, you pay $60 back when you get your check (20% interest rate Use in EMERGENCY situations

Financial Institutions Continued Title Pawn Lender Short term loans for people with salary gap between income and expenses Loan is based on collateral (car) VERY high interest rates Failure to pay back results in loss of vehicle

Investing High Risk Low Risk High Return Low Return Looking for a RETURN (eventual payoff) on my investment RISK (chance of losing investment) in hope for the payoff KEY: MAKE SURE I WILL STILL BE OK IF I LOSE THE MONEY

INVESTING CONTINUED STOCKS – shares in a company – high risk, chance of high return. MUTUAL FUNDS – pool of money from many investors that are used to buy a range of stocks- moderate risk, moderate return RETIREMENT ACCOUNTS – 401K, 403B – Pre-tax, some companies match a percentage of contribution BONDS – loans to a company or the government - low risk, low return SAVINGS ACCOUNT – place to “store” money – minimal risk, minimal return Why invest or save??? To have a good retirement

How do I get credit??? Based upon credit worthiness – The 3 C’s of Credit Assets (collateral) Income/earning potential (capacity) Credit history (character)

Where do I get Credit? Lender 30 YR Fixed Mortgage 5 Yr Fixed Auto Loan Home Equity Lump Sum - Fixed Credit Card no annual fee Institution A 4.0% 4.081% APR 3.24% 4.79% 13.74% – 23.74% variable annual percentage rate Institution B 4.125% 4.2182% APR 2.49% 4.49% 11.99% - 21.99% variable annual percentage rate Institution C 4.125%, 4.186% APR 3.12% 4.75% 17.90% - 26.74% variable annual percentage rate

CREDIT: GOOD, BAD & UGLY GOOD Allows me to have goods or services now and pay later (Student loans, House, Furniture, Car) Difficult to save entire amount to pay in lump sum

Credit Continued Bad Interest charged makes me pay more in the long run Simple interest – applied only to the value of the principle $10K @ 5% annually for 10 years = $10,000 X 5% X 10 = 5K in interest = total paid to bank of $15K for loan Compound Interest – applied to principle and the accrued interest A = P X [1 + r/n]nt A – amount to be paid back P – principle R – interest rate N – number of compounding periods per year T – number of years of the loan

Credit Continued Ugly Failure to pay on time leads to poor credit rating Increased interest rates Increased insurance rates Limited employability

Insurance Provides opportunity to share the risk with insurance company (consumer is not responsible for 100% of loss/damage/debt) Consumer pays a premium Usually includes a deductible (amount paid by consumer before insurer pays anything) Insurer pays amount up to policy limits after deductible and co-pays are met

Types of Insurance Life – pays beneficiary upon insured’s death Whole-life Term-life (limited number of years) Medical (health) – pays for covered medical care Auto – pays for damage to auto and injuries in a covered accident Homeowners- pays for covered damages to home Liability – pays for damages for which insured is held legally liable (comprehensive liability usually applies to businesses) Disability – pays part of insured’s wages while they are unable to work