PERSONAL FINANCE & CREDIT UNIT FOUR PERSONAL FINANCE & CREDIT

INVESTING Examine goals & objectives Risk Tolerance Ex. retirement, home purchase, college fund Risk Tolerance Can I tolerate or recover from a potential loss or downturn in my investment Need to save consistently Importance of Diversification Power of compounding Interest or amount earned is added to the initial principal or amount that is invested; subsequent interest is added to that amount

INVESTING Potential Reward vs. Degree of Risk Low risk/low reward: Bank Savings Account High Risk/higher potential reward: Stocks

INVESTING Bonds: “IOU’s” or debt issued by states, cities, public authorities, corporations, or the Federal Government Bonds have a specific maturity date, interest rate, and face value Bonds are rated based on credit worthiness of the issuer: BBB-AAA Lower rated usually pay higher interest, ex. Junk bonds Bond prices are inversely related to current interest rates Ex. Interest rates rise>bond prices decline Interest rates fall>bond prices rise

INVESTING Stocks represent ownership or equity in a company. Companies sell stock in order to raise financial capital. Goals of Investing in Stocks: Growth: Shares go up in value Income: Company pays dividends to itshareholders Publicly traded companies usually sell their shares on two main exchanges— New York Stock Exchange (NYSE) NASDAQ Mutual Funds: pool of various stocks &/or bonds that are managed by investment professionals Allow for diversification Management fees are charged

INVESTING Stock Indexes Lists of major stocks classified in various groups by various factors such as, size of company or type of market Examples: Dow Jones Industrial Average: List of Top 30 companies S & P 500: List of top 500 companies

INVESTING Other Choices: Real Estate/Property Mortgages Fixed rate—Interest rate and amount of the monthly payment does not change during the life of the mortgage Adjustable Rate—Interest rate and the amount of the monthly payment can change during the life of the mortgage depending on the rate of inflation Options: Contracts that provide the right to puchase or sell commodities or financial assets at some point in the fture at a price agreed upon today Futures: An agreement to buy or sell at a specific date in the future at a predetermined price regardless of the market price

CREDIT Factors influencing credit approval Credit History/Credit Score—prior record of making payments Income—ability to manage payments How to establish a good Credit History/Credit Score Need to make payments on time in a consistent manner Maintain a good debt-to-income ratio Credit Scores are determined by three credit reporting agencies– TransUnion, Equifax, & Experian