Personal Finance

Making Wise Decisions Just like everything else in economics, personal finance involves making decisions Budget: a budget is simply a plan for how you are going to spend your money

Budgeting A good budget is one that accounts for every dollar earned Have a budget for however often you get paid Always put bills and necessities ahead of things like clothes and entertainment Pay yourself first!!! Number 1 Rule- Do not spend more than you make

Budget Example INCOME $500 Taxes -50 $450 Savings -75 $375 Utilities -45 $330 Rent $280 Car -100 $180 Food and Entertainment -150 $30 Clothes -30 $0

Investing What is the difference in investing and saving? Which one is appropriate for your money over the long term? How does investing work?

With investing, just like gambling, the greater the risk, the greater potential for a return!!! Certain investments carry greater risk than others What are you more likely to win, a scratch off Jumbo Bucks ticket or a Powerball ticket? But, which one pays more if you do win? Risk vs. Return

Different Types of investments Savings account– a type of bank account where your money is available whenever you want it, money is guaranteed safe by the government, pays low interest Money Market account– another type of bank account where you are only allowed to withdrawal money so many times per month, pays slightly higher interest

Types of investments Certificates of Deposits (CD’s)– a type of bank account where your money is locked away for a set amount of time If money is accessed earlier, there are steep penalties Pays a little higher interest because access to money is limited

Bonds A bond is basically a loan Bonds can be issued by governments or companies A bond is a contract that is legally enforced, fairly low risk Which would be safer, government bonds or corporate bonds? Which would pay a higher interest rate?

Mutual Funds Mutual Funds- mutual funds are a type of account where your money is put with other people’s money and spread out in many different stocks This allows even the average person to own stock in many different companies, a way to spread out the risk

Stocks Stocks– individual pieces of corporations, sometimes called shares When you buy stock you become a part owner of that company, when it does well, your stock goes up When the company does bad, your stock’s value goes down

Other investments Real Estate- buying property in hopes that it will increase in value Precious items- gold, silver, jewelry, etc Collectibles- antiques, guns, baseball cards, etc.

Simple vs. compound interest The rate of interest is gained on the principle amount only The amount of interest is left in the account, so after the next cycle, interest is earned on top of interest

Simple vs. Compound Interest Most investments have Compound Interest Compound interest allows you to build up much more money over a long period of time If you plan correctly, most of the money you retire on will be from interest you’ve earned, not from the amount of principle you’ve saved

Simple vs. Compound Interest

How to start investing Most people invest through their retirement account Retirement accounts come in several different forms: IRA’s, 401k’s, etc.

Retirement Accounts A 401k is a type of retirement account that many people have through their work The money is taken out of your paycheck before taxes, so you don’t have to pay taxes on the money until you withdrawal it Businesses will match the money you put in up to a certain amount

Retirement Accounts IRA– an IRA stands for Individual Retirement Account An IRA is not offered through your job, you have to go to an investment bank and start one on your own A special kind of IRA, called a Roth IRA, is started using after tax dollars, however, this means your money can grow tax free!!!

Insurance List what kinds of insurance you can think of Life, health, car, property, disability All insurance works the same Payments, or premiums are made to an insurance company If there is an emergency, the company will pay for the cost, except for the deductible

Five C’s of Credit Lenders will look at several things when you go to borrow money These are known as the 5 C’s of Credit

Character and capacity 1. Character– your reputation and previous record Lenders will be less likely to loan you money if you have a record of not paying back debt 2. Capacity– what is your capacity to pay back the loan Do you have a steady job? How much does that job pay?

Capital and collateral 3. Capital– How much net worth does the borrower have? Have you worked for ten years and have little to show for it? 4. Collateral- What secures the debt? What backs up the borrower in case they stop making cash payment.

Conditions 5. Conditions– What are the conditions surrounding the loan? What is the economy currently like? Are there any special situations with the borrower? What interest rate is being considered?

What things will hurt your credit? Being late on making payments Not making payments at all Having too much debt (debt to income ratio)