1. Managing Personal Finances Bonus Chapter D McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 1. Outline the six steps for controlling your assets. 2. Explain how to build a financial base, including investing in real estate, saving money, and managing credit. 3. Explain how buying the appropriate insurance can protect your financial base. 4. Outline a strategy for retiring with enough money to last a lifetime. LEARNING GOALS Bonus Chapter D D-2

3. As a former Microsoft executive, Myhrvold is not your typical millionaire. Typical millionaires tend to have modest homes and buy used cars. Millionaires are educated, work hard, save money, make purchases carefully, and own their own businesses. Profile NATHAN MYHRVOLD D-3

4. NAME that COMPANY Bonus Chapter D One way to save money is to use your credit cards wisely. There are organizations that can help you compare credit cards to get the most out of them. Name one of those organizations! D-4

5. Financial Planning Begins with Making Money An investment in education pays the best interest rate:  A typical full-time worker with a four-year degree earns about $50,000, 62% more than a person with a high school diploma.  The lifetime earnings of a family with bachelor’s degrees will be about $1.6 million more than a family with high school diplomas. FINANCIAL PLANNING BEGINS with MAKING MONEY LG1 D-5

6. Six Steps to Controlling Your Assets 1. Take an inventory of your financial assets 2. Keep track of all your expenses 3. Prepare a budget 4. Pay off your debts 5. Start a savings plan 6. Borrow only to buy assets that increase in value SIX STEPS to CONTROL YOUR FINANCES LG1 D-6

7. Prepare a Budget A household budget generally includes:  Mortgage or rent  Food and clothing  Vehicles and furniture  Insurance needs  Other expenses MANAGING YOUR HOUSEHOLD BUDGET LG1 D-7

8. New CD $15.00 POSSIBLE COST-SAVING CHOICES First ChoiceAlternative Total Savings per Month Starbucks latte $3.00 X 20 days = $60.00 QuikTrip cappuccino $.60 X 20 days = $12.00 $48.00 McDonald’s lunch $4.00 X 20 = $80.00 Lunch from home $2.00 X 20 = $40.00 $40.00 Evian water $1.50 X 20 = $30.00 Generic bottled water $.50 X 20 = $10.00 $20.00 New CD $15.00 Listen to your old music $0.00 $15.00 Banana Republic shirt $34.00 Old Navy shirt $10.00 $24.00 Total savings per month $147.00 Total savings after 4 years of college $7,056.00 LG1 Prepare a Budget D-8

9. HOW MONEY GROWS Time2%5%8%11% 5 years$5,520$6,381$7,347$8,425 10 years6,0958,14410,79514,197 15 years6,72910,39515,86123,923 20 years7,43013,26623,30540,312 25 years8,20316,93234,24267,927 Annual Rate of Return LG1 Prepare a Budget D-9

10. EASY-ish BUDGET CUTS Source: Kiplinger’s Personal Finance, October 2010. LG1 1. Cut back on gourmet groceries and use coupons. 2. Cut down your cell phone bill. 3. Cut out the cable television. 4. Cut down on nights out. 5. Cut the clutter in your house. Prepare a Budget D-10

11. BILLIONAIRE’s TAB Insights into a Lux Lifestyle Source: Forbes, March 29, 2010. LG1 Prepare a Budget PerkNew York BillionaireLos Angeles Billionaire Dinner for Two$550 at Per Se$700 at Urasawa Hotel for Two Nights $70,000 at Four Seasons$30,000 at Four Seasons Haircut$200 at Sally Hershberger$750 at Fekkai Club Table Service $525+ at The Box$1,200+ at Voyeur Massage$225 at Four Seasons $215 at Beverly Hills Hotel D-11

12. Building Your Financial Base Live frugally. If married, try to live on one income. Your first major investment might be a low-priced home. Buy for the long term and don’t live beyond your means. BUILDING YOUR FINANCIAL BASE LG2 D-12

13. FIVE RULES of FRUGALITY Source: AARP, October 2010. LG2 1. Don’t give up what you love. 2. Find inexpensive forms of entertainment. 3. Cut back on non-crucial things. Building Your Financial Base 4. Never go shopping without knowing exactly what you’re buying. 5. Shop around for good deals! D-13

14. Real Estate: Historically, a Relatively Secure Investment A home is an investment you can live in. Paying for a home is a good way of forcing yourself to save. FINANCIAL BENEFITS of BUYING a HOME Interest paid on your home loan is tax deductible. Three keys to optimal return on your home are: location, location, location. LG2 D-14

15. HOW MUCH HOUSE CAN YOU AFFORD? Income Monthly Payment 5%6%7%11% $30,000$700106,263$98,303$91,252$56,870 50,0001,167180,291167,081155,37698,606 80,0001,867287,213266,056247,308155,916 100,0002,333361,240334,832311,433198,013 Interest Rate LG2 Real Estate: Historically, a Relatively Secure Investment D-15

16. Where to Put Your Savings & Learning to Manage Credit Contrarian Approach -- Buying stock whenever everyone else is selling or vice versa. Credit cards serve useful purposes and are important to own but must be used discriminately. SAVING and MANAGING CREDIT Not all credit cards are equal. Check sites like CardRatings.com or CreditCards.com to find a fit. CardRatings.com CreditCards.com LG2 D-16

17. Learning to Manage Credit 50% of college students have four or more credit cards. Only 17% report paying off their balance each month. CREDIT CARDS and DEBT If you feel managing a credit card would be too difficult, try a debit card. LG2 D-17

18. Learning to Manage Credit Created new consumer credit card protections and went into effect in February 2010. New law allows card issuers to increase interest rates for only a limited number of reasons. CREDIT CARD ACT of 2009 LG2 People must be over 21 or have an adult cosigner to get a credit card. D-18

19. AMERICA’S CREDIT CARD DEBT Source: The Nilson Report. LG2 Learning to Manage Credit D-19

20. CLEAN CREDIT Steps to Keep a Good Credit Score Source: Money, October 2010. LG2 Learning to Manage Credit 1. Always pay your bills on time! 2. Keep small balances on multiple cards. 3. Don’t shift balances. 4. Don’t apply for too many cards at once. 5. Don’t file for personal bankruptcy. Photo Courtesy of: Robert Scoble D-20

21. WHAT’s YOUR SCORE? How You Might Rate on a Credit Score Source: Money, October 2010. LG2 Learning to Manage Credit RangeRating 760 to 850Excellent 700 to 759Great 660 to 690Fair 620 to 659Poor 619 and underVery Poor D-21

22. PROGRESS ASSESSMENT Progress Assessment What are the six steps you can take to control your finances? What steps should a person follow to build capital? Why is real estate a good investment? D-22

23. Protecting Your Financial Base: Buying Insurance Term Insurance -- A pure insurance protection for a given number of years that typically costs less the younger you buy it. Whole Life Insurance -- Combines pure insurance with savings, so you buy both insurance and a savings plan. Variable Life Insurance -- A form of whole life insurance that invests the cash value of the policy in stocks or other high-yielding securities. INSURING YOUR LIFE LG3 D-23

24. Annuity -- A contract to make regular payments to a person for life or for a fixed period; an annuity guarantees an income until you die. Two types of annuities: 1. Fixed annuities 2. Variable annuities PURCHASING ANNUITIES LG3 Protecting Your Financial Base: Buying Insurance D-24

25. Health & Other Insurance Disability Insurance -- Insurance that pays part of the cost of a long-term sickness or an accident. Homeowner’s or renter’s insurance covers the cost of things you own if they are destroyed. Umbrella Policy -- Combining all your insurance (life, health, homeowner’s, auto) from one company is less costly. OTHER INSURANCE PROTECTION LG3 D-25

26. WHO PAYS for HEALTHCARE? Source: Center for Medicare and Medicaid Services, National Venture Capital Assn. MethodAmount Private insurance41% Medicare19% Medicaid15% Public13% Patient, out of pocket12% LG3 Health Insurance D-26

27. WHERE HEALTHCARE MONEY GOES Source: U.S. Department of Health and Human Services. WhereAmount Hospital care31% Physicians21% Medicines10% Administration7% Nursing homes6% Other25% LG3 Health Insurance D-27

28. WHAT to KNOW ABOUT HEALTH SAVINGS ACCOUNTS Source: Money, October 2010. LG3 1. Your employer is likely to offer HSA options. 2. The plans can be costly but withdrawal for medical bills is tax-free. 3. They’re not for everyone. 4. HSA accounts can double as retirement accounts. Health Insurance D-28

29. Social Security Social Security -- The Old-Age, Survivors, and Disability Insurance Program established by the Social Security Act of 1935. Social Security benefits are paid through social security taxes paid by workers currently earning wages in the market. The Social Security fund is expected to be hard pressed because of the growing number of older adults. SOCIAL SECURITY LG4 D-29

30. Individual Retirement Accounts (IRAs) Individual Retirement Accounts (IRAs) -- Tax- deferred investment plans that enable a person to save part of their income for retirement. Tax-Deferred Contributions -- Contributions in which you pay no current taxes, but earnings gained in the IRA are taxed as income after withdrawal. Roth IRA -- Doesn’t give an up-front tax deduction but earnings grow tax-free and are tax-free when they are withdrawn. INDIVIDUAL RETIREMENT ACCOUNTS LG4 D-30

31. 401(k) Plans 401(k) Plan -- An employer-sponsored savings plan that allows you to deposit a set amount of pretax dollars and collect compounded earnings tax-free until withdrawal. 401(k) PLANS LG4 D-31

32. Three benefits of 401(k) plans: 1. Contributions reduce your present taxable income 2. Tax is deferred on the earnings 3. Many employers will match your contributions. BENEFITS of 401(k) PLANS LG4 401(k) Plans D-32

33. Keogh Plans Keogh plans allow self-employed people to establish their own retirement plans. Keogh plans are like IRAs for entrepreneurs. Keogh plans can be withdrawn in a lump sum or spread out over years. KEOGH PLANS LG4 D-33

34. Estate Planning Estate planning for those who will inherit money from you may start with life insurance. Will -- A document that names the guardian for minor children, states how you want your assets distributed and names the executor for your estate. Executor -- Person who assembles and values your estate, files income and other taxes, and distributes assets. PLANNING for THOSE WHO WILL INHERIT LG4 D-34

35. PROGRESS ASSESSMENT Progress Assessment What are three advantages of using a credit card? What kind of life insurance is recommended for most people? What are the advantages of investing through an IRA? A Keogh account? A 401(k) account? What are the main steps in estate planning? D-35