Budgeting and Managing ResourcesBudgeting and Managing Resources

Financial ResponsibilityFinancial Responsibility

• Managing your money wisely

• Budgeting allows you to fulfill present and future needs and wants

• Planning

– Allows you to get what you need and want

– Keeps you from wasting your money

Main purposes of a budget:Main purposes of a budget:

• Live within your income

• Achieve your financial goals

• Buy wisely

• Avoid credit problems

• Plan for financial emergencies

Your BudgetYour Budget

• A plan for spending and saving based on your income and your expenses

• You must first set goals

1. Estimate disposable income-(net income) take-home pay

2. Set aside predetermined amounts to save for long- and short-term goals

3. Estimate your expenses

Budget PartsBudget Parts• Fixed Expenses-

remain the same every month– Rent/house

payments– Gasoline– Insurance– Heating/utility costs

• Variable Expenses-different as needs/wants change– Telephone bill– Clothing– Food– Entertainment– Vacations

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Average Monthly Income Net Earnings (Take home pay) $1,188

Interest on Savings 5

Gifts 20

$1,213

Average Monthly Expenses Rent $350

Car loan 220

Car insurance 70

Food 160

Medical and Dental care 50

Clothing 80

Transportation 125

Entertainment 60

Gifts and contributions 40

Miscellaneous 40

$1,195

Savings AccountsSavings Accounts

• Help you establish credit worthiness– Proof of your ability to repay any loan

• Automatic Payroll Deductions– Money is withheld from your paycheck and sent directly

to your savings account

• Savings Clubs– Allow you to make regular deposits that cannot be

withdrawn until a certain date

• Interest– Money that the bank pays you for use of your money– Based on amount in your account multiplied by bank

rate (%)

Savings TermsSavings Terms

• Principal-the money in a savings earning interest

• Deposit-money given over to a bank for safekeeping

• APR-Annual Percentage Rate-interest

• Liquidity-the ease with which you can get your money out of the account/investment

• Diversify-to purchase a variety of investments to protect against large losses and to increase the rate of return

Before choosing a savings account, ask this…Before choosing a savings account, ask this…

• How safe is my money going to be in the savings account?

• How quickly can I withdraw money when I need it?

• Is the bank conveniently located and does it offer complete service?

• How much interest will I earn on my deposit?

• What penalty is there for an early withdrawal?

Where can you save?Where can you save?• Commercial Banks-

– offer checking, savings and many other services

• Savings Banks-

– deal mainly with savings plans and property loans

• Savings and Loan Associations-

– offer same services as commercial banks but specialize in mortgages and higher interest rate savings accounts

• Credit Unions-

– nonprofit and organized for benefit of certain groups of workers

• Brokerage Investment firms-

– sell accounts that may involve high risk and less convenience, but greater rate of return

Savings OptionsSavings Options• Mutual Funds-higher risk investments• Individual Retirement Accounts-IRA-

– account used to save money for retirement where interest earned is not taxed until the money is withdrawn. Cannot be withdrawn before age 59 ½.

• Savings Bonds-– when you buy one, you are lending money to the government– You buy a bond for half of the face value, it grows in value until it

matures when it can be redeemed for full face value

• Money Market Account-– you deposit money that is pooled with money from other savers

and then invested

• Certificates of deposit (CD)-– you deposit an amount of money for a fixed amount of time at a

stated interest rate

Checking AccountsChecking Accounts

• A substitute for using cash

• Check-

– a written document that authorizes the transfer of money from a bank account to a person or business

• You can write checks up to the amount of your balance

Verify your statement for correctnessVerify your statement for correctness

• Balanced checking account provides a practical record keeping system

• Overdraw-

– to write a check that cannot be covered by the funds in an account

• Bounce-

– be returned due to insufficient funds

• Float a Check-

– write a check when you know you do not have enough money in the account to cover it

• Insufficient Funds Fees-

– fees charged for bounced checks

Parts of a CheckParts of a Check

• Payee-– the company or person who the check is written to

• Drawer-– account owner who is authorized to sign the check

• Memo Line-– lists purpose of the check

41

Date_____________________

___________________________________________________Dollars

First Bank of the CapeHyannis, MA 02601

MEMO _________________ ____________________________

|:0111 01602I: 749 2454|| 41

Dennis, MA 02683

Pay to the order of_________________________________________ $_____________

PeabodyCards and Gifts

113 Old Cape Rd.

Feb. 15, 2000

Hassett Homes 400.00

Four hundred and 00/100

Endorsements Blank endorsement-an

endorsement that consists of only the endorser’s name

Restrictive Endorsement-limits the use of the check to the purpose given in the endorsement

Special (Full) Endorsement-includes the name of the person to whom the check has been transferred

For Deposit Only

Christie Ferrentino

Pay to the Order of Jeff Jarosz

Christie Ferrentino

Other Banking ServicesOther Banking Services

• Debit Cards– Allow you to manage your bank account through

ATM’s

– Automated Teller Machines-cash machine

– Requires a Personal Identification Number (PIN) and your card

• Banking On-Line-lets you manage your money from your home computer

Completing a Deposit SlipCompleting a Deposit Slip

First Bank of the Cape Dollars CentsHyannis, MA 02601 Cash

ChecksDate _________________ 1Checks and other items are received for deposit subject to 2the terms and conditions of this bank's collection agreement. 3

45

Peabody 6Cards and Gifts 7

113 Old Cape Rd. 8Dennis, MA 02683 Total

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Feb 14, 2000639 85 25 84 47 23 14 56

727 48

Reconciling Your AccountReconciling Your Account

1. Find your bank statement balance.

2. Enter the balance on the worksheet on the back of the statement.

3. Put all canceled checks in numerical order.

4. Check off each canceled check, each deposit and each service charge in your checkbook register. Enter any missing information.

5. Enter any outstanding deposits (made after statement was printed) on the statement.

6. Subtract outstanding checks from bank statement balance and balance should equal your checkbook.

Sources of CreditSources of Credit

Retail Stores

CommercialBanks

PrivateLenders

Credit Unions

PawnShops

FinanceCompaniesOther

Sources

Sources Of Credit

History of Cash and CreditHistory of Cash and Credit

1. Families used to produce all of their own goods and supplied all of the labor themselves for the necessities of life

2. Bartering and Trading Society-trade goods/services with others who needed them

3. Currency Exchange Economy-people are paid money for labor and use money to buy goods/services

– When crops failed or when people did not have enough money, the need developed for sources of credit

Credit’s HistoryCredit’s History

• 1800’s-credit was informal and interest was rarely charged

• 1900-interest rates dropped when bankers realized they could make money by lending money

• 1960’s-overuse of credit and high inflation rates brought federal legislation to protect consumers

Using Credit WiselyUsing Credit Wisely• Credit-

– sum of money a person can use before having to reimburse the credit lender

• It allows the person to receive a good or service now but to pay for it later

• Credit=Loan

• Establishing and maintaining a good credit rating is a necessity

– Your credit rating will affect your ability to borrow money, buy insurance, rent a car, lease a car or own a home

Credit Rating-Credit Rating-• a grade or score for a

borrower, based on how that person has paid their bills in the past

• Failure to pay taxes, filing for bankruptcy, divorce, application for a marriage license, having a child, being promoted at work, being involved in a lawsuit or being late with loan repayments will all show and affect your credit rating

• Contains information about you from a variety of sources

• Based on:

– Capacity-can you repay the debt?

– Character-will you repay the debt?

– Collateral-do you have other resources that can be used to pay the loan?

• You have legal access to your credit file-correct any errors you find

Credit LingoCredit Lingo

• Default-

– failure by borrower to pay money back

• Principal-

– original amount of money borrowed

• Interest-

– percentage of amount borrowed which must be repaid in addition to amount borrowed

Advantages of CreditAdvantages of Credit• Available in

emergencies

• Safer and more convenient-credit slips can provide identification and can record adjustments

• Lenders charge a finance charge-a fee based on the amount you owe

• The risk of overusing it-if you accumulate too much debt, you may not be able to make timely payments

– You may lose your collateral on secured loans

– Your financial reputation will suffer

Disadvantages of Credit

Establishing CreditEstablishing Credit

• Take on a part-time job and earn good references from your employer

• Get a co-signor for a small loan/store credit card

• Get a credit card to establish a payment history

• Offer collateral-resources that can be used to repay a loan if the borrower’s income is cut off

The Cost of CreditThe Cost of Credit

• Not all companies compute costs in the same way or charge the same amounts

• Annual fees-

– a fixed amount charged to your account no matter how often you use the account

• Finance charges-

– interest on your unpaid balance

– If you pay off your balance each month, you pay no finance charges

– APR-Annual Percentage Rate-the yearly cost of the loan expressed as a percentage

Credit LawsCredit Laws• Fair Credit Billing Act-steps for

consumers/creditors to follow in case of an error in a bill for a revolving credit account

• Fair Credit Reporting Act-gives consumers the right to get info about their credit file at a credit bureau for a fee

• Equal Credit Opportunity Act-race, age, sex and marital status may not be used as reasons for denying credit

• Truth in Lending Law-lender must provide info regarding all costs of borrowing to the consumer

Credit CardsCredit Cards• Open-ended form of credit

– Operate as a revolving charge account-charged for purchases made during the month and billed at end of month

– Finance Charge-must pay if bill is not paid in full

• Your Responsibility– Obey the agreement you signed with credit card

company– Pay for items you have charged and an accrued

interest

• Who issues credit cards?– Credit Card Companies, Banks, Retail Stores,

Gasoline Companies

Things to Remember about “Easy” CreditThings to Remember about “Easy” Credit

• Too much easy credit shows your potential to get in debt as a risk

• Recent changes to bankruptcy laws make it harder to ease out of debt is you cannot pay

• Don’t only pay minimum payments each month– $200 stereo with 16% interest and 10% annual

will take 6 years and 58% more

Installment Buying-LoansInstallment Buying-Loans

• Sometimes it is smarter to use cash and sometimes it is smarter to use credit

• Installment Loans-

– you receive money in a lump sum and pay it back in regular payments called installments

• Application fee-

– an amount of money charged to apply for a loan

• Down Payment-

– a sum or percentage of the total payment paid at the time of purchase

Making Major Purchases Requires Careful PlanningMaking Major Purchases Requires Careful Planning

• Consider financing alternatives to find the most cost effective option

• Consider– Operating Costs-gas, oil, maintenance,

insurance– Fixed Costs-costs that remain constant– Variable Costs-costs that change according to

needs– Depreciation-amount you lose as the car gets

older (30% in 1st year)– Cost of borrowing money-interest– Resale Value-amount of $ something used is

worth

When Making Major Purchases:When Making Major Purchases:

• Shop Locally

• Know Your Accessories

• Try to Get a Discount

• Get a Written Agreement

• Know Your Guarantee

• Research

Housing-no more than 30% of your incomeHousing-no more than 30% of your income

• Apartments-easy to find and afford– Pay rent to landlord, may have

to sign a lease• Landlord can not raise tenants

rent until lease is up• Tenant does not pay property

taxes

• Condominiums-apartment-type units that are purchased like a house– Pay a fee for upkeep of

grounds– Share space/building with

neighbors

• Mobile Homes-flexible and inexpensive– Usually depreciate

• Houses-offer pride of ownership and is an investment– Equity-amount of the

house owned by homeowner (amount paid off so far)

– Well cared for homes will appreciate (gain value)

– Must pay taxes on property and must tend to its needs

Home MortgageHome Mortgage

• Biggest debt you will incur in your lifetime

• Conventional Fixed Rate-

– fixed rate of interest and runs for a fixed period of time

• Adjustable Fixed Rate-

– interest rate varies according to the prime lending rate

• Closing Costs-

– attorney’s fees, title search, title insurance, points

What benefits from paying taxes can you name?What benefits from paying taxes can you name?

• There are 3 levels of government– Federal Government-runs the whole

country– State Governments-manage the 50

states– Local Governments-govern counties,

cities and towns

• All three levels of government need money to operate, so you must pay taxes to all three

TaxesTaxes

• Taxes-– payments that you make to support the

government and to pay for government services

– The responsibility of every citizen in a democratic country

• Voluntary Compliance-– the assumption that all citizens will pay

their income taxes

What happens if you don’t pay your taxes?What happens if you don’t pay your taxes?

IRS LingoIRS Lingo

• Filing Status-tax rates are determined by your marital status

• Deductions-expenses that allow people to subtract from their taxable income

• Exemptions-an allowance for every person dependant on taxpayer

• Gross Income-all taxable income you earn (wages, tips, salaries, interest, dividends)

• Taxable Income-amount that can be taxed after exemptions and deductions

Income Taxes-tax you pay on your income (money you make)Income Taxes-tax you pay on your income (money you make)

Other TaxesOther Taxes

• Sales Tax– Calculated as a percentage of the price of an item.

– This tax goes to the state or local government

– Rate varies from state to state

– Local sales taxes may be added to the cost of items

• Property Taxes– Main source of money for local governments

– Based on the value of property-land and buildings

Where do your tax dollars go?Where do your tax dollars go?

• Education-– public libraries

and public schools

• Transportation-– roadways and

mass transit, dams and airports

• Health-– hospitals and medical

research studies

• Military services• Postal services• Safety-

– law enforcement and fire protection

Here’s a list of services paid for in full or in part by your tax dollars:

Federal Income Tax ReturnsFederal Income Tax Returns

• You must complete and file an income tax return each year

• W-2-sent by employer showing earnings and deductions for a year

• W-4-filled out by employee on 1st day at work listing exemptions

• 1099-sent by bank reporting interest on savings accounts

• If you’re single and earn at least $6,400 in a year, you must file a tax return

• You must mail your return by April 15

1040EZ1040EZ

• Simplest to fill out, you can fill it out if:

– You’re single and earned less than $50,000 during the year

– You are not claiming an exemption for being over 65 or for being blind

– You have no dependants

Filing out a tax returnFiling out a tax returnGather the necessary information (W-2, statement of interest...)

Obtain the tax forms you’ll need

Take your time completing the forms

Keep a photocopy of the completed tax returns

Sometimes things go wrongSometimes things go wrong

• How can you plan for unexpected events?

• When you buy insurance, you pay an agreed-upon amount of money to an insurance company

• The company pays for losses caused by events that would otherwise ruin you financially

Insurance LanguageInsurance Language

• Insurance policy-a legal contract between a person buying insurance (policyholder) and an insurance company. It explains

– Who is covered

– Types of losses for which the company will pay

– Amounts the company will pay

– Cost of insurance

• Insurance coverage-refers to losses that an insurance company agrees to cover

Insurance LanguageInsurance Language• Benefit –

– money paid by an insurance company for a loss

• Beneficiary-– the policyholder

• Premiums-– the amount a policyholder pays an insurance

company

• Deductibles-– the portion of a loss that you pay before the

insurance company pays the remaining cost

• Claim-– an oral or written notice to an insurance company

Holding down insurance costsHolding down insurance costs

Types of Auto InsuranceTypes of Auto Insurance

• Bodily Injury and Property Damage-(Liability insurance)-Mandatory

– Covers damage or injury for which you’re responsible

– Doesn’t cover injuries or property damage to your car

• Personal Injury Protection-required-enables “no fault” payments to be made

• Uninsured Motorist Coverage-mandatory-covers you if you are in an accident caused by a driver with no insurance at all

• Auto Collision-optional-pays for restoration of your vehicle after an accident

• Auto Comprehensive-covers theft, fire, glass breakage, etc.

Buying Automobile InsuranceBuying Automobile Insurance

• Shop around

• Drive carefully

• Take driver education classes

• Buy only the coverage you need

• Raise your deductibles

• Take advantage of insurance discounts

Types of Health InsuranceTypes of Health Insurance

• Workers Compensation

• Basic Hospitalization-covers emergency room and other hospital services (including surgery) according to a schedule of fees and with limits on amounts paid

• Major Medical-

– covers a portion of your expenses that go beyond the schedules of limits

– Also covers everyday doctor expenses and “out of hospital” medical services

Health InsuranceHealth Insurance

• Major Medical Coverage-includes hospital and surgical expenses, doctor visits, prescription drugs and medical tests

– Requires you to pay a deductible and coinsurance-a percentage of your medical expenses

– Able to choose any hospitals and physicians you prefer

– Pay higher premiums and higher co-payments

• Health Maintenance Organization-no deductibles

– Members pay a small co-payment for doctor visits

– Choice of physicians is limited

• Preferred Provider Organization-offer low-cost advantages of HMO’s but allow more freedom of choice with doctors.

Other Types of Medical InsuranceOther Types of Medical Insurance

• Medicare-– federally sponsored form of medical insurance for

people who receive Social Security Benefits

• Medicaid-– federally sponsored form of medical insurance for

people on welfare• Group Plans-keep premium risks down by spreading

the risk over a large number of people– Have a deductible, coinsurance and major medical coverage

• Individual Plans-for those not insured by a group plan– Can be very expensive

Life Insurance- Provides money to your loved ones in case you dieLife Insurance- Provides money to your loved ones in case you die

• You’ll purchase a policy and pay premiums to an insurance company

• The company agrees to pay a benefit to your beneficiary if you die

• The premium amount depends on factors such as your age, health and type of policy you buy

• Ask:– Should you buy life insurance?

– How much life insurance do you need?

– What are some tips on buying life insurance?

Buyer Beware!Buyer Beware!

• Be a smart consumer

• Consumer Fraud-dishonest business practices trying to cheat you

• They succeed by taking advantage of the consumer’s search for a good deal

Consumer FraudConsumer Fraud

• Propaganda-

– gimmicks lure consumers into buying products that they do not really want or need

• Leader Advertising-

– merchant advertises a lead item at a bargain price and when the customer arrives, switches their attention to a higher-priced item (bait and switch)

• Fake Sales-

– goods are priced lower when the original price was too high

• Low Price Lures-

– offer low price work and then “discover” other “needed” repairs

• Pyramiding-– businesses that have salespeople report to a manager

who does less work but gets a large percentage of the profits

• Drug and Health Schemes-– wonder/miracle drugs, pills, creams or machines which

promise impossible results

• Substitute or Rebuilt Products-– door-to-door or telephone caller selling rebuilt/stolen

goods as new

• Con Artists-– a person who swindles others by gaining their confidence

Consumer Fraud

Protect Yourself-Know Your RightsProtect Yourself-Know Your Rights

• Know regular prices• Shop at different stores and compare• Learn the meaning of sales terms (fire clearance, red

tag, liquidation)• Do not buy on impulse• Read labels for care instructions and ingredients• Check to see if a container is open• Read all forms and contracts before you sign• Ask a lot of questions• Do business with reliable people• Use your Better Business Bureau

Seeking Redress (getting action to solve a problem)Seeking Redress (getting action to solve a problem)

1. Go in person to the place where you purchased item

2. Give them copies of sales slips, warranties, pictures of the damage

3. BE FIRM and describe problem-tell them what you want done

4. Write to the manufacturer, include all info and copies

5. Complain to a government consumer protection agency

6. Take legal action

Consumer GroupsConsumer Groups

• Many private groups investigate consumer complaints, educate the public on consumer issues and try to get customer legislation passed

– CAP Consumer Action Panels-formed by trade associations

– Consumers’ Union-publishes Consumer Reports and Consumers’ Research