Personal Finance

CREDIT CARDS

A typical credit card payment of $41.00 would be divided like this:

INTERESTINTEREST

$30.0071% of your 71% of your

paymentpayment

PRINCIPAL$11.0029% of your

payment

Based on $2,000 balance, 18% IR and minimum payment equal to 2% of balance.

Let’s suppose you have 3 credit card accounts:

Bank Balance Int. Rate Min.Paymt. $ in Interest

One Bank $1,300.00 15% $52.00 $16.25

Two Bank 1,700.00 18% 68.00 25.50

Three Bank 1,200.00 16% 48.00 16.00

TOTAL $4,200.00 $168.00 $57.75TOTAL $4,200.00 $168.00 $57.75

**the average American has 1515 credit cards in their wallet.

Let’s look at it another way:

Bank Balance Int. Rate Min.Paymt. $ in Interest

One Bank $10,350.00 15% $259.00 $129.38

Two Bank 4,300.00 18% 108.00 64.50

Three Bank 7,000.00 16% 176.00 93.33

TOTAL $21,650.00 $543.00 $287.21TOTAL $21,650.00 $543.00 $287.21

**for most people, $287.00 is a monthly car payment.

If you only paid the minimum payment AND you never charged another item, here is what it actually costs you to pay the accounts off:

Bank Repayment Amount Cost in Interest to You

One Bank $20,101.00 $9,751.00

Two Bank 9,836.00 5,536.00

Three Bank 14,344.00 7,344.00

TOTAL $44,281.00 $22,631.00TOTAL $44,281.00 $22,631.00

**AND if you’re a little late with the payment, the bank will add a $35.00 late

charge to the balance.

SAVING

Compound Interest

INTEREST RATE:INTEREST RATE: the the amount paid for borrowing amount paid for borrowing someone else’s money. It is someone else’s money. It is usually expressed as anusually expressed as an Annual Annual Percentage Rate (APR)Percentage Rate (APR)

A one-time A one-time $1,000 $1,000

investment with investment with a 6%, 9%, and a 6%, 9%, and

12% rate of 12% rate of returnreturn

How interest rates affect your Return on Investment (ROI)

How interest rates affect your Return on Investment (ROI)

Mary and John graduate from high school in the same year. Starting at age 18, Mary invests $2000 per year for 7 years and stops. John sees that Mary has saved a lot of money and begins investing $2000 per year at

age 25 and continues for the next 40 years. Who will have the most money

with which to retire at age 65?

Mary John

Mary’s investment of $14,000 resulted in $628,329 when she reached age 62.

John’s investment of $66,000 resulted in

$600,082 when he reached age 62.

SAVING

Rule of 72

The Rule of 72The Rule of 72……states that 72 divided by the interest rate will result in the number of years it will take your investment to double…...

SAVING

Diversification

Diversification -- not putting all financial “eggs” in one basket.

COMMODITIES

PENNY

STOCK

SPECULATIVESTOCKS/BONDS/

MUTUAL FUNDS

COLLECT-IBLES

FINANCIALFINANCIAL

PLANNINGPLANNING

PYRAMIDPYRAMID

Highest Risk/Highest Risk/

Highest Highest EarningsEarnings

Lowest Risk/Lowest Risk/

Lowest Lowest EarningsEarnings

BLUE CHIP COMMON

STOCK

REAL ESTATE

GROWTH MUTUAL FUNDS

BALANCED MUTUA L FUNDS

HIGH-GRADE PREFERRED

STOCK

HIGH-GRADE CONVERTIBLE

BONDS

MONEY MARKET

ACCOUNTS or MUTAL FUNDS

HIGH-GRADE MUNICIPAL BONDS or

MUTUAL FUNDS

HIGH-GRADE CORPORATE

BONDS or MUTUAL FUNDS

INSURED SAVINGS/ CHECKING ACCOUNTS

U.S. SAVINGS BONDS

CERTIFICATES OF DEPOSIT

TREASURY ISSUES

AUTOMOBILE INSURANCE

HOMEOWNERS OR RENTERS

INSURANCE

LIFE INSURANCE

MEDICAL/ DISABILITY INSURANCE

LIABILITY INSURANCE

SAVING

Taxes & Inflation

INFLATION -- increase in the prices of goods and services caused by rapid expansion of the money supply.

RECESSION -- extended downturn in economic activity in excess of 3 months.

DEPRESSION -- extended downturn in economic activity in excess of 6 months.

One way the government measures inflation is the

Consumer Price Consumer Price Index (CPI)Index (CPI)

CPI -- prime indicator of inflation and recession

• Comprised of a market basket of goods and services.

• Measures current cost of living against base year (1996)

Value at end of 1995 of $1 invested in 1926

Purchasing Power of the Dollar

$1.00

$.25

1970 1980 1990

The Impact of Inflation

• 1973$ 4,012

• 1993$ 18,924

• 2013$ 40,084

• 1973$ 32,900

• 1993$133,500

• 2013$292,515

The Threat of Inflation & Taxes

$10,000 invested for a year

Gross Return

After Tax (28% bracket)

Less Inflation (3%)

Net Return

4%

$10,400

$10,288

$(300)

$9,988

8%

$10,800

$10,576

$(300)

$10,276

10%

$11,000

$10,720

$(300)

$10,420

SAVING

CDs

CD -- a time deposit that gains interest. There is typically a penalty for early withdrawal.

Jumbo CD -- a time deposit of $100,000 or more.

Brokered CD

• Sold by a stock broker to a client.

• Stock broker shops for best interest rate before selling to a client.

• Can be sold without penalty on the secondary market (similar to a bond)

SAVING

Bonds

Bond

Ratings

Moody’s Standard& Poors

Meaning

Aaa AAA

Best quality, with the smallestrisk, issuers are exceptionallystable and dependable.

Aa AA

High quality, with a slightlyhigher degree of long-term risk.

A A

High-to-medium quality, withmany strong attributes butsomewhat vulnerable tochanging economic conditions

Baa BBB

Medium quality, currentlyadequate but perhaps unreliableover the long term.

I NVESTMENTGRADEBONDS

Ba BB

Some speculative element withmoderate security, but not wellsafeguarded.

B B

Able to pay now but at risk ofdefault in the future.

Caa CCC

Poor quality, clear danger ofdefault.

Ca CC

Highly speculative quality, oftenin default.

C C

Lowest rated, poor prospect ofrepayment, though may still bepaying.

__ D In default.

JUN KBONDS

BONDS

NOTE: Junk Bonds have been known to have interest rates as high as 12% at a time when government bonds were only 8%.

BUYING BONDS AT A DISCOUNT

Suppose Al buys a $1000 bond with a coupon rate of 5 percent. The person who buys the bond (Al) is called the “holder,” while the seller of the bond is called the “issuer.”

Interest rates go up to 6 percent, and Al needs to sell the bond. (noone wants to buy a 5 percent bond when the interest rate is 6 percent)

Al offers to sell the bond to Patsy “at a discount” for $950--taking $50 off the $1000 value of the bond.

Patsy now owns a par value $1000 bond for $950.

FINANCIAL MARKETS

Markets in which money is lent for periods longer than one year are called CAPITAL

MARKETS.

When money is lent for less than one year, it is called a MONEY MARKET. Money market

investments are NOT insured by FDIC (Federal Deposit Insurance Corporation).

FINANCIAL MARKETS

Financial assets that can only be redeemed by the original holder are sold on a PRIMARY

MARKET. (ex: savings bonds, small CDs)

Financial assets that can be resold are sold on SECONDARY MARKET. This option for

resale provides liquidity to investors.

**For example: if the mortgage on a house does not meet the banks’ criteria for sale on the secondary market, the borrower may have to pay a higher interest rate for their mortgage.

SAVING

Mutual Funds

What Is A Mutual Fund?

A mutual fund is a professionally managed pool of money.A mutual fund is a professionally managed pool of money.

$$ Company “B”Company “B”Company “B”Company “B”

Company “C”Company “C”Company “C”Company “C”

Company “A”Company “A”Company “A”Company “A”

Mutual Funds – A collection of stocks,

bonds, or other securities bought by a group of investors and managed by a professional investment company.

•Money is Professionally Managed.

•Diversified.

•Flexible.

•Marketable.

•You Have Control.

Why Own One?

Open-end funds –(most common)

the fund will sell as many shares as investors want. Cannot trade in stock market, only buy or sell through mutual fund company.

Closed-end funds -- have a limited number of shares for trading on an exchange or OTC.

Load funds -- includes a sales charge (usually 5%), + fees. Purchased through a broker.

No-load funds -- charge a management fee, not a commission.

Net Asset Value (NAV) –

The total value of the fund’s holdings divided by the number of shares. (= price per share)

A Hypothetical ExampleInvesting $100 per month with different rates of return

10 years 20 years 30 years 40 years

12%10%8%6%

10 years 20 years 30 years 40 years

12%10%8%6%

$1,188,240$1,188,240

$637,680$637,680$351,430$351,430$200,140$200,140

$200,140$200,140$351,430$351,430$637,680$637,680

$1,188,240$1,188,240

$100,950$100,950$150,030$150,030$227,930$227,930$352,990$352,990

$46,440$46,440$59,290$59,290$76,570$76,570$99,910$99,910

$16,470$16,470$18,420$18,420$20,660$20,660$23,230$23,230

6%6%8%8%

10%10%12%12%

Assumed RatesAssumed Rates 10 Years10 Years 20 Years20 Years 30 Years30 Years 40 Years40 Years

$100 Investment Per Month$100 Investment Per Month

The hypothetical illustration and the 6%, 8%, 10% and 12% nominal rates compounded monthly, are not guaranteed or intended to demonstrate the performance of any actual investment and assumes $100/month investment. Assumes payments are made at the beginning of the compounding period and are rounded to the nearest $10.

WhenYou Become Financially

Independent Depends on How Much Money

You Can Invest.

WhenYou Become Financially

Independent Depends on How Much Money

You Can Invest.

At age 65, could you live on $140,000 / Year?

At age 65, could you live on $140,000 / Year?

40 Year Plan -- 40 Year Plan -- Invest $120/Mo.

• 30 Year Plan -- Invest $400/Mo.

• 20 Year Plan -- Invest $1,400/Mo.

Invest $6,025/Mo.• 10 Year Plan --

@ 12% Average Rate of Return

To do that, you need to accumulate $1,400,000

The High Cost of Waiting

Cost to wait includes monthly contributions. This hypothetical example demonstrates compounding at specified rate and not Cost to wait includes monthly contributions. This hypothetical example demonstrates compounding at specified rate and not the performance of any actual program. No allowance for taxes, applicable fees or inflation. Rate of return is nominal, the performance of any actual program. No allowance for taxes, applicable fees or inflation. Rate of return is nominal, compounded monthly.compounded monthly.

Don’t Procrastinate!Don’t Procrastinate!

Cost to WaitCost to Wait

$ 61,590$ 61,590

$254,850$254,850

Total in 40 YearsTotal in 40 Years

$637,680$637,680

$576,090$576,090

$382,830$382,830

Begin SavingBegin Saving

NowNow

In One YearIn One Year

In Five YearsIn Five Years

Saving $100 per month at 10% returnSaving $100 per month at 10% return

The Best IRA Option for you The Best IRA Option for you Traditional IRATraditional IRA

ContributionsContributions

Contribution/Distribution age limitContribution/Distribution age limit

EarningsEarnings

Withdrawalsafter age 591/2Withdrawalsafter age 591/2

Up to $4,000Tax DeductibleUp to $4,000Tax Deductible

70 1/270 1/2

Tax-deferredTax-deferred

Roth IRA Roth IRA Up to $4,000Non-deductibleUp to $4,000Non-deductibleNo age limitNo age limit

Tax-deferredTax-deferred

Earnings tax-free if Roth IRA account has been open at least 5 years

Earnings tax-free if Roth IRA account has been open at least 5 years

All of the money will be taxable upon withdrawal

All of the money will be taxable upon withdrawal

Money taken will be taxable w/10% penalty

TAX FREE MONEYno matter how much is withdrawn!

Taxes before 59 1/2

Comparing IRA Income Participation Limits

Traditional IRA • Full eligibility income limits for

retirement plan participants

Roth IRA• Full eligibility income limits

(regardless of retirement plan participation)

Full EligibilityFull Eligibility

2006$80,000$50,000

2006$80,000$50,000

Married

Single

Married

Single

2006 and onMarried $150,000Single $95,000

2006 and onMarried $150,000Single $95,000

Famous last words ...

“... if only I had invested…"

SAVING

Stocks

Corporation:

A legal entity that can conduct business in its own name in the same way that an individual

does and that is owned by stockholders.

Financial Markets

The Stock Market– Stock represents a claim to partial ownership in a firm and a

claim to the profits that the firm makes.– The sale of stock to raise money is called equity financing.

• Compared to bonds, stocks offer both higher risk and potentially higher returns.

– The most important stock exchanges in the United States are the New York Stock Exchange, the American Stock Exchange, and NASDAQ.

• Share of stock-- represents

ownership in a corporation or a claim

on the assets of a corporation.

Dividends -- optional payments of annual profits to stockholders.

Growth Stock -- stock where the dividends are reinvested into the stock.

Initial Public Offering (IPO) --when stock is initially offered to the public.

ADVANTAGES OF A CORPORATION

•Corporations continue to exist even if one or more owners of the corporation sell their shares or die.

•Stockholders are not personally liable for the debts of the corporation; they have limited liability.

•Corporations are usually able to raise large sums of money by selling stock.

DISADVANTAGES OF CORPORATIONS

•Corporations are subject to double taxation. (corporate income tax and personal income tax)

•Corporations are difficult to set up.

Stock split -- when a stock’s high price is discouraging new investors, the company splits the stock to a lower price; thus creating more shares at a lower price.

For example:

100 shares at $50 per share equals

200 shares at $25 per share

Would you invest in this company?

Microsoft Corporation 1978

First Sep 21, 1987 2 for 1 Sep 18 = 114.50

Sep 21 = 53.50

Second Apr 16, 1990 2 for 1 Apr 12 = 120.75

Apr 16 = 60.75

Third Jun 27,1991 3 for 2 Jun 26 = 100.75

Jun 27 = 68.00

Fourth Jun 15, 1992 3 for 2 Jun 12 = 112.50

Jun 15 = 75.75

Fifth May 23, 1994 2 for 1 May 20 = 97.75

May 23 = 50.63

Sixth Dec 9, 1996 2 for 1 Dec 6 = 152.875

Dec 9 = 81.75

Seventh Feb 23, 1998 2 for 1 Feb 20 = 155.13Feb 23 = 81.63

History of Microsoft Stock SplitsHistory of Microsoft Stock Splits Symbol:Symbol: MSFTMSFTIPO: IPO: March 13, 1986March 13, 1986 Last updated:Last updated: August 18, 1998August 18, 1998

History of Microsoft Stock SplitsHistory of Microsoft Stock Splits Symbol:Symbol: MSFTMSFTIPO: IPO: March 13, 1986March 13, 1986 Last updated:Last updated: August 18, 1998August 18, 1998

First Sep 21, 1987 2 for 1 Sep 18 = 114.50

Sep 21 = 53.50

SecondApr 16, 19902 for 1 Apr 12 = 120.75

Apr 16 = 60.75

Third Jun 27,1991 3 for 2 Jun 26 = 100.75

Jun 27 = 68.00

Fourth Jun 15, 1992 3 for 2 Jun 12 = 112.50

Jun 15 = 75.75

Fifth May 23, 1994 2 for 1 May 20 = 97.75

May 23 = 50.63

Sixth Dec 9, 1996 2 for 1 Dec 6 = 152.875

Dec 9 = 81.75

SeventhFeb 23, 1998 2 for 1 Feb 20 = 155.13Feb 23 = 81.63

2 shares = $107.00

4 shares = $243.00

6 shares = $408.00

9 shares = $681.75

18 shares = $910.74

36 shares = $2943.00

72 shares =

$5877.36$5877.36

MORTGAGE TYPESMORTGAGE TYPES

FixedFixed

•30 years vs. 15 years The 30-year mortgage has lower monthly payments, yet ultimately costs more; the 15-year mortgage mortgage requires higher monthly payments, but builds equity faster.

AdjustableAdjustable•home loans in which the interest rate changes periodically, rising or falling with an index.

•Advantage: Lower interest rates than the fixed.

•good for borrowers who expect to move within the next few years.

•0ne-year ARMs, in which the initial interest rate changes after one year and then is adjusted every year thereafter; and 3/1 and 5/1 ARMs, in which the initial rate changes after three or five years, then is adjusted annually

BALLOON MORTGAGEBALLOON MORTGAGE:: the payments are calculated over an amortization period of perhaps 15 or 30 years. But the remaining principal balance of the mortgage is payable in full after a fixed, agreed period, often 5, 7 or 10 years. Common with seller financing and commercial loans.

REVERSE MORTGAGEREVERSE MORTGAGE::

•Best for retired people

•You remain the owner of your home just like when you had a forward mortgage. You are still responsible for paying your property taxes and home-owner insurance and for making property repairs.

• When the loan is over, you or your heirs must repay all of your cash advances plus interest. Reputable lenders don't want your house; they want repayment.

MORTGAGES-LOANS with HIGHER RATES:MORTGAGES-LOANS with HIGHER RATES:

•Mobile homes: in financing, the key is the word "mobile." The less mobile a manufactured home is, the better the financing deal a consumer can get.

•Vacant land: land loans are riskier for lenders because the loan's collateral, the property, isn't currently being used. That makes it easier for the owner to walk away and leave the lender with the land. Because of that, down payments and interest rates are higher for land loans than they are for mortgage loans.

CHOOSE YOUR PATH

Retirement

Working 36Working 3636

100 People At Age 65100 People At Age 65

Source: 2005 Department of Health and Human Services

Deceased 5Deceased 555

OK 4OK 444

Wealthy 1Wealthy 1

1154

Dependent 54Dependent 54

The Wealthy 1%The Wealthy 1%

Source: Department of Health and Human Services

CEO/President 10%CEO/President 10%

10%10%

Salesperson 5%Salesperson 5%

5%5% Lottery/ 1%InheritanceLottery/ 1%Inheritance1%1%

Doctor/Attorney 10%Doctor/Attorney 10%

10%10%

Entrepreneur 74%Entrepreneur 74%

74%

Most People Don’t Plan To Fail, They Fail To Plan

Most People Don’t Plan To Fail, They Fail To Plan

Bank Accounts

Bank Accounts

Mor

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age

Credit C

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Credit C

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Savings Accounts

Savings Accounts

Mutual Funds Mutual FundsA

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ome

Aut

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Hom

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401(k

)

401(k

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Life InsuranceLife InsuranceYOUYOU