BONUS CHAPTER D Managing Personal Finances McGraw-Hill/Irwin Copyright © 2015 by the McGraw-Hill Companies, Inc All rights reserved LEARNING OBJECTIVES Outline the six steps for controlling your assets Explain how to build a financial base, including investing in real estate, saving money, and managing credit Explain how buying the appropriate insurance can protect your financial base Outline a strategy for retiring with enough money to last a lifetime D-2 ALEXA VON TOBEL LearnVest • Started LearnVest after graduating from Harvard and jobs with Morgan Stanley and Drop.io • Von Tobel believed the cost structure for financial plans were too pricey for most consumers • She focuses on the 50/20/30 formula - 50% of pay goes to essentials - 20% of pay is saved - 30% of pay goes to lifestyle D-3 NAME that COMPANY 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 SIX STEPS to CONTROL YOUR FINANCES LO D-1 Take an inventory of your financial assets Keep track of all your expenses Prepare a budget Pay off your debts Start a savings plan Borrow only to buy assets that increase in value D-5 MANAGING YOUR HOUSEHOLD BUDGET LO D-1 • A household budget generally includes: - Mortgage or rent - Food and clothing - Vehicles and furniture - Insurance needs - Other expenses D-6 POSSIBLE COST-SAVING CHOICES LO D-1 D-7 HOW MONEY GROWS LO D-1 D-8 EASY-ish BUDGET CUTS LO D-1 Cut back on gourmet groceries and use coupons Cut down your cell phone bill Cut out the cable television Cut down on nights out Cut the clutter in your house Source: Kiplinger’s Personal Finance D-9 BILLIONAIRE’s TAB LO D-1 Insights into a Lux Lifestyle Source: Forbes, www.forbes.com, accessed November 2014 D-10 WHAT’s YOUR SCORE? LO D-2 How You Might Rate on a Credit Score D-19 TEST PREP • 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-20 INSURING YOUR LIFE LO D-3 • 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 D-21 PURCHASING ANNUITIES LO D-3 • 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: Fixed annuities Variable annuities D-22 OTHER INSURANCE PROTECTION LO D-3 • 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 D-23 WHERE HEALTHCARE MONEY GOES Source: U.S Department of Health and Human Services LO D-3 D-24 WHAT to KNOW ABOUT HEALTH SAVINGS ACCOUNTS LO D-3 Your employer is likely to offer HSA options The plans can be costly but withdrawal for medical bills is tax-free They’re not for everyone HSA accounts can double as retirement accounts Source: Money Magazine, money.cnn.com, accessed November 2014 D-25 SOCIAL SECURITY LO D-4 • 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 D-26 INDIVIDUAL RETIREMENT ACCOUNTS LO D-4 • Individual Retirement Accounts (IRAs) Taxdeferred 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 D-27 INDIVIDUAL RETIREMENT ACCOUNTS LO D-4 • Roth IRA Does not give an up-front tax deduction but earnings grow tax-free and are tax-free when they are withdrawn • MyIRA A new Roth IRA-type retirement savings plan for low- and middle-income individuals D-28 401(k) PLANS LO D-4 • 401(k) Plan An employer-sponsored savings plan that allows you to deposit a set amount of pretax dollars and collect compounded earnings taxfree until withdrawal D-29 BENEFITS of 401(k) PLANS LO D-4 • Three benefits of 401(k) plans: Contributions reduce your present taxable income Tax is deferred on the earnings Many employers will match your contributions D-30 KEOGH PLANS LO D-4 • 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 D-31 PLANNING for THOSE WHO WILL INHERIT LO D-4 • 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 D-32 TEST PREP • 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-33 ... Not all credit cards are equal Check sites like CardRatings.com or CreditCards.com to find a fit D- 15 CREDIT CARDS and DEBT LO D- 2 • 50% of college students have four or more credit cards • Only... • If you feel managing a credit card would be too difficult, try a debit card D- 16 CREDIT CARD ACT of 2009 LO D- 2 • Created new consumer credit card protections and went into effect in February... fund is expected to be hard pressed because of the growing number of older adults D- 26 INDIVIDUAL RETIREMENT ACCOUNTS LO D- 4 • Individual Retirement Accounts (IRAs) Taxdeferred investment plans