Term
|
Definition
| Level of affluence we achieve. |
|
|
Term
|
Definition
| The way you live your life- Spiritual aspects |
|
|
Term
| Financial “Rules of Thumb” |
|
Definition
Debt Rule- Less than 20% of take-home pay
Housing Rule- No more than 30% of take-home pay
Savings Rule- At least 10% of take-home pay
Giving Rule- At least 10% of take-home pay |
|
|
Term
| Steps to achieving your goal |
|
Definition
1. Where do you stand financially?
2. Put yourself on a budget!
3. Insure yourself against financial ruin.
4. Set up a regular savings plan
5. Gets your debts under control
6. Start saving for retirement |
|
|
Term
Financial “Rules of Thumb”
1. Where do you stand financially? |
|
Definition
Track Spending
Develop Financial Statements |
|
|
Term
Financial “Rules of Thumb”
2. Put yourself on a budget! |
|
Definition
Not a restrictive document
A plan for spending |
|
|
Term
Financial “Rules of Thumb”
3. Insure yourself against financial ruin. |
|
Definition
Health/Disability
Life/Casualty
Automobile |
|
|
Term
Financial “Rules of Thumb”
4. Set up a regular savings plan |
|
Definition
“Fun” savings
Emergency savings |
|
|
Term
Financial “Rules of Thumb”
5. Gets your debts under control |
|
Definition
Avoid interest charges!
Stay within the “debt rule” |
|
|
Term
Financial “Rules of Thumb”
6. Start saving for retirement |
|
Definition
Social security?
Pension? (defined benefit plan) (now defined contribution plan)
Self-funded |
|
|
Term
| Harness the power of compounding |
|
Definition
| by saving a consistent amount each month for long-term goals. |
|
|
Term
|
Definition
Two Kinds
Simple- =principal x rate x time
Compound- interest is earned on interest. |
|
|
Term
|
Definition
Nominal- 5%
Effective Rate- 5.063% |
|
|
Term
| How much you earn depends on: |
|
Definition
frequency of compounding
balance on which interest is paid
interest rate applied |
|
|
Term
|
Definition
|
|
Term
|
Definition
| lifework chosen by a person to use personal talent, education, and training |
|
|
Term
| How do you develop a career plan? |
|
Definition
1. Assess your values and interests
2. Identify one or more appropriate and desirable career fields.
3. Match your abilities, experiences, and education with your chosen career field
4. Take advantage of networking opportunities
5. Align yourself with tomorrows employment trends |
|
|
Term
|
Definition
Career plans and goals: Initial Career Goal:
Your career plan should be realistic and flexible
You should reassess your career every few years |
|
|
Term
|
Definition
1. Map out your career plan by setting benchmarks as you move up the career ladder.
2. Identify your career planning values and live them in your job selection every day
3. Continually enhance your education and professional training
4. Seek out mentors on the job and in other professional settings
5. Join and be active in professional associations relevant to your career |
|
|
Term
| How do you find job opportunities? |
|
Definition
Classifieds
Internet
Networking
Career fairs
Employment agencies |
|
|
Term
|
Definition
1. Develop financial goals and update and revise them frequently
2. Track your net worth annually
3. Develop a cash-flow statement and spending plan every month to ensure that you spend significantly less than you make
4. Use an uncomplicated but effective financial record keeping system
5. Openly and honestly communicate about money matters with loved ones on a regular basis |
|
|
Term
|
Definition
| require paying attention to the details of your personal finances |
|
|
Term
|
Definition
S-Strategic
M-Measurable
A-Achievable
R-Realistic
T-Time Bound |
|
|
Term
|
Definition
|
|
Term
|
Definition
What is owed
Short-term- Current liability
Long-term liability |
|
|
Term
|
Definition
-What is left
Net Worth formula
assets-liabilities=net worth |
|
|
Term
|
Definition
The Cash-Flow Statement tracks where your money came from and went
Income
Expenses
Surplus or Deflict
Collect and organize the financial records necessary for managing your personal finances
Achieve your financial goals through budgeting (a plan) |
|
|
Term
|
Definition
transfer funds quickly
loses its value if its not invested
protect against unexpected loss of lifestyle
some short term savings readily available |
|
|
Term
|
Definition
Like Regions
Full service banks
Traded publicly in stock |
|
|
Term
|
Definition
| Taking peoples savings and loaning it to others |
|
|
Term
|
Definition
Non profit
“share” account- savings |
|
|
Term
|
Definition
| A letter of introduction sent to a prospective employer to get an interview. |
|
|
Term
|
Definition
Savings accounts
Checking Accounts
Consumer Loans |
|
|
Term
| Types of Financial Institutions |
|
Definition
Commercial Banks
Savings Banks
Credit Unions |
|
|
Term
| Why is a cash balance so important? |
|
Definition
| The cash in your wallet is expensive. If you remember our lesson about the Time Value of Money from last class, you will remember that money grows if it is deposited into an interest bearing account. Likewise, if you use a non-interest bearing checking account, you also are running the risk of sacrificing potential interest earnings…this is called an |
|
|
Term
|
Definition
| the value of what is given up whenever you make and decision. |
|
|
Term
| Why are savings important? |
|
Definition
To ensure that you have cash on hand if you need it quickly.
You can transfer funds between accounts to pay a larger than expected bill thus guaranteeing the integrity of your budget.
To protect against loss of lifestyle in a major setback (loss of job, extended illness, etc.)
To meet a short term goal—a vacation, for example.
To meet a long-term goal—a down payment for a house or vacation home. |
|
|
Term
| Americans, on average, save around....annual income |
|
Definition
| 2% of annual income…compared to Europeans and Japanese who often save 10% or more. |
|
|
Term
| How do we manage our cash? |
|
Definition
| By carefully choosing a financial institution. |
|
|
Term
|
Definition
| Day-to-day checking and savings, safe-deposit boxes, Travelers checks, certified checks, free notary service, hours of operation, friendliness of personnel. |
|
|
Term
|
Definition
| Competition between banks have driven costs down on products (checking accounts, transaction fees for ATM, etc.) and have increased interest rates. However, when you overdraw your account, you will encounter higher fees for the privilege of not “bouncing” a check. |
|
|
Term
|
Definition
| Virtually all financial institutions are federally insured. FDIC (Federal Deposit Insurance Corporation) and NCUSIF (National Credit Union Share Insurance Fund). |
|
|
Term
| Types of Financials Institutions |
|
Definition
Commercial Banks
Savings Banks
Credit Unions |
|
|
Term
|
Definition
| Full Service bank…checking, savings, personal and business loans, trust services, safe-deposit boxes, mortgages, brokerage services. Most commercial banks were started to serve businesses, they now are mostly viewed as a primary place for personal banking as well. Due to mergers in recent years, there are fewer, but larger banks: AmSouth + Regions = Regions; SouthTrust = Wachovia, etc. |
|
|
Term
|
Definition
| At one time known as Savings and Loan Associations. Traditionally served consumers through savings accounts and loans, mostly for home mortgages. Now they are almost indistinguishable from commercial banks |
|
|
Term
|
Definition
| By definition, are a non-profit and are owned by “members” (depositors and borrowers). Savings accounts are called “share” accounts and checking is called “share draft” accounts. Because they are non-profit, they often pay higher interest on savings and offer lower interest in loans. |
|
|
Term
|
Definition
| Non fixed time desposits. No minimum balance required but a minimum is typically charged to open an account. Withdrawals are unlimited (as long as funds are available). |
|
|
Term
|
Definition
| Money Market Deposit Account (MMDA): Pays interest that rises and falls with market rates. Typically requires a higher minimum to open and maintain an account. Usually the number of withdrawals are limited per month. |
|
|
Term
|
Definition
| A Fixed-Time Deposit. You must commit to having your funds inaccessible for a set amount of time to earn a stated rate of interest. Typically the interest rate is higher for a fixed term deposit, but it is much less liquid. |
|
|
Term
|
Definition
| Typically require you to have a minimum balance on your account. This provides you with “free” checking or other services. If you fall below minimum, you will pay a fee for the services. |
|
|
Term
|
Definition
| Typically no minimum balance, but often a charge per-check fee. May be a good choice for folks who write few checks per month. |
|
|
Term
|
Definition
| Allows you to write a check for more than the amount you have in your account. Usually associated with a savings account. Instead of charging the $29 fee, the fee may be as low as $10 and the money is drawn from your savings account to cover the transaction. |
|
|
Term
|
Definition
| Negotiable Order of Withdrawal—a combination checking/savings account (checking |
|
|
Term
| “Bouncing a Check” – Bank can take one of two actions:1. |
|
Definition
| 1. Mark it as “insufficient funds” and return it to the person to whom it was written. The bank will mail you a notification whereupon you will have to deposit the money into your account to cover the check and pay a fee (up to $30). The retail establishment may also charge you a fee…can be up to $20 or more…for the inconvenience you caused them. So, a bounced check could cost you $50 or more. |
|
|
Term
| “Bouncing a Check” – Bank can take one of two actions:2. |
|
Definition
2. The bank may cover the amount of the check and charge you a fee for the service. Typically they draw from an attached savings account…so you lose your savings, plus you pay a fee for the privilege of having the bank cover your check.
If you knowingly write a check for more than you have in your account, it is considered fraud and it is against the law. |
|
|
Term
| Stopping Payment on a Check |
|
Definition
| Suppose you write a check to a service provider and the provider says that they lost the check. Do you write another check to them? You can, and should…but be sure that the first check, if found, can’t be cashed. You do this by stopping payment on that check. Call the bank to stop payment…you may need to complete some paperwork, and you may be charged a fee. But it often is much better than having two checks go through for the same payment. |
|
|
Term
|
Definition
| Most common; the person the check is made out to signs the back of the check. If you lose a check after endorsing it, it can be cashed. |
|
|
Term
|
Definition
You can assign the check to a third party by signing the check on the back as follows:
Pay to the order of
[name]
[your signature] |
|
|
Term
|
Definition
| Indicating “For Deposit Only” and including a checking account number restricts the check to only being deposited into a specific account. |
|
|
Term
|
Definition
| A person check for which the bank has guaranteed payment. When the bank certifies a check, the funds are immediately withdrawn from the person’s account and set aside for payment by the bank when the check is presented. This makes the payment of the check the bank’s responsibility. This check looks like any other check, but has the words “certified” stamped on its face. There usually is a small fee for a certified check. |
|
|
Term
|
Definition
| This check is not drawn on a personal account, but the money is transferred to the bank and the bank writes a check which guarantees payment. There is also a fee for this type of guaranteed check. |
|
|
Term
|
Definition
| A check issued by a bank that is negotiable in many places (even foreign countries) to limit the amount of cash a person has to carry. |
|
|
Term
|
Definition
| Important source of consumer credit. We will discuss this further when we discuss credit options on Thursday (10-13). |
|
|
Term
|
Definition
| MasterCard and Visa are bank credit cards. Also discussed next time. |
|
|
Term
|
Definition
| is a payment required by a local, state, or federal government of individuals and organizations that have property, receive income, or engage in certain activities. |
|
|
Term
| Benefits Received Philosophy |
|
Definition
| Philosophy of taxation stating that those who receive the benefits of a particular public expenditure should pay for it |
|
|
Term
| Ability-to-pay Philosophy |
|
Definition
| Philosophy of taxation stating that those with higher incomes should pay proportionally more taxes than those with lower incomes |
|
|
Term
|
Definition
| Tax approach requiring those who earn more to pay more in taxes |
|
|
Term
|
Definition
| Tax approach takes a smaller percentage of income as income rises |
|
|
Term
|
Definition
| The tax rate applied to the last dollar of earnings |
|
|
Term
|
Definition
| Amount of taxes paid divided by income, also called the effective tax rate |
|
|
Term
|
Definition
| taxes paid by individuals to the US Government and is considered a progressive tax; makes up 45% of federal revenues |
|
|
Term
| State and Local Income Taxes |
|
Definition
| taxes individuals pay to local and state governments; constitutes a much smaller proportion of an individual’s taxes than the federal tax. State taxes are less critical to state revenues than the federal tax; some, but not all, local governments assess an income tax |
|
|
Term
| Social Security and Medicare Taxes |
|
Definition
technically not a “tax” but a “contribution.” Listed on paystub as “FICA.” 60% of taxpayers pay more in FICA than in Federal Income Tax.
FICA = Federal Insurance Contributions Act (1935). A contribution of 7.65% on gross earnings. Social Security (old age pension, disability, etc.) = 6.2%; Medicare (medical) = 1.45%. Limit on earnings in 2008 = $102,000; maximum contribution = $6,324 |
|
|
Term
|
Definition
| Most of the revenue collected by local governments comes from property taxes paid by homeowners and businesses owning real estate; Based on the value of the property’s value; some states also collect a tax on the value of autos and boats (personal property tax) |
|
|
Term
|
Definition
| A tax assessed on retail purchases stated as a percentage of the purchase price; some states exempt citizens from taxes on “necessary items” like food, medication, and medical care. |
|
|
Term
|
Definition
| A tax levied on the purchase of certain items (typically gasoline, alcohol, tobacco, and certain services like airline tickets) |
|
|
Term
| State and Local Licensing Fees |
|
Definition
| Vary widely across the country; paid for the privilege of engaging in certain activities in a state (hunting, fishing, driving, getting married or divorced, entrance to parks, etc.) |
|
|
Term
|
Definition
| An estate is defined as a person’s net worth at the time of death and in certain cases a tax may be levied on certain sized estates; gifts are not taxable to the recipient, but the giver may be subject to a federal gift tax. |
|
|
Term
|
Definition
| (Internal Revenue Service)—the federal agency charged with collecting federal income taxes |
|
|
Term
|
Definition
| A form (or forms) a taxpayer completes to report earned income and tax liability to the IRS |
|
|
Term
|
Definition
| A deduction reduces taxable income (deductions are allowed for items like charitable contributions, medical expenses, and home mortgage interest) |
|
|
Term
|
Definition
| A credit reduces taxes owed after all tax liability has been calculated (Credits are allowed for expenses like child care, certain educational expenses, and for a limited time, expenses like energy savings improvements to your primary residence) |
|
|
Term
|
Definition
Receiving goods or services on the basis of an agreement that the borrower will repay the lender within a specified time period at a specified rate of interest.
Total consumer credit is about $2 Trillion (excludes mortgages and HELOC)
Americans carry over one billion credit cards
Over one million Americans file for personal bankruptcy each year (twice as many as 10 years ago) |
|
|
Term
|
Definition
Installment Loans
Mortgage Loans and Home Equity Loans
Revolving Credit |
|
|
Term
|
Definition
| Consumer can make a variety of purchases up to a certain dollar (credit) limit. A minimum balance is due each month and interest is charged on the unpaid balance (14% average) |
|
|
Term
| Mortgage Loans and Home Equity Loans |
|
Definition
| A type of installment loan secured by real estate. Typically has a term of 15 or 30 years |
|
|
Term
|
Definition
| consumer borrows a fixed amount and repays the principal plus interest at regular intervals (usually monthly). Lender typically holds title to the asset until final payment is made |
|
|
Term
|
Definition
People get in trouble with credit cards because they do not set limits on themselves.
Rule of Thumb: No more than 20% of take home pay devoted to debt (other than housing). |
|
|
Term
| Good Debt—Right reasons for borrowing |
|
Definition
1. Purchase of large important goods and services
House
Car
College education
2. Dealing with emergencies
Loss of job
Death of relative (airline tickets, etc)
3. Taking advantage of opportunities
Great sale on needed equipment (computer, etc)
Convenience (no need to carry lots of cash—pay off balance monthly)
Establishing or improving your credit rating |
|
|
Term
| Bad Debt—Wrong reasons for borrowing |
|
Definition
1. Living beyond your means
Paying for basic living expenses because otherwise you would not have enough money to do so?…clothes, groceries, gasoline, taxes, etc. |
|
|
Term
| Sources of Consumer Credit |
|
Definition
1. Financial Institutions (banks, CU)
2. National credit cards (Visa, MC, Discover)
3. Retailer specific cards (Belk, Kohl’s, Macy’s)
4. Consumer Finance Companies (Household Finance)
Relatively short-term loans
Charge high interest rates
Typically unsecured
Application process easier
Approval process quicker than bank
5. Life Insurance companies and investment companies
Policy holders may be able to borrow their cash value policies
6. May be able to borrow from brokerage account or 401(k)
7. Personal loan from family/friends
Always treat this like a real business transaction due to interpersonal conflict
8. Pawnbrokers
Issues loan for a fraction of the item’s value
Item is held as security until the loan is paid in full
Should be viewed as a lender of last resort |
|
|
Term
|
Definition
How creditors evaluate loan applications: “3 C’s of Credit”
Capacity
Can you afford to repay the debt?
Examines current income and earning potential against current expenses
Are you a good credit risk?
Character
Do you live within your means or above it (debt income ratio: 30%)
Do you pay your bills on time?
Do you demonstrate stability? (job-hopping/frequent moves)
Collateral
Property to secure a loan |
|
|
Term
|
Definition
A clearinghouse for consumer credit information
Experian
Equifax
TransUnion |
|
|
Term
|
Definition
Identifying information
Credit history (including whether or not you pay your bills on time)
Information of public record (bankruptcies, lawsuits, criminal convictions)
You may request a copy of your Credit Report (not your credit score) at any time…once a year free of charge. |
|
|
Term
| What’s NOT in your FICO score? |
|
Definition
-Your race, color, religion, national origin, sex and marital status.
US law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.
-Your age.
-Your salary, occupation, title, employer, date employed or employment history.
Lenders may consider this information, however, as may other types of scores.
-Where you live.
-Any interest rate being charged on a particular credit card or other account.
-Any items reported as child/family support obligations or rental agreements.
-Certain types of inquiries (requests for your credit report).
The score does not count “consumer-initiated” inquiries – requests you have made for your credit report, in order to check it. It also does not count “promotional inquiries” – requests made by lenders in order to make you a “pre-approved” credit offer – or “administrative inquiries” – requests made by lenders to review your account with them. Requests that are marked as coming from employers are not counted either.
-Any information not found in your credit report.
-Any information that is not proven to be predictive of future credit performance.
-Whether or not you are participating in a credit counseling of any kind. |
|
|
Term
| What to do if you’ve been denied credit |
|
Definition
The lender must provide you with a written explanation
Try negotiating with the lender (ask for a lower amount of money)
Try another lender (may have different loan policies; may be more lenient) |
|
|
Term
| Calculating Finance Charges-Finance Charge |
|
Definition
Lenders are required to clearly state the finance charge and annual percentage rate (APR)
Finance Charge—total dollar amount charged for credit
Function of
The amount you borrow
APR
Term of loan |
|
|
Term
| Calculating Finance Charges-PRINCIPAL |
|
Definition
|
|
Term
| Calculating Finance Charges-Annual Percentage Rate |
|
Definition
| the interest paid per dollar per year for credit |
|
|
Term
| Calculating Periodic Interest |
|
Definition
Most consumer debt calculates periodic interest using the simple interest method
The outstanding balance on the loan is multiplied by the periodic interest rate
NOTE: the Annual Percentage Rate (APR) is not the periodic interest rate…Periodic indicates that this is the portion of the interest paid in that period.
For example, an APR of 12% is the same as 1% per month (period) |
|
|
Term
| Choosing the lowest-cost Credit Card |
|
Definition
Four main areas to consider
Annual Fee (typically ranges from $0 to $50 annually)
Late payment and other fees
Annual Percentage Rate
Grace Period – how long you have to pay for new purchases without having to pay interest charges
Ranges from 0 – 30 days
(If you pay your bill in full every month, get a card with no annual fee and a grace period of at least 25 days…this way you won’t pay interest charges)
Many credit card companies offer a low “teaser” rate to lure you in, then raise the rate substantially. Or the company may offer great rates until one payment is late then raise the rates substantially.
WARNING: Read the fine print!! |
|
|
Term
| Credit Counseling and Credit Repair Services |
|
Definition
A credit counselor is a trained professional who helps you develop a budget and arrange a program of debt repayment
Nonprofit Consumer Credit Counseling Service (funded by lenders and credit card companies…they have a vested interest in repayment)
A Credit Repair doctor often claim to “erase your bad credit”
They can’t…don’t use them |
|
|
Term
|
Definition
borrower is relieved of debts, court takes assets/income and divides among creditors
An action of the absolute last resort
Virtually eliminates chances of securing future credit
Two types:
Chapter 7—assets are seized by the court and sold, funds are prorated among creditors (after court costs/legal fees); this action comprises 70% of bankruptcies
Chapter 13—individuals establish a three year plan of debt repayment (debtor retains possession of property; creditors usually receive 60-70% of what is owed)
Bankruptcy doesn’t eliminate all forms of debt obligations
Student loans
Back Taxes
Child Support
Alimony
insurance, etc. |
|
|
Term
|
Definition
| a portion of the borrower’s wages is paid directly to the lender by the employer (this requires a court order) |
|
|
Term
|
Definition
| collection of collateral by the lender (Lorch-Bennett Furniture) |
|
|
Term
| Bankruptcy doesn’t eliminate all forms of debt obligations |
|
Definition
Student loans
Back Taxes
Child Support
Alimony
Bankruptcy should not be considered a “quick fix”
Remains on your credit record for 10 years
Won’t get reasonable credit terms during that time
May be difficult to rent an apartment, obtain car insurance, etc |
|
|
Term
|
Definition
liquid assets “Cash equivalents
|
|
|
Term
|
Definition
|
|
Term
| Whats a FICO Score? How is it determined? |
|
Definition
-Payment History-35%
-Amounts Owed-30%
-Length of Credit History-15%
-New Credit-10%
-Types of credit used-10% |
|
|
Term
|
Definition
| What you own – What you owe= What you’re worth |
|
|
Term
|
Definition
|
|
Term
| which is better tax deferred or tax free? |
|
Definition
|
|
Term
| Between a tax credit and tax deduction which is better? |
|
Definition
|
|
