Unit I - Personal Finance

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Unit I - Personal Finance

• Building Wealth Saving Investing

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Building Wealth

• Who is wealthy?
• Joe Flash Grandma Smith
• Income - 150,000/ year Retired / 1800 month
  SS check
• Wife 2 kids 21, 600 / year
• Retired , lives alone
• Cars- 2011 BMW / 2010 Ford 150 Car 1999
  Toyota Corolla
• House 5 Bedroom, 4 bath
  House three bedroom
• gated community, media room 2 bath.
• pool.
• What is the missing information?

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Personal Finance Key Terms

• Income - the money received for the exchange of
  services (labor), or from other sources, as rents
  or investments.
• Ex. Wages (salary), interest on savings, dividend
  payments, lottery winnings, etc.
• Assets- money (or equity) and or other valuable
  belongings (real estate, stocks, bonds, jewelry,
  etc)
• Liabilities financial obligations (loans (cars,
  home, student), credit cards, etc)
• Principle the original amount of money borrowed
  in a loan.
• Interest 1) the money paid for borrowing money
• 2) the money earned on deposited or loaned
  money
• Liquidity the ease of access to your cash, or
  in which an asset can converted to cash.
• (ex. Checking account very liquid- ATM,
  Valuable painting not liquid)

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Unit I - Personal Finance

• Financial Planning using rational savings
  investment decisions to achieve a future goal.
• Setting long short term goals
• Short Term goals saving for clothes, weekend
  trip, or new golf club.
• Long Term prom, spring break college, trip
  to Europe, retirement, etc.
• Questions to ask
• What does it cost (price other)/ how much do
  I need?
• What do I have to do to achieve this goal?
• How long will it take?

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Saving Investing

• Savings money deposited in a bank or other
  financial institution (security) for later use.
• - Short term goals- clothes , cars, vacations,
  emergencies, etc.
• Investment- money used today to purchase an asset
  with expectation, not the guarantee, that the
  asset will increase in value.
• - Long term goals college education,
  retirement, vacation home, etc.

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Savings / Banking

• Banks 2 major functions
• 1. Store money providing interest bearing
  accounts.
• (banks pay you interest (small ) on accounts for
  the use of your money)
• - Currently accounts Insured up to 250,000/FDIC
  
• 2. Loan Originator Provide loans (financing) to
  individuals businesses (Mortgages, Car,
  College, etc) charging interest, (consumers pay
  to use the money).
• Remember businesses are consumers too, they
  borrow money for capital investments (ex. new
  office equipment, factories, etc)
• Banks profit The difference between the
  interest paid to customers (Saving Accts CDs)
  the interest earned on loans (Cars, Mortgages.
  Etc.) profits for banks
• Pay 2 on savings accounts / charge 7 on a
  car loan 5 profit for the bank!)
• Additional Services provided by banks other
  financial institutions
• Checking accounts / debit
• Investments for customer CDs Money Market
  Accounts

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Saving Money Account Options

• Saving Accounts Interest paid on Money in
  Account (More more return)
• Interest Low (Little Risk low return)
• Minimum Deposit Required (ex. You have to
  keep at least 1000 in account)
• Guaranteed - 250,000
• Liquid easily converted to cash (You have
  access to your money with no penalty)
• CDs Certificates of Deposit (Timed Accounts)
• Requires a deposit for a specified time period
  (ex. 5 year at 6)
• Deposits range from 250 - 100,000
• Higher Rates than other accounts fixed
• Guaranteed - 250,000
• Reduced Liquidity penalties for early
  withdraw
• - Liquidity vs. return- in general, the more
  liquid an account the lower the return. Why?

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Other Financial Institutions

• -S Ls (Savings Loans) same functions as
  bank (store money/ make loans) but centered on
  consumers (not businesses) focused on home
  mortgages (loans)
• -Credit Unions (Non-profits) owned by the members
  of the C.U. and offering banking services.
• Georgia Teachers Credit Union
• Lockheed Credit Union

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Saving

• Start early contribute often (every pay check)
• Simple interest is interest paid only on the
  principle/ Deposit.
• (ex. 100 at 5 for one year 5, so you end up
  with 105)
• Compound interest is interest paid on the
  principle the accumulated interest.
• (so, after the second year of 100 at 5, you
  will be paid interest on the 105 (year 2 balance
  110.25 , year 3 115.76) growing or
  compounding the money you originally invested,
  and so on.

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Investing

• Investment - using money or capital in order to
  gain profitable returns (interest), income, or
  appreciation in value.
• Types of Investments
• Stock (Corporations) - selling shares (pieces)
  of the company to the public (each share
  represents a of ownership.
• So, if 10,000 shares are sold to the public you
  own 100 shares you own 1 of the company.
• Why do companies like Coca-Cola, Wal-Mart, Home
  Depot sell stock?
• What are the costs benefits of selling stock?
• Examples of companies that do not sell stock?
• Who owns a corporation?
• Stocks provide 2 things
• Income - Stockowners receive a dividend or
  percent of the year end profits (more stock
  more income).
• Investment - Stockowners can hold the stock
  hoping the value of the company will increase
  sell at a higher price.
• (imagine if you bought Microsoft Stock in
  the 1980s!!!)

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Bonds

• Bonds are issued by a corporation or govt. (city,
  state, or federal) in exchange for a loan (money
  borrowed) from the investor.
• - So, when you buy a saving bond, you are
  loaning the govt. money, they pay you back pay
  you interest.
• Bond holders earn interest (percentage of the
  original amount borrowed) at intervals specified
  in the contract.
• (ex. 2 pay quarterly for five years)

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Mutual Fund Diversification

• Investments in which money from many investors is
  pooled together invested in a variety of stocks
  bonds.
• Advantages
• investors do not have to personal manage their
  investments
• Risk is spread out among a number of different
  investments
• Investment Banks offer a variety of mutual fund
  options
• high risk / high yield low risk /
  low return

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Other investments opportunities

• Real Estate commercial or residential
• Art
• Antiques
• Rare / scarce collectibles
• Etc.

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Investing Risk vs. Return

• In general, the greater risk you take, the higher
  the potential reward.
• Little risk little return
• High Risk / High return
• Low risk / low return

Real Estate Stock Start ups Stocks Blue
Chip Corporate Bonds, State Municipal
Bonds saving accounts CDs U.S. Bonds