applying the planning process Chapter 6 Purchasing Strategies and Credit Cards Where Does This Fit in Your Comprehensive Financial Plan Protection Plan for death and incapacity Chapters 16 17 Build wealth Save and invest to meet short term and long term goals Chapters 11 15 Making Purchase Decisions Before making a purchase ask yourself Is the purchase consistent with my prioritized goals Is this the best choice out of my alternatives Based on my budget can I afford to buy this now How will I pay for it Secure basic needs Liquidity consumer purchases and credit decisions insurance employee benefits Chapters 5 10 Establish a firm foundation Evaluate your finances acquire tools and skills set goals develop a budget Chapters 1 4 What is a warranty A promise or guaranty made by the manufacturer or seller New products have implied warranty that they are suitable for sale and will work as intended Alternative Ways to Pay Pay cash from current income Take cash out of savings or investment Borrow the money and pay later Express warranty Written promise of more extensive protection Extended warranty Optional for a fee extension of implied or express warranties like insurance 1 Consider the Opportunity Costs Pay Cash Can not use the cash for something else Reduce savings Lost interest earned Reduced savings Borrow Cost of interest Reduced future cash flow due to repayments Reduced credit capacity What is credit In general receive goods services or cash now and arrange to pay for them later Consumer credit credit that is used to purchase consumer goods or services Credit cards Automobile loans Home equity loans Student loans Household Debt in the U S In the last 20 years increased debt ratio 1986 13 8 2003 18 1 Most increase has been in consumer credit Mortgage debt stable at 75 of total debt Debt relative to after tax income rising 1986 72 2003 104 Advantages of Consumer Credit Disadvantages of Consumer Credit Buy now pay later Negative impact on household finances Availability of credit has fueled the economy and permitted a higher standard of living in the U S Convenience and safety Do not have to carry cash Source of emergency funds Reduces net worth Reduces liquidity Limits financial flexibility High cost of interest Increased risk of overspending Increased insurance premiums 2 Types of credit Closed end credit approved and used for a specific purpose and requires the borrower pay it back in full with interest Example Best Buy gives you a loan for the purchase of a computer Single payment loan you pay back entire balance with interest at an agreed upon date Installment loan you repay the loan in equal payments each month for a period of time Types of Credit Open end credit in advance of any purchase you are approved for borrowing up to a specific credit limit and you can borrow and pay back and borrow again Also called revolving credit Most common examples credit cards home equity lines of credit Closed End versus Open End Credit Credit Cards Bank credit cards Issued by a financial institution Service provider MasterCard Visa Discover Retail credit cards For use at particular retailers Sears JCPenney Foley s Travel and entertainment cards Require payment in full each month Main purpose is for reimbursable expenses Other cards Debit cards Withdraw money directly from your checking or savings account at a financial institution Smart cards Money is stored in digitized form on the card Cards can store much more electronic information Commonly used on university campuses Store gift cards increasingly common 3 Credit Card Contract Terms Transaction date Date on which you make a credit purchase Billing date Last day of billing cycle Due date Date payment to be received Grace period Time between new charges and due date Advantages of Credit Cards Same as for consumer credit Pay later convenience safety emergency cash Other advantages Method of identification Record keeping for business expenses Ability to make remote purchases Easier to return merchandise Free credit sometimes Credit Card Contract Terms Credit limit or credit line Maximum amount you can borrow Credit limits usually start low and are increased with responsible card usage Minimum payment Payment required to be in good standing Cash advance Borrowing cash instead of making a purchase with credit card Often subject to different repayment terms Disadvantages of Credit Cards Same as for consumer credit Negative impact on finances overspending cost Most expensive way to borrow Hassles of marketing Mail phone email advertising Marketing to children Reduced privacy of financial information Fraud and identity theft 4