Exam 2 Spending Conscious Spending 03 24 2014 You must plan how you ll spend ahead of time Frugal isn t cheap It s Smart o Frugal choosing what to spend money on Spend on what s important to you Not on what isn t Set your own priorities This is conscious spending It s a trade off of priorities Fight social pressure spending Keeping up with others is a full time job Spend Wisely o Additional costs shipping handling sales tax Don t pay more than you must o Sales o Comparison shopping o Generics off brands Internet Inexpensive things add up Buy what you need Go less expensive Think total cost Don t throw money away o Utilities Lights TV radio computer Hot water use o Cell phone minutes Impulse Buying Hidden Costs Examine why you spend o Focus on 2 areas where you spend the most o Know how much money you have coming in and write down where you re money goes to Some ideas o Leave price tags on save receipts o Delay purchases o Interest payment result in items costing more If you don t have the money at the moment to pay for the item don t buy it o Remind yourself of opportunity costs Still budget problems o Take specific amounts aside rent food savings etc and put them in envelopes When money runs out you re done Track spending Don t cut out don t deprive yourself of something just reduce it Set your own priorities don t let other people create desire in you Expect the unexpected emergencies Be flexible Serious Debt issues o Examine committed expenses too much housing expense Handling Money too much car etc Start Saving Young Saving Wise Spending Don t increase spending once an item is paid for o Continue loan payments to YOURSELF o Raises bonuses tax refunds gifts save o Divide money into pools 1000 into stocks A B C D Review automatic payments o Subscriptions clubs cable bundled services gym Examine insurance needs o What s it for Protection Insurance Health home car disability Shared risk another trade off premiums o How much can you handle yourself Self insure Choose deductibles Life o Term For a period of time 5 or 10 years Renewable term allows you to renew your policy once expired without taking another medical exam Your policy at age 35 will be more expensive than your policy at age 25 o Whole Life Worst form of life insurance Builds up a cash value 3 6 times more expensive than term o Term is your best bet Don t need unless someone is dependent upon your income Advertising Games Would you buy it without the sale Red tags do not equal sales Pricing An additional 20 off an item already reduced by 40 does NOT equal 60 off Package sizes shrinkage and dimples o Large economy size Store placement o Eye level is prime spot cheapest item is going to be on bottom or top shelf items could be just a good if not better than name brand o Place the items that people go to the store for e g milk and cheese in the back so you pass by hundreds of other items to get to it Music smells aisle wandering vegetable sprinkling systems Don t Lose Money Read the fine print Don t make others rich o Over the limit fees o Bounced check fees o Traffic parking tickets Avoid unnecessary costs o Don t pay for things you don t use Double check bundled services Home Buying A Life Style Decision 03 24 2014 Actual cost vs opportunity cost o House price closing costs commission about 6 o Maintenance costs landscaping utilities repairs N A if in an apartment Benefits o Miscellaneous taxes fees insurance new stuff etc o Personal satisfaction o Potential appreciation real estate investment risk house prices can go down like in the housing bubble o Tax benefits at first What can you afford o Same as bank will lend o The seller s mortgage is paid for in closing then they pay what s left Credit score Current ability to pay How much will you give up Know what you want Pre qualify for loan Real estate agents they profit off you buying a more expensive home o Who pays their commission The seller pays their commission What determines the amount People are charged different interest rates o Can be very helpful Multiple listings is good because of choices Moving to a new location Negotiations o Price o Conditions The chandelier has to stay o Moving arrangements o While haggling o Earnest money money paid to confirm a contract The Contract check everything o Buyer seller who pays what o Unable to finance Get earnest money back o Final walk through closing settlement date Mortgage Payment Components o P Principal amount borrowed Pays to loan o I Interest cost of money o T Taxes property taxes Goes into escrow account o I Insurance homeowner s Money held by a 3rd party on behalf of other parties for release under stated terms o PMI Private Mortgage Insurance Depends on Down payment Basic Mortgage Types 1 Fixed rate mortgages amortized o Example Loan 200 000 30 yrs 360 months 7 APR 1 330 60 per month 1st Payment 1 166 67 interest 163 94 principal 359th Payment 15 39 interest 1315 22 principal With each payment the principal gets a little bit bigger and interest payment gets a little smaller Benefits of fixed rate mortgage No suprises No prepayment penalty No negative amortization 2 Variable rate mortgages ARM Adjustable Rate Mortgage Interest rates change with Changing cost of money E x a m Generally stated interest rate at the start is less than that of a fixed rate mtg Fixed rates are tied to some interest rate in the economy that varies overtime Variable interest rates are changed every 2 years and add an 18 margin Has an interest rate change cap to prevent drastic changes 4 change with 3 change cap The extra 1 of loan is added to the total amount owed Negative amortization Costs at Closing Down payment cash Points pre paid interest o One point a small of the loan amount you buy them o Paid at closing need to have cash o Trade off cash now versus lower monthly payments Breakeven when the costs are equal to the savings they provide o Savings result from getting a lower mortgage interest rate The longer a house is owned the more likely points will save money Example 300 000 b loan u y a yo u ca n ap pl y th o What you need to know The cost of a point varies with the amount that you re borrowing How much a point reduces the interest also depends on the amount you re borrowing in addition to the interest rate Longer you ll be in the house the more advantageous points will become