VALENCIA GEB 1011 - The Need for Personal Financial Planning

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The Need for Personal Financial Planning Financial Planning Begins with Making Money What you major in matters Business education historically pays off Objective 1 Outline the six steps for controlling your assets Six Steps to Controlling Your Assets 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 or Step 1 Take an Inventory of Your Financial Assets generate income Make a list of tangible assets and your liabilities Assign a value amount to your assets and subtract from liabilities to get your net worth Step 2 Keep Track of All Your Expenses Keep a detailed record for at least a couple of Then see where you are spending too much and months what you have to do to save more Step 3 Prepare a Budget Choose how much to allow for each non fixed What you spend now reduces what you can save The Rule of 72 says that your money doubles every expense later 12 years at 6 percent Household budget generally includes Mortgage or rent Utilities Food Clothing Vehicles Furniture Life and car insurance Medical care Taxes Figure D 1 Possible Cost Saving Choices The choices you make today can have a dramatic impact on your financial future Compare the differences these few choices you can make now would mean to your future net worth If you would make the lower cost choices five days a week during your four years of college you d have more than 8 300 by graduation Note that the figures in this chart are based on 20 weekdays per month Step 4 Pay Off Your Debts Step 5 Start a Savings Plan Start with those carrying the highest interest rates Save some money each month in a separate account Pay yourself first when you get your paycheck for large purchases Figure D 2 How Money Grows This chart illustrates how 5 000 would grow at various rates of return Recent savings account interest rates were very low less than 2 percent but in earlier years they ve been over 5 percent Tim e Annual Rate of Return Annual Rate of Return Annual Rate of Return 5 6 381 8 7 347 11 8 425 Annual Rate of Return 2 5 520 5 yea rs 10 yea rs 15 yea rs 20 yea rs 25 yea rs 6 095 8 144 10 795 14 197 6 729 10 395 15 861 23 923 7 430 13 266 23 305 40 312 8 203 16 932 34 242 67 927 Building Your Financial Base Tips for Building a Base Live frugally If married try to live on one income and save the other Your first major investment might be a low priced home Objective 2 Explain how to build a financial base including investing in real estate saving money and managing credit Real Estate Historically a Relatively Secure Investment to save Paying for a home is a good way of forcing yourself A home is an investment you can live in Your mortgage payments unlike rent are relatively fixed Tax Deductions and Home Ownership Interest on your home mortgage payments is tax deductible as are your real estate taxes Figure D 3 How Much House Can You Afford Monthly mortgage payments including interest principal real estate taxes and insurance generally shouldn t amount to more than 28 percent of your monthly income Here s how much people in various income categories can afford to pay for a home if they use a 30 year mortgage and make a 10 percent down payment Inco me Intere Intere Intere Mont hly Paym 5 st 15 Intere st 7 st 6 st ent Rate 700 106 2 Rate 98 30 Rate 91 25 Rate 56 87 1 167 180 2 167 0 155 3 98 60 1 867 287 2 266 0 247 3 155 9 2 333 361 2 334 8 311 4 198 0 63 91 13 40 2 76 08 33 3 81 56 32 0 6 16 13 30 000 50 000 80 000 100 000 Learning to Manage Credit Benefits of credit cards May be required to buy certain goods or rent a car Helps you keep track of purchases They are more convenient than cash or checks Paying off credit card balances on time can improve your credit score Dangers of credit cards Too easy to buy items you would not otherwise buy Debt can pile up Hacking and credit card fraud If managing a credit card is too difficult try a debit card A recent law created new consumer credit card protections Allows issuers to increase interest rates for only a limited number of reasons People must be 21 years old or get an adult to co sign The Consumer Financial Protection Bureau regulates financial products and services including mortgages credit cards student loans and debt collection Where to Put Your Savings Savings accounts offer very low interest rates One of the best places to invest over time has been Contrarian approach Buying stock when the stock market everyone else is selling or vice versa Test Prep What are the six steps you can take to control your finances The six steps you can take to control your finances are 1 take an inventory of your financial assets 2 keep track of all your expenses 3 prepare a budget 4 pay off your debts 5 start a savings plan and 6 borrow only to buy assets that increase in value or generate income Why can restate be a Good investment Historically real estate has been a sound investment It is the only investment you can live in Also the payments are fixed with the exception of taxes and utilities As your income increases the house payments get easier to make while rent tends to increase overtime What are the advantages and disadvantages os using a credit card Three advantages of using a credit card are 1 you may have to have a credit card to buy certain goods or rent a car 2 credit cards allow you to easily track your expenses and 3 they are more convenient than carrying cash or writing checks The three disadvantages of credit cards are 1 It is easy to buy items you would not otherwise buy 2 debt can pile up if you do not pay it off and 3 the potential for hacking and credit card fraud Protecting Your Financial Base Buying Insurance Life Insurance Term insurance 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 stays in effect until age 100 Variable life insurance Whole life insurance that invests the cash value of the policy in stocks or other high yielding securities Objective 3 Explain how buying the appropriate insurance can protect your financial base Figure D 4 Why Buy Term Insurance Insurance Needs in Early Years Are High Children are young and need money for education Mortgage is high relative …


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