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PERSONAL FINANCE PRIMER. Covering Your Bases!. DEBT: Using Debt Wisely. CREDIT CARDS 1. Advantages: Interest Free Loan Know your billing date Grace period: 25-30 days Simplified Record Keeping Convenience Simplifies return of goods and resolution of purchase disputes Emergencies.

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personal finance primer


Covering Your Bases!

debt using debt wisely
DEBT: Using Debt Wisely

1. Advantages:

    • Interest Free Loan
      • Know your billing date
      • Grace period: 25-30 days
    • Simplified Record Keeping
    • Convenience
    • Simplifies return of goods and resolution of purchase disputes
    • Emergencies
debt cont
Debt (cont…)

2. Disadvantages

  • Tendency to Overspend
    • Undisciplined sense of buying power not supported by available income
  • High Interest costs
    • 12% Annual Percentage Rate
    • Minimum Payment: $30/month
  • Assume $1000 Credit Card balance
  • It will take 41 months to pay off your $1000 credit card balance with a total payment of $1223.00
interest rates
  • Interest rates on credit cards are the highest of any form of consumer credit.

Rates, 10.6-13.5%

    • National average nearly 12%
    • Variable rate, tied to prime leading rate
    • Rates will vary from Bank to Bank, so shop around
    • If you are carrying a balance, interest will be charged on your old balance purchases
    • On cash advances, interest begins on the day the advance is taken


    • Annual Fees
    • Late Payment Fees
    • Over-the-Limit Fees
    • Transaction Fees – Typically on Cash Advances
how much credit
  • Be sure your monthly repayment burden does not exceed 20% of your monthly take-home pay.
  • Recommended debt safety ratio
    • 10% to 15% of your take-home pay

Debt Safety Ratio = Total Monthly Consumer Credit Payments @

Monthly Take-Home Pay

@ excludes monthly mortgage payment

  • Remember, if credit is used properly, it can help you manage your finances. Misuse it and it is big-time trouble.
Average credit card holder has 11 cards
  • Approximately $3,300 in annual charges
  • Average unpaid balance of about $1,700

Danger Signs of Using Too Much Credit:

  • Regular Impulse buying
  • Postdating checks to keep them from bouncing
  • Regularly exceeding borrowing limit
  • Taking 60-90 days to pay bills that should be paid in 30 days
  • Borrowing to meet normal living expenses
  • Using one credit card to make payments on another
  • Using more than 20% of take home pay on consumer debt, credit card bills
  • Dodging collection agencies
  • Having zero savings
risk management
Risk Management
  • Generally we deal with Risk Exposure by Aquiring Related Insurance Products
  • Health Insurance – employer provided
  • Disability Insurance – employer provided
  • Home Owner’s Insurance
  • Auto Insurance
  • Life Insurance
life insurance
Life Insurance
  • Two Purposes for Life Insurance Coverage
  • Primary Purpose
    • Provide funds for our dependent beneficiaries in the event of death
  • Secondary Purposes
    • Estate planning to provide needed liquidity to our estate and our heirs
types of life insurance
Types of Life Insurance


  • Includes an insurance feature and a savings/investment feature
  • Premium costs are fixed and high


  • Remains in existence for a certain term (period) and then expires
  • This is ‘pure’ insurance coverage and is less expensive than whole life
  • You can get the most insurance coverage for the lowest premium cost
  • Negative – premium costs will continue to rise as we age

***IMPORTANT: Before you buy an insurance coverage check the financial stability rating of the insurance company. Look for an A.M. Best rating of A++

saving vs investing
Saving Vs. Investing
  • Saving: Primarily for funds we may need in a short period of time.
  • Major Concern: Preservation of principle
  • Selection: choose saving investments of low risk
          • Savings Accounts
          • Money Market Accounts
          • Short Term Certificates of Deposit

3 Months to 6 months take home Pay


To cover unanticipated Financial Shocks


Employer downsizing – lost our job


  • What is it?
  • Why do you have to be concerned about it?



  • We have $100
  • Pizza (only consumer item available) costs $5 each. Therefore we can purchase 20 pizzas.
  • We can invest $100 @ 15.5%
    • We will have $115.50, 1 year from now
  • The inflation rate is 5%, so
    • Pizza will cost $5.25 1 year from now.

Therefore $115.50 - $5.25 = 22 pizzas

Notice: We have a 15.5% return on our financial assets, however, the number of pizzas we can consume only increased from 20 to 22 pizzas.

inflation cont
Inflation (cont…)
  • What if you invested your $100 and Received a 5% Rate of Return, equal to the Inflation?
    • 1 year later you have $105
    • Pizza also increased 5% $5.25/each
    • You can buy 20 pizzas
  • This is exactly the same number of Pizzas you could have purchased a year earlier for your $100.
  • You now have more dollars $105, but the quantity of Pizzas you could purchase has remained the same.
  • Your standard of living has not changed.
  • Taking prudent, reasonable risks with your money in order to earn the higher returns that may be necessary to achieve your financial goals.


  • All investments involve some risk
  • The Value of Your Investment Portfolio may decline
  • No guarantee that you will have gains
four issues to address before beginning an investment program
Four Issues to Address Before Beginning An Investment Program
  • Determine your financial goals
  • Determine your time horizon
  • Determine your risk tolerance level
  • Determine your personal financial situation
individual stocks vs mutual funds
Individual Stocks Vs. Mutual Funds
  • Limited Funds to Invest?
      • Do not invest in individual stocks!
  • Diversification
      • Easier to achieve by buying mutual funds
what are mutual funds and how do they work
What Are Mutual Funds And How Do They Work?

The idea behind Mutual Funds Is Simple:

  • Many people pool their money together into a fund
  • The investment advisor invests their money in various securities
  • Each investor shares proportionality in the fund’s investment returns
  • The investment returns consist of the dividend or interest income paid on the Securities, and any capital gains or losses caused by sales of the securities
advantages of mutual funds
Advantages of Mutual Funds
  • Diversification
  • Professional Management
  • Liquidity
  • Convenience:
    • Fund shares can be bought/sold (mail, telephone, internet)
    • Easy to move money from one fund to another
    • Automatic Investing
    • Automatic Transfers from a fund to your bank account
    • Record Keeping Services
disadvantages of mutual funds
Disadvantages of Mutual Funds
  • No Guarantees
  • Diversification “Penalty”
  • Potentially High Costs
  • Tax Impact
general risk levels types of investments
General Risk Levels & Types of Investments

Lowest Risk:

  • Money Market Mutual Funds
    • Large Certificates of Deposit, US Treasury Bills, Commercial Paper

Low Risk:

  • Short Term Bond Funds
    • Gov’t and Corporate

Medium Risk:

  • Mid-Term Bond Funds
    • Gov’t and Corporate (Investment Grade)
  • Balanced Funds
  • Equity Income Funds
  • Index Funds
general risk levels and types of investments cont
General Risk Levels and Types of Investments (cont…)

Higher Risk:

  • Growth & Income Funds
  • Growth Funds
  • Long-Term Bond Funds

Highest Risk:

  • Aggressive Growth Funds
morning star style boxes for equity funds
Morning Star Style Boxes For Equity Funds





morning star style boxes for bond funds
Morning Star Style Boxes For Bond Funds


High – Treasury &


Medium – Corporate



Low – Below Investment Grade


what to look for before buying any particular mutual fund
What to Look For Before Buying Any Particular Mutual Fund
  • The Investment Company that Manages the Fund
    • Examples: The three largest Fund Companies
      • Fidelity
      • Vanguard
      • American Funds
  • Long-Term Track Record
    • 5 yr, 10 yr, Life of the Fund
    • How they performed through both up and down markets
what to look for before buying any particular mutual fund cont
What to Look For Before Buying Any Particular Mutual Fund – cont…
  • The Fund Manager
    • One Individual
      • Longevity
    • Committee
  • Loads and/or Fees
    • Front end or Backend Load (Sales Charges)
    • No Loads
    • Operating Expense
      • Investment Advisory Fees, Legal Frees, Accounting Fees, Administrative Expenses
      • Marketing (12b.1 Fees)
what to look for before buying any particular mutual fund cont1
What to Look For Before Buying Any Particular Mutual Fund – cont…
  • Volatility
    • Equity Funds
      • Beta
      • R – Squared
    • Bond Funds
      • Duration
asset allocation
Asset Allocation
  • How you allocate your investment portfolio between different classes of financial assets.
  • Various studies have found that the asset allocation is more important than the actual selection of securities/investments in determining your overall investment results.
  • Experts argue you should hold a mix of investments from among the asset classes to help reduce the volatility of your portfolio.
asset allocation cont
Asset Allocation cont…
  • Diversification spreads the risk around. A good performance in one area can temper a sub par performance in another.





individual retirement accounts ira
Individual Retirement Accounts (IRA)


  • Earnings grow tax-free
  • Retirement withdrawals are free of federal
  • income taxes
  • Your contributions are not tax deductible
  • You can continue to make contributions after age 70.5.
ira cont
IRA (cont…)


  • Who can contribute:
    • Anyone with earned income and spouses of wage earners who don’t have any insurance of their own
  • Income limitation, Single filers - $101000 and under. Married Filing Jointly - $159,000 and under. Contribution amounts are phased out at Modified Adjusted Gross Income Levels above these amounts
ira cont1
IRA (cont…)


  • Withdraw contributions anytime penalty-free
  • Withdraw earnings beginning at age 59.5 penalty-free
  • Income tax on earnings does apply if you’ve held account for less than 5 years
  • No required minimum distributions
roth ira
Roth IRA
  • Contributions allowed each year,
      • 2008 - $5000
  • Assumptions
      • Monthly Contributions $416.66
      • Term 40 yrs or 480 months
      • Rate of Return 10%/yr or .8333%/month
      • Future Value = $2,634,991
  • Change the Assumptions
      • Monthly Contributions $250.00
      • Term 40 yrs or 480 months
      • Rate of Return 10%/yr or .8333%/month
      • Future Value = $1,581,020
  • Remember
      • Withdrawals from your Roth IRA are free from Federal Income Taxes