Exam Review #1 - HDFS 238 Personal Finance PDF

Preview

Summary

HDFS 238 Personal Finance...

Description

Financial Records ● SMART goals ○ Specific- who, what, when, where, why, how? ○ Measureable- how much needed to save? ○ Attainable- possible to achieve goal, why? ○ Realistic/Relevant- is goal relevant/realistic to life? ○ Timely- when will you achieve goal by? ● Financial Records – Define and compute ○ Budget (Income and Expenses); plan for how one will spend their money which is influenced by Values and Goals ○ Cash Flow; where money came from and went ■ Income; ANY money taken in, examples are wages, received child support, retirement, assistance ■ Fixed Expenses; usually paid in same amount of period each time, scheduled payments, difficult to reduce, must be paid ■ Variable Expenses; Controllable expenses that occur in the short run usually, considerable control ■ Surplus; Net gain or net income ■ Deficit; Net loss ○ Balance Sheet; net worth statement, assets minus liabilities ○ Assets; what is owned, what a willing buyer would pay willing seller ■ Monetary; liquid assets or cash equivalents ■ Investment; capital ■ Tangible; use ○ Liabilities; what is owed ■ Short term; less than one year to pay off ■ long term; more than one year to pay off ■ Net Worth; ○ Liquidity; available assets, cash ● Financial Ratios – Define and compute key ratios: ○ liquidity; determines number of months one could pay off expenses using only monetary assets without income ■ Monetary (liquid) assets/month expenses ○ debt to income; determines if total debt burden is too high ■ Monthly total debt obligations/gross monthly income ■ Renters: 15%-20% or less ■ Homeowners: 28% or less for mortgage, taxes and insurance. 38% or less for all debts ○ consumer debt; determines if non-mortgage debt is too stressful ■ Monthly non-mortgage debt/gross monthly income ■ Renter: 15%-20% ■ Homeowner: 10% or less

○

investment asset to total asset (review the case study from September 20th): determines if one is saving/investing enough ■ Investment assets/total assets ■ 20 year olds: 10% ■ 30 year olds: 11-30% ■ 40 year olds: 30%

Finances and the Economy ● ● ●

● ●

Interest; savings, credit Exchange Rates; determines relative prices of imports and domestic goods and services Inflation; steady rise in prices of goods/services typically purchased by consumers ○ real income; income measured in constant prices relative to period of time, after inflation is considered ○ nominal income; actual money income, before inflation is considered ○ Why should we care?; because sometimes it may seem that one is making more money than they actually are, have to know your actual income to budget Business Cycle; expansion, peak, contraction, trough, trend Indicators in the Economy; statistics that assess how well economy is doing and how well it might do in the future, different sectors have different indicators ○ Procyclical; moves in direction of economy, retail sales, gross domestic product, number of employees on nonfarm payroll ○ Countercyclical; moves in opposite direction of economy, unemployment rate, gold/silver prices ○ Leading; change before the economic changes, help predict economy in future, stock market, consumer confidence survey

Savings ● ●

Types of financial institutions, core products, and insurers of banks and credit unions Time Value of Money; ○ Longer saved and/or invested the more money will accumulate ○ More money saved and/or invested the more it will accumulate because of compound interest ○ Simple Interest; Principal * Rate * Time ○ Compound Interest; M=P(1+i)^n ■ M = final amount including principal ■ P = principal amount ■ i= interest rate per year ■ n= number of years invested ■ More frequent compounding results in higher yield ○ Rule of 72; tells how long it will take money to double ■ 72/number of years = interest rate needed to double money

● ●

●

●

●

■ 72/interest rate = number of years it will take to double money Saving strategies (pro’s & con’s); Savings options; ○ highest interest; ○ lowest interest; APY; ○ Rate received from investment that factors amount of time interest is compounded ○ Check how often interest is paid (compounded), if two rates are same, choose one with more compounding periods ○ Shop around APR; ○ Yearly interest rate includes all fees and cost ○ Earn on savings account ○ Pay to a lender when borrow money ○ Required by law to tell APR Effect of compounding;

Credit 1, 2, and 3 ●

●

●

●

●

Types of Credit; ○ Open-ended (revolving credit); credit extended in advance, borrow up to your limit ○ Closed-ended (installment credit); repay amount plus interest, number of equal payments ○ Secured; secured by collateral, if delinquent asset is taken ○ Unsecured; no collateral, if delinquent may go to court Credit terms; ○ Annual Percentage Rate (APR); interest calculated in the same way, best to use for comparison ○ Annual Fee; yearly charge (not all cards) ○ Credit Limit; max amount of credit extended ○ Finance Charge; actual dollar cost ○ Origination Fee; charge to set up loan (home loans) ○ Loan Term; length of time one has to pay the loan ○ Grace Period; time one has before they start accumulating interest Advantages; easy/convenient, emergencies, reservations, owning/using products or services while paying for it, obtaining expensive products or services (education, home), special offers and bonuses, establishing credit history Disadvantages; can reduce financial flexibility, ties up future income, tempting to overspend and spend impulsively, interest (Annual percentage rate), finance changes and fees, identity theft 5 C’s of Credit

● ●

● ●

● ● ●

●

●

○ Capital ○ Capacity ○ Character ○ Condition ○ Collateral ○ Credit History Credit Reports; Credit Bureaus; repositories or libraries of data, lending agencies report to 3 credit bureaus (Equifax, Transunion, Experian), report personal information, credit status and inquiries. Each bureau uses a different scoring model, some creditors or lenders do not report to all 3 Role of reports; Categories in a report; Identifying information and consumer statement, summary information/account history/creditor information/credit history/trade lines, public record information and collections, inquiries from creditors ○ Hard inquiries; potential lender is reviewing your request for credit ○ Soft inquiries; checking own credit, by businesses wanting to offer YOU goods or services, or businesses whom you already have an account ○ Stay on report for 2 years importance of a credit report; influence of credit score on APR; What constitutes a credit score? ○ Payment history; pay bills on time, late or missed payments, type of credit ○ Amounts owed; amount owed on all accounts, balance on accounts, utilization ratios ○ Credit history; length accounts have been maintained, keep oldest account open, are cards being used, stagnant, paid off cards are not used in credit score calculations ○ Taking on more debt; opening too many cards or taking too much debt in a short period of time, inquiries can be counted as negative, score can improve as credit history improves ○ Types of credit; healthy mix of credit, experience and maintenance of credit cards and installment loans, 2-3 cards max What can help or hurt your score? ○ Hurt; late payments, derogatory information, maxed out credit cards, opening multiple accounts quickly, closing accounts with a long history, lowering credit limits, reviewing credit utilization ratio ○ Help; paying bills on time every time, bringing delinquent accounts current, paying down/off credit cards, not opening new lines of unnecessary credit, mixture of credit Credit and debt management strategies; ○ Highest interest rate; pay highest first

○

● ● ● ●

Snowball; Lineup debt smallest to largest, pay lowest amount first to create momentum, easiest to achieve first ○ influence of only paying the minimum payment Credit Laws (identify, explain in general what the laws do, and apply to a situation) Where to access credit report – (annualcreditreport.com) Debit vs. Credit Card (similarities and differences); is running a debit card as a credit card building your credit score?

Bankruptcy ●

●

●

●

●

Influence of Bankruptcy on Credit; ○ Can provide relief or a fresh start ○ But can also affect future access to credit Chapter 7; ○ No ability to repay debt ○ stays on report for 10 years, cannot file for another 8 years ○ Go to court, show assets, show debt, keep some exempt assets (can exempt assets up to a certain amount), liquidate others, judge/trustee determines who gets paid ○ Left over debt are discharged, they go away ○ Unsecured debts discharged Chapter 13; ○ Repayment plan ○ Stop calling, might be able to repay ○ Lower interest rates, consolidate debts ○ Usually up to 5 years ○ Less extreme ○ On report but lessens over time, cannot file for another 2 years ○ Protected from lawsuits Bankruptcy Law changes; ○ Must receive individual or group “briefing” with credit counselor and take a financial education course ○ Hire attorney ○ Chapter 7 cannot file for another 8 years ○ Chapter 13 cannot file for another 2 years ○ Means test, state median income Dischargeable debts; debts that can be gotten rid of, unsecured can usually be discharged ○ Landlord ○ Utilities ○ Credit cards ○ Department stores ○ Medical bills

●

● ●

non-dischargeable debts; debts that cannot be gotten rid of ○ Student loans ○ Taxes ○ Child support ○ Alimony automatic stay; no more contacts from creditors or collections exempt assets; state or federal but not both ○ home/food ○ Benefits ○ Some personal property up to a certain money limit ○ Cash value of life insurance

Alternative Financial Services ●

●

●

Payday Lending Process (and access to credit); offer short term loans secured by written check or auto withdrawal from account ○ APR you expect to pay; borrower writes check for amount of the loan PLUS a lender fee Deferred Presentation Services Act; governs payday loans ○ Customer signs written agreement ○ Can only have ONE outstanding payday loan per customer totaling $600 with 1 lender ○ Only TWO outstanding payday loans at a time Why do people use these services? ○ Access to immediate cash ○ Accessible locations ○ Convenient operating hours ○ Spanish speaking tellers ○ Respectful, courteous treatment ○ Target market

Financial Records Cash Flow Statement: Income – Expenses = Surplus (positive) or a Deficit (negative) Balance Sheet: Assets – Liabilities = Net Worth Budget: Income- Expenses Key Financial Ratios Liquidity Ratio = Monetary (liquid) Assets/Monthly Expenses (Recommended 3-6 months) Consumer Debt Ratio = Non-Mortgage Debt/Monthly Gross Income (Recommended less than 10%) Debt to Income Ratio = Monthly Total Debt/Monthly Gross Income (Recommended less than 38% for homeowners; 15-20% for renters) Investment Asset to Total Asset Ratio = Investment Assets/Total Assets (Recommended ratio should increase with age) Finances and the Economy Inflation: Real Income = Nominal Income after Raise 1.0 + previous inflation rate Savings Rule of 72: 72/number of years = interest rate Simple Interest: Principle * Rate * Time

or

72/interest rate = number of years

Compound Interest: M= P(1+i)^n Credit Utilization: Current (or Total) Balance/Total Available Credit to be used...