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Chapter 19: Personal Financial Literacy

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Alexandra Martin

on 14 January 2016

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Transcript of Chapter 19: Personal Financial Literacy

Chapter 19: Personal Financial Literacy

Budgeting
It is making sure that you're spending less than what you are earning by planning for both the short-term and long-term.
Housing
Costs and benefits of renting
You as a Borrower
society depends more and more on credit, or borrowing, to pay for purchases.
Creditors look at three things when they are considering to lead you their money.
Can you pay them back?
Do you have a good credit rating?
Do you have collateral?
Stocks
Stocks are shares of a company’s assets and are considered a good long-terminvestment. However, stocks are also the investments with the largest amount of risk.
- A company might suffer any number of setbacks, and you could lose some or all of the money you invested.
- To reduce risk, many people buy a collection of stocks called a mutual fund. This is a pool of money from many people and invested together in a variety of stocks and bonds. It is administered by an investment manager
Capital Formation
Capital formation
is a term used by economists to describe the transfer of money from individuals or households to businesses and government through investments and loans.
Financial institutions turn the collective savings of all their customers into investments that result in more jobs, which result in more goods and services being produced.
Rising employment also increases demand for more goods and services.
Countries with good capital formation experience economic growth.
How can you take control of your own money?
Funding your education

Financial aid

Free Application for Federal Student Aid (FAFSA)
Individual Retirement Accounts
Individual Retirement Accounts (IRAs) can be considered both investments and savings. They are savings accounts because you deposit money into them, which you do not access until you reach retirement.
They are investments because you (or financial advisors) select the stocks and bonds into which you want your deposits directed.
There are many different types of IRAs. The most common are Traditional and Roth. The differences are in how you pay taxes on the deposits.
Traditional IRA: In a traditional IRA, you can make yearly contributions (deposits) into the account up to a certain limit determined by the government. These contributions are not taxed when they are deposited, but you have to pay tax on the whole amount (as income) when you withdraw the funds upon retirement. In theory, by then you might be in a lower tax bracket and won’t pay as much in taxes.

Questions
1. How is the Roth IRA diffeent to a traditional IRA?

2.What is the difference between a Federal Work-Study program and a Non-Federal?

3.Work-Study program?

4.Name three nontraditional methods of paying for college?

5. What is a deductible?
Manging your budget
Make long- and short-term predictions about your finances
Keep Track of Every Expense, Including the Small Ones
Update Your Budget - Daily
Saving Money
Checking Accounts
Demand deposit account(DDA)
Customers can access their money by walking into the bank and filling out a deposit or withdrawal slip, by writing a check, or by using a debit card.
Ways to access the money:
Withdraw cash from an ATM.
Use a debit card at a store.
Write a paper check
Go to the bank, fill out a withdrawal slip, and receive cash.
Pay bills with your bank online.
Different types of Businesses
Sole proprietorship
Partnership
Corporation
Small businesses such as sole proprietorships and partnerships may obtain start-uploans to establish their businesses. These funds typically are used to purchase property and inventory, or to pay start-up fees.
- Another type of loan for small business owners is a Small Business Administration loan. These are funded by the U.S. Small Business Administration and administered through participating banks. Lines of credit are loans designed to help with cash flow during slow periods or negative growth. They allow a business to draw from a set amount of funds without having to go through the loan application process over and over again.
- There are four general ways for corporations to raise capital: selling bonds, issuing stocks, borrowing directly from financial institutions, and converting profits.
- Selling bonds: Bonds are like loans from individuals. A corporation offers bonds for sale, and then pays instalments of interest to the bondholders. Eventually, the bond itself is repaid.
- Bondholders do not have any say in how the company is run, yet investors like bonds because they are not very risky; corporations must pay bondholders even if the company has not made a profit.
- Corporations like bonds because the interest rate is lower than that of a bank loan. The interest paid to bondholders is also tax deductible for the corporation.
Student loans
Direct subsidized loan
Direct unsubsidized loan
Direct PLUS loan (Parent Loans for Undergraduate Students)
Direct consolidation loan
Federal Perkins loan program
Scholarships and Grants
A grant is tax exempt ant not always related to academics
Scholarships are more selective and competitive
Nontraditional Methods of Paying for College
Taking Advanced Placement (AP) courses
College-Level Examination Program (CLEP)
Employer reimbursement
Joining the military
Attend a tuition-free school
Enrolling in a Public Service Loan-Forgiveness Program after graduation
Costs and benefits of buying a house
Fixed-Rate Mortgage
Transitioning from renting to buying a house
Start saving money
Establish good credit
Research the market
Consider roommates
Credit Cards
You are borrowing money
If you have good credit, you can negotiate to lower your annual percentage rate. (APR)
Good credit score: 700+
By paying back your credit card from a bank or a retail store credit card and pay it on time.
Credit Card Killers:
Payment history
Debt
Types of credit used
Length of credit history
Declaring Bankruptcy
Stays on credit record for a long time
It is your last option
There are two parties:
The debtor (owes money)
The creditor (is owed money)
Treasury Instruments
Treasury instruments are loans you make to the federal government. They include Treasury bills (T-bills), Treasury notes (T-notes), Treasury bonds (T-bonds), Treasury Inflation-Protected Securities (TIPS), and several series of savings bonds.
They have various interest rates and maturity dates. These types of federal bonds offer different payment plans depending upon the maturity date. Because they are issued and backed by the government, Treasury instruments offer low risk.
Treasury bills (T-Bills), notes and bonds are marketable securities the U.S. government sells in order to pay off maturing debt and to raise the cash needed to run the federal government.
When you buy one of these securities, you are lending your money to the government of the United States.
T-bills are short-term obligations issued with a term of one year or less, and because they are sold at a discount from face value, they do not pay interest before maturity.
The interest is the difference between the purchase price and the price paid either at maturity (face value) or the price of the bill if sold prior to maturity.

Treasury notes and bonds, on the other hand, are securities that have a stated interest rate that is paid semi-annually until maturity.
What makes notes and bonds different are the terms to maturity.
Notes are issued in two-, three-, or five- and 10-year terms. Conversely, bonds are long-term investments with terms of more than 10 years.
Based on Jim Harvey's speech structures
Work-Study Programs
Federal Work-Study (FWS)
Based on financial need
On or off campus
Employer pays 50% of your wages, and the government pays the rest
Earnings cannot exceed your financial aid award
10-15 hours a week
Non-Federal Work-Study (non-FWS)
Not based on financial need
On campus
Flexible and more convenient
How much should you pay?
Utilities and other expenses
Location and amenities
Security deposit and first and last months’ rent
Read the lease carefully before signing
Choosing the right roommates
Understand your rights and responsibilities
Interests rates don’t change
Issued for either 15 or 30 years
Monthly payments stay the same
Adjustable-Rate Mortgage (ARM)
Interest rates vary over time
First few years have lower rates
Hybrid
Your as a Depositor
Money begins to grow over time
Compound interest
Opening an Account
Choose the right bank for you
Must be 18
photo ID
Proof of address
Social Security
money to deposit
A business owned by one person. It is the most common form of businessorganization.
Because the business is not separate from the individual who owns it, he or she holds unlimited liability for debt and other obligations
A business owned by two or more people. Together, they divide all profits, and they are responsible for all debts.
Three types of partnerships:
1. General Partnership: In this type of partnership, management of the business, liability, and profits are split equally among partners.
2. Joint Venture: This type of partnership is like a general partnership, but it is typically set up for a single project or for a limited time span.
3. Limited Partnership: This type of partnership allows for certain partners to have less input—less money invested or fewer decision-making powers, for example—in exchange for less profit. The percentages of profits are decided in advance and documented in a legal agreement.
A business that is legally separate from its owners.
It is made up of stockholders (shareholders) who invest money and, in return, receive profits that the corporation earns.
- Issuing stocks: Stocks are also like loans from individuals. Unlike bondholders, purchasers of stock receive dividends representing a portion of corporate profits.
- There are generally two types of stock. Purchasers of preferred stock receive dividends after bondholders are paid but have no say in how the company is run. Purchasers of common stock earn dividends last but are allowed a certain say in how a company is run. For instance, they are allowed to vote for the board of directors who manage the corporation.
- Borrowing directly from financial institutions: Businesses can get loans from banks or other lenders. The interest rates typically are higher than those for bonds and stocks.
- Converting profits: Some corporations use all of their profits to pay their shareholders. Other corporations, called “growth companies,” put their profits toward expanding the business in new directions or investing in research that relates to their industry.
Roth IRA: The Roth IRA was created as part of the Taxpayer Relief Act of 1997. With this type of account, you have taxes taken out before you make deposits so you do not have to pay taxes when you withdraw the money at retirement.

Roth IRA
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