Bonus Chapter D – Managing Personal Finances
D-1
bonus chapter
.
Managing Personal
Finances
what’s new in this edition D.2
brief chapter outline and learning objectives D.3
lecture outline and lecture notes D.5
PowerPoint slide notes D.39
lecture enhancers D.50
lecture enhancer D-1: MILLIONAIRE WOMEN NEXT DOOR D.50
lecture enhancer D-2: THE RENT-VERSUS-BUY DECISION D.51
lecture enhancer D-3: KNOW YOUR CREDIT SCORE D.52
lecture enhancer D-4: AMERICA’S GROWING CREDIT CARD AVERSION D.53
lecture enhancer D-5: DISCREDIT REPORT D.54
lecture enhancer D-6: SOCIAL SECURITY AND YOUR RETIREMENT D.56
lecture enhancer D-7: THE TROUBLE WITH SUING YOUR BROKER D.57
critical thinking exercises D.59
critical thinking exercise D-1: PREPARING A PERSONAL BALANCE SHEET D.59
critical thinking exercise D-2: DEVELOPING A SPENDING PLAN D.62
critical thinking exercise D-3: FINDING THE BEST CAR LOAN D.64
critical thinking exercise D-4: CHOOSING THE RIGHT MORTGAGE LOAN D.66
D
Bonus Chapter D – Managing Personal Finances
D-2
what’s new in
this edition
additions to the 11th edition:
• Getting to Know Alexa Von Tobel
• New subsection: MyIRAs
revisions to the 11th edition:
• Statistical data and examples throughout the chapter were updated to reflect current information.
deletions from the 10th edition:
• Getting to Know Nathan Myhrvod and Many Millionaires
Bonus Chapter D – Managing Personal Finances
D-3
brief chapter outline
and learning objectives
Bonus Chapter D
MANAGING PERSONAL FINANCES
Getting to Know ALEXA VON TOBEL
learning objective 1
Outline the six steps for controlling your assets.
I. THE NEED FOR PERSONAL FINANCIAL PLANNING
A. Financial Planning Begins with Making Money
B. Six Steps to Controlling Your Assets
learning objective 2
Explain ways to build a financial base, including investing in real es-
tate, saving money, and managing credit.
II. BUILDING YOUR FINANCIAL BASE
A. Real Estate: Historically, a Relatively Secure Investment
B. Tax Deduction and Homeownership
C. Where to Put Your Savings
D. Learning to Manage Credit
learning objective 3
Explain how buying the appropriate insurance can protect your finan-
cial base.
III. PROTECTING YOUR FINANCIAL BASE: BUYING INSURANCE
A. Health Insurance
B. Homeowner’s or Renter’s Insurance
C. Other Insurance
learning objective 4
Outline a strategy for retiring with enough money to last a lifetime.
Bonus Chapter D – Managing Personal Finances
D-4
IV. PLANNING YOUR RETIREMENT
A. Social Security
B. Individual Retirement Accounts (IRAs)
C. Simple IRAs
D. MyIRA
E. 401(k) Plans
F. Keogh Plans
G. Financial Planners
H. Estate Planning
V. SUMMARY
Bonus Chapter D – Managing Personal Finances
D-5
Getting to Know ALEXA VON TOBEL
As the founder of LearnVest, certified financial planner, Alexa von Tobel, has been
named one of the Coolest Young Entrepreneurs by Inc. Magazine.
learning objective 1
Outline the six steps for controlling your assets.
I. THE NEED FOR PERSONAL FINANCIAL PLAN-
NING
A. The secret to success in a capitalist country is to
have CAPITAL.
1. You have to earn the money, then save, spend,
and invest it wisely.
2. However, students are poorly educated about fi-
nancial matters.
B. FINANCIAL PLANNING BEGINS WITH MAKING
MONEY.
1. HAVING A GOOD EDUCATION is one of the
best assets in finding a well-paying job.
2. The government helps by giving various tax
breaks for you to go to college.
C. SIX STEPS TO CONTROLLING YOUR ASSETS
1. The key to saving is to spend less than you make.
a. In order to be financially secure, you have to
save.
One way to save money is to use your credit card wisely. There are organizations that can
help you compare credit cards to get the most out of them. What is the name of one of those
organizations?
(Students should read the chapter before guessing the companies’ names:
CreditCards.com or CardRatings.com.)
Bonus Chapter D – Managing Personal Finances
D-6
PPT D-1
Bonus Chapter Title
Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Managing
Personal
Finances
BONUS CHAPTER D
PPT D-2
Learning Objectives
LEARNING OBJECTIVES
D-2
1. Outline the six steps for controlling your assets.
2. Explain how to build a financial base, including
investing in real estate, saving money, and
managing credit.
3. Explain how buying the appropriate insurance
can protect your financial base.
4. Outline a strategy for retiring with enough money
to last a lifetime.
PPT D-3
Alexa von Tobel
ALEXA VON TOBEL
LearnVest
D-3
• Started LearnVest after graduating
from Harvard and jobs with Morgan
Stanley and Drop.io.
• Von Tobel believed the cost
structure for financial plans were too
pricey for most consumers.
• She focuses on the 50/20/30
formula.
– 50% of pay goes to essentials
– 20% of pay is saved
– 30% of pay goes to lifestyle
PPT D-4
Name That Company
NAME that COMPANY
D-4
One way to save money is to use your credit cards
wisely. There are organizations that can help you
compare credit cards to get the most out of
them.
Name one of those organizations!
(See complete PowerPoint slide notes on page D.39.)
Bonus Chapter D – Managing Personal Finances
D-7
b. Less than 10% of the U.S. population has
accumulated enough money by retirement
age to live comfortably.
c. Also 25% of U.S. households don’t have a
retirement account.
2. STEP 1: Take an INVENTORY of your financial
assets.
a. First, develop a BALANCE SHEET for your-
self.
i. A balance sheet starts with the formula:
Assets = Liabilities + Owners’ Equity
ii. ASSETS include anything you own, and
should be evaluated based on their
CURRENT VALUE, not purchase price.
iii. Subtract your LIABILITIES to determine
your NET WORTH.
b. An INCOME STATEMENT starts with REV-
ENUE, and then subtracts COSTS and ex-
penses to calculate NET INCOME.
3. STEP 2: Keep track of all your EXPENSES.
a. If you often run out of cash, write down every
penny you spend each day.
b. The only way to trace where the money goes
is to keep track of every cent you spend by
keeping a JOURNAL.
c. Develop CATEGORIES for expenditures,
based on what is important to you.
d. Cutting back on luxuries can add up over
time.
Bonus Chapter D – Managing Personal Finances
D-8
PPT D-5
Six Steps to Control Your Finances
SIX STEPS to CONTROL YOUR
FINANCES
D-5
LO D-1
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
6. Borrow only to buy assets
that increase in value
critical thinking
exercise D-1
PREPARING A PERSONAL
BALANCE SHEET
This exercise asks students to calculate the assets, liabilities,
and owners’ equity for a couple. (See the complete exercise on
page D.59 of this manual.)
critical thinking
exercise D-2
DEVELOPING A SPENDING PLAN
This exercise asks students to develop a monthly budget and
judge the impact of an increase in monthly rent. (See the com-
plete exercise on page D.62 of this manual.)
Bonus Chapter D – Managing Personal Finances
D-9
4. STEP 3: Prepare a BUDGET.
a. Your personal budget (revenue and expens-
es) is your financial plan—you will have to
make CHOICES on how to allocate your re-
sources.
b. What you spend now reduces what you can
save later.
c. Running a household is similar to running a
small business—it takes careful record
keeping, budgeting, control, and the need to
borrow funds.
5. STEP 4: Pay off your DEBTS.
a. Use any extra money to pay off your debts.
b. Start with the debts that carry the highest in-
terest rates.
6. STEP 5: Start a SAVINGS PLAN.
a. Each month save some for large purchases
in a separate account.
b. The best way to save money is to PAY
YOURSELF FIRST—take money out of your
paycheck for savings, and then plan what to
do with the rest.
7. STEP 6: Borrow money only to BUY ASSETS
that have the potential to increase in value.
a. Don’t borrow for ordinary expenses.
b. Ideally, you should SAVE SIX MONTHS OF
EARNINGS for contingency purposes in
highly liquid accounts.
Bonus Chapter D – Managing Personal Finances
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PPT D-6
Managing Your Household Budget
MANAGING YOUR HOUSEHOLD
BUDGET
D-6
LO D-1
• A household budget generally
includes:
– Mortgage or rent
– Food and clothing
– Vehicles and furniture
– Insurance needs
– Other expenses
PPT D-7
Possible Cost-Saving Choices
TEXT FIGURE D.1
Possible Cost-Saving Choices
POSSIBLE COST-SAVING
CHOICES
D-7
LO D-1
PPT D-8
How Money Grows
TEXT FIGURE D.2
How Money Grows
HOW MONEY GROWS
D-8
LO D-1
PPT D-9
Easy-ish Budget Cuts
EASY-ish BUDGET CUTS
Source: Kiplinger’s Personal Finance. D-9
LO D-1
1. Cut back on gourmet
groceries and use coupons.
2. Cut down your cell phone bill.
3. Cut out the cable television.
4. Cut down on nights out.
5. Cut the clutter in your house.
PPT D-10
Billionaire’s Tab
BILLIONAIRE’s TAB
Insights into a Lux Lifestyle
Source: Forbes, www.forbes.com, accessed November 2014. D-10
Perk New York
Billionaire
Los Angeles
Billionaire
Dinner for Two $550 at Per Se $700 at Urasawa
Hotel for Two Nights $70,000 at Four
Seasons
$30,000 at Four
Seasons
Haircut $200 at Sally
Hershberger $750 at Fekkai
Club Table Service $525+ at The Box $1,200+ at Voyeur
Massage $225 at Four
Seasons
$215 at Beverly Hills
Hotel
LO D-1
Bonus Chapter D – Managing Personal Finances
D-11
c. You should borrow only for very unexpected
expenses.
d. Instead, you can try to produce more in-
come.
learning objective 2
Explain ways to build a financial base, including investing in real estate, saving
money, and managing credit.
II. BUILDING YOUR FINANCIAL BASE
A. Accumulating capital takes discipline and careful
planning.
1. Savings can help you become an ENTREPRE-
NEUR, one of the fastest ways to wealth.
2. A capital-generating strategy may require a
FRUGAL LIFESTYLE.
3. Married couples need to discuss financial goals.
4. Ideally, the couple should live on one income
and save the other.
5. The first investment might be a LOW-PRICED
HOME.
6. Through the years, homeownership has been a
wise investment.
B. REAL ESTATE: HISTORICALLY, A RELATIVELY
SECURE INVESTMENT
1. The real estate bust that began in 2008 is a rela-
tively rare occurrence.
2. HOME OWNERSHIP
a. The one investment that you can live in is a
Bonus Chapter D – Managing Personal Finances
D-12
lecture enhancer D–1
MILLIONAIRE WOMEN NEXT DOOR
Thomas J. Stanley and William D. Danko, the authors of the
1996 book The Millionaire Next Door, undertook a three-year
study of wealthy women with some interesting findings. (See
the complete lecture enhancer on page D.50 of this manual.)
PPT D-11
Building Your Financial Base
BUILDING YOUR
FINANCIAL BASE
D-11
LO D-2
• Live frugally. If married,
try to live on one income.
• Your first major
investment might be a
low-priced home.
• Buy for the long term and
don’t live beyond your
means.
PPT D-12
Five Rules of Frugality
FIVE RULES of FRUGALITY
Source: AARP, October 2010. D-12
1. Don’t give up what you love.
2. Find inexpensive forms of entertainment.
3. Cut back on non-crucial things.
LO D-2
4. Never go shopping
without knowing exactly
what you’re buying.
5. Shop around for good
deals!
Bonus Chapter D – Managing Personal Finances
D-13
home.
b. The mortgage payments are also relatively
fixed.
c. Paying for a home is a good way of forcing
yourself to save.
d. Some people have used the strategy to BUY
DUPLEX HOMES.
e. By living in one and renting the other, a cou-
ple can live very cheaply while their invest-
ment in a home appreciates.
f. The ownership versus rental analysis can be
applied to other large purchases.
C. TAX DEDUCTIONS AND HOMEOWNERSHIP
1. Buying a home is probably the largest and
MOST IMPORTANT INVESTMENT you’ll make.
2. INTEREST on home mortgage payments is
TAX-DEDUCTIBLE, as are real estate taxes.
3. Almost all of the mortgage payments in the first
few years go toward interest, so the early pay-
ments are tax-deductible.
4. The key to getting the optimum return on a
home is LOCATION, LOCATION, LOCATION.
5. Buying a small house in a great location is usu-
ally better than buying a large house in a not–so–
great setting.
D. WHERE TO PUT YOUR SAVINGS
1. One of the WORST PLACES to keep your long-
Bonus Chapter D – Managing Personal Finances
D-14
PPT D-13
Financial Benefits of Buying a
Home
• A home is an investment you can live in.
• Paying for a home is a good way of forcing
yourself to save.
FINANCIAL BENEFITS of
BUYING a HOME
D-13
LO D-2
• Interest paid on your
home loan is tax
deductible.
• Three keys to optimal
return on your home
are: location, location,
location.
PPT D-14
How Much House Can You Afford?
TEXT FIGURE D.3
How Much House Can You Afford?
HOW MUCH HOUSE CAN YOU
AFFORD?
D-14
LO D-2
lecture enhancer D-2
THE RENT-VERSUS-BUY DECISION
Although buying is generally better than renting, there are sit-
uations in which it is better to rent. (See the complete lecture
enhancer on page D.51 of this manual.)
critical thinking
exercise D-4
CHOOSING THE RIGHT MORTGAGE
LOAN
How much would the monthly payment be to purchase an
$85,000 house? It depends on the interest rate, type of loan,
and down payment. (See the complete exercise on page D.66
of this manual.)
Bonus Chapter D – Managing Personal Finances
D-15
term investments is in a bank or savings and
loan, even online banks.
2. However, it is important to have about SIX
MONTHS OF SAVINGS in the bank for emer-
gencies.
3. One of the BEST PLACES to invest over time
has been the STOCK MARKET.
4. The stock market will rise and fall, but over time
it has been a good investment.
5. Times of financial crisis may be the time to in-
vest.
a. The greater the RISK, the greater the RE-
TURN.
b. Low stock prices may be an opportunity to
invest in the stock market.
c. The average investor buys when the market
is high and sells when prices are low.
d. CONTRARIAN APPROACH is buying stock
when everyone else is selling or vice versa.
6. Bonds have traditionally lagged behind stock as
a long-term investment.
E. LEARNING TO MANAGE CREDIT
1. Even if they are rarely used, having credit cards
is important.
a. Some merchants require credit cards as a
form of IDENTIFICATION.
b. Credit cards help KEEP TRACK OF PUR-