978-0078023163 Chapter D Part 2

Bonus Chapter D – Managing Personal Finances

D-16

PPT D-15

Saving and Managing Credit

• Contrarian Approach — Buying stock whenever

everyone else is selling or vice versa.

• Credit cards serve useful purposes and are

important to own but must be used discriminately.

SAVING and MANAGING CREDIT

D-15

LO D-2

• Not all credit cards are

equal. Check sites like

CardRatings.com or

CreditCards.com to ﬁnd a ﬁt.

Bonus Chapter D – Managing Personal Finances

D-17

CHASES.

c. It is easier to write one check at the end of

the month than to carry cash.

d. Credit cards are SAFER than cash—you can

cancel a stolen credit card.

2. Credit is expensive.

a. 50% of college students have four or more

cards and only 17% regularly pay off their

balance.

b. The financial charges on CREDIT CARDS

are 12 to 26% annually.

c. If you do use a credit card, PAY THE BAL-

ANCE IN FULL each month during the peri-

od when no interest is charged.

3. Choose a card that pays you cash back or gives

you purchase credits or frequent flier miles.

a. The value of these givebacks can be from 1

to 6%.

b. Some cards charge an annual fee whereas

others do not.

4. The DANGERS OF CREDIT CARDS are:

a. It is easy to buy goods and services you

normally would not buy.

b. You can pile up more than you can repay.

c. If you have trouble sticking to a budget, it

may be better NOT TO HAVE A CREDIT

CARD AT ALL.

Bonus Chapter D – Managing Personal Finances

D-18

lecture enhancer D–3

KNOW YOUR CREDIT SCORE

Your credit score determines the interest rate you are charged

for credit. This lecture enhancer gives some practical tips for

improving our score. (See the complete lecture enhancer on

page D.52 of this manual.)

PPT D-16

Credit Cards and Debt

• 50% of college students have four or more credit

cards.

• Only 17% report paying off their balance each

month.

CREDIT CARDS and DEBT

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LO D-2

• If you feel managing a

credit card would be

too difﬁcult, try a debit

card.

PPT D-17

Credit Card Act of 2009

• Created new consumer credit card protections

and went into effect in February 2010.

• New law allows card issuers to increase interest

rates for only a limited number of reasons.

CREDIT CARD ACT of 2009

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LO D-2

• People must be over 21

or have an adult

cosigner to get a credit

card.

lecture enhancer D–4

AMERICA’S GROWING CREDIT

CARD AVERSION

As new credit card regulations come into effect, more and

more Americans are still turning away from plastic. (See the

complete lecture enhancer on page D.53 of this manual.)

Bonus Chapter D – Managing Personal Finances

D-19

d. Credit cards can be convenient, but they can

also be a FINANCIAL DISASTER if you

have little financial restraint.

e. We have seen recently that hacking can be

an issue too.

5. For some people it may be better to have a debit

card.

6. DEBIT CARDS are like credit cards, but they

won’t let you spend more than a certain amount.

7. A recent credit card act created new protections

for consumers.

a. Card issuers can raise rates only for a lim-

ited number of reasons.

b. You must be 21 or have an adult cosign to

get a credit card.

 learning objective 3

Explain how buying the appropriate insurance can protect your financial base.

III. PROTECTING YOUR FINANCIAL BASE: BUY-

ING INSURANCE

A. BUYING LIFE INSURANCE

1. The death of one spouse can mean a sudden

drop in income for the survivor.

2. To PROVIDE PROTECTION from the loss of a

spouse or business partner, you should buy life

insurance.

3. TERM INSURANCE is pure insurance protec-

tion for a given number of years.

Bonus Chapter D – Managing Personal Finances

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PPT D-18

Clean Credit

CLEAN CREDIT

Steps to Keep a Good Credit Score

Source: Money Magazine, money.cnn.com, accessed November 2014. D-18

PhotoCredit:RobertScoble

LO D-2

1. Always pay your bills on time!

2. Keep small balances on

multiple cards.

3. Don’t shift balances.

4. Don’t apply for too many cards

at once.

5. Don’t ﬁle for personal

bankruptcy.

PPT D-19

What’s Your Score?

WHAT’s YOUR SCORE?

How You Might Rate on a Credit Score

D-19

Range Rating

760 to 850 Excellent

700 to 759 Great

660 to 690 Fair

620 to 659 Poor

619 and under Very Poor

LO D-2

critical thinking

exercise D-3

FINDING THE BEST CAR LOAN

This exercise asks students to use online financial sites to find

the latest interest rates for car loans and calculate the monthly

payment. (See the complete exercise on page D.64 of this

manual.)

lecture enhancer D-5

DISCREDIT REPORT

Maybe you’ve never seen your credit report, but dozens of

strangers have. (See the complete lecture enhancer on page

D.54 of this manual.)

test

prep

PPT D-20

Test Prep

TEST PREP

D-20

• What are the six steps you can take to control

your ﬁnances?

• What steps should a person follow to build

capital?

• Why is real estate a good investment?

Bonus Chapter D – Managing Personal Finances

D-21

a. Term insurance costs less the younger you

buy it.

b. You can use a financial formula to figure out

how much insurance you need at different

points in your life.

c. MULTIYEAR LEVEL-PREMIUM INSUR-

ANCE guarantees that you’ll pay the same

premium for the life of the policy.

4. WHOLE LIFE INSURANCE combines pure in-

surance and savings.

a. It places part of the premium in savings and

the other part toward pure insurance.

b. This type may be right for people who have

trouble saving.

c. A UNIVERSAL LIFE POLICY lets you

choose how to divide the premium between

insurance and investment.

5. VARIABLE LIFE INSURANCE is whole life in-

surance that invests the cash value of the policy

in stocks or higher-yielding securities; it is vul-

nerable to stock market dips.

6. An ANNUITY is a contract to make regular pay-

ments to a person for life or for a fixed period.

a. With an annuity you are guaranteed to have

an income until you die.

b. FIXED ANNUITIES are investments that pay

the policyholder a specified interest rate.

c. VARIABLE ANNUITIES provide investment

Bonus Chapter D – Managing Personal Finances

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PPT D-21

Insuring Your Life

INSURING YOUR LIFE

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LO D-3

• Term Insurance — A 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.

• Variable Life Insurance — A form of whole life

insurance that invests the cash value of the policy in

stocks or other high-yielding securities.

TEXT FIGURE D.4

Why Buy Term Insurance?

This text figure shows the reasons for purchasing term insur-

ance.

PPT D-22

Purchasing Annuities

PURCHASING ANNUITIES

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LO D-3

• Annuity — A contract to make

regular payments to a person for

life or for a ﬁxed period; an

annuity guarantees an income

until you die.

• Two types of annuities:

1. Fixed annuities

2. Variable annuities

Bonus Chapter D – Managing Personal Finances

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choices identical to mutual funds; they are

becoming more popular.

d. Variable annuities are riskier; be careful

choosing the insurer.

7. Before buying any insurance, it is wise to consult

an independent financial adviser.

B. HEALTH INSURANCE

1. Individuals need to consider protecting them-

selves from losses due to health problems.

a. Many have health insurance coverage

through their employer.

b. If not, you can buy insurance throught the

government’s heath insurance marketplace.

2. You should also have DISABILITY INSUR-

ANCE because the chances of becoming

disabled at an early age are higher than your

chances of dying from an accident.

3. DISABILITY INSURANCE is insurance that

pays part of the cost of a long-term sickness or

an accident.

C. HOMEOWNER’S OR RENTER’S INSURANCE

1. APARTMENT INSURANCE or HOMEOWN-

ER’S INSURANCE covers loss of your posses-

sions.

2. It is best to get guaranteed REPLACEMENT IN-

SURANCE, which means the insurance compa-

ny will give you whatever it costs to buy things

new.

Bonus Chapter D – Managing Personal Finances

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lecture enhancer D–6

SOCIAL SECURITY AND YOUR

RETIREMENT

Back in the 1980s there were five active workers paying So-

cial Security taxes for each retiree. Today it’s 3.2 workers and

dropping. (See the complete lecture enhancer on page D.56 of

this manual.)

PPT D-23

Other Insurance Protection

OTHER INSURANCE

PROTECTION

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LO D-3

• Disability Insurance — Insurance that pays part of

the cost of a long-term sickness or an accident.

• Homeowner’s or renter’s insurance covers the

cost of things you own if they are destroyed.

• Umbrella Policy — Combining all your insurance

(life, health, homeowner

’

s, auto) from one company

is less costly.

Bonus Chapter D – Managing Personal Finances

D-25

3. Another option is to buy insurance that covers

only the DEPRECIATED COST of the items.

4. You need to buy a RIDER to your insurance pol-

icy to cover expensive items such as jewelry or

silver.

D. OTHER INSURANCE

1. Most states require that drivers have automobile

insurance.

2. Be sure to insure against losses from uninsured

motorists.

3. A large deductible ($500 or so) will keep the

premiums lower.

4. An UMBRELLA POLICY is a broadly based in-

surance policy that saves you money because

you buy all your insurance from one company.

 learning objective 4

Outline a strategy for retiring with enough money to last a lifetime.

IV. PLANNING YOUR RETIREMENT

A. Successful financial planning requires long-range

planning, including retirement.

B. SOCIAL SECURITY

1. SOCIAL SECURITY is the term used to de-

scribe the Old-Age, Survivors, and Disability In-

surance program established by the Social Se-

curity Act of 1935.

2. By the time students retire, there will be huge

changes in the Social Security system.

Bonus Chapter D – Managing Personal Finances

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PPT D-24

Where Healthcare Money Goes

WHERE HEALTHCARE

MONEY GOES

Source: U.S. Department of Health and Human Services. D-24

Where Amount

Hospital care 31%

Physicians 21%

Medicines 10%

Administration 7%

Nursing homes6%

Other 25%

LO D-3

PPT D-25

What to Know about Health Sav-

ings Accounts

WHAT to KNOW ABOUT

HEALTH SAVINGS ACCOUNTS

Source: Money Magazine, money.cnn.com, accessed November 2014. D-25

LO D-3

1. Your employer is likely to

offer HSA options.

2. The plans can be costly but

withdrawal for medical bills is

tax-free.

3. They’re not for everyone.

4. HSA accounts can double as

retirement accounts.

PPT D-26

Social Security

SOCIAL SECURITY

D-26

LO D-4

• Social Security — The Old-Age, Survivors, and

Disability Insurance Program established by the

Social Security Act of 1935.

• Social Security beneﬁts are paid through social

security taxes paid by workers currently earning

wages in the market.

• The Social Security fund is expected to be hard

pressed because of the growing number of older

adults.

Bonus Chapter D – Managing Personal Finances

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3. The number of people RETIRING AND LIVING

LONGER is increasing while the number of

workers paying into the fund is declining.

4. As a result, expect cuts in benefits, later retire-

ment age, or higher Social Security taxes.

5. Don’t count on Social Security to provide you

with all your funds for retirement—SAVE

FUNDS NOW.

C. INDIVIDUAL RETIREMENT ACCOUNTS (IRAs)

1. An INDIVIDUAL RETIREMENT ACCOUNT

(IRA) is a tax-deferred investment plan that en-

ables you (and your spouse, if you are married)

to save part of your income for retirement.

a. A TRADITIONAL IRA allows people who

qualify to deduct from their reported income

the money they put into an account.

b. TAX-DEFERRED CONTRIBUTIONS are re-

tirement account deposits for which you pay

no current taxes, but the earnings gained

are taxed as regular income when they are

withdrawn at retirement.

c. A traditional IRA is a good deal for an inves-

tor because the INVESTED MONEY IS NOT

TAXED.

2. The earlier you start saving the better, because

your money has the chance to double and dou-

ble again.

a. Saving $5,500 in an IRA at 10% interest will

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PPT D-27

Individual Retirement Accounts

INDIVIDUAL

RETIREMENT ACCOUNTS

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LO D-4

• Individual Retirement Accounts (IRAs) — Tax-

deferred investment plans that enable a person to

save part of their income for retirement.

• Tax-Deferred Contributions — Contributions in

which you pay no current taxes, but earnings gained

in the IRA are taxed as income after withdrawal.

Bonus Chapter D – Managing Personal Finances

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yield $1.6 million in 35 years.

b. The actual rate of return depends on the

type of investments you choose and can

vary widely over time.

3. The earlier you start, the faster you will accumu-

late retirement funds.

4. A ROTH IRA is an IRA where you don’t get up–

front deductions on your taxes as you would with

a traditional IRA, but the earnings grow tax-free

and are also tax-free when they are withdrawn.

a. Traditional IRAs offer tax savings WHEN

THEY ARE DEPOSITED.

b. Roth IRAs offer tax savings WHEN THEY

ARE WITHDRAWN.

5. Both types of IRAs have advantages and disad-

vantages.

b. In general, a Roth IRA is best for younger

workers.

6. You cannot take the money out of an IRA until

you are 59½ YEARS OLD without paying a 10%

penalty and paying taxes on the income.

a. You cannot tap the fund for impulse pur-

chases.

b. However, you can now take out some funds

for an EDUCATION or a FIRST HOUSE.

7. A wide range of investment choices are availa-

ble.

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