Bonus C – Managing Personal Finances
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PPT D-22
Purchasing Annuities
PURCHASING ANNUITIES
D-22
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
1. Fixed annuities are investments that pay the policy
holder a specified interest rate.
2. Variable annuities provide investment choice identical
to mutual funds.
PPT D-23
Other Insurance Protection
OTHER INSURANCE
PROTECTION
D-23
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.
Disability insurance is an important coverage, since the
likelihood of a young individual sustaining a disability is
higher than the likelihood of dying.
PPT D-24
Where Health Care 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
1. This slide illustrates the percent of money that goes to
different aspects of healthcare.
2. Before showing the slide you could give the students
these categories in a random order and ask them to
rank which ones they think are the highest percentage
based on money spent for healthcare.
3. Note to students that hospital care is the highest per-
centage which makes sense because hospitalization is
usually only done for serious medical issues.
Bonus C – Managing Personal Finances
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PPT D-25
What to Know about Health Savings Ac-
counts
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.
1. Health Savings Accounts (HSAs) are not for everyone.
Some people choose to save money by choosing a
high-deductable plan.
2. Those plans might work for young, healthy people.
Consulting a financial planner should be the first step.
3. If you have cash to pay medical bills, keep your money
in the HSA. At 65, you can withdraw the money penal-
ty-free and use it for anything.
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.
It is important that students understand they cannot rely on
Social Security alone as their sole retirement option.
PPT D-27
Individual Retirement Accounts
INDIVIDUAL
RETIREMENT ACCOUNTS
D-27
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 C – Managing Personal Finances
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PPT D-28
Individual Retirement Accounts
INDIVIDUAL
RETIREMENT ACCOUNTS
D-28
LO D-4
• Roth IRA — Does not give an up-front tax deduction
but earnings grow tax-free and are tax-free when they
are withdrawn.
• MyIRA — A new Roth IRA-type retirement savings
plan for low– and middle-income individuals.
PPT D-29
401(k) Plans
401(k) PLANS
D-29
LO D-4
• 401(k) Plan — An
employer-sponsored
savings plan that allows you
to deposit a set amount of
pretax dollars and collect
compounded earnings tax-
free until withdrawal.
PPT D-30
Benefits of 401(k) Plans
BENEFITS of 401(k) PLANS
D-30
LO D-4
• Three benefits of
401(k) plans:
1. Contributions
reduce your present
taxable income
2. Tax is deferred on
the earnings
3. Many employers
will match your
contributions.
If an employer matches your contribution, it is like free
money. 61% of companies will match your contribution
sometimes 50 cents on a dollar.
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PPT D-31
Keogh Plans
KEOGH PLANS
D-31
LO D-4
• Keogh plans allow self-employed people to
establish their own retirement plans.
• Keogh plans are like IRAs for entrepreneurs.
• Keogh plans can be withdrawn in a lump sum or
spread out over years.
PPT D-32
Planning for Those Who Will Inherit
PLANNING for THOSE
WHO WILL INHERIT
D-32
LO D-4
• Estate planning for those who will inherit money
from you may start with life insurance.
• Will — A document that names the guardian for minor
children, states how you want your assets distributed
and names the executor for your estate.
• Executor — Person who assembles and values your
estate, files income and other taxes, and distributes
assets.
PPT D-33
Test Prep
TEST PREP
D-33
• What are three advantages of using a credit card?
• What kind of life insurance is recommended for
most people?
• What are the advantages of investing through an
IRA? A Keogh account? A 401(k) account?
• What are the main steps in estate planning?
1. Three advantages of using a credit card are: (1) You
may have to have a credit card to buy certain goods or
rent a car, (2) credit cards allow you to easily track
your expenses, and (3) they are more convenient than
carrying cash or writing checks.
2. Term insurance is often recommended for most peo-
ple, since it is cheaper than whole life.
3. The primary advantage of an IRA and Keogh is that
the money invested is not taxed until it is withdrawn.
A Keogh plan is like an IRA for the self-employed.
While the current IRA contribution limit is $5,500, it
increases each year in line with inflation. An addition-
al $1,000 can be added if you are over the age of 50.
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lecture
enhancers
“Avoiding the phrase ‘I don’t have time . . .’ will soon help you to realize that you
do have the time needed for just about anything you choose to accomplish in life.”
Bo Bennett
“Why is there always so much month left at the end of the money?”
Anonymous
“The tax-payer—that’s someone who works for the federal government but
doesn’t have to take a civil service exam.”
Ronald Reagan
lecture enhancer D-1
MILLIONAIRE WOMEN NEXT DOOR
Thomas J. Stanley and William D. Danko’s 1996 book The Millionaire Next Door examined to-
day’s millionaires, who turned out to be small-business owners that drove old cars, shopped in ware-
houses, and pinched pennies. But years later Stanley realized that he was getting a lot of mail from
wealthy women who complained that this portrait of the millionaire didn’t fit them at all. Stanley noted
that 92% of the people in the original study were men, who would have different experiences and out-
looks than women do. Stanley then started a new project—a three-year study of wealthy women, Million-
aire Women Next Door, published in 2003.
The typical millionaire woman is 49 years old, a wife, and a mother. Her workweek averages
about 49 hours doing work she enjoys. Her income—$414,000—represents 71% of her household’s in-
come. She is college-educated and owns her own home. It is important for her to give to significant caus-
es.
“Most millionaire women zeroed in on a skill or hobby that interests them, then stuck with it until
they reaped financial rewards,” says Stanley. Research bears this out—people who enjoy what they are
doing are worth 50% more than the average person their age.
Stanley found several common characteristics. Women millionaires:
1. Set goals, not limits. Most women millionaires have specific daily, weekly, monthly, and
annual goals; and they believe that all their goals are possible. They also have several
possible endgames planned—as opposed to men who tend to be more single-minded.
2. Sweat the small stuff. These wealthy women keep a detailed record of household expens-
es. Most are responsible for family financial planning and budgeting.
3. Sell themselves. Although running an antiques store or clothes boutique may seem attrac-
tive, the study found that these are among the hardest ways to make a living. Women do
much better if they promote themselves as the product.
4. Don’t look back. Four out of five millionaire women say they never look back. Instead,
they use experience to look forward. They believe it is up to them to turn their situations
around.
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5. Think long quality. Rather than going on regular payday spending sprees, women mil-
lionaires stash a percentage of their wages in a bank account. Typically, they save 12% of
their income in a 401(k) or an IRA.
Stanley’s findings are echoed by findings in a 2005 British study. That study found that there
were more 16- to 44-year-old women worth seven figures than men. The BBC program Filthy Rich and
Female claims that the number of millionaire women is on the rise, and that within 20 years, 60% of the
world’s wealth will be controlled by women.i
lecture enhancer D-2
THE RENT-VERSUS-BUY DECISION
The argument has always been “obviously” buying a home is a much better economic decision
than renting. But, depending on how you figure it and how long you stay in a house, that may not be true.
The real estate industry’s logic always has been, “Buy now, make monthly payments, and write them off
your taxes. Then, in a couple of years, the house will have appreciated, you sell it, and you get back all
the money you put into it, plus a profit. It’s like living free.”
As powerful and persuasive an argument as that was in the 1970s and 1980s, it bears reexamining
in the current era of mortgage points, escalating maintenance costs, and the fairly rapid rate with which
the average American seems to change homes every seven years. And you don’t need a calculator to
know that those who bought homes at the peak of the housing market in 1989 have seen their property
values depreciate 10, 20, and even 30%.
Nevertheless, if you crunch the numbers, buying remains a better deal than renting. But it is nei-
ther “obviously” nor “of course” the right decision. It takes a little more thought.
If you plan to stay in one place long enough to recover the fees of buying, say five to seven years,
you are going to be a lot better off in the long run buying. Rent and real estate conditions vary dramatical-
ly city to city and even neighborhood to neighborhood, so a banker, accountant, or broker who knows the
local market can help you compare the merits of renting versus buying.
Some factors to consider include:
Buying: Consider down payment, closing costs, mortgage payment, insurance, property taxes,
maintenance, inflation, appreciation, real estate commission when you sell, and the tax
break for deducting monthly interest.
Renting: Consider monthly rent and insurance, plus the profit you can earn on the money you
would have used for maintenance and a down payment if you had bought a house instead,
minus the income tax you pay on the profit.
What can’t be factored in are “lifestyle choices.” And really, that’s what it comes down to.
There’s always going to be a trade-off. You can always decide to rent a less expensive house, and that
would affect the way the numbers come out for you. Maybe you can rent a place for $500 instead of $750.
But is that going to be the kind of place you want to live in?
The same is true of buying a house. How much house do you really need, and can you get by with
less house to save a little more money?
The issue isn’t whether it’s better to rent or buy; the issue is really an individual one based on
lifestyle.
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lecture enhancer D-3
KNOW YOUR CREDIT SCORE
Lenders have long used credit scores and reports to determine whether or not to lend you money
and how much interest to charge. But other stakeholders are also interested in your credit report—auto
insurers, employers, landlords, even utility companies.
A company called Fair Isaac developed the present credit scoring system in 1989 to give lenders a
shortcut for judging applicants’ credit worthiness. Based on the data they collect about you from banks,
credit card companies, and public records, the three major credit bureaus calculate a so-called FICO
score. Fair Isaac says its formula involves 22 pieces of data and that the final figure, from 300 to 850, is
based on mathematical models that forecast behavior. (See Lecture enhancer D-5 for details about your
credit report.)
The credit score can be compared to the letter grade system familiar from childhood. It reduces
the complexity of credit information and provides a quick way to separate the good credit performers
from the bad. The median U.S. credit score is about 720. More than a quarter of consumers fall into the
750 to 788 score range.
You’re being judged on five major areas:
1. Past payment history. Your payment punctuality weighs heavily (about 35%) on your
credit score. The more recent your tardiness, the more points you sacrifice.
2. Amounts owed. All of the account balances are added up and compared with your credit
limits. As you near your credit limits, your credit score will go down. This part of your
credit makes up about 30% of your credit score.
3. Length of credit history. Fifteen percent of your credit score is determined by how long
you’ve been using credit. The longer your credit history, the better your score. But don’t
open up a lot of new accounts at once to establish a credit history. That will lower the
“average account age” on your score.
4. Amount of new credit. Each time you apply for new credit, an inquiry shows up on your
report. Red flags start waving when you take on more credit, or even just apply for new
credit, in a short period of time.
5. Types of credit. These include credit cards, retail accounts, and installment loans (like
car loans and mortgages). Your use, or overuse, of these has a 10% impact on your over-
all score. If you have had no credit, lenders will consider you a higher risk than someone
who has managed credit cards responsibility.
Your credit report influences lenders and can affect your finances in significant ways. A consum-
er with a credit score of 730 applying for a $150,000 30-year mortgage, for example, may be charged a
5.5% interest rate. For those with a score of 620 to 684, the rate rises to about 7.4%. The 5.5% interest
rate equals a monthly mortgage payment of $856. The 7.4% loan translates to $1,034 per month. (These
interest rates are used as examples. The actual percent interest charged will be based on current economic
conditions.)
Your credit score is not part of the free credit reports guaranteed by the Fair and Accurate Credit
Transactions Act of 2003. However, for a small fee, you can purchase this information from one or all of
the credit bureaus.
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After reviewing your credit report, there are several steps you can take to improve your
credit score.
1. Sign up for automatic bill payment. If you accidentally miss a bill payment, your credit
score can drop as much as 100 points.
2. Watch the timing of your spending. If you plan to apply for a loan in the next few
months, cut down on your spending and try to reduce your debt. The lower the balance,
the better your credit rating.
3. Limit credit card applications. Each time you apply for credit, a lender’s inquiry to
view your report is noted, which can reduce your score.
4. Think twice before cancelling cards. The more companies you owe money to, the
worse your credit score will be. But closing accounts may not improve your score. This is
because you gain points if you only use a small percentage of the total credit available on
your cards. Eliminating accounts can reduce that ratio.
5. Make sure credit limits are posted. When creditors don’t report your available credit,
the credit scoring system may assume that those cards are maxed out no matter how
much you’ve borrowed. Ask lenders to report your credit limit if it is not included on any
accounts.
lecture enhancer D-4
AMERICA’S GROWING CREDIT CARD AVERSION
On February 22, 2010, the provisions of Congress’s Credit CARD Act of 2009 came into effect.
The law’s central reform prohibits card companies from suddenly increasing rates on fixed rate cards.
Also, companies are no longer allowed to institute over-the-limit fees without first consulting the card-
holders. If the customers don’t agree to pay the fines, they are simply barred from spending anymore on
their card, thus halting a vicious cycle that drove many people deep into debt.
But while the new regulations are intended to make credit cards more transparent and trustwor-
thy, card companies used the months before the new law took effect to find ways to circumvent it. Issuers
raised rates, added new fees, and cut back on rewards while they still had the freedom to do so. For dis-
gruntled consumers, this was just another example of the ways that card companies tried to take ad-
vantage of their customers. As a result, studies have shown that more and more people plan to reduce
their credit card usage in the future. In fact, a Federal Reserve study shows that outstanding credit card
debt has been unprecedentedly decreasing in recent months.
According to financial experts, consumers are experiencing an “emotional realignment” with their
cards. What was once a convenient purchasing tool has transformed for some into an uncontrollable debt
accumulator. For cardholders already burdened with debt, their natural inclination is to avoid the same
behaviors that led to their problems. Others avoid the danger of credit cards by switching to debit instead.
At the end of 2008, for instance, Visa announced that the purchase volume of debit cards outweighed that
of credit cards for the first time. Still, economists fear Americans may become too afraid of using credit.
Jumping from such an excessive credit boom to almost no card activity at all could cause a slower eco-
nomic recovery in the long run.ii
Bonus C – Managing Personal Finances
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lecture enhancer D-5
DISCREDIT REPORT
Maybe you’ve never seen your credit report, but dozens of strangers have. Among those who’ve
looked to see how much debt you have and whether you pay your bills on time are banks and mortgage
companies, credit card companies, retailers, insurance companies, maybe even a landlord or prospective
employer. You should add your name to that list.
Consumer advocates strongly recommend you review your credit report at least once a year if you
use a credit card or make installment payments. The incidence of identity theft is exploding. Credit report-
ing agencies that compile the reports have been under fire from federal and state regulators who’ve heard
nightmarish stories about reports riddled with errors and consumers struggling to get them corrected.
Our nation’s credit reporting system includes a handful of major national reporting agencies as
well as hundreds of smaller bureaus that operate in only a single state or county. Millions of bits of in-
formation are fed daily into their computers and into individual consumer credit files.
According to a survey by the Public Interest Research Group, one in four credit reports has errors
serious enough to disqualify consumers from buying a home, opening a bank account, or getting a job. Of
the 197 credit reports surveyed from people in 30 states, 79% had some error. Fifty-four percent of the
reports included personal identifying information that was misspelled, outdated, belonged to someone
else, or otherwise incorrect. Thirty percent contained credit accounts that consumers had closed but that
remained listed as open. A common error is confusion over names—somebody else’s credit woes get
scrambled with your file.
Your credit report contains information about where you work and live and how you pay your
bills. It also may show whether you’ve been sued or arrested or have filed for bankruptcy. Companies
called consumer reporting agencies (CRAs), or credit bureaus, compile and sell your credit report to busi-
nesses. Because businesses use this information to evaluate your application for credit, insurance, em-
ployment, and other purposes allowed by the Fair Credit Reporting Act (FRCRA), it is important that the
information in your report be complete and accurate.
You should review your credit reports once a year, or several months before applying for a loan.
Check for errors, negative data, or any suspicious activity that may signal identity theft. The government
has made it easier to review your credit rating. Under the Fair and Accurate Credit Transactions Act of
2003, all consumers are entitled to free annual credit reports from the three major credit bureaus. If you
find any errors, there are appeal procedures available to clear up credit report mistakes. (You can access
your free credit reports through www.annualcreditreport.com, a website sponsored by the three credit re-
porting agencies.)
What’s in Your Credit Report?
Identifying information. Your name, address, phone number, and Social Security number ap-
pears on your credit report. The report may also include a list of your current and previous
employers, even your previous home addresses.
Your credit history. Your credit history includes a breakdown of your debt, including:
• Late payments
• Outstanding debt
• Total amount of credit currently available to you
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Any public records. This section includes any filings of personal bankruptcy or court judgments
against you. These items remain on your credit report for 7 years, except bankruptcies,
which remain on your credit report for 10 years.
Inquiries into your credit. Whenever you or someone else checks your credit report, it shows up
in your file as an “inquiry.” There are two types of inquiries: hard and soft. Hard inquiries
come mainly from lenders from whom you are seeking a loan. Lenders look at your report to
see what kind of credit risk you pose. A “soft” inquiry will show up when you request a
copy of your credit report or when your existing creditors routinely review your credit.
These do not count against you.
In reviewing your information, ask yourself these questions:
1. Is the identifying information correct, including middle initials and Social Security num-
bers?
2. Are the accounts accurate? Check the account numbers, credit limits, and payment rec-
ords.
3. Is the information current? By law, negative information can remain in your file for 7
years; bankruptcies, for 10 years.
4. Are old, closed accounts included? If they’re listed as current accounts, a creditor might
assume you have access to too much credit.
When negative information in your report is accurate, only the passage of time can ensure its re-
moval. Accurate negative information can generally stay on your report for 7 years. There are certain ex-
ceptions:
• Information about criminal convictions may be reported without any time limitation.
• Information about a lawsuit or an unpaid judgment against you can be reported for 7 years or
until the statue of limitations runs out, whichever is longer.
• Criminal convictions can be reported without any time limit.
Disputing a Credit Report Error
If you wish to dispute an item on your credit report that you feel is wrong, you can do so for free.
When you contact the credit reporting company, it will investigate the dispute and issue you a revised
credit report for free.
1. Start a record. Every step of the way, be sure to keep good records of all your conversa-
tions and copies of each letter you send. Send all letters via certified mail and be sure to
include copies of any documentation that supports your claim. Also, be sure to tell the
credit bureau exactly what you want it to do.
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2. Inform the credit reporting agency and tell the agency what information you believe is
inaccurate. The Federal Consumer Information Center provides a sample dispute letter
(www.pueblo.gsa.gov). Within 30 days, the credit reporting agency will reinvestigate the
items in question. It will forward all relevant data you provide about the dispute to the
“information provider” (lender, creditor, etc.). The creditor is then required by law to in-
vestigate your complaint and report its findings. If the disputed information turns out to
be inaccurate, the creditor must notify all nationwide credit reporting agencies, so they all
can correct the information in your file.
3. Inform the business that sent the erroneous information of your dispute. Let the creditor
know in writing that you are disputing an item it put on your report. Include copies of the
communication you have had with the credit bureaus.
4. Get positive information put into your file. If you have accounts with creditors that
don’t appear in your credit file, you can ask the credit agencies to add this information to
future reports.
If your dispute results in a change to your credit report, the credit bureau will give you the written
results and a free copy of your report.
But if you are unsuccessful in removing information from your credit file and reach an impasse,
you always have the legal right to attach a letter of explanation to your credit file. Make sure all three
credit bureaus receive the letter, as well as the business that provided the negative report. The business is
obligated to include your letter in any future input to the credit bureaus.
Repairing Your Credit
If you find that you have less than stellar credit, there are two key ingredients to improving your
creditworthiness: time and responsible use of credit. Nothing else will improve your credit image in the
eyes of the lending world. When someone tells you they can wipe your credit record clean, they are lying.
Worse, they could be telling the truth but using an illegal method to “clean” your record—creating fraud-
ulent identities, producing false documents, or making false claims.
To heal your past credit abuses, you simply have to pay your bills on time and demonstrate re-
sponsible credit management consistently over time. Nothing else will work.iii
lecture enhancer D-6
SOCIAL SECURITY AND YOUR RETIREMENT
The headlines have recently been filled with speculation about the future of Social Security. So-
cial Security is not a pension fund with money put aside to pay future benefits. The taxes of current work-
ers are used to pay the Social Security and Medicare benefits of current retirees.
That was workable back in 1980 when there were five active workers for each retiree. It is barely
workable today with 3.2 workers per retiree. It won’t work at all when baby boomer retirements reach
their peak early in the 21st century.
By then, there could be fewer than two workers per retiree. By the year 2030, the Social Security
system, including Medicare, would be paying out $1.8 trillion more each year than it takes in, if it had the
money to pay.
No matter which scenario occurs, retirees will have to rely more on their own savings, and they
can’t depend on Social Security and Medicare to see them through. There are steps anyone can take now
to secure their future.
Save More Than You Ever Thought Possible
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Social Security benefits may have to be cut by up to 25%. Also, typical Americans in their 50s
are staring at retirement with only $12,000 in net financial assets. To make up for those factors, Ameri-
cans must quintuple their rate of savings and invest for an average return of 10% a year.
Can the average household really hope to quintuple its savings rate? Maybe not right away, but
you can move in that direction:
Rethink your savings. Do a thorough retirement diagnosis of when you will expect to retire,
what your expected sources of retirement income are, and how much you will actually need
when you retire.
Force yourself to acknowledge how big a retirement gap you will face—with a Social Securi-
ty benefit that is significantly smaller than promised. Confronting that retirement gap can
produce a dramatic change in expectations. Most people who do that calculation soon start
trading some of the dollars they are spending today for the dollars they will need later.
Examples include eating out less often, taking one vacation each year instead of two and
making that vacation much less costly than ever before, and buying fewer things—paying
off credit cards instead of letting balances and interest charges pile up. Saving more and
spending less can take you a long way toward closing your retirement gap.
Invest More Aggressively
There may be more stock market investors than ever, but few of them invest aggressively enough. Saving
more won’t close the retirement gap if you don’t earn sufficient returns on your money.
Strategy. Unless you are within a few years of retiring, saving for your retirement is a long-term
goal. When you’re dealing with the long term, you can invest most of your money in higher return, higher
risk investments such as stocks.
Favor mutual funds. Most people don’t have the time or expertise to pick individual stocks. The
prudent investment strategy is to pick a number of mutual funds.
Diversify. Don’t put all your money in one type of fund. Diversify among different types of stock
funds and between stock and bond funds.
Also, don’t put all your money in one country. Diversify between funds that invest only in the
United States and funds that invest in foreign markets. About 15% of your portfolio can be invested
abroad—if you’re in your 40s or early 50s; less if you’re older. Maybe you won’t earn a 10% return on
your money every year, but history suggests it is reasonable and prudent to expect to earn that return on
average over time.
Finally, you can prepare for a postretirement career. The way retirement works today, you wake
up on a given day and go from working many hours a week to not working at all. Despite much longer
and healthier lives, only 16% of men now work past age 65. In the new model of retirement, most people
will want to work beyond age 65 and most will be physically able to do so.
lecture enhancer D-7
THE TROUBLE WITH SUING YOUR BROKER
The recent stock market crash left many investors feeling spurned or mislead by those financial
minds they trusted most, namely their stockbrokers. In fact, complaints against brokers have risen 81%
since 2008. Despite the passage of time, investors are still rankled by the nosedive their portfolios have
taken since October 2008, with many even pursuing legal action against the brokers who gave them such
bad advice.