Finance 6

budgeting

• maximize cash inflows

  • income from working

• minimize cash outflows

  • required living expenses

  • minimum debt payments

• pay yourself first

  • emergency faving

  • pay down high interest debt

  • short and long term saving

  • investing for wealth building

• fun spending

maslovs hierarchy of needs

BOTTOM

• physiological needs

  • food water, warmth rest

• safety

  • security safety

• belonging and love needs

  • relationships, friends

• esteem needs

  • prestige and accomplishment

• self actualization

  • full potential

hierarchy of needs based on money

• managing your money

  • daily expenses

  • reducing debt

  • establishing a stable cash flow

• building your safety net

  • creating an emergency fund

  • growing savings

  • protecting yourself with insurance

• accumulating wealth

  • growing your investment portfolio

  • saving for retirement

  • utilizing tax-efficient investing

• preserving wealth

  • enjoying financial confidence

  • turning retirement savings into income

  • maximizing your pension

• leaving a legacy

  • estate planning

  • charitable giving planning

  • business continuity planning

pay yourself first

first priorities

• emergency saving

• pay down high interest debt

second priorities

• short and long-term saving

• shorter term goals (large purchases

  • car

  • vacation

  • home

• long term: retirement

investing for wealth building

downside of saving cash

cash and normal checking accounts don’t accumulate interest

over time, you purchasing power decreases due to inflation

assets

in investing, anything you own that has monetary value and that you expect to grow in value and produce income

4 main asset classes

groups of asset types that behave in similar ways to each other

• cash and cash equivalents

• fixed income

• equities

• property/real assets

cash and cash equivalents

liquid assets with relatively low risk and yield

• cash/savings accounts

• money market

• certificates of deposits (CDs)

INTEREST

fixed income

BOTH

fixed payments on principal investment (debt instruments)

• bonds

equities

ownership shares in companies

• stock market

• investments I privately held companies

CAPITAL GAINS

property/real estate

tangible items - value is heavily reliant on supply and demand

• real estate

• commodities (food, etc)

CAPITAL GAINS

capital gains

the profits you get when you sell and asset (increase in value)

• short term (held for less than one year): taxed at regular tax rates

• long term (held for a year or more): taxed at lower tax rates

interest

money earned by an individual or company for lending their funds

emergency fund

highly liquid (easily accessable)

furutre purchases

medium/high liquidity depending on time

• car

• home

• vacation, etc.

retirement

lest liquid

does not need to be highly liquid during the accumulation phase

HIGHER

typically, savings options that are less liquid have ___ returns. banks and other organizations have to incentivize you to not move your money

• this is hwy higher interest rate savings accounts at banks have minimum balance requirements. 

cash equivalents

• checking and savings accounts (most liquid, minimal returns)

  • smallest returns

• money market accounts (highly liquid, higher variable returns)

  • operates similarly to check king accounts but accrues more interest than savings accounts

  • offered by banks, credit unions and other financial instituions

  • normally higher minimum balances to open or avoid fees

  • may have transaction fees

• certificates of deposit (not as liquid, higher fixed returns)

  • savings account that receives a higher fixed rate for a set period of time

  • if you withdraw your money early, you are charged a penalty

emergency fund

low risk, highly liquid

savings account

future purchases

low risk, medium to high liquidity based on time

money market accounts

certificate of deposit (cd)

false

Keeping your savings in cash is the safest way to maintain its value.

stock, business, rental property

Which of the following would be considered an Asset? (select all that apply)

 

Credit Card

 

Stock

 

Business

 

Rental Property

interest

The term for the money you earn by lending your funds to another individual or company.

true

Assets bought and sold less than a year later would be considered short term.

false

The short term capital gains tax rate is less than the long term capital gains tax rate.

Banks don't benefit financially from the amount you keep in your accounts therefore there is no correlation between liquidity and returns.

Which of the following is NOT true about the relationship between liquidity and returns?

 

Some accounts require a higher minimum balance to qualify for the higher returns.

 

Some accounts with higher returns will charge a penalty for withdrawing early.

 

Banks don't benefit financially from the amount you keep in your accounts therefore there is no correlation between liquidity and returns.

 

Banks incentivize you with a higher interest rate to keep your money in your account as long as possible.

savings account

Where should you keep your emergency savings fund that only has enough to cover one month of your expenses?

retirement math

• start with your expected monthly expenses

  • necessities

    • housing

    • car

    • food

    • medical

  • lifestyle

    • travel

    • family activities and gifts

    • hobbies and entertainment

    • charities

the 4% rule

i you only withdraw and live on 4% of your retirement savings in your initial year, and then pull the same amount ever year after only adjusted for inflation, you can be reasonably certain that you will not run out of money before you pass

the interest earned each year will offset a significant portion of your withdrawals making your savings last longer

*note: this is snot completely fool-proof, but it gets you in the right ballpark

equation: annual expenses/.04 = target retirement savings

OR

annual expenses * 25 = target retirement savings

$300,000

for every $1k month less you spend in retirement, you reduce your total savings requirement by ___

how to start funding our retirement

• typical route

  • save in tax advantaged retirement accounts

  • IRAs

  • 401ks or 403bs

• social security income

• supplement with other investments

tax advantaged retirement savings accounts

IRA

401k, 403b, 457 plans

ira

individual retirement account

• relatively low contribution limits (compared to 401ks)

• if you or your spouse have an earned income you can contirbute

• lots of investment options available

• cannot take out loans (only withdrawals)

401k, 403b, 457 plans

employer sponsored retirement accounts

• much higher contributions limits

• employers often offer matching (free money!)

  • typically they will match your contributions up to a certain percentage of your income (such as 3-5%)

• investment options are limited to those offered through employers plan

• can take out loans to certain limits

traditional (ira or 401k)

• contributions reduce taxable income

• distributions are taxed (when money is taken out)

• early distribution tax penalty of 10% before age of 59.5

  • exceptions: disability, higher education, excessive medical expenses

• most valuable when your current tax rate is higher than your expected retirement tax rate

roth (ira or 401k)

contributions are taxable

distributions are tax free (when money is taken out)

• earnings grow tax free

early distribution tax penalty of 10% before age of 59.5 (if account is untouched and 5 years old) (if accounti s 5 years old there is no penalty)

• exceptions

  • disability

  • higher education

  • excessive medical expenses

most valuable when our current tax rate is lower than your expected retirement tax rate

how social security and Medicare are funded

• payroll taxes

• self employment income tax

how are social security income benefits calcualted

• based on the highest earning 35 years of work (subject to withholdings)

• age of retirement

  • 67 is the current age of full retirement with min benefits available at 62  and max available at 70

medicare

minimum levels of health insurance coverage

available at age of 65

• know that his does not cover everything so consider supplemental insurance

housing, medical, hobbies, travel

Which of the following MAY be included in your estimated monthly expenses at retirement?

 

Housing

 

Medical Expenses

 

Hobbies

 

Travel

false

The 4% Rule to calculate the amount you need to save for retirement is completely fool proof.

1200000

If you expect your monthly expenses to be $4,000 in retirement, based on the 4% rule, how much would you need to have saved before you can retire?

true

Paying off your house and car loans before you retire significantly reduces the amount you need to save for retirement.

receiving social secuirty benefits, contributing to an ira, saving through an employer matched retirement fund

Which of the following is a common method of at least partially funding retirement? (Select all that apply)

 

Storing cash under the mattress

 

Receiving Social Security Benefits

 

Contributing to an IRA

 

Saving through an employer matched retirement fund

IRA

Which tax advantaged retirement savings account is owned directly by the individual?

false (they match your whole salary, not every contributions)

If an employer offers a 5% match to your retirement accounts, it means that for every $100 you contribute, they will contribute $5.

true

You have more investment options available in individually owned retirement accounts than you do with those offered by an employer.

traditional IRA, traditional 401k

Contributions to which type of retirement account reduces your income tax in the year you contribute, but taxes distributions? (Select all that apply)

false

You receive the highest monthly social security benefit if you claim retirement benefits as soon as you are allowed.

stock

a security that represents partial ownership in a publicly traded company

• you own equity in the company

• may be entitled to dividends (a portion of the earnings of the company)

common stock

• sold at fair market value

• have voting rights in the company

• higher risk, higher potential return (more volatile) - change more and more risky

preferred stocks

• costs more due to preferential treatment

• dividends are paid before common stock (when funds are available)

• fixed redemption value

• don't have voting rights

• lower risk (dividend payments and less chances of losses) but may not get the same upside upon sale

fair market value

what someone is willing to pay for an asset

• heavily influenced by supply and demand

  • increased demand (increased price)

    • good financial performance

    • expected growth

      • business decisions

      • economic factors

    • popularity

  • increased supply (reduced price - people are selling)

    • poor financial performance

    • poor economic outlook

    • bad press

market capitalization

• markets estimation of the value of the company

• stock price x shares outstanding = market capitalization rate

forward dividend

estimation of the dividend to be paid per share over the next 12 months

dividend yield

• financial ration indicating how much a company pays out in dividends per year relative to its stock price 

• forward dividend/stock price

ex-dividend date

• if you own the stock on this date (must purchase by the day before) you will be entitled to the dividend.

how to make money with stocks

• buy low and sell high

• stocks or volatile (a lot of up and down)

  • market perceptions can change quickly

• short term investors (day traders)

  • try to catch the drops (vuy) and rises (sell)

  • MUCH more risky and STRESSFUL

• long term investors

  • plan for the pattern of long-term growth and ignore the drops

  • must less risky and more reliable

• gains and losses are FINAL (and taxable) when the stock is sold

true

gains and losses are FINAL (and taxable) when the stock is sold

day trading

• not reccomended

• diadvantages

  • short term gains = higher tax rates

  • higher risks

  • more stress

  • large learning curve

  • wash sales - if you buy too soon after you sell you lose the tax benefits of any losses

97%

studies have shown that around __ of day traders have lost their money in only 2 years… only 1% make a profit

speculation

making bets, highest risk - highest reward (day trading)

investing

in it for the long haul knowing that long term trends are in your favor

diversifying stocks

growth - higher risk, higher reward

• tend to be newer companies

• may have low earnings now but has the potential to grow significantly over time

value - lower risk, lower reward

• more established and stable companies

• likelihood of exponential growth is limited

industries (it's safer to spread across different industries - INDEPENDANT from eachother)

domestic vs. international

funds

diversification made easy

a collection of investments that are bought and sold as a unit

• exchange traded fund (etfs)

  • traded on the exchange like stocks

  • lowest fees

index funds

• higher cost of administration

  • higher cost of administration

    • purchase through a broker like fidelity or vanguard rather than the stock exchange

  • slightly higher fees than etfs

can hold all types of investments: stocks, bonds, REITs, commodities, currencies, etc

GOOD place to start when staring investing

bonds

debt instrument

• company or gov organization borrows money from you with a promise to pay it back with “interest”

par (face) value (normally $1000) is the amount you will receive back on the stated “maturity date”

• normally purchased at a ‘discount’ (less than $1000)

  • can be ‘at par’ or ‘premium’ rates

• the higher the interest rate, the bigger the discount

coupon payments are stated amount that you received at regular intervals (quarterly, semi-anually, or annually)

-treated as interest income

a bond without a coupon is called a zero-coupon bond

tried to maturity is the total amount (as a percentage) you can expect to profit

how much is a bond worth

• relies on a few factors

  • current interest rates

  • coupon payments

  • riskiness of the bond

    • this is a debt instrument. if a company goes bankrupt you may not get paid

    • the price of risky bonds will be less than those of safe bonds to entice more buyers

    • promised return: stated yield to maturity

    • expected return: takes into consideration the risk of default/bankruptcy

      • WILL BE LESS than the promised return

higher interest rates =

price goes down

higher expected returns (therefore bigger discount on purchase price)

• if you own a bond, you WANT interest rates to drop to INCREASE the price of your bond

who issues bonds

corporate (private businesses)

• no tax advantages

treasury bonds (us gov)

• tax advantages at state level only

municipal bonds (state and local govs)

• tax advantages at both federal and state levels

true

gov bonds are less risky than corporate bonds

which is more risky: corporate stocks or corporate bonds

• stocks.

• enterprise value is the total of market clue (stocks) and debt value (bonds)

• when the interprise value drops 

  • stocks are reduced first (more risky)

    • risk losses form simple fluctuations

  • debt (bonds) losses value last (less risky)

    • when you lose enough value to no longer be able to pay your debts, the company is bankrupt

public opinion, replacement of a CEO, financial performance, economic outlook

Which of the following factors affect the price of a stock?  (Select all that apply)

 

Public opinion

 

Replacement of a CEO

 

Financial Performance

 

Economic outlook

false

Stocks are reliable short term investments.

true

97% of day traders have lost their money in two years.

Pick a growth company and an established company, invest in etfs, pick a foreign company and a domestic company

Which of the following are ways to diversify your stocks? (select all that apply)

 

Pick a growth company and an established company.

 

Invest in ETF's

 

Pick an auto company and a gas company.

 

Pick a foreign company and a domestic company

1000

The Par Value of a Bond is usually

true

The higher the coupon payment, the higher the price of the bond.

false

The expected return of a bond will be higher than the promised return.

stocks - most risky

corporate bonds - middle risk level

gov bonds - least risky

organize the following investments with their level of riskiness

state or local govs

A municipal bond is offered by which of the following entities?

stocks - equities

bonds - fixed income

funds - mixed

match the asset class with the following assets

property

real estate

commonodties

collectibles

real estate

rental

held for sale (house flipping, rental)

REITs

commodities

a physical good that is used in production or in trade. gold, oil, wheat and copper

How to invest:

physical ownership

exchanges

part of mutual funds, index funds, and ETFS

collectibles

held for the appreciation of value

• art

• antiques

• Lego sets

rental real estate investing

going out and investing in a property: encompasses all elements of a financial statement

• rental income

• expenses

  • property tax

  • insurance

  • repairs and maintenance

  • management expenses

    • accounting and tax prep

    • advertising and placement

  • mortgage interest (normally at the beginning)

• debt

• asset

  • appreciation of value of time to be recognized

things to know about real estate investing

• not fully passive income

  • its self managed: it can be a lot of work

  • in management is outsourced

    • you still have to oversee the managers work

    • their cost eats into profits

• produces the most cash flow after it is paid off

  • not great as a short term investment

  • start early in the wealth building process

• there will be surprise expenses/repairs

  • renters are not as invested in maintaining their space

• getting paid can be difficult sometimes

  • sometimes due to unexpected hardships, others because they never really intended to pay

real estate investment trusts

multiple investors pool together their capital to purchase real estate

as an investor you are entitled to your portion of the profits and appreciation of the investments

most are traded int he same way as stocks

built in diversification:

• investment doesn’t go into just one property

  • residential

  • commercial

  • multiple locations

cryptocurrencies

pretend money

the main theory behind it is that if enough people agree it is valuable, then it becomes valuable

• there is not underlying inherent value

• different from

  • government flat currencies: all businesses in the country have to accept that currency

  • businesses int he stock market: even as public perception of a company and stock prices drop, there is still a true underlying value of the business, it operates its ability to generate money and value regardless of public perception

• does that mean you cant make money on it?

  • no but it is very much speculation and not a safe bet

  • incredibly risky

diversify

• making sure youre not putting all of your money in one stock or one place

• if you have all of your money in one stock, it only takes one compan to strugggle for you to lose everyting

• you have have all of your money in STOCKS (different), more has to go wrong but you are still subject to the risk of a stock market drop

• if instead you invest in stocks and bonds and real estate sicne they tend to oeprate fairly independently of each other, youa re less likely to hav eevrything fall at once

funds

diversisfication made easy

• etfs - exchange traded funds

  • traded on the exchange lik stocks

  • lowest fees

• index funds

  • higher cost of administration

    • purchases through a broker like fidelity rather than the stock exchange

    • slightly higher fees than etfs

• can hold all types of investments: stocks, bonds, rets, commodities, currencies, etc

time and risk tolerance

the more time you have to recover form a lose, the more risk you CAN take

• just because you CAN take more risk, does not mean you HAVE to

alternatively, the higher return you need in a short amount of time, the more risk you need to take (high risk, high reward)

phases of life and investing

• general rule, gradually icnrease your portfolio allocation in bonds as you get odler

• of course made adjustments as needed to fit your goals and lifetime

allocation

how much money out of all of your retirement savings, regular savings, investments - how much money are you putting towards each of your investments

things to consider before investing

• do i have room in my budget?

• do i have a sufficient emergency fund

• have I paid down my high interest debt

  • high interest is anything above average interest rates for mortgages and student loans (anything about 8%)

• what is my current risk profile

  • how much will if affect my ability to attain my financial goals if i lose everything I put into this particular investment

  • how much liquidity do i need in my investments

• how long do I have to reach my financial goals

how to get started in investing

long term goals: if you can put it in a tax benefited retirement account, do it!

• remember

  • roth mean syou pay tax now but not later

  • traditional means you avoid tax now but have to pay it later when you draw on the account

determine your risk allocation based on your needs and timeline

keep it simple: funds make diversification easy

• can open an account with vanguard, fidelity, charles schwab, robinhood, etc

• pay attention to fees

review and reallocate as needed