Untitled Flashcards Set

Decision Making and Goals

• Course Introduction – Money plays an important part of our daily life. Our interactions with money (saving, spending, borrowing, and investing) will have a direct impact on our well-being. Our Financial well-being will ultimately depend on the choices we make with money.

• FOUR Course Themes

  • You are Responsible for Yourself – being accountable for your actions

  • Your Present Self Impacts Your Future Self – need to live in the moment, expectations for future

  • You are Better Off in a Community – collective/shared experience

  • Investing Helps to Cope with Risk/Uncertainty – investing is a long term activity, the sooner you start the more time you have to grow your money

• Articles – Key Takeaway’s: Americans Say This is the Most Valuable Money Lesson They’ve Ever Learned, Sally Krawcheck Worst Advice She Ever Heard, Kakeibo – The Japanese Art of Saving Money. Kakeibo is a mindfulness strategy.

• Goals – the end result of something a person intends to acquire, achieve, do, reach, or accomplish at some point in the future

• Financial Goals – specific objectives that are accomplished through financial planning.

• Financial Planning – managing money continuously throughout life. Financial Planning never ends – even in retirement.

• Emergency Fund (EF) – this is where financial literacy begins. Having 3-6 months living expenses covered in a savings account. Life happens, unexpected expenses always crop up (Murphy’s Law – if something can go wrong it will go wrong). EF gives us flexibility.

• Money in Your Life – Well Being – feeling good about yourself. Characteristics of well-being – optimistic, love what they do, are in healthy relationships, etc. Domains of Well Being (acronym PISEF) Physical, Intellectual, Social, Emotional, and Financial. Please refer to the reading guides for details.

• Financial Decisions – Values – fundamental beliefs, Trade-offs – giving up one thing for another, and Opportunity Costs – the value of the opportunity that is forgone or given up

• SMART Goals – Elements of a SMART goal (specific, measurable, attainable, realistic, time bound) please refer to readings in classroom. Goals are financial objectives accomplished through financial planning

• Retirement Accounts – Pillars of Retirement

  • Defined Contribution Plan (an employer sponsored 401k plan – the contribution amount is defined. For 2024 employees can contribute $23,000) 

  • Defined Benefit Plan – a Company Pension. The employer provides employee a monthly benefit at retirement. This puts the burden on the employer to fund retirement benefits of employees. These plans are no longer popular and employers are moving to defined contribution plans. 

  • Social Security (Entitlement Program) – Income for Retirees. A government sponsored retirement program, contributions deducted through payroll taxes (7.65%), only those paying into plan receive benefits which include being eligible for unemployment insurance. S.S. never meant to fund entire retirement. S.S. is in jeopardy of running out of money.

• 401k - Pre-Tax Contributions. The contribution amount is defined ($23,000) and it is the employees responsibility to contribute to fund their own retirement.

  • 1. Reduce Taxable Income by the amount of 401k contribution

  • 2. Money grows Tax deferred

  • 3. Company Matching Contributions – aka ‘Free Money’

• Dollar-Cost-Averaging – we invest in our 401K’s 26 times per year. 52 weeks per year divided by 2 equals 26 paychecks. When we invest 26 paychecks each year we buy shares over the course of the year at many different times of highs and lows. When you invest a fixed amount multiple times over the course of the year it is called dollar-cost-averaging.

• Traditional IRA - Pre-Tax Contributions but there are income restrictions – may or may not be tax deductible (depends on income level – lose tax deduction if income over $77k), max contribution $7,000/ year. Individuals over income limit can still contribute but can not take a tax deduction

• ROTH IRA - After-Tax Contributions. This is the best retirement account for young people, tax-free growth for life. No income deduction since your contributions are after taxes. You need earned income to qualify (taxes taken out of pay), once income above $77k an individual can NOT contribute. Max contribution $7,000/ year. 

• Financial Statements – are formal records that reflect business activities, performance, and the overall condition of the business. Investors use these statements to analyze potential investments.

• Income Statement – a financial statement that shows the revenues and expenses of the company. Produced quarterly. Revenue minus expenses equals Profit or Loss. It is referred to as the profit and loss statement

  • Top line -revenue, bottom line – profit or loss. Forward guidance – company remarks about the future business conditions – headwinds/tailwinds. Guidance is not on the Inc. Statement.

• Balance Sheet – snapshot of what a business owns (assets) and owes (liabilities). Produced annually. Debt is recorded on this statement which investors should be aware of. The balance sheet is the preferred financial statement for investors as it is used to compute financial ratios ex: debt to equity ratio, etc.

• Federal Reserve (the FED) – the Central Bank of the U.S. is responsible for providing a safe, flexible, and stable monetary system. They conduct Monetary Policy – interest rate policy. The Fed is mandated by Congress with two key goals: to foster conditions that promote maximum employment and stable prices. The Fed is our primary inflation fighting agency of the federal government. The tool the Fed uses to raise/lower rates is the overnight lending rate between banks known as Federal Funds. When the Fed raises interest rates it sends a signal to consumers that it will cost more to borrow money and in this way they slow consumer spending. Higher rates are headwinds for investors.

• Inflation – a general rise in prices, our current economic environment is seeing robust inflation. The fed fights inflation by increasing interest rates.

• Capital Markets – financial markets where capital is raised, the place where different types of financial securities (equity and debt) are traded both in-person and electronically. Equity markets are where stocks and other securities are traded. The bond markets are comprised of government, corporate, and municipal securities. These are known as debt securities.

• Initial Public Offering (IPO’s) – this is the process by which private companies utilize the Capital Markets to go through the listing process and become publicly traded companies. IPO’s are risky – they tend to be very volatile and don’t have a track record like more established companies.

• Long versus Short – A long position refers to an investor who has purchased shares of stock and has an ownership position. A short position is very risky and involves a margin account which uses leverage. An investor who is short is potentially exposed to unlimited losses. 

• Dividends – earnings (profits) companies share with investors as a reward for holding the stock. Dividends = compound interest. Dividends can be accepted in cash or re-invested as additional shares of stock. We always re-invest dividends because this contributes to a stocks total return (growth plus dividends). Most stocks pay quarterly dividends – 4 periods of interest.

• Simple Interest – money invested or deposited (principal balance) earns interest over a period of time. Simple interest = One period of interest. Invest money with the bank in a one-year CD. Your money earns interest over one year – one interest period. Interest is credited to your account after ONE year (one interest period of simple interest).

• Compound Interest – interest-on-interest. Stocks pay dividends quarterly – 4 interest periods per year. Invested money earns interest that is added back to the principal. After the first interest period the interest is added back to original balance so the money earns more interest on the second interest period. When we invest into the stock market we earn compound interest from dividends. Each quarterly dividend is added to the original number of shares so each quarterly dividend is incrementally more than the previous dividend since we are re-investing each dividend as additional shares of stock.

  • Two Most Important Variables to create Wealth – Time and Compound Interest. One advantage young people have – TIME. You have 50 years to save $2 million for retirement. The longer you wait to start the more you have to save and the harder it becomes to hit that goal. Compound Interest is the secret to successful investing. Dividends are how we earn compound interest. Stocks that pay good dividends is the key.

  • Pay Yourself First – budgeting strategy where an individual saves money first, before paying any expenses. The idea is to save money first to ensure that it happens. If monthly expenses are paid first then the individual will say – ‘I don’t have enough money to save’. The idea is to save BEFORE we pay our expenses.

  • S&P 500 Index – the best place for young people to invest. This is a diversified Index of 500 large U.S companies. The Index has averaged returns of 7%-10% per year over the last 50 years. The Index is comprised of 11 Sectors and countless sub-industries. This is the best place for young people to start their Investing careers. Most widely tracked U.S. Index. The performance of the S&P 500 is a benchmark by which most professional money managers are compared against. We looked at this several times by pulling up the FINVIZ website.

Unit II, III, IV

The Basics of Taxes

• Taxes: a sum of money demanded by a government. Taxes fund the activities of the government – highways, roads, bridges, ports, defense, and law enforcement, etc.

• Taxpayer: a person who pays taxes to the Federal, State, or Local government

• U.S. Tax System: Progressive tax system. The more you make the more you pay in taxes.

  • Internal Revenue Service: agency responsible for collecting the government's taxes and administering the federal tax code.

  • Marginal Tax Rates – rates published in the IRS Tax Code 10%, 12%, 20%, etc.

  • Effective Rates – the blending of tax rates according to IRS tax code. Ex: First $10k of income taxed at 10%, income between $11k and $49k taxed at 12%, etc.

• Earned Income: money earned from working for pay – Salary or Hourly

• Unearned Income: Income received from sources other than employment. Interest earned on a bank account, dividends from stocks owned, monetary gifts.

• Community: a group of people with common interests. Communities could be either a school, sports team, club, company, municipality, or state

• How do we benefit from communities: communities come together for things they need: roads, libraries, schools, parks, police & fire, national defense, etc. Communities offer us a collective experience – we all go through things together. We survived the Covid pandemic together, so we draw strength from having lived through this collective experience.

• Transfer Payments: payments in which there are no goods and services exchanged. Governments use these payments to have a stimulative effect on the economy. During Covid in 2020, the federal government gave lower-income citizens free money to help out during this economic slowdown. Unemployment insurance payments are an example of a transfer payment. Government payments that redistribute money for social welfare programs such as welfare payments, student grants, educational services, and social security payments are types of transfer payments.

Types of Taxes

• Income Taxes: a tax on earned/unearned income. Income taxes are mandatory taxes. Funds the activities of the Federal/State government. Not all states have an income tax.

• Payroll Taxes: a tax on earned income to fund Social Security and Medicare. A shared tax. Payroll taxes are mandatory taxes. Social security 6.2%, Medicare 1.45%. Employee pays 7.65% and Employer pay 7.65% - Both employee & employer pay combined 15.3%. Tax capped at $168,600.00. Self-employed people have to pay 15.3% (self-employment tax)

• Property Taxes: Tax on personal property such as a house, land, car, motorcycle, and boats. Property taxes are Ad Valorem taxes which means according to assessed value. Property taxes fund the activities of a municipal government – schools, parks, beaches, and roads. Fairfield funds its budget (2023 $356.8 million) through these taxes.

• Sales Taxes: a tax on the purchase of goods and services. A percentage of tax is added to the price of a good. CT sales tax is 6.35%. Funds activities of the state government.

• Excise Taxes: taxes collected from the seller/retailer and are often hidden or buried in the price of the good. Governments impose these taxes in some instances to discourage use of a product such as Sin Taxes (alcohol/cigarettes/firearms). CT imposes this tax on alcohol, tobacco, gasoline, airline tickets, and hotel rooms to name a few. Early withdrawals from a retirement account (non ROTH) are hit with a 10% excise tax penalty to discourage this behavior. Legal withdrawals begin after age 59.5.

• Legislative taxes: a government (federal, state, local) decides how much tax to impose. Examples: property, sales, and excise taxes

• Capital Gains Taxes: a tax on the sale of certain types of assets such as stocks, bonds, or personal property such as a car or home. Capital gains taxes fall into two categories: short term & long term. Short Term Gains: a person held asset for less than ONE year. Subject to ordinary income taxes. Long Term Gains: a person held an asset for more than one year. Tax on long term gains depends on the income level of the person who realized the gain. Generally, 15% or 20% depending on their income level.

Getting Paid

• Employment: an agreement between an employer and an employee. An employer hire and employee in exchange for compensation in the form of an hourly wage or a salary. Employee needs to accept the terms of employment.

• Methods of Payment: Paper Paycheck, Direct Deposit, or compensation loaded onto a Payroll Card.

• Gross Income: your total income before any deductions. Deductions can be Mandatory (Income Tax & Payroll Tax) or Optional (401k, Healthcare, Flexible Spending accounts).

• Net Income: the employee’s take home pay after taxes and deductions

• Tax Forms: W4 Employee Withholding Allowance Certificate – THIS HAS BEEN CHANGED. employee fills out at the beginning of employment. Form helps employee manage their tax liability. Government allows employees to manage tax liability by claiming how many dependents rely on them for financial support. Can be children, or elderly family members like grandparents who need assistance.

• Form W2 – this is a summary of wages earned from your employer at the end of the tax year

• Dependents: a person who relies on the taxpayer for financial support.

• Withholding Allowances: NO LONGER REQUIRED by IRS. Tax system changed. Between 2018 and 2025 taxpayers no longer list individual allowances to manage tax liability. Now dependents (children under 18) are listed by using a formula (each child corresponds with a $2,000 deduction). Old system required a declaration on a tax form indicating how much in taxes should be withheld from employees pay. Claiming ZERO allowances will correlate with the maximum amount of taxes withheld from pay. The larger the number of allowances (ex: 2,3,4,5, etc.) will result in a smaller amount of taxes withheld from pay.

• Employee Benefits: employer may offer employee benefits besides just pay. An employer might offer any of the following benefits: retirement account (401k), healthcare, workers compensation insurance (long term insurance benefits due to on the job injury), gym membership, healthcare flexible spending accounts, discounts at stores, paid time off, holidays off, mileage compensation for commuters, unemployment insurance, etc.

• Pay Stub/Earnings Statement: employer will provide employee with a record of each pay period. Pay stub records all details regarding pay including: gross income, net income, deductions, retirement contributions, healthcare cost, and any other deduction from pay.

Depository Institutions

• There are many different types of financial institutions. Banks, brokerages, Insurance companies, Mortgage companies, community banks, internet banks to name a few.

• Banks: Financial institutions that offers deposit products, loans, advice, and services such as wealth management. The primary activity for most banks is to lend money – home loans, auto loans, personal loans, etc. Banks make money from lending activities and Investing excess reserves into bonds (treasuries) and bond equivalents. More on Net Interest Margins later in this section.

• United States Treasury Securities: Debt issued by the United States Treasury Department to fund activities of the federal government. Treasuries are backed by the full faith and credit of the U.S. government. The government currently has a $34 Trillion dollar deficit. The Federal government spends more than it takes in from the IRS in taxes each year so it issues debt when funds are needed.  This is unsustainable and MUST change! Treasuries are auctioned every day to meet the needs of the federal government. Treasuries come in three forms:

  • Treasury Bills: Known as Zero Coupon Bonds (no coupon payment) because they don’t pay semiannual interest. T-bills are purchased at a discount, and they mature to face value. T-bills are short term debt obligations. Maximum maturity is 1 year. Short duration securities are relatively safe and not significantly impacted by changes in rates.

  • Treasury Notes: These are medium term government debt obligations. T-notes pay semi-annual interest and have maturities between 2 and 10 years. The interest (known as the Coupon) is fixed for the life of the security. The coupon is the interest rate the treasury pays. Coupon rates are fixed and will not change. At maturity the U.S. government returns the amount invested to the investor.

  • Treasury Bonds: The are long term borrowings of the federal government. These are debt instruments that are issued with maturities ranging from 11 years to 30 years. T-bonds pay semi-annual interest. The interest (coupon) is fixed for the life of the security. The only difference between t-notes and t-bonds is the duration (time). T-bonds are long duration assets and are heavily influenced by a changing rate environment. We looked at several low coupon long duration assets that are trading at half their par values. Treasury bonds are risky because you are investing money for a LONG period of time. Treasury bonds can be subject to big price swings that can make them very volatile.

• 10 Year United States Treasury Note: banks use the yield on this treasury security as the basis for pricing mortgage products. We said banks add a spread on top on the ten-year treasury to price out mortgages. The Fed’s rate hiking cycle means the ten-year yield has moved significantly higher making mortgages more expensive. Rates have more than doubled from 3% to 8%. The Fed wants to slow down the economy by hiking rates which makes the ten year yield go higher pressuring mortgage rates. This has slowed the demand for mortgages by 50%.

• Net Interest Margins – this is how banks make money. Net Interest Margins are known as the spread which is the difference banks charge between deposit rates and lending rates. We reviewed how banks are slow to raise deposit rates but move very fast raising loan rates. Banks pay low rates on deposit products (approximately 0.5% at best) and charge much higher rates on loans (mortgage rate above 7%) and banks also earn money by investing in treasuries (they invest excess reserves in treasuries 1yr rate 5.5%).

• Retail Banks: offer services to the general public. They provide a range of services such as checking accounts (transaction accounts) and saving accounts, loans for mortgages and autos, safety-deposit boxes, and sometimes credit cards. Examples: Webster Bank, Fairfield County Bank, and Citizens bank. 

• Commercial Banks: Larger banks that deal with retail customers as well as large businesses, corporations, and governments. Commercial banks use their size and scale as a strategic advantage over smaller banks. The range of services offered is larger than retail banks. Services like cash management, trust, credit card, foreign currency conversions, capital market activities, and the full spectrum of loan or credit services. Examples: Bank of America, Wells Fargo, and Citigroup.

• Investment Banks: Banks that offer the full range of banking services but specialize in capital market activities. They offer financial advice, Merger & Acquisitions, Underwritings (IPO’s), bond offerings, etc.  Examples: Goldman Sachs, Morgan Stanley, and JP Morgan.

• Credit Unions: They are often referred to as cooperatives. They are the only not for profit bank. They are owned and operated by their members. They offer basic deposit products like checking and saving and basic lending services for mortgages and autos. Credit Unions are often owned by large corporations such as Sikorsky Federal Credit Union or General Electric Federal Credit Union.

• Central Bank: The Federal Reserve. Responsible for promoting a safe, stable, Flexible Financial System. They are responsible for the oversight of the U.S. Banking system. They regulate and supervise all member banks in the United States. They are mandated by Congress to conduct monetary policy. Their mandate is to promote price stability (control inflation) and maximum employment. This is known as their ‘Dual Mandate’. They conduct policy by raising/lowering interest rates (federal funds rate is the tool the FED uses to change rates), manage the supply of money in circulation, and they also implement reserve requirements for all member banks based on their size. They also conduct stress testing of banks to make sure they can weather any economic storm. Current Federal Funds rate is 4.75% - 5% - October 2024. The Fed cut by 50 basis points in September.

• Central Bank Monetary Policy – the federal reserve will raise and lower interest rates (Federal Funds) to control the economy. The Fed raises and lowers the Federal Funds Rate to slow or stimulate the economy. The Federal Funds rate is the overnight lending rate between banks. After a bank meets its’ reserve requirement they often sell their excess reserves to other banks in the overnight market to get a return on their funds. When the Central Bank raises rates they change the Federal Funds Rate. The biggest issue with the FED is the velocity with which they raised interest rates after Covid – this has caused tremendous losses for banks holding portfolios of bonds (increases in rates has led to massive declines on bond prices which move inversely to rates. In September 2024 the Fed began to lower interest rates due to a slowing in inflation.

Retirement Accounts – Defined Contribution Plans

401k – Employer Sponsored Plan – Max Contribution limit for 2024 - $23,000

• Reduce Taxable Income

• Money grows tax deferred

• Matching contributions – Free Money

• Money taxed upon withdrawal

• Early withdrawals before 59.5 years old face 10% Excise penalty

Individual Retirement Account – May or may not be tax deductible – depends on income. Max contribution in 2024 - $7,000

• Money grows tax deferred

• Withdrawals taxed as income

• Early withdrawals before 59.5 years old face 10% Excise penalty

ROTH Style IRA – Best for high school students – Money grows TAX FREE

Max Contribution in 2024 - $7,000

• Income Limits Apply. Tax free growth and NO TAXES Due for withdrawals if done at legal age limit

Bank Products – Bank products offer safety, security, and liquidity. Bank products are safe and offer FDIC insurance. We view bank products as defensive assets. We are safeguarding our money and in some cases we can earn a little bit of interest. Banks are excellent places to store our emergency fund (6 to 9 months salary) because we don’t want to take any risk so a savings account is an ideal place for our emergency fund.

• FDIC Insurance (Federal Deposit Insurance Corporation): government agency that insures depository institutions. Every account holder is insured up to $250,000 per depositor, per institution.

• NCUA Insurance (National Credit Union Administration): provides insurance protection for credit unions. The coverage is the same as the FDIC $250,000. Each depositor is insured against a loss due to the credit union failing.

• Checking Account – this account is where our pay gets deposited. Checking accounts are transaction accounts. We write checks and pay bills from our checking account. Checking accounts do NOT pay interest. Savings need to be moved from your checking account into a savings account.

• Savings Accounts – accounts that pay a low level of interest. Today, most savings accounts pay less than 1 percent. Savings accounts are defensive assets. We want no exposure to risk with our emergency reserves. For fractionally higher rates of return we use a money market account.

• Money Market Account – earns a depositor an incrementally higher rate of return than a savings account. MMA’s can have a one day delay on access to money market accounts. Insured by FDIC insurance.

• Money Market Funds – offered by investment banks and brokerage companies. Money market funds are not insured like money market accounts. An investor uses a money market account to get a higher rate of return. An investor can lose money in a money market fund although the chance of loss is small. Money market funds offer higher returns but with some modest to low level of risk because returns are based on a portfolio of securities to generate a higher yield.

• Certificate of Deposit – These are time deposits that lack liquidity. They earn an incrementally higher rate of return but the money is locked up for a specific time frame. Generally CD’s are chosen for a fixed term. Ex: 6 months up to 2 years.

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Credit Reports and Scores

Borrower: someone who receives something today with a promise to pay it back in the future

Lender: a person or company who makes funds available to borrow

Credit History: a record of the borrowers past lending and credit-related activities. It tells lenders how trustworthy you are as a borrower.

Credit Report: a record/statement/report of a person’s use of credit. It reflects information about your current credit condition.

Credit Score: a three-digit number that reflects the likelihood a consumer will repay their debts. The credit score is a measure of the consumers trustworthiness. Each consumer will have numerous credit scores. Companies evaluate statistical characteristics found in a consumer’s credit report when evaluating things like: payment patterns, amount of debt, and type of debt, etc. Credit scores do not appear on credit reports.

Soft Credit Check – you have been pre-screened for a credit card offer. Credit Card Company performs soft credit check to see if you are in good standing and ‘current’ and do not have any late/outstanding or missed payments before they send out pre-approved credit offers. This type of inquiry has NO impact on your credit score. Soft inquiries typically happen as part of a background check by employers or landlords before any offers are made.

Hard Credit Check – this is a formal credit check that involves pulling a consumers credit report and history. All hard credit checks will negatively impact a credit score. Multiple hard credit checks over a short period of time are problematic and will tell lenders you are seeking too much credit. Credit should be sought out sparingly.

Fixing Credit – it is important to monitor your credit history. Low credit scores are low because consumers have bad habits. Fixing low credit scores is an easy process: make payments on time and begin to reduce the total amount of debt. High scores are high because consumers practice good habits. It is difficult to raise high scores but very easy to damage a high credit score. One missed payment can hurt a high credit score more than the same missed payment for a low credit score.

Major Credit Reporting Agencies (CRA’s): Experian, Equifax, and Trans Union

Credit Report Personal Information: name, address, social security number, telephone number, date of birth, employment history 

Public Record Information on a Credit Report: bankruptcy, foreclosure, tax liens, collection agency reports on items that have not been paid back

Negative Credit Report Information: hard credit checks which are the result of applying for credit, seeking credit too often, failure to pay any debt by the due date, making late payments, having too much similar credit – ex: too many credit cards.

Things that have no Effect on Credit: you checking your own credit (one free credit check per year), soft inquiries/background checks, receiving a pre-approved credit card offer in the mail, employer/landlord background check.

Shopping for Credit: CRA’s are aware when you are shopping for credit. If multiple credit checks come in for the same type of credit within a 14-day period it will have no impact on your credit score.

What is Not on a Credit Report: your credit score does not appear on a credit report, medical information about you, race/gender, religion/ethnicity, buying habits, and criminal history

How can Consumers Improve Their Credit: Some activities take a long time to remove from a report. TIME is the only way to clean-up a credit report. Some CRA’s retain historical information on a credit report for up to 10 years – bankruptcies/foreclosures.

Positive Credit Activities: pay bills on time, pay bills in full, apply for credit sparingly, have a diverse mix of credit, check credit report annually

Fair Isaac Corporation (FICO): Most common credit scoring model. FICO is a data analytics company founded by Bill Fair and Earl Isaac in 1956. They created a proprietary model considered the most reliable scoring model. By 1989 banks began to use FICO scoring models to evaluate a consumer’s trustworthiness. FICO scores range from 300 to 850. There are hundreds of scoring models in use today.

FICO 5: FIVE components that make up a FICO credit score: 35% Payment History, 30% Debt Amount, 15% Length of Credit History, 10% New Credit, 10% Credit Mix

Article: The Top 6 Misconceptions About Credit Scores – article in google classroom about common misconceptions people have about credit scores.

1. FICO is the one, true credit score: FICO is the most common but there are dozens of companies producing credit score models – Vantage Score, Credit Karma, Trans Risk, Credit Xpert Credit Score, etc

2. Checking Your Score is Bad for your Credit – Hard Inquiries knock off a few points when your credit is checked on a lending decision. Soft inquiries do not effect your credit and are part of a background check

3. My Credit Score Affects Future Job Opportunities – potential employers don’t look at your credit score, they actually pull your credit report to see how well a .candidate has managed their own credit. They must ask for your permission. Credit scores are not on a credit report.

4. It takes forever for a Credit Score to Budge – Poor credit scores are relatively easy to improve. By simply paying back debt owed it will have a significant impact on a credit score. High credit scores are difficult to move incrementally higher. Missteps are just the opposite. One missed payment will have a bigger negative effect on high credit scores than the same missed payment on a low credit score.

5. Credit Cards Are Good for your Credit Score – too many credit cards is not good for a credit score. This is viewed by CRA’s negatively and indicates the borrower is in need of credit which may be a problem. They want to see a diverse mix of credit.

6. I don’t have to worry, I already have an excellent credit score – Consumers with high credit scores need to be diligent about maintaining their good credit. Small mistakes will impact good credit scores more negatively than the same mistake for someone with poor credit.

Unit V

Credit Basics 

What is Credit: the term has many meanings: an accounting entry, a legal agreement, creditworthiness. Credit involves borrowing money, or the ability to receive goods & services today with the promise to pay it back in the future. It is not really a promise but a legal obligation. 

Credit Responsibilities: credit can be an effective tool if managed responsibly. Borrowing money means you are spending future income before you have received it. When we use credit we jeopardize our future discretionary income. If credit is not managed properly it can lead to stress and have a negative effect on your well-being and quality of life.

Discretionary Income: the money leftover after ALL living expenses have been paid. Examples: rent, mortgage, utility bills, phone, cable, streaming services, food, insurance, loan payments, etc.

Sources of Credit: sources of credit can vary from family and friends to more traditional sources such as: insurance companies, banks (mortgages/auto loans/personal loans), merchants (retail stores), and the government (education, housing, small business loans)

Net Interest Margins: known as the ‘spread’ which is how banks make money. The spread is the difference between deposit rates and lending rates.

10 Year Treasury Significance: benchmark used by banks to determine mortgage rates

Cost of Credit: the cost of credit is expressed/measured in terms of the interest rate. Credit cards charge compound interest (daily interest) which means the amount you owe can add up rapidly.

Benefits of Not Using Credit: spending in cash (including debit card’s which pull money directly from a bank account) is best because there is no legal contract, no fees/penalties, we are not being charged high interest rates, and we are NOT jeopardizing future discretionary income.

Positive Credit Behaviors: need to be very intentional/purposeful when we use credit. Seek credit sparingly (no need for more than ONE credit card). Pay bills on time and in full (must keep utilization rate low). Monitor credit usage. Review credit report for accuracy.

Negative Credit Behaviors: behaviors to be avoided. Missing payments will drop credit score rapidly (shows you can’t be trusted). Late payments (you can’t handle the responsibility). Having too much of one type of credit (no diversification) such as credit cards. Chasing rewards such as points, airline miles, or cash back from spending is dangerous and not worth the benefits. 

Types of Credit: we discussed two main types of credit which report our activities to the Credit Reporting Agencies (CRA’s)

Revolving Credit: Open-Ended Credit. Examples: Credit Cards/Credit Lines from a Bank. Revolving credit is unsecured credit. There is no collateral associated with revolving credit. Revolving credit is established in advance (no need to re-apply). Variable Interest Rate & variable payments (depends on amount charged and how they decide to repay). 

Installment Credit: Closed-End Credit. Examples: Auto loans/Mortgages/Student loans. Installment loans are secured loans. Loans based on the purchase of an asset like a car or house. Loans are based on a fixed rate of interest that does not change over the life of the loan. Loans are repaid in equal amounts over a specific period of time. Car loans may last a few years while a mortgage loan can last up to 30 years. The payment amount does NOT change each month until the loan is repaid in full.

Alternative Credit: may combine elements of closed-end or open-end credit. Alternative credit is a type of last resort (not a good option) credit. These sources of credit charge higher rates than conventional credit, lots of fees and should NOT be considered. Alternate lenders do not judge applicants based on a credit history. At most an alternate lender may do a soft credit check to see if your account is in good standing. Alternate sources of credit are generally short-term loans at high rates of interest. Alternate lenders may judge applicants on proof of income or some other metric.

Alternative Credit Examples:

Payday Loan: short term loan secured by the borrowers written check or authorization for automatic withdrawal from borrower’s bank account

Rent-to-Own: tangible items are leased (furniture/appliances) until the terms of the loan are satisfied. Once loan is paid off the items will be owned.

Title Loan: borrower gives title for automobile to lender in exchange for a loan. If terms of loan not satisfied the lender keeps the title to the automobile. 

Pawn Loan: borrower gives personal property to the lender to secure a loan. If loan terms not meant the lender keeps the property.

Refund Anticipation loan: short-term cash advance secured by a taxpayers expected tax refund. 

Credit Cycles: the credit cycle is aligned with the business cycle of rising and falling economic activity. When the economy is expanding (GDP is rising) more credit is offered and when the economy is contracting (slowing GDP) credit conditions are tightened making it more difficult to acquire credit. Gross Domestic Product (GDP) is our best measure of economic activity and as you would imagine credit cycles are aligned with cycles of rising and falling economic activity.

Understanding Credit Cards

What is a Credit Card: is a revolving line of credit established in advance. Credit cards are issued by banks, retail stores, and merchants. Credit cards are useful tools for new borrowers for establishing a credit history if they are used responsibly but can be a very damaging if they are abused.

Credit Card Benefits: can be a convenient payment tool - need to carry cash, useful in emergencies, they offer consumers fraud protection, they can be a good tool for establishing credit, and some consumers like the rewards program – earn free miles, discounts on hotels/merchandise, or cash back but ALL require the consumer to spend money in order for them to receive benefits

Credit Card Drawbacks: They charge daily compound interest. Teaser rates can be misleading and can change any time the consumer makes a mistake. Credit Card debt is the most expensive debt you will EVER encounter. Credit card companies charge high rates for credit, high fees, and numerous penalties for bad behavior. They are easy to abuse, they can harm your credit, and lead to a cycle of debt which can negatively impact your health/well-being. When we use a credit card, we are jeopardizing our future discretionary income. 

Pre-Approved Application – credit card companies look for new consumers by sending out pre-approved applications in the mail. This means the company has performed a soft credit check. They don’t actually pull your credit report but they use a software that tells if your account is up to date without any outstanding debts. If you have received this type of offer it means you have passed the first step in the screening process.

Deadbeat – a derogatory term that credit card companies call users who pay off credit card balances in full each month. Credit card companies do not make interest/fees off deadbeats. Deadbeats keep credit card utilization rate low so they do not get charged ridiculously high rates

Positive Credit Card Behaviors: need to be intentional when we use a credit card. Seek credit sparingly. It is important to have a mixture of credit. Good behavior- small purchases that are paid in full when the bill comes. New credit card users should NEVER leave a balance on the card. If a consumer utilizes credit by not paying the balance in full it will lower your credit score.

Schumer Box: credit card issuers are required to disclose the terms and fees of each credit card offer in an easy to read box. Consumers can review Schumer Box to better understand the cost of the credit so they can make easy comparisons when shopping for credit.

Credit Cards versus Debit Cards: a credit card charges interest and fees when a consumer utilizes credit. Debit Cards are connected to checking accounts and are better options for everyday purchases. When a consumer spends on a debit card they are using their own money. Credit Cards are lines of credit and if the purchases are not paid in full the consumer will have high interest expenses.

Credit Card Annual Percentage Rate (APR): credit cards charge borrowers compound interest (interest-on-interest) on the balances that cardholders carry. Credit card companies can change your APR (interest rate) at any time for poor behavior which we call Penalty APR. Credit card companies charge different APR’s (interest rates) for different activities like: balance transfers, cash advances, introductory or teaser APR, etc.

Unit VI

FUNDAMENTALS OF INVESTING & THE VALUE OF MONEY

Definition of Investing: Allocating resources, typically money, with the expectation of generating

income or profit.

Key Reasons to Invest:

• Building wealth over time.

• Reaching financial goals (e.g., retirement, education).

• Countering inflation.

Types of Investments

Stocks: Ownership in a company; potential for dividends and capital appreciation.

Bonds: Lending money to entities (government, corporations) with fixed interest returns.

Mutual Funds: Pool of funds from multiple investors managed by professionals.

Real Estate: Property investment for income or appreciation.

Commodities: Physical goods like gold, oil, or agricultural products.

Risk and Return

Risk Tolerance: Understanding personal comfort with risk (low, moderate, high).

Risk vs. Return Relationship: Higher risk typically correlates with higher potential returns.

Dow Jones Industrials – Our oldest Index. The stocks that make up the Index are NOT all industrials as the name implies. The DOW is considered a bell-weather of stock performance for the U.S. and the overall economy. Comprised of 30 ‘blue chip’ industry leading stocks. It is a collection of 30 stocks selected by the Dow Jones company. Investors can gain exposure to the DOW Jones through the DIA ETF. The DOW is a price weighted Index.

Stock – is a security that represents ownership or Equity. It is a general term that can be further broken down into many different classes of stock. In our class we said stocks offer the greatest potential to generate long term wealth. Individual stocks carry more risk than diversified investments like Mutual Funds/Index Funds. Investors who purchase individual stocks need to build diversified portfolios of stocks. Stocks are our best way to reduce the impact of inflation because their returns tend to outpace inflation.

S&P 500 Index – Index that tracks the performance of 500 large well capitalized stocks. It is our single best gauge of stock market performance. Most portfolio managers are benchmarked against the performance of this Index. The Index has returned 10.13% since 1957. Investors have averaged anywhere between 7-9% over the life of the Index. Since 1980 the Index has had 33 positive years and 10 negative years. Investors can buy the S&P in two versions – market cap and equal weighted. The S&P 500 is a market cap weighted Index (symbol SPY). The MEGA Cap technology stocks are the largest weightings in the Index. For example, the SEVEN largest tech stocks AAPL, MSFT, etc are 20% of the entire S&P 500. Many investors buy the equal weighted S&P Index where all 500 companies are equally weighted. The equal weighted S&P ETF (symbol is EWI).

Bonds – a bond is a type of security that is similar to an IOU. Bonds are Debt Securities that companies must pay back to the investors who have lent them money. A company will raise capital by borrowing money from investors, paying them a rate of interest, and when the borrowing term is complete (at maturity) the borrower pays the lender back the money they borrowed plus interest. We discussed three types of bonds: U.S. Government Treasuries (the safest investment in the world), Corporates (companies), and Municipals (municipalities like Fairfield).

Asset Allocation – all investors are asset allocators. Investors allocate investment capital across different asset classes such as stocks, bonds, and cash to help reduce risk and avoid concentration in any one place. Other notable asset classes include commodities, collectibles (art, classic cars), and crypto currencies. Investors allocate capital based on three factors: Timeframe (how long do you have until you need the money), Risk Tolerance (Investing requires risk to generate returns), and Investment Objectives (long term growth or income in the form of dividends).

Mutual Funds – a professionally managed fund that offers shares to investors. Mutual Funds are where investors pool their money together by buying shares in the fund and the portfolio manager will invest their money according the funds investment objectives. Mutual Funds offer investors instant diversification, professional management, and the ability to meet any type of investment objective. Mutual Fund investing is an Active investment strategy. Mutual Funds are not priced until after the market closes at the end of each day. Mutual Fund are perfect for investors who don’t have the time or desire to manage their own money. Index Funds – a strategy where investors pool their money into an Index like the S&P 500. Indexing is a Passive strategy and have shown to be one of the best ways for new investors to get exposure to the stock market. Indexing offers investors the benefit of diversification, lower costs, transparency, and solid long-term returns. The S&P 500 has averaged 7% to 9% returns over the last 50 plus years. Some common passive ETF’s are SPY, QQQ, and DIA. ETF’s that do not track an Index and instead have a portfolio manager to make investment selections are considered active.

Diversification – Might be the most important term we cover. It is an investment strategy to reduce risk by spreading out investments into different sectors of the stock market. Diversification is about avoiding asset concentrations.

Exchange Traded Funds (ETF’s) – offer some characteristics of stocks and some characteristics of mutual funds. They are listed on an exchange and can be bought and sold at any time the stock market is open. This means ETF’s offer investors greater liquidity and flexibility over mutual funds. The most common type of ETF track the S&P 500 under the trading symbol (SPY). ETF’s that track an Index are considered a Passive investing strategy.

Yield Curve – is a line that plots the yields of individual U.S. Treasury securities of different durations (time) from 3 months to 30 years. The shape of the yield curve helps to gauge investor sentiment about the future. Normal yield curve (upward sloping from left to right) shows short duration treasuries having lower yields than longer duration securities and implies stable economic conditions. Inverted Yield curve (downward sloping from left to right) reflects short duration securities yielding higher than longer duration securities. Inverted yield curves are a sign of slowing economic conditions and generally ends with a recession.

Risk – any uncertainty that can negatively impact an investment and reduce the expected rate of return. All investments have some degree of risk. In finance there is a fundamental relationship between risk and return. Risk can be categorized in many different way’s and comes in many different forms. Investors face investment risk, inflation risk, interest rate risk, etc. Uncertainty – when investors have difficulty assessing current and future market conditions. When markets are gripped by periods of uncertainty the stock market tends to be more volatile with large swings in either direction.

10 Year Treasury Significance – a closely watched benchmark that reflects the cost of mortgage rates. Banks add a spread to the 10-year yield to price mortgage products. A rising 10 yr rate means trouble (slowing) for the housing industry.

Types of Risk – there are numerous types of risk that can affect the markets. Investment Risk is the risk that your investments might not produce the expected rate of return or that your investments will lose value. Inflation Risk is the risk that inflation will erode the value of your money and/or investments. Interest Rate Risk is the risk of changes in the interest rate environment. Bond investors must be aware of the changing interest rate environment and face the risk of rising interest rates. Investors do not want to be exposed to long duration securities during periods of rising interest rates. Risk Tolerance – the amount of risk an investor is comfortable taking. Two factors all investors must consider: time horizon and investment objective. We don’t invest in equities if our time horizon is less than five years.

Dividends – A payment to a shareholder. Dividends are earnings companies let flow through to shareholders. Dividends are a reward for investors and represent compound interest for investors who re-invest their dividends. Dividend Yield is how much the stock yields per share (annual dividend/share price).Some older investors buy dividend paying stocks to generate more income. Dividend Aristocrats – companies that have paid rising dividends over 25 consecutive years. These companies are favored for their stability particularly in down markets. Dividend Kings – companies that have paid a rising dividend for 50 years.

Earnings Per Share (EPS) – how much money a company makes for each share of its stock. This is a profitability metric. EPS calculations are best used to compare how a company is performing against its peers. The calculation: Net Profit divided by shares outstanding

Volatility – a statistical measure of the dispersion of returns or price swings. It measures how much the price of a stock fluctuates. The higher the volatility of a stock the more risk the security is to an investor. VIX Index is a benchmark for investors and measures the market expectation for volatility over the next 30 day’s. The VIX Index is commonly referred to as the ‘Fear Gauge’ and measures the level of stress in the market.

Price Earnings Ratio (PE Ratio) – one of our most basic valuation ratios. PE’s are used by investors to get a sense of how over/under valued a stock is against its peers. The calculation: Price of the stock divided by its EPS. The PE Ratio shows what investors are willing to pay for the stock versus its trailing or future earnings. We look at past EPS for trailing earnings comparisons and/or expected future EPS for future EPS comparisons.

Types of Stocks – Blue Chips are well-known, high-quality stocks and represent consistency and stability. Growth stocks – tend to be younger companies that offer above average expectations for growth although with more risk. These companies tend to be secular long term growth stories. Growth stocks tend to not pay dividends and trade based on future earnings growth. Value stocks - usually larger slower growers in more predictable industries such as consumer cyclicals and consumer staples. Value investors want solid consistent dividends – dividend aristocrats/dividend kings. Penny Stocks – these are high risk stocks that are traded below $10 per share. These type of stocks should be avoided because they are extremely risky.

S&P 500 Sectors – A sector is a group of stocks from a similar area of the economy. The S&P 500 Index is broken down into 11 sectors. The stocks that make up the Index come from the following sectors: Information Technology, Health Care, Financials, Consumer Discretionary, Communication Services, Industrials, Consumer Staples, Energy, Materials, Real Estate, and Utilities. Industries are sub-groupings within sectors of stocks that are closely related. For example the Consumer Discretionary sector can be broken down by the following industries: home improvement, retail, specialty retail, apparel, footwear, etc.

Alpha – a finance term that measures a stocks performance or growth. Investors often measure their ability to beat a market index like the S&P 500. Alpha refers to excess returns earned on an investment above the market benchmark. Beta – a measure of the volatility of a stock in relation to the overall market (like the S&P 500). S&P 500 is assigned a Beta of 1. Anything above 1 is more volatile than the market and below 1 less volatile than the market. Delta – measures the change in an asset’s performance. When an investor measures the change between two investments it is often referred to as the Delta.

Income Statement – know as the profit and loss statement. Publicly traded companies must produce a quarterly Income Statement. This statement summarizes Revenue and Expenses. Top Line – Revenue. Bottom Line – Profit or Loss. Guidance is associated with this statement. Guidance is when companies provide comments about future business conditions. Headwinds or tailwinds affect the business. Balance Sheet – our most important financial statement. Produced annually. Shows the true condition of a business. Debt lives on the balance sheet. Assets and Liabilities are summarized on this statement.

Asset Classes – Cash, Stocks, Bonds, Real Estate, Commodities, Cryptocurrencies, and Alternative Assets (Tangible Assets like Art, collectables such as classic cars, etc.)

Liquidity – how quickly and easily an asset can be converted to cash. Our Financial Markets are known for their liquidity. Market liquidity is how easily assets can be bought and sold without a major change in price. Liquidity and transparency are two reasons U.S. financial markets are the most robust in the world.

Long versus Short – Long investors own the asset like stock. Long is a term that implies ownership. Short – a high risk activity that exposes the investor to unlimited risk. Selling short means an investor wants the price of an asset to go down in value. It is the opposite of owning a stock. Shorting stocks is the riskiest activity an investor can do.

Capital Markets – refer to the venues where securities are bought and sold. A place where capital is formed or created. The Capital Markets are comprised of stock markets, the bond market, commodity markets, and foreign currency markets. Primary Markets – where new securities are created. This market is often called the New Issues Market. Initial Public Offerings (IPO’s) are where new stocks are created. Private companies turn into public companies through this process. Secondary Market – where securities go to live or trade after they are created. All IPO’s are required by the Securities and Exchange Commission (SEC) to provide a Prospectus (a disclosure document) that provides details about the new issue and discloses all of the risks to the investing public.

Capital Markets – refer to the venues where securities are bought and sold. A place where capital is formed or created. The Capital Markets are comprised of stock markets, the bond market, commodity markets, and foreign currency markets. Primary Markets – where new securities are created. This market is often called the New Issues Market. Initial Public Offerings (IPO’s) are where new stocks are created. Private companies turn into public companies through this process. Secondary Market – where securities go to live or trade after they are created. All IPO’s are required by the Securities and Exchange Commission (SEC) to provide a Prospectus (a disclosure document) that provides details about the new issue and discloses all of the risks to the investing public.

Time Value of Money – the concept that money is worth more today than the same amount in the future. Forces like Inflation erode the value of money over time. Money can be invested today and grow to a greater sum in the future. The more time money is allowed to grow means it has more time to compound. Dividends are an investors form of compound interest. Technology companies are valued based on future cash flows. In Finance, we discount future cash flows because of the time value of money concept. As interest rates rise we must discount the value of the future flows.

Speculative Investments – investments that carry high levels of risk. These types of investments often lack transparency and liquidity and are dangerous and have high degrees of volatility. Investors should avoid speculative investments. Examples: penny stocks, cryptocurrencies, options contracts, and alternative investments (collectibles, art, classic cars). These type of investments have a high degree of risk and can be impacted by liquidity issues.

Pay Yourself First – this is a savings strategy to put money in a savings account BEFORE we pay our bills. It is important we put money in savings (Emergency Fund – 3 to 6 months expenses) EVERY paycheck. Having no savings to fall back on is risky and will increase the stress in your life.

Savings Products – Bank products are defensive assets. Safety and Liquidity are our primary goals when we use bank products. Checking accounts (most liquid) are for spending our own money through debit cards. They do NOT pay interest. Savings accounts (Emergency Fund) pay very small rates of interest. Money Market Accounts pay incrementally higher rates of interest. MMA’s are usually less liquid. One day delay on access to your money. Certificates of Deposit (CD’s) are time deposits that lack liquidity.