oersonal finance ur fufcur Robert B. Walker Mount Mercy University Kristy P. Walker University of Iowa Me Gnaw Hill McGraw-Hill Irwin
contents PREFACE IX one MONEY $ MONEY $ MONEY $ 2 CHAPTER 1 GOAL SETTING 4 MONEY MATTERS: VALUES, VISION, MISSION, AND YOU 2 1.1 PERSONAL RELATIONSHIPS WITH MONEY 4 Step 1: Understanding Your Perception of Financials 5 Step 2: Identifying Your Values 5 1.2 FINANCIAL INDEPENDENCE, LITERACY, ") AND PLANNING 8 Step 3: Assessing Methods for Achievement 8 Financial Literacy 9 Options to Financial Independence 11 Financial Life Stages 12 1.3 VISION, MISSION, AND GOALS 14 Step 4: Creating a Vision for Your Future 14 Step 5: Establishing Your Mission 14 Step 6: Setting Your Goals 15 1.4CAREER CHOICES, MONEY/AND HAPPINESS 17 What Makes You Happy? 17 \ Career and Education Choices 18 Information on Careers 18 Learn. Plan & Act. Evaluate. 19 CHAPTER 3 PLANNING AND BUDGET5NG 52 BUDGETING FROM THE BEGINNING 54 3.1 ANALYZING YOUR SPENDING HABITS: EVERY PENNY COUNTS 54 Step 1: Keep a Spending Journal 55 Step 2: Understand Elements of Personal Financial Statements 56 Step 3: Create a Personal Cash Flow Statement 59 3.2 OPPORTUNITY COST 60 3.3 WAYS TO SAVE MONEY AND LIVE WITHIN YOUR MEANS 63 Pay Yourself First -63 Cash Allocations to Budgeted Buckets 63 Stopping Little Leaks^and Making Big Adjustments 64 Sustainable Consumption 65 3.4 REALISTIC BUDGET BUILDING 66 Building Your Budget 67 Reviewing and Revising Your Budget 67 Learn. Plan & Act. Evaluate. 70 CHAPTER 2 TIME VALUE OF MONEY 28 POWER OF COMPOUNDING 30 2.1 WHAT GIVES MONEY VALUE 30 2.2 POWER OF COMPOUNDING 30 Compounding Interest 31 Making Compounding Work for You 32 Pay Yourself First 35 2.3 THE TIME VALUE OF MONEY 35 Future Value of a Lump Sum 35 Present Value of a Lump Sum 37 Future Value of an Annuity 39 Present Value of an Annuity 41 Calculating Loan Payments 44 Learn. Plan & Act. Evaluate. 45
CHAPTER 4 EXPENSIVE LESSONS 80 FINANCIAL INSTRUMENTS AND INSTITUTIONS 78 4.1 ALIGNING FINANCIAL INSTRUMENTS WITH LIFE STAGES 80 Dependent Life Stage (Age <16) 80 Independent Life Stage (Age 16-24) 82 Early Family Life Stage (Age 25-40) 84 Empty Nest Life Stage (Age 41-65) 85 Retirement Life Stage (Age 66+) 86 4.2 CHECKING AND SHARE DRAFT ACCOUNTS 88 The Negotiable Instrument 88 Balancing Your Checking Account 89 Types of Checking Accounts 92 ATM and Debit Cards 93 Overdraft Protection 93 4.3 FINDING THE RIGHT FINANCIAL INSTITUTION 94 Financial Institutions 94 Insured Savings 95 ( Convenience 95 Products and Services 96 Cost 96 Learn. Plan & Act. Evaluate. 99 two CREDIT MANAGEMENT 108 ) CONSUMER CREDIT: CREDIT CARDS AND STUDENT LOANS 108 CREDIT CARD LESSONS 110 5.1 BASICS OF CREDIT AND INTEREST RATES 110 Credit Options 111 Applying for Credit 112 The Five Cs of the Credit Decision 113 Risk and Interest Rates 116 5.2 UNDERSTANDING CREDIT CARDS 116 The Advantages and Disadvantages of Credit Cards 116 Credit Limits 117 Grace Periods 117 < Interest Rates 117 Charges and Fees 118 Choosing a Credit Card 120 5.3 STUDENT LOANS 122 Federal Student Loans to Students 122 Federal Student Loans to Parents 122 Private Student Loans 122 Repaying Student Loans 123 Calculating Payments 124 5.4 COSTLY CASH 125 Payday Loans 125 Title Loans 127, Rent-to-Own 128 Considering the Alternatives 128 Learn. Plan & Act. Evaluate. 129 CHAPTER 6 CREDIT BUREAU REPORTS AND IDENTITY THEFT 136 THE PERFECT CREDIT SCORE 138 6.1 ESTABLISHING CREDIT 138 6.2 READING CREDIT REPORTS 139 Credit Reporting Agencies 139 Credit Card Purchases 140 6.3 DERIVING THE CREDIT SCORE 141 FICO Score Range 142 FICO Score Variables 142 6.4 IMPROVING YOUR CREDIT SCORE 144 Accessing Your Credit Report 144 Strengthening Your Credit Report 145 6.5 CORRECTING ERRORS ON YOUR CREDIT REPORT 147 Reporting Errors 147 Identifying Missing Accounts 148 Expunging Negative Information 148 6.6 SAFEGUARDING AGAINST IDENTITY THEFT 149 Defining Identity Theft 149 Strategies to Protect Your Identity 150 Victim of Identity Theft 151
6.7 FINANCIAL LIFE STAGES OF DEBT MANAGEMENT 152 Learn. Plan & Act. Evaluate. 153 CHAPTER 7 AUTO AND HOME LOANS 162 THE CAR DECISION 164 7.1 THE AUTO PURCHASE 164 Step 1: Analyze Needs versus Wants 164 Step 2- Determine What You Can Afford 165 Step 3: Do Your Homework 165 Step 4: Comparison Shop 168 *>. Step 5: Negotiate the Deal 168 Step 6: Shop for Financing 168 Step 7: Close the Deal 168 Step 8: Complete After-Sale Activities 169 7.2 HOME OWNERSHIP 170 Rent vs. Buy 170 Life Stages and Home Ownership 172 7.3 BUYING A HOME 174 Selection Criteria 174 The Role of the Real Estate Broker 174 The Purchase Price 175 Refinancing Your Home 179 7.4 HOME EQUITY LOANS 181 Types of Home Equity Loans 181 Comparison Shopping 182 Disadvantages of Second Mortgages 182 Learn. Plan & Act. Evaluate. 183 CHAPTER 8 DEBT, FORECLOSURE, AND BANKRUPTCY 192 EMERGENCY FUND START 194 8.1 EARLY WARNING SIGNS OF FINANCIAL TROUBLE 194 ; Forewarn ings 194 Emergency Fund Refuge 196 8.2 STOPPING LITTLE LEAKS 196 Necessary versus Nonessential Spending 196 Trimming Expenses' 197 8.3 DIGGING OUT OF DEBT 199 Steps to Digging Out of Debt 199 Managing Past Credit Card Debt 201 8.4 FORECLOSURE 203 Avoiding Foreclosure 204 The Foreclosure Process 206 8.5 INS AND OUTS OF BANKRUPTCY 208 Types of Bankruptcy 208 Counseling and Education Requirements 208 Consequences of Bankruptcy 208 Life after Bankruptcy 211 Learn. Plan & Act. Evaluate. 212 three LIMITING YOUR LIABILITY 220 CHAPTER 9 TAX MANAGEMENT 220 TAX REALITY 222 9.1 TYPES OF TAXES 222 Principles of Progressive and Regressive \ Taxes 222 9.2 FILING TAXES 227 '- Tax-Filing Basics 227 Using Tax Forms 229 Tax Audits 230 9.3 TAX RATES 232 Marginal Income Tax Rates 232 Average Tax Rate 232 '' Alternative Minimum Tax (AMT) 232 Comprehending Capital / Gains 233 9.4 STRATEGIES TO MINIMIZE YOUR TAX LIABILITY 235 Exemptions and Deductions 235 Itemizing 236 Lowering Taxable Income 237 Tax Credits 240 Learn. Plan & Act. Evaluate. 240 CHAPTER 10 INSURANCE: COVERING YOUR ASSETS 246 HEALTH INSURANCE: EXPENSIVE BUT WORTH EVERY PENNY 248 10.1 THE IMPORTANCE OF INSURANCE 248 Insurance Basics 248 Selecting an Insurance Company 248 Knowing the Terms of the Policy 248 10.2 AUTO INSURANCE 249 Liability Auto Insurance 250 Full Coverage Auto Insurance 250 Lowering Your Costs 252 contents xxiii
10.3 HOMEOWNER'S AND RENTER'S INSURANCE 252 Home Insurance Basics 252 Insuring Your Personal Property 253 Lowering Your Costs 255 10.4 HEALTH INSURANCE 255 Health Insurance Basics 255, Health Insurance Options 256 Lowering Your Costs 258 10.5 DISABILITY AND LONG-TERM CARE INSURANCE 259 Advance Directives 259 Disability Insurance 259 v _ Long-Term Care Insurance 261 Lowering Your Costs 262 10.6 LIFE INSURANCE 262 Types of Life Insurance 263 Recommended Amount of Life Insurance 264 Personal Finance Life Stages 264 Lowering Your Costs 266 Learn. Plan & Act. Evaluate. 266 section four WEALTH ACCUMULATION 276 CHAPTER 11 INVESTMENT BASICS 276 INVESTMENT'STRATEGIES 278 11.1 SAVINGS VERSUS INVESTMENTS 278 Impact of Inflation on Savings 278 Risk of Investing 279 11.2 RISK AND RETURN 280 Default or Credit Risk 280 Interest Rate Risk 280 Market Risk 281 Liquidity Risk 282 Analyzing Your Risk Tolerance 282 11.3 THE INVESTMENT PYRAMID 283 Base: No-Risk, Known-Return Investments 283 Tier I: Low-Risk, Low-Return Investments 284 Tier Ih Intermediate-Risk, Intermediate-Return Investments 284 Tier III: High-Risk, High-Return Investments 284 11.4 DIVERSIFICATION OF ASSETS 284 Why Diversify? 284 Targeted and Automatic Asset-Allocation Mutual Funds 284 11.5 PORTFOLIO EVALUATION 285 Maintaining Balance 285 Life Stages and Investments 286 Learn. Plan & Act. Evaluate. 289 CHAPTER 12 MUTUAL FUNDS 296 INVESTMENT SEED MONEY 298 12.1 MUTUAL FUND BASICS 298 History of Mutual Funds 298 Mutual Fund Regulation 299., Costs and Fees of Mutual Funds 299 12.2 TYPES OF MUTUAL FUNDS 299 Actively Managed Mutual Funds 301 Index Market Funds 301 Exchange-Traded Funds (ETFs) 301 Equity Mutual Funds 301 Bond Mutual Funds 303 Money Market Mutual Funds 303 Other Specialized Funds 304 12.3 BENEFITS AND RISKS OF MUTUAL FUNDS 304 Benefits 304 Risks 308 12.4 COSTS AND CLASSES OF MUTUAL FUNDS 308 Finding the Mutual Fund Price 309 Mutual Fund Costs 309 Share Classes'311 12.5 CHOOSING AND BUYING A MUTUAL FUND 312 Investment Strategies 312 Where to Buy Mutual Funds 315 Learn. Plan & Act. Evaluate. 316 CHAPTER 13 STOCKS 322 STARTING IN STOCKS 324 13.1 STOCK BASICS 324 Private and Public Companies 324 Types of Stock 325 Stock Exchanges 325 13.2 STOCK EVALUATION 327 Expectations 327 The Market and Indexes 328 Comparison of Indexes 329 Stock Quotes 329 13.3 COMPANY EVALUATION 334 Research 334
contents xxv 15.1 REAL ESTATE BASICS 376 Types of Real Estate Investments 376 Measuring Return on Investment 377 15.2 RENTAL PROPERTY 378 Advantages of Rental Property 378 Disadvantages of Rental Property 379 Landlordship 380 Shared Ownerships 382 Temporary Rentals 383 15.3 REAL ESTATE INVESTMENT TRUSTS 384 How to Invest in REITs 384 How to Avoid Scams 385 15.4 FLIPPING REAL ESTATE 386 Measuring Your ROI on Flipping 386 Steps to Successful Flipping 386 Flipping Land 389 Learn. Plan & Act. Evaluate. 389 13.4 BUYING AND SELLING STOCKS 336 Types of Brokers 336 Types of Trades 336 Investment Clubs 338 Buying Stock Directly 339 Personal Finance Life Stages and Stock Ownership 340 Learn. Plan & Act. Evaluate. 341 CHAPTER 14 BONDS 349 BURIED TREASURE 350 14.1 BOND BASICS 350 What Are Bonds? 350 How Do Bonds Work? 350 14.2 TYPES OF BONDS 353 \ United States Savings Bonds 353 Treasury Bonds, Bills, Notes, and TIPS 353 Municipal Bonds 353 Corporate Bonds 355 14.3 BOND EVALUATION 356 Bond Ratings 357 Researching Bonds 357 Bond Value 359 14.4 BENEFITS AND RISKS OF BONDS 361 Benefits 362 Risks 362 14.5 BUYING BONDS 364 Strategy 364 Where to Buy 365 Learn. Plan & Act. Evaluate. 366 section five PERPETUAL PAYOFFS 394 CHAPTER 16 TRADE-OFFS 396 RETIREMENT AND ESTATE PLANNING 394 16.1 RETIREMENT PLANNING 396 Company Savings Plans 396 Simplified Employee Pension Plans 398 Individual Retirement Accounts 398 CHAPTER 15 LONG-TERM GAINS 376 REAL ESTATE INVESTMENTS 374
Social Security 399 Life Stages of Retirement Planning 401 16.2 ESTATE PLANNING 404 Wills 404 Trusts 406 Power of Attorney 407 Advance Directives 407 16.3 CHARITABLE GIVING 408. Selections 408 Impact on Taxes 408 Learn. Plan & Act. Evaluate. 410 CHAPTER 17 FOUNDATION-SETTING 422 17.1 BALANCE 422 17.2 SUSTAINABILITY 423 Frugality 424 Focus on Goals 424 FINANCIAL PLANNING FOR LIFE 420 17.3 REASSESSMENTS 425 Monthly Budget Review 425 Annual Budget Review 425 Other Financial Reassessments 426 Learn. Plan & Act. Evaluate. 427 APPENDIX A: FINANCIAL TABLES 429 APPENDIX B: LIMITED SOLUTIONS 438 GLOSSARY 457 CREDITS 463 INDEX 465 xxvi contents