Fif"ocus on irersona P ali H na nee An Active Approach to Help You Develop' Successful Financial Skills THIRD EDITION COLLEGE >r OF DU PAG E Les R, D!abay L A K E FOREST C O L L E G E Robert J. Hughes D A L L A S C O U N T Y C O M M U N I T Y C O L L E G E S I McGraw-Hill I Irwin
1 Personal Financial Planning in Action 2 Making Financial Decisions 2 Your Life Situation and Financial Planning 3 Financial Planning in Our Economy 4 Financial Planning Activities 7 Developing and Achieving Financial Goals 9 Types of Financial Goals 9 Goal-Setting Guidelines 10 Opportunity Costs and the Time Value of Money 12 Personal Opportunity Costs 12 Financial Opportunity Costs 12 A Plan for Personal Financial Planning 16 Career Choice and Financial Planning 23 Appendix: Time Value of Money 33 2 Money Management Skills 44 A Successful Money Management Plan 44 Components of Money Management 46 Mone'y Management Troubles and Debt 46 A System for Personal Financial Records 47 Personal Financial Statements 49 Your Personal Balance Sheet:The Starting Point 49 Your Cash Flow Statement: Inflows and Outflows 52 A Plan for Effective Budgeting 55 Step 1: Set Financial Goals 55 Step 2: Estimate Income 56 Step 3: Budget an Emergency Fund and Savings 56 Step 4: Budget Fixed Expenses 58 Step 5: Budget Variable Expenses 58 Step 6: Record Spending Amounts 59 Step 7: Review Spending and Saving Patterns 59 Money Management and Achieving Financial Goals 61 Selecting a Saving Technique 63 Calculating Savings Amounts 63 3 Taxes in Your Financial Plan 76 Taxes in Your Financial Plan 76 Planning Your Tax Strategy 76 Types of Tax 77 The Basics of Federal Income Tax 79 Step 1: Determining Adjusted Gross Income 79 Step 2: Computing Taxable Income 81 Step 3: Calculating Taxes Owed 82 Step 4: Making Tax Payments 84 Step 5: Watching Deadlines and Avoiding Penalties 85 Filing Your Federal Income Tax Return 86 Who Must File? 86 Which Tax Form Should You Use? 86 What Is the Process for Completing the Federal Income Tax Return? 88 How Do I File My State Tax Return? 89 How Do I File My Taxes Online? 90 What Tax Assistance Sources Are Available? 93 Tax Preparation Services 93 What If Your Return Is Audited? 94 Using Tax Planning Strategies 96 Consumer Purchasing 97 Investment Decisions 98 Retirement Plans 99 Changing Tax Strategies 100 4 Savings and Payment Services 108 What Financial Services Do You Need? 108 Meeting Daily Money Needs 109 Sources of Quick Cash 110 XXII
XXIII Types of Financial Services 110 Electronic and Online Banking 111 Financial Services and Economic Conditions 112 Sources of Financial Services 113 Comparing Financial Institutions 114 Typesof Financial Institutions 114 Problematic Financial Businesses 116 Comparing Savings Plans 117 Regular Savings Accounts 117 Certificates of Deposit 118 Interest-Earning Checking Accounts 119 Money Market Accounts and Funds 119 U.S. Savings Bonds 119 Evaluating Savings Plans 121 Comparing Payment Methods 126 Electronic Payments 126 Checking Accounts 126 Evaluating Checking and Payment Accounts 127 Other Payment Methods 128 Managing Your Checking Account 129 5 Consumer Credit: Advantages, Disadvantages, Sources, and Costs 142 What Is Consumer Credit? 143 The Importance of Consumer Credit in Our Economy 144 Uses and Misuses of Credit 144 Advantages of Credit 144 Disadvantages of Credit 145 Types of Credit 146 Closed-End Credit 147 Open-End Credit 148 Sources of Consumer Credit 148 Loans 148 Credit Cards 151 ' Applying for Credit 153 Can You Afford a Loan? 153 General Rules of Credit Capacity 154 The Five Cs of Credit 154 Other Factors Considered in Determining Creditworthiness 158 What If Your Application Is Denied? 158 Your Credit Report 159 The Cost of Credit 163. Finance Charge and Annual Percentage Rate 163 Tackling the Trade-Offs 164 Calculating the Cost of Credit 166 Protecting Your Credit 169 Billing Errors and Disputes 169 Identity Crisis: What to Do If Your Identity Is Stolen 170 Protecting Your Credit from Theft or Loss 170 Protecting Your Credit Information on the Internet 170 - " Cosigning a Loan 171 Complaining about Consumer Credit 171 Consumer Credit Protection Laws 171 Your Rights under Consumer Credit Laws 172 Managing Your Debts 173 Warning Signs of Debt Problems 173 Debt Collection Practices 173 Financial Counseling Services 174 Declaring Personal Bankruptcy 174 6 Consumer Purchasing Strategies and Wise Buying of Motor Vehicles 188 Consumer Buying Activities 188 Practical Purchasing Strategies 188 Warranties 190 Research-Based Buying 192
XXIV Contents ' Major Consumer Purchases: Buying Motor Vehicles 193 Phase 1: Preshopping Activities 193 Phase 2: Evaluating Alternatives 194 Phase 3: Determining Purchase Price 197 Phase 4: Postpurchase Activities 199 Resolving Consumer Complaints 202 Step 1: Return to Place of Purchase 203 Step 2: Contact Company Headquarters 203 Step 3: Obtain Consumer Agency Assistance 203 Step 4:Take Legal Action 203 Legal Options for Consumers 205 Small Claims Court 205 Class-Action Suits 205 Using a Lawyer 206 Other Legal Alternatives 207 7 Selecting and Financing Housing 218 Evaluating Renting and Buying Alternatives 218 Yodr Lifestyle and Your Choice of Housing 218 Renting versus Buying Housing 219 Rental Activities 221 Home-Buying Activities 224 Step 1: Determine Home Ownership Needs 224 Step 2: Find and Evaluate a Home 226 Step 3: Price the Property 227 The Finances of Home Buying 228 Step 4: Obtain Financing 228 Step 5: Close the Purchase Transaction 234 Home Buying: A Summary 237 A Home-Selling Strategy 238 Preparing Your Home for Selling 238 Determining the Selling Price 238 Sale by Owner 239 Listing with a Real Estate Agent 240 8 Home and Automobile Insurance 250 Insurance and Risk Management 251 What Is Insurance? 252 Types of Risk 252 Risk Management Methods 253 Planning an Insurance Program 253 Property and Liability Insurance in Your Financial Plan 256 Home and Property Insurance 258 Homeowner's Insurance Coverages 258 Renter's Insurance 261 Home Insurance Policy Forms 262 Home Insurance Cost Factors 264 How Much Coverage Do You Need? 264 Factors That Affect Home Insurance Costs 264 Automobile Insurance Coverages 267 Motor Vehicle Bodily Injury Coverages 268 Motor Vehicle Property Damage Coverage 269 No-Fault Insurance 269 Other Automobile Insurance Coverages 269 Automobile Insurance Costs 270 Amount of Coverage 272 Motor Vehicle Insurance Premium Factors 272 Reducing Vehicle Insurance Premiums 273 9 Health and Disability Income Insurance 286 Health Insurance and Financial Planning 288 What Is Health Insurance? 288 Health Insurance Coverage 286 Types of Health Insurance Coverage 289 Major Provisions in a Health Insurance Policy 294 Health Insurance Trade-Offs 295 Which Coverage Should You Choose? 296 Private Health Care Plans and Government Health Care Programs 297 Private Health Care Plans 297
XXV Government Health Care Programs 301 Disability Income Insurance 304 The Need for Disability Income 304 Sources of Disability Income 305 Disability Income InsuranceTrade-Offs 306 Your Disability Income Needs 306 High Medical Costs 308 Why Does Health Care Cost So Much? 309 What Is Being Done about the High Costs of Healthcare? 310 What Can You Do to Reduce Personal Health Care Costs? 311 10 Financial Planning with Life Insurance 320 What Is Life Insurance? 321 The Purpose of Life Insurance 322 The'Principle of Life Insurance 322 How Long Will You Live? 322 Do You Need Life Insurance? 322/ Estimating Your Life Insurance Requirements 323 Types'of Life Insurance Companies and Policies 326 Types of Life Insurance Companies 326 Types of Life Insurance Policies 327 Selecting Provisions and Buying Life Insurance 331 Key Provisions in a Life Insurance Policy 331 Buying Life Insurance 334 Financial Planning with Annuities 339 Why Buy Annuities? 339 Tax Considerations 339 11 Investing Basics and Evaluating Bonds 348 Preparing for an Investment Program 348 Establishing Investment Goals 350 Performing a Financial Checkup 350 Surviving a Financial Crisis 351 Getting the Money Needed to Start an Investment Program 352 The Value of Long-Term Investment Programs 353 Factors Affecting the Choice of Investments 356 Safety and Risk 356 Components of the Risk Factor 358 Investment Income 359 Investment Growth 359 Investment Liquidity 359 Factors that Reduce Investment Risk 361 Portfolio Management and Asset Allocation 361 Your Role in the Investment Process 363 Conservative Investment Options: Government Bonds 365 Government Bonds and Debt Securities 366 Conservative Investment Options: Corporate Bonds 369 Why Corporations Sell Corporate Bonds 369 Why Investors Purchase Corporate Bonds 371 A Typical Bond Transaction 374 The Decision to Buy or Sell Bonds 375 The Internet 375 Financial Coverage for Bond Transactions 375 Bond Ratings 376 Bond Yield Calculations 377 Other Sources of Information 378 12 Investing in Stocks 390 Common and Preferred Stock 390 Why Corporations Issue Common Stock 392 Why Investors Purchase Common Stock 393 Preferred Stock 396 Evaluating a Stock Issue 397 The Internet 398 Stock Advisory Services 400
How to Read the Financial Section of the Newspaper 402 Corporate News 402 Numerical Measures That Influence Investment Decisions 403 Why Corporate Earnings Are Important 404 Other Factors That Influence the Price of a Stock 406 Buying and Selling Stocks 408 Secondary Markets for Stocks 409 Brokerage Firms and Account Executives 410 Should You Use a Full-Service or a Discount Brokerage Firm? 410 Computerized Transactions 411 A Sample StockTransaction 412 Commission Charges 412 Long-Term and Short-Term Investment Strategies 414 Long-Term Techniques 414 Short-Term Techniques 416 13 Investing in Mutual Funds 428 Why Investors Purchase Mutual Funds 430 Characteristics of Funds 430 Classifications of Mutual Funds 437 Stock Funds 438 Bond Funds 439 Other Funds 439 How to Make a Decision to Buy or Sell Mutual Funds 441 Managed Funds versus Index Funds 441 The Internet 443 Professional Advisory Services 444 The Mutual Fund Prospectus 446 The Mutual Fund Annual Report 446 Financial Publications 447 Newspapers 448 The Mechanics of a Mutual Fund Transaction 450 Return on Investment 450 Taxes and Mutual Funds 452 Purchase Options 453 Withdrawal Options 454 14 Retirement and Estate Planning 466 Planning for Retirement: Start Early '466 Conducting a Financial Analysis 468 Estimating Retirement Living Expenses 470 Your Retirement Income 472 Employer Pension Plans 472 Public Pension Plans 475 Personal Retirement Plans 477 Annuities 479 Living on Your Retirement Income 479 Estate Planning 481 The Importance of Estate Planning 481 What Is Estate Planning? 482 Legal Documents 482 Legal Aspects of Estate Planning 483 Wills 483 Types of Wills 483 Formats of Wills 484 Writing Your Will 484 A Living Will 485 Trusts 486 Types of Trusts 487 Taxes and Estate Planning 488 Appendixes A Developing a Career Search Strategy 500 B Consumer Agencies and Organizations 510 C Daily Spending Diary 516 Photo Credits 525 Index 526