Personal Finance Total McGraw

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Chapter 1
Personal Financial Planning
What You’ll Learn

 Section 1.1
 Define personal financial planning.
 Name the six steps of financial planning.
 Identify factors that affect personal financial
decisions.
 Section 1.2
 Explain opportunity costs associated with personal
financial decisions.
 Identify eight strategies for achieving financial goals
at different stages of life.
1
The Money Plan
• Q: I am a high school student. I do not have money for
investments or buying property. So what difference does it
make how I spend my money now?
• A: You will not always be a student. Learning to save and
use money wisely now will help you know how to achieve
financial security in the future. While you are in high school,
financial planning can help you decide how to spend, save,
and invest your money for special purchases or activities
that matter to you. You may even be able to buy stock!
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Section 1.1
Financial Decisions and Goals
Main Idea
The steps in the financial planning process can
List three of your help you reach your financial goals.
financial goals.
Video Clip: Why Have a Financial Plan?
Business and Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/McGraw- 3

3
Hill
Section 1.1
Personal Financial Personal Financial Decisions

Planning
Personal finance is everything in your life that
arranging to spend,
save, and invest
involves money.
money to live Some of the benefits of personal financial
comfortably, have planning are:
financial security, and  You have more money and financial
achieve goals
security.
 You know how to use money to achieve
your goals.
 You have less chance of going into debt
you cannot handle.
 You can help your partner and support
your children, if you have a family.
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Section 1.1
goals The financial planning process has six steps to

the things you help you reach your goals.
want to
accomplish Step 1: Determine Your Current Financial
Situation
To figure out your current financial situation, make
a list of items that relate to your finances, such as:
 Savings
 Monthly income (job earnings, allowance,
gifts, and interest on bank accounts)
 Monthly expenses (money you spend)
 Debts (money you owe to others)
When you have determined your financial
situation, you will be able to start planning.
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Section 1.1
values Step 2: Develop Your Financial Goals

the beliefs and To develop clear financial goals, think about
principles you your attitude toward money and ask yourself
consider some questions:
important, correct,  Is it more important to spend your money
and desirable now or to save for the future?
need  Would you rather get a job right after high
something you school or continue your education?
must have to  Do your personal values affect your
survive, such as financial decisions?
food, shelter, and  Do you know the difference between your
clothing needs and your wants?
want
something you
desire or would
like to have or do
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Section 1.1
Step 3: Identify Your Options

It is impossible to make a good decision unless
you know all your options. If you are saving $50
a month, for example, you might have these
options:
 Expand the current situation by
increasing the amount of money you save
every month to $60.
 Change the current situation by investing
in stocks instead of putting your money
into a savings account.
 Start something new by using the $50 to
pay off your debts.
 Continue the same course of action.
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Section 1.1
opportunity cost Step 4: Evaluate Your Alternatives

what is given up You must consider the consequences and risks
when making one
of each decision you make during the financial
choice instead of
another
planning process.
You can do this by:
 Using the many available sources of
financial information to keep you up-to-
date with social and economic conditions
that can affect your financial situation.
 Understanding the opportunity cost of
your decisions.
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Section 1.1
liquidity Understanding Risks

the ability to easily When you make a financial decision, you also
convert financial accept certain financial risks. Some types of
assets into cash
financial risks include:
without loss in
value  Inflation Risk
 Interest Rate Risk
 Income Risk
 Personal Risk
 Liquidity Risk
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Section 1.1
Step 5: Create and Use Your Financial

Plan of Action
A plan of action is a list of ways to achieve your
financial goals.
Some examples of plans of action include:
 Cutting back on spending to increase
your savings.
 Getting a part-time job or working more
hours at your present job to increase
your income.
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Section 1.1
Step 6: Review and Revise Your Plan

As you get older, your finances and needs will
change. That means that your financial plan will
have to change too. You should reevaluate and
revise it every year.
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Section 1.1
Developing Personal Financial Goals

Why do so many people have money problems?
The main reason is that they do not plan how
they will use their money. You can avoid money
problems by planning with some clear financial
goals in mind.
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Pay Yourself First
When you receive your first paycheck, pay yourself first. This
means that before you pay bills or buy anything, you should put
something into your savings account—even a small amount.
Think of it as paying yourself. Try saving a percentage of your
take-home pay or allowance—1 percent the first month, 2
percent the second month, and so forth. Then sit back and watch
you money grow.
If your take-home pay is $860 a month and you save the
percentages listed above for 12 months, how much would you
have?
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Section 1.1
Types of Financial Goals

Two factors will influence your planning for
financial goals. These factors are:
 The time frame in which you would like to
achieve your goals.
 The type of financial need that inspires
your goals.
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Section 1.1
Time Frame of Goals

Goals can be defined by the time it takes to
achieve them:
 Short-term goals take one year or less to
achieve (such as saving to buy a
computer).
 Intermediate goals take two to five years
to achieve (such as saving for a down
payment on a house).
 Long-term goals take more than five
years to achieve (such as planning for
retirement).
Start with short-term goals that may lead to
long-term ones.
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Section 1.1
service Goals for Different Needs

a task that a Services and goods are two different categories
person or a of financial needs. A haircut is an example of a
machine performs
service, while a new car is a good.
for you
How you establish and reach your financial
good goals will depend on whether a goal involves the
a physical item need for:
that is produced
and can be  Consumable goods (such as a soda)
weighed or  Durable goods (such as a car)
measured  Intangible items (such as an education)
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Section 1.1
Guidelines for Setting Goals

When setting your financial goals, follow these
guidelines:
 Your financial goals should be realistic.
 Your financial goals should be specific.
 Your financial goals should have a clear
time frame.
 Your financial goals should help you
decide what type of action to take.
Your financial goals will change as you go
through life.
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Section 1.1
Influences on Personal Financial

Planning
Many factors will influence your day-to-day
decisions about finances.
The three most important factors are:
 Life situations
 Personal values
 Economic factors
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Section 1.1
Life Situations and Personal Values

Your financial planning will be affected by
changes in your life situation, such as:
 Going to college
 Starting a new career
 Getting married
 Having children
 Moving to a new city
Your personal values also influence your
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Section 1.1
economics Economic Factors

the study of the
Economic factors across the country and around
decisions that go
into making, the world play a role in day-to-day financial
distributing, and planning and decision making for most people.
using goods and To understand economics and the economy,
services you need to be aware of:
economy  Market forces
the ways in which  Financial institutions
people make,
distribute, and use  Global influences
their goods and  Economic conditions
services
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Section 1.1
supply Market Forces

the amount of The forces of supply and demand determine the
goods and prices of products, or goods and services, you
services available
purchase.
for sale
When there is a high demand for an item, or
demand when a company cannot manufacture enough of
the amount of a certain product to keep up with the demand,
goods and the price of the product rises.
services people
are willing to buy
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Section 1.1
Financial Institutions
Most people do business with financial
institutions, which include:
 Banks
 Credit unions
 Savings and loan associations
 Insurance companies
 Investment companies
Financial institutions provide services that
increase financial activity in the economy.
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Section 1.1
Federal Reserve The Federal Reserve System

System
The Federal Reserve System’s primary role in
the central the economy is the regulation of the money
banking
supply. The Fed controls the money supply by:
organization of
the United States,  Determining interest rates
also known as the  Buying or selling government securities
Fed
Its decisions affect:

 The interest rate you earn on your
savings
 The interest rate you pay when you
borrow money
 The prices of the products you buy
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Section 1.1
Global Influences
You and the money you spend are part of the
global marketplace, which is another economic
factor that can affect financial planning.
The economy of every nation is affected by
competition with other nations. When more
money is leaving the U.S. than entering it, for
example:
 Less money is available for spending and
investing.
 Interest rates may rise.
These global influences also affect personal
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Section 1.1
Economic Conditions
Current economic conditions also affect your
personal financial decisions. The three
important economic conditions are:
 Consumer prices
 Consumer spending
 Interest rates
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Section 1.1
inflation Consumer Prices

a rise in the level Over time the prices of most products inflate.
of prices for
goods and
The main cause of inflation is an increase in
services demand without an increase in supply. For
example, prices will rise if:
 People have more money to spend
because of pay increases or borrowing.
 The same amounts of goods and
services are available.
The inflation rate affects consumer prices and
varies from year to year.
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Section 1.1
consumer Consumer Spending

a person who Consumer spending affects the economy by
purchases and helping to create and maintain jobs.
uses goods or When people buy more goods or services:
services
 Companies have to hire extra employees
to meet the demand.
 The employment rate rises, making more
jobs available.
 More people work, and they have more
money to spend.
When consumers buy fewer goods and
services, companies have to produce less, and
unemployment rises.
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Section 1.1
interest Interest Rates

the price that is Interest rates represent the cost of money
paid for the use of
and are also influenced by supply and
another’s money
demand.
Interest rates will affect your financial planning
as you:
 Save
 Invest
 Obtain loans
Interest rates are just one facet of the
economic factors that influence your personal
financial planning.
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Section 1.2
Opportunity Costs and Strategies
Main Idea
By recognizing the trade-offs of financial
Why do you think decisions and learning to use your money wisely
you may have to now, you will be able to live according to your
make trade-offs to values and meet your financial needs and goals
meet your throughout your life.
financial goals?
Business and Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/McGraw-Hill 29

Section 1.2
Personal and Financial Opportunity

Costs
Whenever you make a choice, you have to give
up, or trade off, some of your other options.
When making your financial decisions and
plans, you will need to carefully consider:
 Personal opportunity costs
 Financial opportunity costs
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Section 1.2
Personal Opportunity Costs

Like financial resources, your personal
resources require management. These
resources include:
 Health
 Knowledge
 Skills
 Time
You have to decide how to use your time to
meet your needs, to achieve your goals, and to
satisfy your values.
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Section 1.2
time value of Financial Opportunity Costs

money
You also must make choices about how you
the increase of an
spend money.
amount of money
due to earned To help make choices, consider the time value
interest or of money every time you:
dividends  Spend
 Save
 Invest
Think about the time value of this money as an
opportunity cost.
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Section 1.2
principal Calculating Interest

the original You can calculate the time value of your savings
amount of money by figuring out how much interest you will earn.
on deposit
To do this, you will need to know:
 The principal
 The annual interest rate
 The length of time your money will be in
an account
By comparing interest rates at several financial
institutions, you can figure out which one will
make your money grow the fastest.
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Section 1.2
future value Future Value of a Single Deposit

the amount your You can determine the future value of your
original deposit savings by:
will be worth in
the future based  Multiplying the principal by the annual
on earning a interest rate.
specific interest  Adding that interest amount to the
rate over a principal.
specific period of
time Each year, interest is earned on your principal
and on previously earned interest.
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Section 1.2
Compounding
To calculate the interest earned for the second
year:
 Add interest earned in the first year to the
principal.
 Take that amount and multiply it by the
annual interest rate.
Future value computations are also called
compounding. With compounding, your money
increases faster over time.
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Section 1.2
annuity Deposit Values

a series of equal Some savers and investors like to make regular
regular deposits deposits into their savings. A series of equal
present value regular deposits is sometimes called an annuity.
the amount of You can also:
money you would  Calculate the present value of a single
need to deposit deposit.
now in order to
have a desired  Use present value calculations to
amount in the determine how much you would need to
future deposit so you can take a specific
amount of money out of your savings
account for a certain number of years.
You can use these calculations to determine
your retirement age.
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Section 1.2
Achieving Your Financial Goals

Throughout your life you will have many
different financial needs and goals.
By learning to use your money wisely now, you
will be able to achieve many of those goals.
Financial planning involves:
 Choosing a career
 Learning how to protect and manage the
money you earn
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Section 1.2
Strategies to Achieve Your Financial

Goals
By using the following eight strategies, you can
avoid many common money mistakes:
 Obtain
 Plan
 Spend Wisely
 Save
 Borrow Wisely
 Invest
 Manage Risk
 Plan for Retirement
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Section 1.2
Developing and Using a Financial Plan

A good personal financial plan includes:
 Assessing your present financial
situation
 Making a list of your current needs
 Deciding how to plan for future needs
You can design a plan on your own, hire a
financial planner, or use a good money-
management software program. Making your
financial plan work takes time, effort, and
patience, but you will develop habits that will
give you a lifetime of satisfaction and security.
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Section 1.2
Financial Planning
When developing and using a financial plan,
you can:
 Design a plan on your own.
 Hire a financial planner.
 Use a good money-management
software program.
Making your financial plan work takes time,
effort, and patience, but you will develop habits
that will give you a lifetime of satisfaction and
security.
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Chapter 1
Key Term Review

 personal financial planning  Federal Reserve System
 goals  inflation
 values  consumer
 opportunity cost  interest
 liquidity  time value of money
 service  principal
 good  future value
 economics  annuity
 economy  present value
 supply
 demand
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Chapter 1
Reviewing Key Concepts

1. Explain personal financial planning and its importance.
Personal financial planning is arranging to spend, save, and

invest money to live comfortably, have financial security, and
achieve goals. Planning your personal finances is important
because it will help you to reach your goals, no matter what they
are. Some of the benefits of planning are:
 You have more money and financial security.
 You know how to use money to achieve your goals.
 You have less chance of going into debt you cannot
handle.
 You can help your partner and support your children, if
you have a family.
43
Chapter 1

2. Describe the six strategies of financial planning.
The six steps of financial planning are

 Determine your current financial situation
 Develop your financial goals
 Identify your options
 Evaluate your alternatives
 Create and use your financial plan of action
 Review and revise your plan
44
Chapter 1

3. Describe the factors that affect personal financial decisions.
The three most important factors that influence your

day-to-day decisions about finances are:
 Life situations
 Personal values
45
Chapter 1

4. Explain opportunity costs and how they might affect your
personal financial decisions.
An opportunity cost is what is given up when making one choice

instead of another. Whenever you make a choice, you have to
give up, or trade off, some of your other options.
You should consider both personal and financial opportunity
costs before making your financial decisions and plans.
46
Chapter 1

5. List eight strategies for achieving financial goals.
The following are eight strategies for achieving financial goals:

 Obtain
 Plan
 Spend Wisely
 Save
 Borrow Wisely
 Invest
 Manage Risk
 Plan for Retirement
47
Newsclip: Internet Planning
If your knowledge about personal finance is limited, being Web
and tech savvy will help you learn more. Finance is a frequent
topic on the news and is easy to research.
48
Chapter 2
Finances and Career Planning
49
Chapter 2
What You’ll Learn

 Section 2.1
• Identify the personal issues to consider when
choosing and planning your career.
• Explain how education and training affect career
advancement.
• Discuss the factors that influence employment.
 Section 2.2
• Describe effective strategies to obtain employment.
• Identify sources of career opportunities.
• Identify the financial and legal issues to consider
when looking for employment.
50
Planning for Life
• Q: Career plans are for people who do not know what they
want. I know already that I want a high-paying job. So why
should I bother thinking about career planning?
• A: Money is just one motivation for work. You need to
consider many other factors as well. Career planning
considers your personal values, goals, and interests, the
basics for any career decision. Since you will probably spend
the majority of your life working, consider the old adage:
“Choose a career you love, and the money will follow.”
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2
Section 2.1
Planning Your Career
Main Idea
Choosing and planning for the right career will
Why will help you find fulfillment both personally and
choosing the financially.
right career help
you find both
personal
satisfaction and
financial
security?
52
3
Section 2.1
job Choosing a Career

work that you do
Some people find true satisfaction in their work,
mainly to earn
money
while others work just to make money.
You can choose whether to:
career
 Get a job just to earn money.
a commitment to
work in a field  Prepare for a career.
that you find Ensuring that your career will fulfill your
interesting and personal and financial goals requires planning.
fulfilling
53
Section 2.1
Career Decision Trade-Offs

Your choice of career will affect:
 The amount of money you make
 The people you meet
 How much spare time you have
54
Section 2.1
standard of Choosing a Career

living People make career decisions based on
a measure of whether they want to:
quality of life  Simply maintain a standard of living
based on the
amounts and
 Pay for the hobbies and activities they
kinds of goods
enjoy
and services a  Pursue careers that provide them with
person can buy both money and personal fulfillment
 Select careers that reflect their interests,
values, and goals
55
Section 2.1
trends Opportunity Costs

developments Choosing a career will involve trade-offs, or
that mark opportunity costs.
changes in a Recent trends indicate that some people are
particular area making career decisions that allow them to:
 Spend more time with their families
 Enjoy their hobbies and interests
 Run their own business
The more you know about your own interests,
values, needs, and goals, the better you will be
able to choose a career that will provide a
balance between personal satisfaction and
financial rewards.
56
Section 2.1
potential earning Career Training and Skill Development

power Acquiring more education will help you to:
the amount of  Increase your potential earning power.
money you may
earn over time
 Meet your financial goals.
 Increase your chances for success.
Your field of study will also affect your salary.
57
Section 2.1
Checklist for Success

You will be an asset to any employer if you:
 Work well with others
 Strive to do your best
 Are creative when solving problems
 Communicate well
 Understand yourself and other people
These basic qualities and skills make success
more likely in most job situations.
58
Section 2.1
aptitudes Personal Factors

the natural You can take special tests to learn more about
abilities that your:
people possess  Abilities
interest  Interests
inventories  Personal qualities
tests that help These tests—called aptitude tests and interest
you identify the inventories—may give you an edge in choosing
activities you
a career.
enjoy the most
59
Section 2.1
Stages of Career Planning

Before you make any decisions about your
career, you should review your situation.
Your progress will depend on:
 Your opportunity costs
 The choices that are available to you
 Your career area
Talking to people in your field of interest can
help you with your career planning.
60
61
Section 2.1
External Factors and Opportunities

Before you begin your job search, you should
take into consideration:
 Social influences
 Trends
These factors directly affect the job market and
the opportunities that are available to you.
62
Section 2.1
External Influences on Your Career

When you consider your career options, you
need to focus on:
 Your skills
 Your training
 Your experience
 Social influences
 Economic conditions
 Industry trends
You may have no control over the “big picture”
factors, but you can make some personal
decisions based on real-world influences.
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Section 2.1
demographic Social Influences

trends Demographic trends can affect your
tendencies of employment opportunities. Some examples of
people grouped demographic trends that have affected the job
by age, gender, market are:
ethnicity,  More working parents
education, or
income that
 More leisure time
change over  More elderly people in the overall
time population
 Greater demand for ongoing employment
training
64
Section 2.1
geographic Geographic Trends

trends Geographic location also influences earning
tendencies of level. In recent years, geographic trends have
people moving indicated that some of the fastest-growing job
from one area of markets are in:
the country to  Florida
another as
financial centers
 Nevada
shift location  Arizona
 Arkansas
 New Jersey
 California
Remember to consider differences in earning
levels and costs of living as you decide where to
look for employment.
65
Section 2.1
Economic Factors
Since the job market changes as the economy
does, the demand for certain types of jobs
changes.
Some economic factors that can reduce career
opportunities are:
 High interest rates
 Price increases
 Decreased demand for certain goods and
services
Being aware of current economic trends will
help you to choose a career so that you can
achieve your financial goals.
66
Career Center
At your school’s career center, you will find a variety of free
information that can help you with college choices, résumé
preparation, job opportunities, and career counseling.
How can researching different careers that interest you help
your financial planning for the future?
67
18
Section 2.1
service Trends in Industry and Technology

industries Changes in industry and technology also affect the
businesses that job market.
provide services While opportunities have dwindled in some areas of
for a fee, offer the economy, such as manufacturing, opportunities
employment in other areas—such as service industries—have
potential in grown. Some examples of service industries
coming years include:
 Computer or telecommunications technology
 Health care
 Social services
 Hospitality services
 Management
 Education
 Financial services
68
Section 2.2
Employment and Career Development
Main Idea
Learn effective strategies to help you get the job or
career that meets your personal and financial goals.
What are some
strategies you
think might be
effective in
obtaining
employment
experience?
69
20
Section 2.2
Employment Search Strategies

As you take steps to search for a job, your level
of success will depend upon:
 How well you communicate the value of
the experience you already have
 How effectively you use proven
employment strategies
70
Section 2.2
Obtaining Employment Experience

As you enter the world of work, you may worry
that you do not have enough experience.
You may be overlooking the importance of
various kinds of work-related training, including:
 Part-time work
 Volunteer work
 Internships and cooperative education
 Class projects or after-school activities
71
Section 2.2
Types of Work-Related Training

When you volunteer with places such as nonprofit
community organizations and government agencies,
you can:
 Learn new skills
 Develop good work habits
 Make professional contacts
Working as a “temp” is a good way to gain experience
and learn more about a particular field.
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Section 2.2
internship Internships and Cooperative Education

a position in
An internship may:
which a person
receives training  Give you the experience you need to
by working with obtain employment
people who are
 Lead to permanent employment
experienced in a
particular field  Allow you a chance to practice your
application and interviewing skills
cooperative
education Cooperative education programs are another
programs that way to apply the workplace skills you learn in
allow students to class to an actual business environment.
enhance
classroom
learning with part-
time work related
to their majors
and interests
73
Section 2.2
Class Projects or After-School Activities

Class assignments and school activities can be
sources of work-related experience. They can
help you gain valuable career skills such as:
 Managing, organizing, and coordinating
people
 Public speaking
 Goal setting, planning, and supervising
 Financial planning and budgeting
 Conducting research
74
Section 2.2
Career Information Sources

You need up-to-date information to make the
best career decisions. Many sources of
information are available to you, including:
 Mass media
 The Internet
 School guidance offices
 Community organizations
 Professional organizations
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Section 2.2
Contacts
Contacts are another good source of advice and
information as you prepare for a career. Your
contacts are your:
 Family
 Friends
 Coworkers
 Teachers
 Professors
 Former employers
76
Section 2.2
networking
a way of making
Networking
and using Even people whom you do not know can assist
contacts to get you in a job search. That is why it is never too
job information late to begin networking.
and advice
Your contacts may:
informational
 Know someone who can hire you
interview
a meeting with  Be able to arrange an informational
someone who interview
works in your
area of interest
who can provide
you with practical
information about
the career or
company you are
considering
77
Section 2.2
Identifying Job Opportunities

If you are going to find employment that is right
for you, you need to know where to look for job
openings. Explore sources such as:
 Job advertisements
 Job fairs
 Employment agencies
78
Section 2.2
Job Advertisements
All newspapers have classified ads that include
job listings; some list both local jobs and those
from a wide geographic area.
You can also use the Internet as a valuable
source for job opportunities. On the Internet, you
can:
 Use a search engine to find a company’s
Web site and learn more about it
 Find a company’s list of current job
openings
 Use job-search Web sites with job
advertisements, advice, and résumé
services
79
Section 2.2
Job Fairs
At a job fair, recruiters from local and national
companies set up tables or booths where you
can:
 Discuss job opportunities
 Submit your résumé
To make the most of a job fair, be prepared to
make your best impression on several recruiters
in a short amount of time. They may call you in
for an in-depth interview at a later date.
80
Section 2.2
Employment Agencies
Employment agencies are businesses that
match job hunters with employers. The
employment agency fee may be paid by:
 The company that hires you
 You
 You and your new employer
Do not get involved with agencies that ask you
to pay a fee without promising you a job in
return.
To find out more about employment agencies,
contact your state’s employment service or
department of labor.
81
Section 2.2
Other Ways to Find a Job

Your ability to find a job is limited only by your
imagination and energy. Other ways to find a job
include:
 Visiting specific companies where you
would like to work
 Calling local businesses in your field of
interest
 Talking to people with similar interests
who have already graduated from your
school
82
Section 2.2
résumé Applying for a Job

a one- or two-
Making the best possible presentation of your
page summary
of your
skills and experience is the key to landing a job.
education, Your résumé is your most important tool. The
training, two basic types of résumés are the:
experience, and  Chronological résumé
qualifications
 Skills résumé
Your résumé provides prospective employers
with an overview of the special contribution you
may be able to make to their companies.
83
Section 2.2
cover letter Cover Letters

the personal You will want to include a cover letter with your
letter that you
résumé when you send it to an employer by:
present along
with your  Regular mail
résumé  E-mail
 Fax
The cover letter tells a potential employer why
you are interested in a particular job and why
you think that it would be worthwhile for him or
her to interview you.
84
Section 2.2
interview Preparing for the Interview

a formal meeting If you are granted an interview, you should
with your
obtain as much information as you can about
potential
employer that
the company or industry before your interview.
allows you to Possible resources include:
express why you  The library
think you are the  The Internet
best person for
the job  Informal interviews with people who are
familiar with that company or industry
85
Section 2.2
The Interview
Here are some typical questions an employer
might ask:
 What education and training qualify you
for this job?
 Why are you interested in working for this
company?
 Other than past jobs, what experiences
have helped prepare you for this job?
 What are your major strengths? Major
weaknesses?
After the interview, send your interviewer a note
reiterating your interest and expressing your
thanks for the opportunity to interview.
86
Section 2.2
Considering a Job Offer

Before you accept an offer, you have to
consider several factors. Find out all you can
about:
 The company
 The job itself
 The working environment
 The salary
 Any other benefits
87
Section 2.2
The Work Environment

As you go on interviews, you will notice
differences in workplaces.
Ask about official company policies:
 How does the company handle pay
increases?
 How does it measure the quality of
employees’ work?
 How does it decide which employees to
promote?
88
Section 2.2
Factors Affecting Salary

Your beginning salary will depend on:
 Your education and experience
 The size of the company
 The average salary for the job you are
considering
To make sure that you are starting with a fair
salary, talk to people with similar jobs at other
companies or look for related information on the
Internet.
89
Section 2.2
Raises and Promotions

Raises and promotions are a direct result of how
well you do your job. Once you have accepted a
job offer and started to work:
 Meet regularly with your supervisor
 Ask for feedback on your performance
and any suggestions for improvement
 Let your supervisor know that you are
interested in increased responsibility
90
Section 2.2
Measuring Employee Benefits

You should also evaluate the types of benefits
the company offers besides a paycheck and pay
particular attention to:
 Health care
 Retirement benefits
 The specific needs of your family
91
Section 2.2
cafeteria-style Meeting Employee Needs

employee Changes in society have brought about changes
benefits
in the types of benefits that employees receive.
programs that
Some of these changes include:
allow workers to
choose the  Cafeteria-style employee benefits
benefits that  Social Security benefits
best meet their
 Pension plans
personal needs
pension plan
a retirement plan
that is funded at
least in part by
an employer
92
Section 2.2
Comparing Benefits
You can compare the dollar value of employee
benefits in several ways. These ways include
finding:
 The market value
 Whether the benefits are tax-exempt or
tax-deferred
.
93
Section 2.2
Your Rights as an Employee

As an employee, you have certain legal rights; you
also have certain legal rights during the hiring
process:
 An employer cannot refuse to hire a woman
or terminate her employment because she is
pregnant.
 An employer cannot discriminate against a
person for any reason related to age, race,
color, religion, gender, marital status,
national origin, or any mental or physical
disabilities.
 An employer must pay for unemployment
insurance, contribute to Social Security, and
provide for workers’ compensation funds in
case of a work-related injury or illness.
94
Section 2.2
Long-Term Career Development

A job is for today, but a career can last a
lifetime. As you enter the world of work, ask
yourself:
 Will you always enjoy the work that you
do today?
 Will you be successful in the career you
select?
You cannot predict the future, but you can
develop skills and attitudes that will increase
your chances of being satisfied with your work in
years to come.
95
Section 2.2
Guidelines for Career Success

Here are some basic guidelines to follow for
career success:
 Make a point of improving your
communication skills—both written and
oral.
 Do your best to get along with your
coworkers.
 Remain flexible and open to new ideas.
 Develop good work habits.
 Be creative in solving your own problems.
 Be willing to learn new techniques and
technologies.
96
Section 2.2
Training Opportunities
A key to your ongoing success will be your
ability to keep up with changes in technology
and to adapt to the global economy.
Take advantage of your company’s:
 Regular training programs
 Professional seminars
 Help with payment for college courses
You should also continue to read and learn as
much as you can on your own.
97
Section 2.2
Career Paths and Advancement

As time goes by, you will experience changes in
your personal interests, values, and goals.
Outside factors, such as economic conditions
and social trends, will also influence:
 Your career choices
 Other financial decisions that you make
You will probably go through a series of career
stages and experience specific tasks and
concerns with each one.
98
Section 2.2
mentor Mentors
an experienced One way to make sure that your career
employee who develops in the right direction is to gain support
serves as a
from a mentor.
teacher and
counselor for a A mentor can:
less-experienced  Give you one-on-one training
person
 Help you to meet other knowledgeable
people
 Provide you with emotional support
during difficult times at work
Some of the best mentors are retired people
who are eager to share a lifetime of knowledge
and experience.
99
Section 2.2
Changing Careers
Most workers change jobs several times over
the course of their lives. The following are some
signs that it may be time to move on:
 You feel bored or depressed at work.
 Your job adversely affects you physically
or emotionally.
 You receive a series of poor performance
evaluations.
 You have little opportunity to obtain a
raise or promotion.
 You have a poor relationship with your
supervisor or coworkers.
100
Section 2.2
The Time Between Jobs

Being out of work can cause emotional and
financial stress. While you are looking for a job:
 Continue to eat, sleep, and exercise as
usual.
 Stay involved in family and community
activities.
 Improve your skills through personal
study, classes, or volunteer work.
 Think about opportunities with nonprofit
or government organizations.
Whether looking for a new job or your first job,
always consider how the financial and personal
costs and benefits of your career choice will
affect your needs and goals.
101
Chapter 2
Key Term Review

 job  internship
 career  cooperative education
 standard of living  networking
 trends  informational interview
 potential earning power  résumé
 aptitudes  cover letter
 interest inventories  interview
 demographic trends  cafeteria-style employee benefits
 geographic trends  pension plan
 service industries  mentor
102
Chapter 2

1. List some of the personal issues you will need to consider
when planning your career.
Personal issues to consider when choosing a career include your:

 Aptitudes
 Interests
 Personality
 Current financial situation
103
Chapter 2

2. Describe factors that affect your potential earning power.
Your potential earning power will be influenced by:

 Your level of education and training
 The field of study you select
104
Chapter 2

3. Explain how current demographic trends might influence
your choice of career.
Demographic trends can affect your employment

opportunities
Some examples of demographic trends that have affected the
job
market are:
 More working parents
 More leisure time
 More elderly people in the overall population
 Greater demand for ongoing employment training
105
Chapter 2

4. List some ways you might obtain job-related experience.
You can gain experience through:

 Part-time work
 Volunteer work
 Internships
 Cooperative education
 Class projects
106
Chapter 2

5. Identify sources of information to find out more about the
career in which you are interested.
To evaluate career opportunities, use sources such as:

 The Internet
 Libraries
 Newspapers
 School guidance offices
 Community organizations
 Networking with people working in the field you
choose
107
Chapter 2
6. Explain your rights as an employee.
As an employee, you have certain legal rights; you also have
certain legal rights during the hiring process:
 An employer cannot refuse to hire a woman or

terminate her employment because she is pregnant.
 An employer cannot discriminate against a person for
any reason related to age, race, color, religion,
gender, marital status, national origin, or any mental or
physical disabilities.
 An employer must pay for unemployment insurance,
contribute to Social Security, and provide for workers’
compensation funds in case of a work-related injury or
illness.
108
Newsclip: Career Edge
Students who develop strong job-search skills have a career
advantage. They develop clear career direction. They also
communicate and promote their competitive edge to employers.
109
110
Money When You Need It
• Q: Do I need an emergency fund even though I work part
time, live at home, and have no bills?
• A: There is no guarantee that your job will always be there
for you. If you become sick or injured, you may have to
take time off from work. Even if you have disability
insurance, it may pay only a fraction of what you earn. If
you own a car, you may have unexpected repair bills.
Emergency funds are for those unexpected things.
111
2
Section 3.1
Organizing Financial Records
money Opportunity Costs and Money

management
Management
planning how to
get the most Good money management can help you keep
from your money track of where your money goes so that you can
make it go farther.
112
Section 3.1
Resolving Tough Opportunity Costs

Consider the factors that influence your decision
making by compiling a mental list of your
options. Then consider how those options fit
your:
 Values
 Current financial situation
 Goal of effective money management
113
Section 3.1
Benefits of Organizing Your Financial

Documents
The first step in effective money management is
to organize your personal financial documents,
which include:
 Bank statements
 Paycheck stubs
 Receipts
 Automobile ownership titles
 Birth certificates
 Tax forms
114
Section 3.1
Personal Financial Documents

Creating an organized system for handling your
personal financial documents helps you:
 Plan and measure your financial progress
 Handle routine money matters, such as
paying bills on time
 Determine how much money you will
have now and in the future
 Make effective decisions about how to
save money
115
Section 3.1
Where to Keep Your Financial

Documents
You can keep your financial documents in
different places, such as:
 A home file
 A safe-deposit box
 On a computer
116
Section 3.1
Setting up a Home Filing System

To make good use of a home filing system:
 Sort through all your personal financial
records.
 Arrange them according to the type of
each document.
 Label all folders or boxes.
 File your receipts and other financial
papers as soon as possible after
receiving them.
Do not keep hard-to-replace documents in a
home file.
117
Section 3.1
safe-deposit box Safe-Deposit Boxes

a small, secure More important documents that are commonly
storage kept in safe-deposit boxes include:
compartment  Car titles
that you can rent
in a bank,
 Mortgage loan papers
usually for $100  Birth certificates and adoption papers
a year or less  List of insurance policies
 Valuable collectables such as coins or
stamps
As an alternative, some people use home fire-
safe boxes that lock.
118
Section 3.1
Home Computers
You can use your computer to:
 Store certain types of financial records.
 Plan your financial future.
 Keep a running summary of checks you
have written.
 Track your monthly spending.
You can also generate personal financial
documents and statements from the information
you have organized by using software.
119
Section 3.2
Personal Financial Statements
Main Idea
A personal balance sheet and cash flow statement
can help you to analyze your financial situation.
What
information do
you think might
be on a cash
flow statement?
Business and Personal Finance Unit 1 Chapter 3 © 2007 Glencoe/McGraw- 120

13
Hill
Section 3.2
personal Personal Balance Sheet

financial For a complete look at your financial situation,
statement you should create a personal balance sheet and
a document that a cash flow statement.
provides These personal financial statements can help
information you:
about an  Determine what you own and what you
individual’s owe.
current financial  Measure your progress toward your
position and financial goals.
presents a  Track your financial activities.
summary of  Organize information that you can use
income and when you file your tax return or apply for
spending credit.
121
Section 3.2
personal balance Personal Balance Sheet

sheet
To evaluate your financial situation, you will first
also called a net worth
statement; a financial need to create a balance sheet. A personal
statement that lists balance sheet lists:
items of value owned,  Items of value owned
debts owed, and a  Debts owed
person’s net worth
 A person’s net worth
net worth
Use the following steps to create a personal
the difference balance sheet.
between the amount
that you own and the
debts that you owe
122
Section 3.2
assets Step 1: Determine Your Assets

any items of value To determine your assets, you need to consider
that an individual the four categories of wealth:
or company owns,
including cash,  Liquid assets
property, personal  Real estate
possessions, and  Personal possessions
investments
 Investment assets
wealth
an abundance of
valuable material
possessions or
resources
123
Section 3.2
liquid assets Categories of Wealth

cash and items that The money in your savings and checking
can be quickly
accounts is a liquid asset.
converted to cash
The second category of wealth, real estate, is
real estate not as easy to convert into cash.
land and any
You can determine the market value of your real
structures that are
estate by looking at the amount recorded on the
on it that a person or
family owns real estate portion of your balance sheet.
market value
the price at which
property would sell
124
Section 3.2
Personal Possessions
Your personal possessions include items such
as:
 Cars
 Any valuable belongings that are not real
estate
You will get a better idea of your financial
situation by recording these items’ current
market value on your balance sheet.
125
Section 3.2
Investment Assets
Investment assets are the fourth category of
wealth. These include:
 Retirement accounts
 Securities such as stocks and bonds
You should set aside such assets for long-term
financial needs, such as:
 Paying for college
 Buying a house
 Retirement
126
Section 3.2
liabilities Step 2: Determine Your Liabilities

the debts that When you prepare a personal balance sheet,
you owe
you must also record your liabilities. There are
two main types of liabilities:
 Current liabilities—short-term debts that
have to be paid within one year
 Long-term liabilities—debts that do not
have to be fully repaid for at least a year
127
Section 3.2
insolvency Step 3: Calculate Your Net Worth

a financial state You can determine your net worth by
that occurs if
subtracting your liabilities from your assets.
liabilities are
greater than Although you may have a high net worth, you
assets can still have trouble paying your bills. This is
true when:
 Most of your assets are not liquid.
 You do not have enough cash to meet
your expenses.
If you are unable to pay all your debts, you may
experience insolvency.
128
Section 3.2
Step 4: Evaluate Your Financial Situation

You can use a balance sheet to track your
financial progress.
As a rule, you can increase your net worth by:
 Increasing your savings
 Increasing your investments
 Reducing your expenses
 Reducing your debts
129
Section 3.2
cash flow Cash Flow Statement: Income Versus

the money that Expenses
actually goes
into and out of Cash flow is divided into two parts:
your wallet and  Cash inflow—your income
bank accounts
 Cash outflow—all of the money you
income spend
the money you A cash flow statement is simply a summary of
receive your cash flow during a particular period.
130
Section 3.2
Cash Flow Statement

To create a cash flow statement, follow these
steps:
 Record your income.
 Record your expenses.
 Determine your net cash flow.
This summary gives you important information
and feedback on your income and spending
patterns.
131
Section 3.2
take-home pay Step 1: Record Your Income

the amount of income To record your income:
left after taxes and
other deductions are  List all of your sources of income during a
taken out of your given month.
gross pay  Record the amounts as your cash inflow.
discretionary income  Make sure you record the exact amount
the money left over of cash inflow—your take-home pay plus
after paying for the your interest earnings on investments
essentials—food, and savings.
shelter, clothing, Some financial experts evaluate the strength of
transportation, and
a person’s income by measuring discretionary
medication
income.
132
Section 3.2
Step 2: Record Your Expenses

Fixed expenses are those that are more or less
the same each month. These include:
 Cable television charges
 Rent
 Bus fare for commuting to work or school
Variable expenses may change from month to
month and include:
 Food and clothing
 Electricity, medical costs, and recreation
The total of your fixed and variable expenses is
your cash outflow.
133
Section 3.2
surplus Step 3: Determine Your Net Cash Flow

extra money that You can determine your net cash flow by
can be spent or subtracting your expenses from your income. If
saved, you have a surplus, you can:
depending on a
person’s  Place it in an emergency fund savings
financial goals account for unexpected expenses or to
and values pay living costs if you do not receive a
salary.
deficit
 Place it in savings and investment plans.
the financial
situation that If your cash net flow is negative, you will have a
occurs when deficit.
more money is
spent than is
earned or
received
134
Section 3.2
Your Financial Position

When your net cash flow changes, so does your
net worth.
To make up for a deficit, for example, you can:
 Borrow money (increasing your liabilities).
 Draw from your savings (decreasing your
assets).
If you end a month with a surplus, you can:
 Save the money (adding to your assets).
 Pay off previous debts (reduce your
liabilities).
135
Section 3.3
Budgeting for Financial Goals
Main Idea
Learn to budget and achieve financial goals by
What is your increasing your savings.
definition of a
budget, and
what are the
advantages of
using one?
136
29
Section 3.3
budget Preparing a Practical Budget

a plan for using
Having a budget is necessary for successful
money to meet
wants and needs
financial planning. By using a budget, you will
learn how to:
 Live within your income.
 Spend your money wisely.
You will also develop good money management
skills that will help you reach your financial
goals.
137
Section 3.3
Step 1: Set Your Financial Goals

Your financial goals are the things you want to
accomplish with your money.
It is important that you:
 Make your financial goals as specific as
possible.
 Have a definite time frame for your goals.
 Separate your goals into short-term,
intermediate, and long-term goals.
138
Section 3.3
Step 2: Estimate Your Income

When you have set your goals, you can begin
working on a budget that is practical for you.
To create a budget:
 Record your estimated income for the
next month.
 Include all sources of income that you
know you will be receiving.
 Do not include money you may or may
not get, such as bonuses and gifts.
139
Section 3.3
Step 3: Budget for Unexpected Expenses

You can create special savings accounts to help
you:
 Meet unexpected expenses
 Reach your financial goals
140
Section 3.3
Step 4: Budget for Fixed Expenses

Your fixed expenses are those that do not
change from month to month. These include:
 Mortgage
 Automobile and student loan payments
 Insurance premiums
141
Section 3.3
consumer price Step 5: Budget for Variable Expenses

index (CPI)
a measure of the Planning for variable expenses is not as easy as
changes in prices budgeting for fixed expenses. You should make
for commonly your best guesses based on costs from previous
purchased goods months.
and services in the
United States To determine reasonable expense levels, you
can use:
 Guidelines published by financial experts
 The consumer price index (CPI)
 Your friends and relatives
142
143
Section 3.3
budget variance Step 6: Record What you Spend

the difference To find out how practical your budget is, you will
between the
need to keep track of your expenses during an
budgeted
amount and the
entire month and then revise your budget if
actual amount necessary.
that you spend Your spending will not always work out as
planned. The budget variance can either be a:
 Surplus (if you spend less than you had
expected)
 Deficit (if you spend more than you had
expected)
144
Section 3.3
Step 7: Review Spending and Saving

Patterns
Budgeting is a continual process. You may need
to:
 Review your budget each month.
 Consider making changes based on the
nature of your expenses.
Even if your budget generally seems to be on
target, it is a good idea to prepare an occasional
budget summary to review your progress.
145
Section 3.3
How to Budget Successfully

A budget should have several important
characteristics:
 A good budget is carefully planned.
 A good budget is practical.
 A good budget is flexible.
 A good budget must be written and easily
accessible.
146
Section 3.3
Ways to Increase Your Savings

Increasing your savings is the key to
establishing a sound financial future.
While learning to save is not easy, you can
improve your savings rate by using several
savings strategies.
147
Section 3.3
Pay Yourself First

One method you can adopt is to set aside a
fixed amount as savings before you sit down to
pay your bills.
As an alternative to writing a check each month,
many banks will:
 Automatically deduct a certain amount
from your checking amount each month.
 Deposit that amount into your savings
account.
148
Pay or Save?
Be a smart consumer and pay off your credit card bills
before you put money away in a savings account. The
interest rate charged on credit cards is usually higher than
the interest you can earn from your savings account.
How do you determine the interest rate on your credit
card?
149
42
Section 3.3
Payroll Savings
Your employer may offer a similar option called
a payroll savings deduction. A payroll savings
deduction is a portion of your earnings that is:
 Automatically taken out of your paycheck
 Put into your savings or retirement
account
150
Section 3.3
Spending Less to Save

A third way to save is to start small. Make a
conscious effort to spend less each day.
How you save, though, is less important than
the action of saving. The earlier you start, the
better. Even small amounts of savings can:
 Grow quickly
 Help you reach your financial goals
151
Chapter 3
Money Management Strategy
Key Term Review

 money management  insolvency
 safe-deposit box  cash flow
 personal financial statement  income
 personal balance sheet  take-home pay
 net worth  discretionary income
 assets  surplus
 wealth  deficit
 liquid assets  budget
 real estate  consumer price index (CPI)
 market value  budget variance
 liabilities
152
Chapter 3

1. List at least three examples from your own experience of
opportunity costs.
153
Chapter 3

2. Explain the benefits of keeping and organizing financial
records and documents.
 Plan and measure progress.

 Handle routine money matters.
 Know how much money is available.
 Make effective decisions.
154
Chapter 3

3. Identify documents to store in home files, safe-deposit
boxes, or on a computer.
 Birth certificates and Social Security cards

 Mortgage loan papers
 Title deeds
 Copy of will
 Tax records
 Résumé
155
Chapter 3

4. Describe what you learn from a balance sheet and personal
cash flow statement.
A personal balance sheet helps you to:

 Determine your net worth.
 Manage your money to meet financial goals.
A personal cash flow statement helps you to:
 Determine the amount of cash you receive.
 Determine how you use this cash.
156
Chapter 3

5. List the steps in preparing a personal balance sheet and a
personal cash flow statement.
To create a personal balance sheet, you will need to:

 Determine your assets
 Determine your liabilities
 Calculate your net worth
 Evaluate your financial situation
To create a personal cash flow statement, you will need to:
 Record your income
 Record your expenses
 Determine your net cash flow
157
Chapter 3

6. Identify the steps in preparing a personal budget.
To create a budget, you will need to:

 Set financial goals.
 Estimate your income.
 Budget for unexpected expenses and savings.
 Budget for fixed expenses.
 Budget for variable expenses.
 Record what you spend.
 Review your spending and saving patterns.
158
Chapter 3

7. Explain how you can use your budget to identify ways to
increase your savings.
By creating and using a budget, you can decide to:

 Set aside a fixed amount as savings before you sit
down to pay your bills.
 Take advantage of your employer’s payroll savings
deduction.
 Make an effort to spend less each day.
159
160
Chapter 4
Consumer Purchasing and Protection
What You’ll Learn

 Section 4.1
 Determine the factors that influence buying
decisions.
 Explain a research-based approach to buying
goods and services.
 Identify strategies for making wise buying decisions.
 Section 4.2
 Identify ways to solve consumer problems.
 Describe the legal alternatives for consumers.
161
Comparison Shopping
 Q: I would like to purchase a new stereo. Is it really that
important for me to comparison shop?
 A: Prices and quality can be very different from one store to
another. Particularly with expensive items, it is worthwhile
to compare prices on similar items to see if one store has a
lower price than the others. If you write down the
manufacturer and style information, you can do a lot of this
“legwork” by phone, by looking at store advertisements, or
by doing research on the Internet.
162
Section 4.1
Consumer Purchasing
Main Idea
Understanding the factors that influence your
How could buying decisions will help you get the best value
learning about for your money.
consumer
purchasing
benefit you now
and in the
future?
163
Section 4.1
Consumer Purchasing
Factors That Influence Buying

Decisions
Wise buying decisions will:
 Help you get the most out of the products
you buy now
 Enable you to meet your long-term
financial goals
To get the most for your money, you will need to
recognize the economic, social, and personal
factors that affect your buying habits.
164
Section 4.1
Consumer Purchasing
Trade-Offs and Buying Decisions

Keep in mind that buying decisions always
involve trade-offs.
Some examples of trade-offs include:
 Buying a sound system with a credit card
instead of waiting until you have saved
enough money to pay cash for it
 Choosing a poorly made or difficult to
repair jacket because it is the cheapest
one available
165
Section 4.1
Consumer Purchasing
Researching Consumer Purchases

By taking time to do research and evaluating
products you want to buy, you can get more
value for your money.
A research-based approach to buying has four
phases:
 Before you shop
 Weighing alternatives
 Making the purchase
 After the purchase
166
Section 4.1
Consumer Purchasing
Phase 1: Before You Shop

Before you begin to shop, you need to do some
background work. A good start to successful
shopping involves three steps:
 Identifying your needs
 Gathering information
 Becoming aware of the marketplace
Completing these steps will enable you to get
what you really want.
167
168
Section 4.1
Consumer Purchasing
Identifying Your Needs and Gathering

Information
If you define your needs clearly, you will be
more likely to make the best buying decisions.
Information for buying decisions usually falls into
three categories:
 Costs
 Options
 Consequences
169
Section 4.1
Consumer Purchasing
Information Sources
Simple, routine purchases probably do not
require much more research than your own
experience can provide.
You can find information about more expensive
items through:
 Recommendations by people you know
 Product advertising and labeling
 Media sources
 Consumer publications
 Government agencies
 The Internet
170
Section 4.1
Consumer Purchasing
Becoming Aware of the Marketplace

When you become aware of the marketplace,
you will be able to identify:
 The brands and features from which you
can choose
 Average prices for an item
 Where you can obtain reliable information
about similar products
171
Section 4.1
Consumer Purchasing
Phase 2: Weighing Alternatives

As you evaluate alternatives when making a
purchase, decide which characteristics of the
product are important to you.
You can judge a potential purchase by
considering the following factors:
 Your personal values
 Available time for research
 Amount of money you have to spend
 Convenience of buying the item
immediately
 Pros and cons of a particular brand
172
Section 4.1
Consumer Purchasing
Compare Prices
The price of an item is an important
consideration.
When prices and quality vary, you have two
options:
 Buy the highest-quality item if you can
afford all choices.
 Consider buying the item that gives you
the best value per dollar if you cannot
afford all choices.
Remember that while differences in price may
be related to quality, price does not always
equal quality.
173
Section 4.1
Consumer Purchasing
Comparison Shopping
Comparison shopping can be useful when:
 You are buying complex or expensive
items.
 You are buying items you purchase often.
 You are using the Internet, print
advertisements, or mail-order catalogs.
 Different sellers are offering different
prices and services.
 Product quality or price varies greatly.
174
Section 4.1
Consumer Purchasing
Phase 3: Making the Purchase

After you have completed the research and
evaluation process, you may wish to:
 Negotiate the price.
 Decide whether to use credit or cash.
 Determine the real price of the product.
Certain purchases, such as real estate or cars,
may involve price negotiation. To negotiate,
research information about the product and the
buying situation.
175
Section 4.1
Consumer Purchasing
down payment Deciding on Cash or Credit

a portion of the Before deciding to use credit, evaluate its costs,
total cost of an such as interest rates and fees. These costs will
item that must
differ depending on various factors:
be paid at the
time of purchase  Source of the loan
 Type of credit account
 Payment period
 Amount of down payment
176
Section 4.1
Consumer Purchasing
Phase 4: After the Purchase

After making a purchase, you may have other
costs or tasks. When buying a car, for example,
these will include:
 Additional maintenance
 Ownership costs (gasoline and
insurance)
 Repair service
Remember that the purchasing process is an
ongoing activity. You should rethink and
reevaluate your decisions.
177
Section 4.1
Consumer Purchasing
Smart Buying Strategies

Whatever your buying style, several strategies
can help you get the most value for your dollar:
 Timing of purchases
 Store selection
 Brand comparison
 Label information research
 Price comparison
 Warranty evaluation
178
Section 4.1
Consumer Purchasing
Timing Purchases
You are more likely to find a bargain at certain
times of the year. You can save money by:
 Buying seasonal clothing about midway
through a particular season
 Shopping at back-to-school sales, spring
sales, and other special sales
 Taking advantage of clearance sales
179
Section 4.1
Consumer Purchasing
Store Selection
Your decision to shop at a store may be
influenced by the:
 Quality and variety of goods
 Price
 Hours
 Location
 Reputation
 Policies
 Services such as parking and delivery
180
Section 4.1
Consumer Purchasing
cooperative Alternatives to Store Shopping

a nonprofit Over the years, several alternatives to store
organization shopping have emerged, including:
owned and
operated by its  The cooperative
members for the  Direct selling (mail order, TV home
purpose of shopping, and online shopping)
saving money on
An advantage of these types of shopping is the
the purchase of
goods and
convenience of not having to leave home;
services disadvantages include paying for shipping and
handling and difficulty in returning purchases.
181
Section 4.1
Consumer Purchasing
impulse buying Brand Comparison

purchasing items
on the spur of the Remember to consider price and quality when:
moment  Comparing brands
 Choosing between national-brand
products and store-brand, or generic,
products
You can avoid impulse buying by:
 Planning what you are going to buy
before you shop
 Taking a list of what you need
Impulse buying can cost you more, and you may
buy products that you do not really need.
182
HONEST BRANDING Some food labels claim that the product
is considered “low in fat” or “lighter.” Foods must meet
government criteria to be labeled with such terms. Why do
you think this type of regulation is necessary?
183
Section 4.1
Consumer Purchasing
Label Information Research

Federal laws require labels to present factual
information.
For example, food labels must indicate the:
 Common name of the product
 Name and address of the manufacturer
or distributor
 Net weight of the product
 List of the ingredients in decreasing order
of weight
 Nutritional information
184
Impulse Buying
Too much impulse buying can ruin a budget. When you are
tempted to buy clothes, cool sneakers, CDs, or anything
else that you really do not need, give yourself a two-day
cool-down period. If you decide you really want it, you can
go back to the store and buy it. However, chances are that
most things will not seem as necessary a few days later.
How would you plan your budget to allow for some impulse
buying?
185
Section 4.1
Consumer Purchasing
open dating Open Dating

a labeling method
indicating the
To help consumers determine the freshness of
freshness, or shelf some foods, manufacturers print dates on the
life, of a perishable labels. Labels indicate open dating with phrases
product, such as such as:
milk or bread
 “Use before May 25, 2008”
 “Not to be sold after October 8”
186
Section 4.1
Consumer Purchasing
rebate Price Comparison

a partial refund of You can save money by taking advantage of:
the price of a
 Discount coupons
product
 Manufacturers’ rebates
unit pricing
the use of a Most grocery stores and drugstores display the
standard unit of unit pricing information for the products they
measurement to sell. If a store does not provide this information,
compare the prices you can calculate the unit price by dividing the
of packages that
are different sizes price of the item by the unit of measurement.
187
Section 4.1
Consumer Purchasing
Guidelines for Price Comparison

When comparing prices, the following guidelines
can be very helpful:
 More convenience usually means higher
prices.
 Large packages are usually the best buy.
 Ready-to-use products usually have
higher prices.
 Buying items “on sale” may not always
mean that you save money.
188
Section 4.1
Consumer Purchasing
warranty
Warranty Evaluation
a written guarantee
from the Many products come with a guarantee of quality
manufacturer or
distributor that states
called a warranty. Warranties are divided into
the conditions under two basic types:
which the product
can be returned,
 Implied—unwritten guarantees that cover
replaced, or repaired certain aspects of a product or its use
service contract  Express—full or limited written warranties
a separately
purchased agreement When you buy a product, you may be offered an
by the manufacturer extended warranty, or service contract. Before
or distributor to cover
the costs of repairing
purchasing a service contract, make sure that it
the item is worth the cost.
189
Section 4.1
Consumer Purchasing
Smart Shopping
Smart shoppers know:
 When to buy
 Where to buy
 What to buy
 How much to pay
 How to make sure that the products they
buy will perform as advertised
190
Section 4.2
Resolving Consumer Complaints
Main Idea
Various methods can solve consumer problems.
What would you do Legal alternatives are available to consumers.
if you received a
bill for an item you
did not buy?
191
Section 4.2
fraud Sources of Consumer Complaints

dishonest
business practices Every purchase involves some degree of risk.
that are meant to Most customer dissatisfaction results from
deceive, trick, or products that are:
gain an unfair
advantage  Defective
 Of poor quality
Consumers also complain about:
 Unexpected costs
 Deceptive pricing
 Unsatisfactory repair service
Another source of consumer complaints is fraud.
192
Section 4.2
Common Types of Fraud

As a consumer, you must be aware of various
types of fraud. Telephone and mail scams, for
example, may offer you phony:
 Free prizes
 Travel packages
 Work-at-home schemes
 Investment opportunities
193
Section 4.2
Protecting Yourself from Fraud

Protect yourself from consumer fraud by:
 Recognizing it before you become a victim
 Reporting it if you see it happening
194
Section 4.2
Resolving Differences Between Buyers

and Sellers
If you are dissatisfied with a product or service and
decide to make a complaint, document the process
by keeping a file of:
 Receipts
 Names of people you talk to
 Dates of attempted repairs
 Copies of letters you write
 Any fees that you have had to pay
195
Section 4.2
Return to the Place of Purchase

Most consumers can resolve their complaints at
the original place of purchase. Remember to:
 Bring sales receipts and other relevant
information.
 Remain calm and avoid yelling or
threatening the salespeople or managers.
 Explain the problem as clearly as
possible, and ask them to help you
resolve it.
196
Section 4.2
Contact Company Headquarters

If you cannot resolve your problem at the local
store or business, contact the company’s
headquarters. Sending a complaint letter can be
effective.
You can find a company’s address through:
 Consumer’s Resource Handbook
 The library
 Company Web sites
197
Section 4.2
Consumer Agency Assistance

If the company is not providing the answers you
seek, get help from various:
 Consumer organizations
 Business organizations (Better Business
Bureau)
 Government organizations (Food and
Drug Administration, Consumer Product
Safety Commission)
198
Section 4.2
mediation Dispute Resolution

the attempt by a
neutral third party to Dispute resolution programs offer other ways to
resolve a conflict settle disagreements about a product. Working
between a customer out a complaint may involve:
and a business
through discussion  Mediation
and negotiation  Arbitration
arbitration Settling a dispute through one of these methods
a process whereby a can be quicker, less expensive, and less
conflict between a stressful than going to court.
customer and a
business is resolved
by an impartial third
party whose decision
is legally binding
199
Section 4.2
Sources for Dispute Resolution

Sources for dispute resolution programs in your
area include:
 Local or state consumer protection
agencies
 State attorney general’s office
 Small claims courts
 Better Business Bureau
 Trade associations
 Local bar associations
If these dispute resolution methods do not
produce the results you want, you may choose
to take legal action.
200
Section 4.2
Legal Options for Consumers

First, try to settle your dispute by:
 Going to the place of business
 Contacting the company’s headquarters
 Getting help from a consumer agency
However, if you are still unhappy with the
outcome, your final alternative is the legal
system.
201
Section 4.2
small claims Small Claims Court

court
Every state has a court system to settle minor
a court that
disagreements.
deals with legal
disputes that When you present your case in a small claims
involve amounts court:
below a certain  Be calm and polite and stick to the point.
limit
 Submit your own evidence, such as
receipts, contracts, and photographs.
 Use witnesses who can testify on your
behalf and support your claims.
This process will take a few weeks.
202
Section 4.2
class-action suit Class-Action Suits

a legal action on Sometimes many people have the same
behalf of all the
complaint. A group may qualify for a class-
people who have
suffered the
action suit when several people are, for
same injustice example:
 Injured by a defective product
 Overcharged by a utility company
If a situation qualifies for a class-action suit, all
parties must be notified of the suit. If a court
rules in favor of the class action, the money
awarded may be:
 Divided among the claimants
 Put into public funds
203
Section 4.2
Other Legal Alternatives

If you do not want to go to small claims court or
join in a class-action suit, you may seek the
services of a lawyer. You can find a lawyer by:
 Getting a referral from someone you
know
 Checking newspapers and the yellow
pages of the phone book
 Calling a local branch of the American
Bar Association (ABA)
Make sure that the lawyer you choose has
experience in handling your type of case.
204
Section 4.2
legal aid society Legal Aid Society

a network of If the cost of lawyers and other legal services is
community law too high for you, you may be able to:
offices that
provide free or  Seek help from a legal aid society.
low-cost legal  Visit a legal clinic.
assistance Your income must fall below a certain amount to
qualify for help from a legal aid society.
205
Section 4.2
Avoiding Consumer Problems

You will have fewer consumer problems if you:
 Do business only with companies that
have good reputations.
 Avoid signing contracts and other
documents you do not understand.
 Watch out for offers that seem too good
to be true.
206
Chapter 4
Key Term Review

 down payment  small claims court
 cooperative  class-action suit
 impulse buying  legal aid society
 open dating
 unit pricing
 rebate
 warranty
 service contract
 fraud
 mediation
 arbitration
207
Chapter 4

1. List the economic, social, and personal factors that influence
a decision to buy an article of clothing.
Buying decisions are influenced by:

 Economic factors—prices, brand names, quality, and
maintenance costs
 Social factors—lifestyle and culture
 Personal factors—age, occupation, and family size
208
Chapter 4

2. Describe the research-based steps for buying a personal
computer.
A research-based approach to buying involves:

 Identifying needs
 Gathering information
 Becoming aware of the marketplace
 Weighing alternatives
 Making the purchase
209
Chapter 4

3. Explain why some of the strategies for making wise
purchases may be more important than others, depending
on the item being purchased.
Although some purchases may require more careful weighing of

options, smart shoppers know:
 When to buy
 Where to buy
 What to buy
 How much to pay
 How to make sure that the products they buy will
perform as advertised
210
Chapter 4

4. Identify methods to resolve consumer complaints.
To solve consumer problems:

 Return to the place of purchase.
 Contact the company that manufactured the disputed
product.
 Obtain help from a consumer agency or dispute
resolution program.
 Initiate legal action.
211
Chapter 4

5. Describe the advantages and disadvantages of small claims
court and joining a class-action suit.
If you are unable to solve a dispute through other means, the

legal system may help you to achieve your desired results.
However, going to court will be:
 Slower
 More expensive
 More stressful
212
Newsclip: Continuous Shopping
Consumer spending has been on the rise since 2001. Despite
unemployment rates, higher oil prices, and terrorist threats,
Americans continue to shop.
213
214
Chapter 5
Banking
What You’ll Learn

 Section 5.1
• Identify types of financial services.
• Describe the various types of financial institutions.
 Section 5.2
• Compare the costs and benefits of different savings
plans.
• Explain features of different savings plans.
• Compare the costs and benefits of different types of
checking accounts.
• Explain how to use a checking account effectively.
215
Savings Account
• Q: I make only $75 a week at my part-time job and use
most of it for movies, food, and CDs. Because I make so
little, do I really need to put my money in a bank?
• A: Since you have a small amount of money to take care
of, you may not need a bank. However, $75 a week is a
large sum to spend on entertainment. You should open a
savings account and try to save at least $10 a week. After
three months you would have $130, and after a year you
would have more than $500.
216
Section 5.1
Financial Services and Institutions
Main Idea
Understanding the features of financial services and
institutions will help you choose options that best
What might be meet your needs.
the differences
between
commercial
banks, savings
and loans, and
credit unions?
217
Section 5.1
How to Manage Your Cash

Today, with more than 11,000 banks, 2,000
savings and loan associations, and 12,000
credit unions in the United States, you have a
wide array of financial services from which to
choose.
Your choice of financial services will depend on
your:
 Daily cash needs
 Savings goals
218
Section 5.1
Daily Cash Needs

Your daily cash needs may include:
 Buying lunch
 Going to the movies with friends
 Filling the car with gasoline
 Paying for other routine activities
Consider the pros and cons of each method you
can use for your everyday cash needs.
219
Section 5.1
Sources of Quick Cash

Regardless of how well you plan, you may
sometimes need more cash than you have
available. You have two options:
 Use your savings.
 Borrow the money.
Remember that either choice requires a trade-
off. Although you will have immediate access to
the funds you need, long-term financial goals
may be delayed.
220
Section 5.1
Types of Financial Services

In order to stay competitive in today’s
marketplace, banks and other financial
institutions have expanded the range of services
that they offer.
These services can be divided into three main
categories:
 Savings
 Payment services
 Borrowing
221
Section 5.1
Savings
Safe storage of funds for future use is a basic
need for everyone.
Some examples of time deposit funds include:
 Money that you keep in any type of
savings account
 Certificates of deposit or CDs
Having a savings account is essential for any
personal finance plan.
222
Section 5.1
Payment Services
Transferring money from a personal account to
businesses or individuals for payments is a
basic function of day-to-day financial activity at a
bank.
The most commonly used payment service is a
checking account. Money that you place in a
checking account is:
 Called a demand deposit
 Able to be withdrawn at any time, or on
demand
223
Section 5.1
Borrowing
Most people use credit at some time during their
lives. If you need to borrow money, financial
institutions allow you to:
 Borrow money for a short term by using a
credit card or taking out a personal cash
loan.
 Borrow money for a longer term by
applying for a mortgage or auto loan.
224
Section 5.1
Other Financial Services

Financial institutions may also offer a variety of
services, such as:
 Insurance protection
 Stock, bond, and mutual fund investment
accounts
 Income tax assistance
 Financial planning services
225
Section 5.1
Electronic Banking Services

Your bank’s electronic services allow you to:
 Check the status of your account.
 Make a transaction from an ATM, by
telephone, or online.
 Get up-to-date information with personal
financial management software.
Security is the number one issue for online
customers. The way to ensure online security is
to:
 Use a security code, or password.
 Use a customer identification name or
number.
226
CASH AT HAND Follow simple rules of ATM etiquette when
using this banking convenience. If you are in line, stand at
least a few feet away from the person who is using the
machine. When you are at the machine, protect the screen as
you enter your PIN and other information. Why are these
practices important? 227
Section 5.1
direct deposit Direct Deposit

an automatic Many businesses offer their employees direct
deposit of net
deposit. Instead of a paper paycheck,
pay to an
employee’s
employees receive a printed statement that lists:
designated bank  Deductions
account  Other information about their earnings
Direct deposit offers a save way to transfer
funds and saves:
 Time
 Money
 Effort
228
Section 5.1
Automatic Payments
With your authorization, your bank can withdraw
the amount of your monthly payments or bills
from your bank account.
In order to use automatic payments, you will
need to:
 Make sure you always have enough
money in your account for the payment.
 Arrange your payments according to
when you receive your paycheck.
 Check your bank statements each month
to make sure that the payments were
made correctly.
229
Section 5.1
automated teller Automated Teller Machines (ATMs)

machine (ATM)
a computer A cash machine, or automated teller machine
terminal that (ATM), allows you to:
allows a  Withdraw cash from an account
withdrawal of
cash from an  Make deposits
account  Transfer money from one account to
debit card another
a cash card that To use an ATM for banking, you must apply for
allows you to
withdraw money
a debit card from your financial institution.
or pay for Unlike a credit card, a debit card enables you to
purchases from spend only the money that you have in your
your checking or account.
savings account
230
Section 5.1
ATM Fees
The fees that some financial institutions charge
for the convenience of using an ATM can add
up over time. You might consider these
suggestions:
 Compare ATM fees before opening an
account.
 Use your bank’s ATM machines to avoid
the additional fees that other banks
charge when you use their machines.
 Consider using traveler’s checks, credit
cards, personal checks, and prepaid cash
cards when you are away from home.
231
Section 5.1
point-of-sale Plastic Payments

transaction
Although cash and checks are very common
a purchase by a
methods of paying for goods and services,
debit card of a
good or service
various access cards are also available. These
at a retail store, include:
a restaurant, or  Point-of-sale transactions
elsewhere  Store-value cards
 Electronic cash
232
Section 5.1
Opportunity Costs of Financial

Services
When you are making decisions about saving
and spending:
 Try to find a balance between your short-
term needs and your future financial
security.
 Consider the opportunity costs, or trade-
offs, of each choice you make as you
select financial services.
Remember to consider the value of your time in
addition to the money you are saving.
233
Section 5.1
Types of Financial Institutions

After you have identified the services you want,
you can choose from among many types of
financial institutions.
You may select an institution that:
 Offers a wide range of services
 Specializes in certain services
 Provides the option of cyber-banking, or
banking via the Internet
 Operates exclusively on the Internet
234
Section 5.1
Federal Deposit Insurance Corporation

The Federal Deposit Insurance Corporation
(FDIC):
 Protects deposits in banks
 Insures each account in a federally
chartered bank up to $100,000 per
account
 Administers the Savings Association
Insurance Fund (SAIF) for savings and
loan associations
All federally chartered banks must participate in
the FDIC program.
235
Section 5.1
commercial bank Deposit Institutions

a for-profit
institution that Most people use deposit-type institutions to
offers a full range handle their banking needs. These institutions
of financial include:
services, including
checking, savings,  Commercial banks
and lending  Savings and loan associations
credit union  Mutual savings banks
a nonprofit  Credit unions
financial institution
that is owned by
its members and
organized for their
benefit
236
Section 5.1
Non-Deposit Institutions
Financial services are also available at
institutions such as:
 Life insurance companies
 Investment companies
 Finance companies
 Mortgage companies
237
Section 5.1
Comparing Financial Institutions

When you compare banks and other financial
institutions, you should ask these questions to
help choose the best one:
 Where can you get the highest rate of
interest on your savings?
 Where can you obtain a checking
account with low (or no) fees?
 Will you be able to borrow money from
the institution when you need it?
 Does it have online banking services?
 Does it have convenient locations?
238
Section 5.2
Savings Plans and Payment Methods
Main Idea
Recognizing the types of savings plans and
What is the payment methods that financial institutions offer
difference can help you use money wisely.
between a CD
and a money
market account?
Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill 239

25
Section 5.2
Types of Savings Plans

To achieve your financial goals, you will need a
savings program. Various types of savings
programs include:
 Regular savings accounts
 Certificates of deposit
 Money market accounts
 U.S. Savings Bonds
240
Section 5.2
Regular Savings Accounts

Regular savings accounts, traditionally called
passbook accounts, are ideal if you plan to
make frequent deposits and withdrawals. These
accounts:
 Require little to no minimum balance
 Allow you to withdraw money on demand
The trade-off for this convenience is that the
interest you earn will be low compared with
other savings plans.
241
Section 5.2
certificate of Certificates of Deposit

deposit (CD)
A certificate of deposit (CD) is a relatively low-
a savings
risk way to invest your money.
alternative in
which money is It offers a higher interest rate than a regular
left on deposit savings account pays, but you will have to accept
for a stated three key limitations:
period of time to  You may have to leave your money on
earn a specific
deposit for one month to five or more years.
rate of return
 You probably will pay a penalty if you take
the money out before the maturity date.
 Financial institutions require that you
deposit a minimum amount to buy a
certificate of deposit.
242
Section 5.2
CD Investment Strategies
Here are some tips for investing in CDs:
 Find out where you can get the best rate.
 Consider the economy as you decide
what maturity date to choose.
 Never let a financial institution “roll over”
a CD.
 Consider when you will need the money.
 If you have enough funds to have several
accounts, you might consider creating a
CD portfolio, which includes CDs that
mature at different times.
243
Section 5.2
money market Money Market Accounts

account The interest rates of a money market account
a savings float, or go up and down, as market rates
account that change.
requires a Although the interest rate of a money market
minimum account is usually higher than that of a regular
balance and savings account:
earns interest
that varies from
 A money market account also requires a
month to month
higher minimum balance, typically $1,000.
 You may have to pay a penalty if your
balance goes below the minimum amount.
244
Section 5.2
U.S. Savings Bonds

Another savings option is purchasing a U.S.
Savings Bond. The maturity date of a bond
depends on:
 The date it was bought
 The interest rate the bond is earning
Your bond’s worth will depend on current
interest rates and on the month and year in
which the bond was issued.
245
Section 5.2
Evaluating Savings Plans

Your selection of a savings plan will be
influenced by several factors. You should
consider:
 The rate of return
 Inflation
 Tax considerations
 Liquidity
 Restrictions
 Fees
246
Section 5.2
Rate of Return
rate of return Earnings on savings can be measured by the
the percentages of rate of return, or yield.
increase in the
value of your Compounding can have a great impact on
savings from large amounts of money that are held in savings
earned interest accounts for long periods.
compounding The more frequently your balance is
the process in compounded, the greater your rate of return will
which interest is
earned on both the
be.
principal—the
original amount
you deposited—
and on any
previously earned
interest
247
Section 5.2
annual Truth in Savings

percentage yield
According to the Truth in Savings law (Federal
(APY)
reserve Regulation DD), financial institutions
the amount of
have to inform you of the following information:
interest that a
$100 deposit  Fees on deposit accounts
would earn, after  Interest rate
compounding,
 Annual percentage yield (APY)
for one year.
 Terms and conditions of the savings plan
The APY helps you determine the amount you
can expect to earn on your money.
248
Section 5.2
Inflation
You should compare the rate of interest you
earn on your savings with the rate of inflation.
Usually, the interest rates offered on savings
accounts increase if the rate of inflation
increases.
The biggest problem with inflation occurs if you
are locked into a lower interest rate for a long
period.
249
Section 5.2
Tax Considerations
Like inflation, taxes reduce the interest earned
on savings. You may want to look into:
 Tax-exempt saving plans
 Tax-deferred savings plans
250
Section 5.2
Liquidity
Check the savings plans you are considering to
determine whether early withdrawal of funds will
cause them to:
 Charge a penalty
 Pay a lower rate of interest
If you are saving for long-term goals, a high
interest rate may be more important than
liquidity.
251
Section 5.2
Restrictions and Fees

Be aware of any restrictions on savings plans,
such as:
 A delay between the time when interest is
earned and when it is actually paid into
your account
 Fees for making deposits and
withdrawals
 Service charges you may have to pay if
your balance drops below a certain
amount or if you do not use your account
for a certain period
252
Section 5.2
Types of Checking Accounts

Checking accounts can be divided into three
main categories:
 Regular accounts
 Activity accounts
 Interest-earning accounts
253
Section 5.2
Regular Checking Accounts

Regular checking accounts usually do not
require a minimum balance. You may have to
pay a monthly service charge, however, if:
 The account requires a minimum balance.
 Your account drops below that amount.
Some institutions will waive a service charge if
you keep a certain balance in your savings
account.
254
Section 5.2
Activity Accounts
An activity account might be right for you if you:
 Write only a few checks each month
 Are unable to maintain a minimum
balance
The financial institution may charge a fee for:
 Each check you write
 Each deposit
In addition, a monthly service fee will be
charged.
255
Section 5.2
Interest-Earning Checking Accounts

Interest-earning checking accounts are a
combination of:
 Checking accounts
 Savings accounts
These accounts pay interest if you maintain a
minimum balance.
256
Section 5.2
Evaluating Checking Accounts

How do you decide which type of checking
account will meet your needs? You will need to
weigh several factors:
 Restrictions
 Fees and charges
 Interest
 Special services
257
Section 5.2
Restrictions
The most common restriction is the requirement
that you keep a minimum balance. Other
restrictions may include:
 The number of transactions allowed
 The number of checks you may write in a
month
258
Section 5.2
Fees and Charges

You may pay a monthly service charge as well
as fees for:
 Check printing
 Overdrafts
 Stop-payment orders
259
Section 5.2
Interest
An interest-earning checking account will be
affected by:
 Interest rates
 Frequency of compounding
 The way in which interest is calculated
260
Section 5.2
overdraft Special Services

protection
Checking account services include:
an automatic
loan made to an  ATMs
account if the  Banking by telephone and online
balance will not As a checking account customer, you may also
cover checks
receive overdraft protection.
written
261
Section 5.2
Using a Checking Account

After you select the type of checking account
that best fits your needs, you need to know how
to use it effectively.
262
263
Section 5.2
Opening a Checking Account

Before you open a checking account, decide
whether you want:
 An individual account
 A joint account
Personal joint accounts are usually “or”
accounts, which means that only one of the
owners needs to sign a check.
264
Section 5.2
Writing Checks
Before writing a check, use your check register
to record the:
 Date
 Number of the check
 Name of the party who will receive the
payment
 Exact amount of the check
Be sure to keep a current balance of the money
you have by deducting from or adding to your
balance the amount of any check transaction.
265
Section 5.2
Steps in Writing a Check

Follow these steps when you write a check:
 Write the current date.
 Write the name of the party who will
receive the check.
 Record the amount of the payment in
numerals.
 Write the amount in words.
 Sign the check.
 Make a note of the reason for the
payment.
266
Section 5.2
stop-payment Stop-Payment Order

order
You may ask the bank to issue a stop-payment
a request that a
order if:
bank or other
financial  A check is lost or stolen.
institution not  You want to take back your payment for a
cash a business transaction.
particular check
Fees for this service can range from $10 to $20
or more.
267
Section 5.2
endorsement Making Deposits

the signature of To add money to your checking account:
the payee, the
party to whom  Fill out a deposit ticket.
the check has  Endorse the back of each check you
been written want to deposit.
Here are some tips to follow when endorsing a
check:
 Do not endorse a check until you are
ready to cash or deposit it.
 Use a pen so that your signature cannot
be erased.
 If depositing a check by mail, write “For
deposit only” above your signature.
268
Section 5.2
Check Clearing
Check clearing is a system that ensures that the
money you deposited in the account is available
for withdrawal.
Check-clearing rules vary by bank, so ask your
bank about its rules.
269
Money Toss
Empty the change from your pocket or wallet every night
and throw it into a jar. At the end of each month, deposit all
your “throwaway” money in your savings or checking
account. That loose change can really add up.
What type of bank account would be best for your loose
change? Why?
270
Section 5.2
Keeping Track of a Checking Account

Each month your bank will send you a statement
that shows your checking account activity for the
month. Your bank statement will list:
 Deposits
 Checks you have written
 ATM withdrawals
 Debit card charges
 Interest earned
 Fees
The balance reported on the bank statement may
be different from the balance in your check
register.
271
Section 5.2
bank Reconciliation
reconciliation You can fill out a bank reconciliation form to
a report that determine your true balance.
accounts for the To balance, or reconcile, your account, follow
differences these steps:
between the
bank statement
 Compare the checks you have written
and a
during the month with those that are
checkbook
listed on the bank statement as paid, or
balance
cleared.
 Determine whether any recent deposits
are not on the bank statement.
 Subtract fees and charges listed on the
statement from your checkbook balance.
 Add interest earned to your checkbook
balance.
272
Section 5.2
Other Payment Methods

You can make payments using methods other
than writing a personal check. Some
alternatives include:
 Certified checks
 Cashier’s checks
 Money orders
 Travelers check
 Prepaid travelers cards
273
Section 5.2
Financial Institutions and Your

Money
Banks make money by making loans. The
amount of deposits held by a bank affects its
ability to:
 Loan money
 Put money back into the economy to pay
for goods and services
Banking your money benefits you as well as
others in the economic system.
274
Chapter 5
Banking
Key Term Review

 direct deposit  compounding
 automated teller machine (ATM)  annual percentage yield (APY)
 debit card  overdraft protection
 point-of-sale transaction  stop-payment order
 commercial bank  endorsement
 savings and loan association (S&L)  bank reconciliation
 credit union
 certificate of deposit (CD)
 money market account
 rate of return
275
Chapter 5
Banking

1. Explain two advantages and two disadvantages of online
banking.
At any time of the day, you can use a bank’s electronic services to:
 Check the status of your account.
 Make a transaction.
Security is the number one issue for online customers. You

will need to be careful to ensure that you do not become a
victim of identity theft.
276
Chapter 5
Banking

2. Identify the services offered by the different financial
institutions.
The three primary types of financial services are:

 Savings
 Payment services
 Borrowing
277
Chapter 5
Banking

3. Explain why a large, nationally chartered bank may be the
safest place to deposit your money.
The Federal Deposit Insurance Corporation (FDIC)

protects deposits in federally chartered banks and
insures each account up to $100,000 per account.
278
Chapter 5
Banking

4. Discuss how you benefit when interest is compounded
monthly as opposed to annually.
The more frequently your balance is compounded, the

greater your rate of return will be.
279
Chapter 5
Banking

5. Explain the circumstances under which a person should
choose a regular checking account, activity checking
account, or interest-earning checking account.
Regular checking accounts usually do not require a

minimum balance.
An activity account might be right for you if you:
 Write only a few checks each month.
 Are unable to maintain a minimum balance.
Interest-earning accounts pay interest if you maintain a
minimum balance. If your account balance goes below the
limit:  You may not earn any interest.
 You may have to pay a service charge.
280
Chapter 5
Banking

6. List the steps to take to use a checking account effectively.
To use a checking account:

 Write checks carefully.
 Endorse checks you deposit.
 Reconcile your checkbook against bank statements.
281
Newsclip: Fuzzy Numbers
Banks offer many saving options to teenagers. A teen can open a
savings/passbook account or CD (certificate of deposit).
282
283
Chapter 6
Consumer Credit
What You’ll Learn
 Section 6.1
 Explain the meaning of consumer credit.
 Differentiate between closed-end credit and open-
end credit.
 Section 6.2
 Name the five C’s of credit.
 Identify factors to consider when choosing a loan or
credit card.
 Explain how to build and protect your credit rating.
 Section 6.3
 Discuss how to protect yourself from fraud and
identity theft.
 Section 6.4
 Identify ways to manage debt problems.
284
Credit Payments
 Q: My brother is going to college and has three credit cards

with balances totaling $5,000. He is having trouble paying
the minimum monthly payments. What should I tell him?
 A: He needs a plan to pay down these debts. Have him
contact the credit card companies and tell them that he
wants to pay the debt and maintain good credit. They may
accept payments of interest only for a few months while he
finds ways to increase his income or cut spending.
285
Section 6.1
What Is Consumer Credit?
Main Idea
There are advantages to using consumer credit
What is your if you use it correctly.
definition of
credit?
286
Section 6.1
credit Using Consumer Credit Wisely

an arrangement to
When you borrow money or charge an item to a
receive cash,
goods, or services
credit card, you are using credit. A creditor can
now and pay for be:
them in the future  A financial institution
creditor  A merchant
an entity that  An individual
lends money Consumer credit is a major force in the
consumer credit American economy, and the use of credit is a
the use of credit basic factor in personal and family financial
for personal planning.
needs
287
Section 6.1
Credit Uses and Misuses

Using credit may increase the amount of money
you can spend now, but the cost of credit
decreases the amount of money you will have in
the future.
That is because you will be paying back:
 The money you borrowed
 Any charges for borrowing that money
288
Section 6.1
Factors to Consider Before Using

Credit
Before you decide to finance a major purchase
by using credit, consider:
 Do you have the cash you need for the
down payment?
 Can you afford the item?
 Could you put off buying the item for a
while?
 What are the costs of using credit?
Make sure the benefits of making the purchase
now outweigh the costs of credit.
289
Section 6.1
Advantages of Credit
Using consumer credit allows you to:
 Enjoy goods and services now and pay
for them later.
 Combine several purchases, making just
one monthly payment.
 Keep a record of your expenses.
 Shop and travel without carrying a lot of
cash.
If you use credit wisely, other lenders will view
you as a responsible person.
290
THINK FIRST Everyone likes to have nice things, but using credit
unwisely can lead to problems. What should you consider before
using credit?
291
Section 6.1
Disadvantages of Credit
Always remember that credit costs money. If
you fail to repay a credit card balance:
 You can lose your good credit reputation.
 You may also lose some of your income
and property, which may be taken from
you in order to repay your debts.
You should always approach credit with caution
and avoid using it for more than your budget
allows.
292
Section 6.1
Types of Credit
There are two basic types of consumer credit:
 Closed-end credit
 Open-end credit
You may use both types during your lifetime
because each has advantages and
disadvantages.
293
Section 6.1
closed-end Closed-End Credit

credit
Closed-end credit is used for a specific purpose
credit as a one-
and involves a definite amount of money.
time loan that you
will pay back over
Examples of closed-end credit include:
a specified period  A mortgage
of time in  Vehicle loans
payments of equal
amounts.
 Installment loans for purchasing furniture
or large appliances
These types of loans usually carry lower interest
rates than open-end credit carries.
294
Section 6.1
open-end credit Open-End Credit

credit as a loan Examples of open-end credit include:
with a certain limit
on the amount of  Department store credit cards
money you can  Bank credit cards (Visa or MasterCard)
borrow for a You can use your credit card to make as many
variety of goods
purchases as you wish, as long as you do not
and services
exceed your line of credit.
line of credit
the maximum
amount of money
a creditor will
allow a credit user
to borrow
295
Section 6.1
Sources of Consumer Credit

Many sources of consumer credit are available,
including:
 Commercial banks
 Credit unions
296
Section 6.1
Loans
A loan is borrowed money with an agreement to
repay it with interest within a certain amount of
time. Before going to your local bank to take out
a loan, you might want to consider:
 Inexpensive loans (family members)
 Medium-priced loans (commercial banks,
savings and loan associations, credit
unions)
 Expensive loans (finance companies,
retail stores, banks)
 Home equity loans
297
Section 6.1
grace period Credit Cards

a time period Most credit card companies offer a grace period.
during which no
If you pay your balance before the due date
finance charges
will be added to
stated on your monthly bill, you will not have to
your account pay a finance charge.
The cost of a credit card depends on:
finance charge
 The type of credit card you have
the total dollar
amount you pay  The terms set forth by the lender
to use credit
298
Section 6.1
Types of Cards
Debit cards allow you to electronically subtract
money from your savings or checking account to
pay for goods or services.
Other types of cards include:
 Smart cards
 Travel and entertainment (T&E) cards
(American Express)
299
Section 6.2
The Costs and Methods of Obtaining Credit
Main Idea
You should consider the costs of credit and your
How would you own credit standing when applying for credit.
qualify for a credit
card or loan?
300
Section 6.2
Can You Afford a Loan?

Taking out a loan can be a substantial financial
burden. Before you take out a loan, make sure
that you can afford it:
 Add up all your basic monthly expenses
and then subtracting the total from your
take-home pay.
 Consider what you might have to give up
to make the monthly loan payment.
 Use the debt payments-to-income ratio
formula to decide whether you can safely
take on the responsibility of credit.
301
Section 6.2
net income Debt Payments-to-Income Ratio

the income you The debt payments-to-income ratio is the
receive (take-
percentage of debt you have in relation to your
home pay,
allowance, gifts,
net income. Experts suggest that you spend no
and interest) more than 20 percent of your net income on
debt payments, which include:
 Credit card payments
 Loan payments
You can calculate your debt payments-to-
income ratio by dividing your total monthly debt
payments by your monthly net income.
302
Section 6.2
The Cost of Credit

If you are thinking of taking out a loan or
applying for a credit card, your first step should
be to figure out:
 How much the loan will cost you
 Whether you can afford it
Two key factors in your decision will be:
 The finance charge
 The annual percentage rate (APR)
303
Section 6.2
annual The Finance Charge and the Annual

percentage rate Percentage Rate (APR)
(APR)
the cost of credit
The finance charge, or total dollar amount you
on a yearly basis, pay to use credit, is calculated using the annual
expressed as a percentage rate (APR).
percentage All organizations must state the true APR that
they charge their customers. This makes it easy
to compare the cost of credit.
304
305
Section 6.2
Tackling the Trade-Offs

When you select your financing, you will have to
make trade-offs. The various features you will
have to choose between include:
 The length of the loan
 The size of monthly payments
 The interest rate
306
Section 6.2
Major Trade-Offs
Some of the major trade-offs you should
consider are:
 Term versus interest costs (choosing
long-term financing despite the increased
interest charges)
 Lender risk versus interest rate (taking a
more expensive loan because of its
minimum down payment or low fixed
payments)
307
Section 6.2
Reducing Lender Risk

To reduce lender risk and increase your chance
of getting a loan at a lower interest rate,
consider the following options:
 Variable interest rate
 A secured loan
 Up-front cash
 A shorter term
308
Section 6.2
simple interest Calculating the Cost of Credit

the interest The most common method of calculating
computed only on
interest is the simple interest formula. There are
the principal, the
amount that you
other variations of this formula, including:
borrow  Simple interest on the declining balance
 Add-on interest
Simple interest is based on three factors:
 The principal
 The interest rate
 The amount of time the principal is
borrowed
309
Section 6.2
Cost of Open-End Credit

The Truth in Lending Act requires that open-end
creditors:
 Inform consumers how the finance
charge and the APR will affect their costs.
 Explain how they calculate the finance
charge.
 Inform you when finance charges on your
credit account begin to accrue.
310
Section 6.2
Cost of Credit and Expected Inflation

Inflation reduces the buying power of money.
Because of this, lenders incorporate the
expected rate of inflation when deciding how
much interest to charge.
311
Section 6.2
minimum The Minimum Monthly Payment Trap

monthly Lenders often encourage you to make the
payment
minimum monthly payment because it will then
the smallest
take you longer to pay off the loan.
amount you can
pay and remain a If you pay only the minimum amount on your
borrower in good monthly statement, you need to:
standing  Plan your budget more carefully.
 Understand that the longer it takes for
you to pay off a bill, the more interest you
pay.
312
Section 6.2
Applying for Credit

When you are ready to apply for a loan or a
credit card, you should understand the factors
that determine whether a lender will extend
credit to you.
313
Section 6.2
The Five C’s of Credit

When a lender extends credit to consumers, it
expects that some people will be unable or
unwilling to pay their debts.
Most lenders use the “five C’s of credit” to
determine who will receive credit. These C’s
are:
 Character
 Capacity
 Capital
 Collateral
 Credit history
314
Section 6.2
Character: Will You Repay the Loan?

Creditors want to know what kind of person they
will be lending money to. Some questions a
lender might ask to determine your character
are:
 Have you used credit before?
 How long have you lived at your present
address?
 How long have you held your current job?
They want to know that you are trustworthy and
stable.
315
One Is Enough
When you turn 18, you may start receiving applications for
credit cards. Be a smart consumer and compare interest rates,
annual fees, and any other fees. Decide which credit card best
suits your needs and apply for that one. Toss any other
applications you get into the trash.
Why should you get the best (or lowest) interest rate for a credit
card?
316
Section 6.2
Capacity: Can You Repay the Loan?

Your income and the debts you already have
will affect your ability to pay additional debts.
A creditor may ask several questions about your
income and expenses, such as:
 What is your job and how much is your
salary?
 Do you have other sources of income?
 What are your current debts?
317
Section 6.2
Capital: What Are Your Assets and Net

Worth?
Lenders want to be sure that you have enough
capital to pay back a loan. That way, if you lost
your source of income, you could repay your
loan:
 From your savings
 By selling some of your assets
A lender might ask:
 What are your assets?
 What are your liabilities?
318
Section 6.2
Collateral: What If You Do Not Repay the

Loan?
Creditors look at what kinds of property or
savings you already have, because these can
be offered as collateral to secure the loan.
A creditor might ask:
 What assets do you have to secure the
loan (a vehicle, your home, or furniture)?
 Do you have any other assets (bonds or
savings)?
319
Section 6.2
credit rating Credit History: What Is Your Credit History?

a measure of a Lenders will review your credit history to find out
person’s ability whether you have used credit responsibly in the
and willingness to
past. Some questions a creditor might ask about
make credit
payments on time
your credit history are:
 Do you pay your bills on time?
 Have you ever filed for bankruptcy?
The information gathered from your application
and the credit bureau establishes your credit
rating.
320
Section 6.2
Credit and Equal Opportunity

The Equal Credit Opportunity Act (ECOA) gives
all credit applicants the same basic rights.
It states that a lender may not discriminate
against you on a basis of:
 Race
 Nationality
 Age
 Sex
 Marital status
 Redlining (discrimination against you
based on the race or nationality of the
people in the neighborhood where you
live)
321
Section 6.2
What If Your Application Is Denied?

If your credit application is denied, the ECOA
gives you the right to know the reasons.
If the denial is based on a credit report from a
credit bureau, you are entitled to:
 Know what specific information in the
report led to the denial.
 Contact the credit bureau and ask for a
copy of your credit report.
 Ask the bureau to investigate any
inaccurate or incomplete information and
correct its records.
322
Section 6.2
Your Credit Report

When you apply for a loan, the lender will review
your credit history closely. The record of your
complete credit history is:
 Your credit report, or credit file
 Collected and maintained by credit
bureaus
Most lenders rely heavily on credit reports when
they consider loan applications.
323
Section 6.2
Credit Bureaus
A credit bureau is an agency that collects
information on how promptly people and
businesses pay their bills.
Credit bureaus get their information from:
 Banks
 Finance companies
 Stores
 Credit card companies
 Other lenders
324
Section 6.2
Your Credit File

A typical credit bureau file contains your:
 Name
 Current and previous address
 Social Security number and birth date
 Employer, position, and income
 Previous employer
 Homeowner or renter status
 Checks returned for insufficient funds
 Detailed credit information
325
Section 6.2
Fair Credit Reporting

Fair and accurate credit reporting is vital to both
creditors and consumers.
The Fair Credit Reporting Act:
 Regulates the use of credit reports
 Requires the deletion of out-of-date
information
 Gives consumers access to their files as
well as the right to correct any
misinformation that the files may include
 Places limits on who can obtain your
credit report
326
Section 6.2
Who Can Obtain a Credit Report?

Your credit report may be issued only to
properly identified persons for approved
purposes. It may be:
 Supplied in response to a court order or
by your own written request
 Provided for use in connection with a
credit transaction or some other
legitimate business need
You may obtain a copy of your credit report free
of charge if you have been denied credit.
327
Section 6.2
Time Limits on Unfavorable Data

Most of the information in your credit file may be
reported for only seven years. If you have
declared personal bankruptcy, that fact may be
reported for ten years.
A credit reporting agency cannot disclose
information in your credit file that is more than
seven or ten years old unless:
 You are being reviewed for a credit
application of $75,000 or more.
 You apply to purchase life insurance of
$150,000 or more.
328
Section 6.2
Incorrect Information
If you think a credit bureau may be reporting
incorrect data from your file:
 Contact the bureau to dispute the
information.
 Be sure the credit bureau changes or
removes the incorrect items.
If you challenge the accuracy of an item on your
credit report, the bureau must remove the item
unless the lender can verify that the information
is accurate.
329
Section 6.2
Legal Action
You have a legal right to sue a credit bureau or
creditor that has caused you harm by not
following the rules established by the Fair Credit
Reporting Act.
If the agency or the user is found guilty, the
consumer may be awarded:
 Actual damages
 Court costs
 Attorneys’ fees
330
Section 6.3
Protecting Your Credit
Main Idea
You must take action to protect your credit if you
How could you discover billing errors, have purchase disputes,
protect your or experience identity theft.
credit?
331
Section 6.3
Billing Errors and Disputes

If you want to protect your credit rating, your
time, and your money, you need to know how to
correct mistakes that may pop up in your credit
dealings.
To dispute billing errors, you should:
 Notify your creditor in writing.
 Include any information that might
support your case.
 Pay the portion of the bill that is not in
question.
332
Section 6.3
Protecting Your Credit Rating

According to law, a creditor may not:
 Threaten your credit rating or do anything
to damage your credit reputation while
you are negotiating a billing dispute
 Take any action to collect the amount in
question until your complaint has been
answered
333
Section 6.3
Defective Goods and Services

According to the Fair Credit Billing Act, you may
tell your credit card to stop payment if:
 You purchase a defective item.
 The store will not accept a return.
You must have made a sincere attempt to
resolve the problem.
334
Section 6.3
Credit and Stolen Identity

When imposters use your personal information
for their own purposes, they are committing a
crime, sometimes called “identity theft.”
You may not even know that your identity has
been stolen until you:
 Get bills for a credit card account you
never opened
 See charges to your account for things
that you did not purchase
335
Section 6.3
Protecting Your Credit from Theft or

Loss
Lost credit cards are a key element in credit
card fraud. To protect your card, you should:
 Be sure that your card is returned to you
after you make a purchase.
 Keep a record of your credit card number.
 Notify the credit card company
immediately if your credit card is stolen.
336
Section 6.3
Keeping Track of Your Credit

You can take steps to stop or prevent identity
theft by:
 Immediately closing any accounts
accessed by an identity thief
 Insisting on password-only access when
opening new accounts
 Stopping payment on stolen or misused
checks
 Canceling a lost or stolen ATM card and
getting another one with a new PIN
Stay alert to new instances of identity theft.
337
Section 6.3
Government Agency Protection

If you continue to experience identity-theft
problems after taking these steps, contact the
Privacy Rights Clearinghouse of the Federal
Trade Commission (FTC).
The FTC:
 Cannot resolve individual problems for
consumers
 Can against against a company if it sees
a pattern of possible law violations
338
Section 6.3
Protecting Your Credit Information on

the Internet
Although you cannot control fraud or deception
on the Internet, you can take steps to recognize,
avoid, and report it. These steps include:
 Using a secure browser
 Keeping records of your online
transactions
 Reviewing your monthly bank and credit
card statements
 Reading the privacy and security policies
of Web sites you visit
 Keeping your personal information private
 Not downloading files sent to you by
strangers
339
Section 6.3
cosigning Cosigning a Loan

agreeing to be
Think carefully before cosigning a loan. If you
responsible for
loan payments if
cosign a loan and the borrower does not pay the
the other person debt, you may have to pay:
fails to make them  Up to the full amount of the debt
 Any late fees or collection costs
If the debt is not repaid, that fact will appear on
your credit record.
340
Section 6.3
Complaining About Consumer Credit

If you believe that a lender is not following the
consumer credit protection laws:
 First try to solve the problem directly with
the lender.
 Use more formal complaint procedures if
that fails.
341
Section 6.3
Consumer Credit Protection Laws

If you decide to file a lawsuit against a creditor,
you should be aware of the various consumer
credit protection laws listed here:
 Truth in Lending and Consumer Leasing
Acts
 Equal Credit Opportunity Act (ECOA)
 Fair Credit Opportunity Act
 Fair Credit Reporting Act
 Consumer Credit Reporting Reform Act
342
Section 6.3
Your Rights Under Consumer Credit

Laws
If you believe that you have been refused credit
because of discrimination, you can take one or
more of the following steps:
 Complain to the creditor.
 Let the creditor know that you are aware
of the law.
 File a complaint with the government.
 Sue the creditor if all else fails.
343
Section 6.4
Managing Your Debts
Main Idea
If you experience the warning signs of debt
What corrective problems, there are several options available to
steps would you manage your finances.
take if you were
experiencing the
debt troubles
listed here? (See
next slide.)
Video Clip: Credit Problems
344
Section 6.4
Managing Your Debts
Signs of Debt Problems

Some people who seem to be wealthy are just
barely keeping their heads above water
financially. They may:
 Lack self-discipline and do not control
their impulses
 Use poor judgment
 Fail to accept responsibility for managing
their money
345
Section 6.4
Managing Your Debts
The Warning Signs

The following are some warning signs of being
in financial trouble:
 You make only the minimum monthly
payment on credit cards.
 The total balance on your credit cards
increases every month.
 You miss loan payments or often pay
late.
 You use savings to pay for necessities
such as food and utilities.
 You borrow money to pay off old debts.
 You exceed the credit limits on your
credit cards.
346
Section 6.4
Managing Your Debts
Debt Collection Practices

Creditors will often turn their bad debts over to
debt collection agencies.
The Federal Trade Commission, however,
enforces the Fair Debt Collection Practices Act
(FDCPA), which:
 Prohibits certain practices by debt
collectors
 Does not erase the legitimate debts that
consumers owe
 Does control the ways in which debt
collection agencies do business and deal
with consumers in debt
347
Section 6.4
Managing Your Debts
Financial Counseling Services

If you are having trouble paying your bills and
need help, you have several options. You can:
 Contact your creditors and try to work out
an adjusted repayment plan.
 Contact a non-profit financial counseling
program, such as the Consumer Credit
Counseling Service, which operates
nationwide.
348
Section 6.4
Managing Your Debts
Consumer Credit Counseling Service

The Consumer Credit Counseling Service
(CCCS) is concerned with preventing problems
as much as it is with solving them.
As a result, its activities are divided into two
parts:
 Aiding families with serious debt
problems by helping them manage their
money better and setting up a realistic
budget
 Helping people prevent indebtedness by
teaching them the importance of budget
planning, educating them about the
pitfalls of unwise credit buying, and
encouraging credit institutions to withhold
credit from people who cannot afford it
349
Section 6.4
Managing Your Debts
Other Counseling Services

In addition to the CCCS, you can sometimes
find nonprofit credit counseling services through:
 Universities
 Credit unions
 Military bases
 State and federal housing authorities
These organizations usually charge little to
nothing for their assistance.
350
Section 6.4
Managing Your Debts
bankruptcy Declaring Personal Bankruptcy

a legal process in
As a last resort, an individual can declare
which some or all
of the assets of a
bankruptcy. Declaring bankruptcy is a last resort
debtor are because it severely damages your credit rating.
distributed among
the creditors
because the
debtor is unable
to pay his or her
debts
351
Section 6.4
Managing Your Debts
The U.S. Bankruptcy Act of 1978

You have two choices in declaring personal
bankruptcy:
 Chapter 7 (a straight bankruptcy)
 Chapter 13 (a wage-earner plan
bankruptcy)
Both choices are undesirable, and neither
should be considered an easy way to get out of
debt.
352
Section 6.4
Managing Your Debts
Using a Lawyer
Choosing a bankruptcy lawyer may be difficult.
Some of the least reputable lawyers make easy
money by handling hundreds of bankruptcy
cases without considering individual needs.
You should get recommendations from:
 Friends
 Family
 Employee-assistance programs
353
Section 6.4
Managing Your Debts
Effects of Bankruptcy
People have varying experiences in obtaining
credit after they file for bankruptcy.
Since bankruptcy reports are kept on file in
credit bureaus for ten years, you should take the
extreme step of declaring bankruptcy only when
you have no other options.
The best way to solve your financial problems is
to avoid them by maintaining good credit.
354
Chapter 6
Consumer Credit
Key Term Review

 credit  collateral
 consumer credit  simple interest
 creditor  minimum monthly payment
 closed-end credit  credit rating
 open-end credit
 cosigning
 line of credit
 bankruptcy
 grace period
 finance charge
 net income
 annual percentage rate (APR)
355
Chapter 6
Consumer Credit

1. Explain the concept of consumer credit.
Consumer credit is the use of credit for personal needs.
356
Chapter 6
Consumer Credit

2. Differentiate between open-end credit and closed-end credit.
Closed-end credit is credit as a one-time loan that you pay back

over a specified period of time in payments of equal amounts.
Open-end credit is credit as a loan with a limit on the amount of
money that you borrow for goods and services.
357
Chapter 6
Consumer Credit

3. Identify the five C’s of credit using a graphic organizer. Then
rate yourself.
The five C’s of credit are:

 Character
 Capacity
 Capital
 Collateral
 Credit history
358
Chapter 6
Consumer Credit

4. Discuss the factors to consider when choosing a loan or
credit card.
When choosing a loan or credit card, consider factors such as:

 Length of the loan
 Amount of monthly payments
 Interest rate
359
Chapter 6
Consumer Credit

5. Identify ways you can build a good credit rating.
To build and protect good credit:

 Pay your bills and loans promptly.
 Manage your personal finances carefully.
 Correct mistakes related to your credit bills and credit
reports.
 Dispute billing errors in writing and pay amounts that
are not in question.
360
Chapter 6
Consumer Credit

6. Discuss the steps you should take if your identity is stolen.
If your credit or identity is stolen:

 Contact all your credit card companies.
 Close and open new bank accounts.
 Change all PINs.
 Notify law enforcement agencies and credit bureaus.
361
Chapter 6
Consumer Credit

7. Explain the role of the Consumer Credit Counseling Service.
The Consumer Credit Counseling Service:

 Aids families with serious debt problems by helping
them manage their money better and setting up a
realistic budget
 Helps people prevent indebtedness by teaching them
the importance of budget planning, educating them
about the pitfalls of unwise credit buying, and
encouraging credit institutions to withhold credit from
people who cannot afford it
362
Newsclip: Student Credit Cards
Many credit card companies offer credit cards to students 18 and
over. As a result, many students have heavy debts. Debt advisors
say students should have a low minimum limit.
363
364
Section 7.1
Housing Options
Your Lifestyle and Choice of Housing

Finances play an important role in housing
decisions.
One major factor you will need to consider when
making housing decisions is your lifestyle. Your
lifestyle will determine:
 How close to work you want to live
 How long you plan to stay in one place
 How much privacy you would like to have
365
Section 7.1
Housing Options
mobility Opportunity Costs of Housing

the ability to Choices
move easily from
place to place When you make choices about housing, you
have to consider what you will be giving up in
terms of:
 Time
 Effort
 Money
Renting an apartment, for example, may give
you more mobility, but you will give up the tax
advantages that homeowners enjoy.
366
Section 7.1
Housing Options
Renting versus Buying

One of the most basic considerations about
housing is whether to rent or buy. Your decision
will depend on:
 Your lifestyle
 Financial factors
367
Section 7.1
Housing Options
Renting
Renting is a good choice for:
 Young adults who are beginning their
careers
 People who want or need mobility
 People who do not want to devote time or
money to maintenance
Because renting is often—though not always—
cheaper than owning a home, it appeals to
people whose funds are limited.
368
Section 7.1
Housing Options
Buying
Owning property is a wise choice for people who
want:
 A certain amount of stability in their lives
 Privacy and some freedoms that may not
be available to a renter
While ownership can be costly, it offers financial
benefits, such as:
 Tax advantages
 Potential for a good long-term investment
if the value of the house increases
369
Section 7.1
Housing Options
Housing Information Sources

Housing information is plentiful and often free.
You can begin researching on your own, using a
variety of sources:
 Libraries
 Newspapers
 Internet
 Friends and family
 Real estate agents
 Government agencies
370
Section 7.2
Renting a Residence
tenant Selecting a Rental Unit

a person who
When you rent the place where you live, you
pays for the right
to live in a
become a tenant with a landlord.
residence owned When making a selection, you should consider
by someone else the differences in the rental units’:
landlord  Size
the person who  Cost
owns the
property that  Location
you rent
371
Section 7.2
Renting a Residence
Size and Cost

Most people who rent live in apartments. These
units may be located in:
 A two-story house
 A high-rise building
 An apartment complex
Some apartments are located in complexes with
on-site conveniences such as:
 Swimming pools
 Laundry facilities
372
Section 7.2
Renting a Residence
Renting a House or Private Room

A family or individual who needs more space
than an apartment provides may prefer to rent a
house.
A single person with very few possessions might
choose to rent a private room in a house. In this
case, the person may have to share common
areas, such as the:
 Kitchen
 Bathroom
373
Section 7.2
Renting a Residence
Mobility
For many people, the appeal of renting is the
mobility it offers. For example, you may wish to
move if:
 You are offered a job in another town.
 You decide that you want to live in a
different community.
 Your family is growing and needs more
space.
374
Section 7.2
Renting a Residence
Fewer Responsibilities
Tenants do not have many of the responsibilities
that homeowners have, including:
 Making major repairs and maintaining the
property
 Worrying about property taxes or property
insurance
375
Section 7.2
Renting a Residence
Low Initial Costs

A third advantage to renting is cost. Buying a
house typically requires many thousands of
dollars for:
 The down payment
 Other costs
In contrast, you usually pay the equivalent of
only one or two months’ rent to move into a
rental unit.
376
Section 7.2
Renting a Residence
Disadvantages of Renting
Renting is a good option for many people, but it
has some disadvantages.
For example, renting:
 Offers few financial benefits
 Can contribute to a more restrictive
lifestyle
 May involve various legal issues for
tenants
377
Section 7.2
Renting a Residence
Financial and Lifestyle Restrictions

Certain financial benefits are available to
homeowners but not to tenants. For example,
homeowners:
 Are eligible for various tax deductions
 Benefit as the value of their property
increases
 Gradually pay back the money they
borrowed to buy their home, eventually
eliminating their monthly housing
payments
Tenants must also accept certain limitations
regarding their activities in the places they rent.
378
Section 7.2
Renting a Residence
lease Legal Issues

a legal document If you decide to rent, you will probably have to
that defines the
sign a lease. When you sign a lease:
conditions of the
rental agreement  Make sure you understand and agree
between the with what it says.
tenant and the  Pay special attention to the amount and
landlord due date of the monthly rent and the
length of the rental period.
 Check to see whether you have the right
to sublet the property if you want to move
out before the lease expires.
A lease is designed to protect the rights of both
the landlord and the tenant.
379
Section 7.2
Renting a Residence
The Cost of Renting

Some of the factors that affect and determine
the price of renting a home include:
 Location
 Living space
 Utilities
 Security deposit
 Insurance
380
Section 7.2
Renting a Residence
Location
The amount of your monthly rent will depend on
the location, or neighborhood, where you
choose to live.
381
Section 7.2
Renting a Residence
Living Space
The price of a rental unit will also depend on the
amount of living space that you require.
Your choices, from least to most expensive, are:
 A private room in a house
 An apartment
 A townhouse or single-family house
You might consider living with one or more
roommates to share expenses.
382
383
Section 7.2
Renting a Residence
Utilities
You may also have to pay for utilities, such as:
 Electricity
 Gas
 Water
 Trash
Before you sign a lease, be sure to ask your
landlord if the rent payment includes any
utilities.
384
Section 7.2
Renting a Residence
security deposit Security Deposits

an amount of When you sign a lease, you may have to pay a
money paid to
security deposit.
the owner of the
property by a When you move out, your landlord must return
tenant to guard the security deposit, minus any charges for:
against any  Damage you may have caused
financial loss or
damage that the
 Any unpaid rent
tenant might Security deposits usually equal one or two
cause months’ rent.
385
Section 7.2
Renting a Residence
renters Renters Insurance

insurance
Another expense is renters insurance. Many
a type of
tenants neglect to buy renters insurance,
insurance that
covers the loss
wrongly assuming that their possessions are
of a tenant’s covered by their landlord’s insurance.
personal Most tenants who buy it find the cost worth the
property as a peace of mind it brings.
result of damage
or theft
386
Section 7.3
Buying and Selling a Home
Step 1: Determine Your Home

Ownership Needs
To make an informed decision about whether to
buy a home, you will need to consider:
 The benefits and drawbacks of ownership
 The types of homes that are available
 How much you can afford to spend
387
Section 7.3
equity Owning Your Residence: Benefits

the value of the As a homeowner, you can enjoy benefits such
home less the
as:
amount still
owed on the  A sense of stability and permanence
money borrowed  Freedom to decorate, change your own
to purchase it home, and have pets
 Tax deductions
Homeowners can usually sell their homes for a
profit, depending on their equity.
388
Section 7.3
Owning Your Residence: Drawbacks

Some drawbacks of being a homeowner
include:
 Financial risk
 Limited mobility
 High expenses
The cost of taking good care of a home can be
quite high, even if homeowners do most of the
work themselves.
389
Section 7.3
Types of Housing
Homes come in all shapes and sizes, providing
housing alternatives for a range of budgets and
lifestyles. You can choose between:
 Single-family dwellings
 Multiunit dwellings
 Condominiums
 Cooperative housing
 Prefabricated homes
 Mobile homes
390
Section 7.3
Affordability and Your Needs

Selecting a type of dwelling is only one part of
determining your home ownership needs. You
will also need to consider:
 The price of a home and the required
down payment
 Its size
 Its quality
As you advance in your career and your income
increases, you may be able to “trade up” and
purchase a home with some extra comforts.
391
Section 7.3
Step 2: Find and Evaluate a Property

to Purchase
You will be able to start searching for a property
to purchase when you know:
 What type of residence you would prefer
 What you can afford
392
Section 7.3
Selecting a Location
Some factors that can help you determine
where you want to live are:
 The distance between home and work
 The quality of the local school system
 Your interests and lifestyle
The existence of local zoning laws can also
affect your housing decisions.
393
Section 7.3
Hiring a Real Estate Agent

Real estate agents can help you:
 Find housing
 Negotiate the purchase price between
buyer and seller
 Arrange financing for the purchase
 Find lawyers, insurance agents, and
home inspectors
Real estate services are usually hired by a seller
and are free to the buyer.
394
Section 7.3
Conducting a Home Inspection

Before you make a final decision to buy
property, it is important to get an evaluation of
the house and land by a qualified home
inspector.
A home inspection costs money, but it can save
you from problems and unplanned expenses in
the future.
395
Section 7.3
Step 3: Price the Property

After you have checked out the property as
thoroughly as possible, it is time to consider
making an offer to the current owner.
This is usually done through a real estate agent,
unless the owner is acting as his or her own
agent.
396
Section 7.3
Determining the Price of the Home

Every home that is for sale has a listing price,
but that is not necessarily the price you will pay.
Here are some questions to consider when
making an offer:
 How long has the home been on the
market?
 What have similar homes in the
neighborhood sold for recently?
 Do the current owners need to sell in a
hurry?
 How well does the home meet your
needs?
 How easily can you arrange financing?
397
Section 7.3
escrow account Negotiating the Purchase Price

an account When the buyer and seller agree on a price,
where money is
they must sign a purchase agreement that
held in trust until
it can be
states their intention to complete the sale.
delivered to a At this point in the process, the buyer
designated party sometimes must pay the seller a portion of the
purchase price. This earnest money is:
 Held in an escrow account until the sale
is completed
 Applied toward the down payment
398
Section 7.3
Step 4: Obtain Financing

After you have decided to purchase a specific
home and have agreed on a price, you will have
to:
 Have money for the down payment.
 Get a loan to help pay for the remainder
of the purchase price.
 Be responsible for fees and other
expenses related to the settlement of the
real estate transaction.
399
Section 7.3
private mortgage Determining Amount of Down Payment

insurance (PMI)
The most common sources of funds for down
a special policy
payments are:
that protects the
lender in case  Personal savings accounts
the buyer cannot  Sales of investments or other assets
make payments
 Gifts or loans from relatives
or cannot make
them on time If your down payment is less than 20 percent of
the purchase price, some lenders will require
you to obtain private mortgage insurance.
400
Section 7.3
mortgage Qualifying for a Mortgage

a long-term loan You will need to meet certain criteria to take out
extended to
a mortgage. To decide whether you are a good
someone who
buys property
risk, lenders look at your:
 Income
 Debts
 Savings
If you fail to repay the mortgage or make regular
payments, the lender can foreclose, or take
possession of the property.
401
Section 7.3
points Paying Points

extra charges The size of your mortgage will also depend on
that must be
the current interest rate. If you want a lower
paid by the
buyer to the
interest rate, you may have to pay:
lender in order  A higher down payment
to get a lower  Points
interest rate
A lower interest rate results in a lower monthly
payment, but you might pay more money up
front.
402
Section 7.3
The Loan Application Process

To apply for a mortgage, the buyer must fill out
forms, giving details of his or her:
 Income
 Employment
 Debts
If the application is approved, the purchase
contract between seller and buyer becomes
legally binding.
403
Section 7.3
amortization Types of Mortgages

the reduction of
Depending on the terms of the loan, a
a loan balance
through
homeowner will have to make monthly mortgage
payments made payments for many years.
over a period of The monthly payments on a mortgage are set at
time a level that allows amortization of the loan.
404
Section 7.3
fixed-rate Fixed-Rate Mortgages

mortgage
Fixed-rate mortgages:
a mortgage with
a fixed interest  Typically run for a period of 15, 20, or 30
rate and a fixed years
schedule of  Offer peace of mind because monthly
payments payments always remain the same
 Guarantee a particular interest rate
405
Section 7.3
adjustable-rate Adjustable-Rate Mortgages

mortgage (ARM)
With an adjustable-rate mortgage (ARM), the
a mortgage with
rate changes according to economic indicators,
an interest rate
that increases or
such as:
decreases  Rates on U.S. Treasury securities
during the life of  The Federal Home Loan Bank Board’s
the loan mortgage rate index
 The lender’s own cost-of-funds index
Your rates will change according to the terms of
your agreement with the lender.
406
Section 7.3
Evaluating Adjustable-Rate Mortgages

You should consider the following factors when
you evaluate adjustable-rate mortgages:
 Determine the frequency of and
restrictions on allowed changes in
interest rates and in the monthly
payment.
 Find out what index the lender will use to
set the mortgage interest rate over the
term of the loan.
Most adjustable-rate mortgages have a rate
cap, which limits the amount the interest rate
can rise or fall.
407
Section 7.3
Government Financing Programs

Some government agencies that help qualified
buyers arrange for loans from regular lenders
are:
 The Federal Housing Administration
(FHA)
 The Veterans Administration (VA)
Although extra insurance fees may be added on
to government-guaranteed loans, government-
backed mortgages are a good deal for those
who qualify for them.
408
Section 7.3
home equity Home Equity Loans

loan
A second mortgage is also called a home equity
a loan based on
loan. To determine the amount of this type of
the difference
between the
loan, the financial institution will find out:
current market  The current market value of a home
value of a home  How much equity is in the property
and the amount
the borrower
owes on the
mortgage
409
Section 7.3
Dangers of a Second Mortgage

Carefully consider taking out a second
mortgage. Taking out this type of loan can:
 Keep a homeowner continually in debt
 Cause a homeowner to lose the house if
he/she is unable to make the second
mortgage payments
410
Section 7.3
refinance Refinancing
obtaining a new Many homeowners need extra money or want to
mortgage to
reduce their monthly payments. These options
replace an
existing one
are possible when they refinance.
Remember that if you refinance, you may:
 Pay extra fees
 Extend the life of a loan
411
Section 7.3
closing Step 5: Close the Transaction

a meeting of the
The final step in the home-buying process is the
seller, the buyer,
and the lender of
closing, when:
funds, or  Documents are signed.
representatives  Last-minute details are settled.
of each party, to
complete the
 Money is paid.
transaction The seller and buyer must also pay a number of
fees and charges, which are closing costs.
412
Section 7.3
title insurance Closing Costs

a type of Most closing costs involve the legal details
insurance that
related to purchasing a home. Some common
protects the
buyer if
closing costs include:
problems with  Title insurance
the title are  A fee for recording the deed
found later
 Private mortgage insurance to protect the
deed lender from any loss resulting from
the official default on the loan
document
transferring
ownership from
seller to buyer
413
Section 7.3
Escrow Account
After the closing, your lender might require that
you deposit money into an escrow account. The
money, usually held by the lender, is set aside
to pay for:
 Property taxes
 Homeowners insurance
414
Section 7.3
Selling a Home
As your needs change, you may decide to sell
your home. You will have to:
 Get it ready for the market.
 Set a price.
 Decide whether to sell it on your own or
with professional help.
415
Section 7.3
Preparing a Home for Selling

When preparing a home for selling, real estate
salespeople recommend that homeowners:
 Make needed repairs.
 Paint worn exterior and interior areas.
The nicer your home looks, the faster it will sell
at the price you want.
416
Section 7.3
appraisal Determining the Selling Price

an estimate of Setting a price on a home can be difficult. You
the current value
may want to pay for an appraisal and use that
of the property
as a basis for a listing price.
If you ever sell a home:
 Find out whether the current market and
demand for housing favors buyers or
sellers.
 Decide how quickly you need to sell your
home.
 Evaluate any improvements you have
made to the property.
417
Section 7.3
Choosing a Real Estate Agent

Real estate agents can:
 Help determine a selling price
 Attract potential buyers and show them
your home
 Handle the financial aspects of the sale
When choosing a real estate agent, pick
someone who knows your neighborhood and is
eager to sell your home.
418
Section 7.3
Sale by Owner
Selling your home yourself can save you
thousands of dollars, but it will cost you time and
energy. You will need to:
 Advertise the home.
 Show the home to prospective buyers.
Be sure to use the services of a lawyer or a title
company to help you with the contract, closing,
and other legal matters.
419
Section 7.3
Making Choices
Your housing decisions will be affected by many
factors, including:
 Your lifestyle
 Your financial situation
You will make the best housing choice to suit
your needs if you:
 Carefully review your options.
 Make educated decisions.
 Follow the appropriate process.
420
Chapter 7
The Finances of Housing

1. Evaluate the various housing alternatives that are available.
Renting a home:
 Tends to be less expensive than buying
 Offers more flexibility than buying
Home ownership offers:
 Stability
 Financial benefits
 Increased value over time
421
Chapter 7

2. List the advantages and disadvantages of renting.
Renting a residence has the advantages of:

 Mobility
 Few maintenance responsibilities
 Relatively low initial costs
Disadvantages include:
 Rent increases
 Few tax benefits
 Restricted activities
422
Chapter 7

3. Identify the costs of renting.
The cost of renting is affected by the:

 Neighborhood
 Space
 Monthly rent
 Security deposit
 Renters insurance
423
Chapter 7

4. List the advantages and disadvantages of owning a
residence.
Advantages of owning a residence include:

 Stability
 Individual expression
 Tax benefits
 Increased value
Disadvantages include:
 Financial risk
 The possibility of value not increasing
 Limited mobility
 High expenses
424
Chapter 7

5. Explain how to evaluate a property.
When evaluating a property:

 Walk through the neighborhood.
 Check the home exterior and interior.
 Get a home inspection.
425
Chapter 7

6. Discuss the financing involved in purchasing a home.
When you purchase a home, you will need to:

 Pay a down payment.
 Get a long-term loan, or mortgage, to pay for the
remaining purchase price.
 Pay closing costs.
426
Chapter 7

7. Describe a plan for selling a home.
To sell a home:
 Decide whether to use a real estate agent.
 Prepare the home.
 Set a fair price.
 Keep the home neat and clean.
427
428
Chapter 8
Saving and Investing
What You’ll Learn

 Section 8.1
 Explain how to establish goals for a savings or
investment program.
 Discuss ways to obtain funds for investing.
 Identify the factors that affect your investment
choices.
 Section 8.2
 Identify the main types of savings and investment
alternatives.
 Explain the steps involved in developing a personal
investment plan.
 Section 8.3
 Describe your role in a personal investment plan.
 Identify sources of financial information.
429
Investments
 Q: After paying my bills, I do not have much money left
over. I save any extra that I get. Since I do not have a lot of
money, why should I even considering investing?
 A: If inflation increases at a higher rate than your savings
account return, you can lose purchasing power. To stay
ahead of inflation and taxes, the money you set aside for
long-term goals will need to earn more than the rates
usually paid on savings accounts. Consider other
investments that can earn a higher return.
430
Section 8.1
Preparing for a Savings or Investment Program
Main Idea
Laying a foundation for your savings or
Can you think of investment program will help ensure that you
any reasons to meet your future financial goals.
risk putting
money in
investments
instead of a
savings
account?
431
Section 8.1
emergency fund Establishing Your Financial Goals

a savings
A savings or investment plan starts with a
account that you
can access
specific, measurable goal. You can reach that
quickly to pay goal through:
for unexpected  A savings account
expenses or  An investment
emergencies
You might also decide that you should begin
saving money in an emergency fund.
432
Section 8.1
Your Goals and Values

Your goals should correspond with your values.
You will have to choose whether to:
 Save or invest as much of each paycheck
as possible
 Spend a lot of money on temporary
activities, thus running out of money
before you receive your next paycheck
Even a small amount of money saved or
invested on a regular basis can add up to a
large amount over time.
433
Section 8.1
Outlining Goals
As you outline your financial goals, ask yourself
these questions:
 How do I want to spend my money?
 How much money do I need to satisfy my
goals?
 How long will it take to save the money?
 How much risk am I willing to take when I
invest?
 Am I willing to make sacrifices to save?
 What will happen if I do not meet my
goals?
434
Section 8.1
Performing a Financial Check-Up

Before you think about investing for the future,
you must take steps to be sure your personal
finances are in good shape. Then you will be
ready to move ahead with your financial plan.
435
Section 8.1
Money to Get Started

You will be ready to start saving or investing
after you have:
 Set your goals
 Completed your financial check-up
 Gotten the money
436
Section 8.1
Pay Yourself First

Instead of saving and investing money after you
have paid all your other expenses, you should:
 Include the amount you want to save in
your monthly expenses and pay that
amount first.
 Pay your monthly living expenses, such
as rent and food.
 Use money that is left over for personal
pleasures, such as going to the movie or
buying a new CD.
437
Section 8.1
Employer-Sponsored Retirement Plans

Your employer may offer a retirement plan,
usually a:
 401(k)
 403(b)
With this ready-made investment program,
saving is made simple because an amount you
choose is deducted automatically from each
paycheck.
Many employers will match part or all of the
money you save.
438
Section 8.1
Elective Savings Programs

Some employers provide the option of having
money:
 Automatically withheld from your
paycheck
 Deposited in a standard savings account
You can also arrange with a mutual fund or
brokerage firm to take a certain amount from
your bank account every month and invest it.
439
Section 8.1
Special Savings Effort

Another way to save is to set aside a specific
time each year when you:
 Cut back sharply on what you spend.
 Put the money you save into an
investment fund.
440
Section 8.1
Gifts, Inheritances, and Windfalls

During your lifetime, you might receive:
 Gifts of money
 Inheritance money
 Bonuses at work
 Tax refunds
 Salary raises
Consider putting this extra money in a savings
or investment program.
441
Section 8.1
The Value of Long-Term Investment

Programs
Many people do not start investing because
they:
 Have only a small amount of money
 Believe that they are too young to invest
Remember that small amounts of money add up
because of the time value of money.
442
Section 8.1
Making Investment Decisions

Once you know how much money you need to
meet your goals, you then have to think about
where to invest it.
To make that decision, you need to:
 Understand the different risk factors.
 Consider each investment’s potential for
income and growth as well as its liquidity.
443
Section 8.1
speculative Safety and Risk

investment
You can select investments that are:
a high-risk
investment that  Very safe
might earn a  Very risky
large profit in a  In between these extremes
short time
Generally, if you choose a safe investment, your
rate of return will be low. With a speculative
investment, you may:
 Earn a large profit in a short time
 Lose most or all of the money you invest
444
Section 8.1
Choosing Your Risk Level

Without risk, it is impossible to obtain returns
that make investments grow. The key is to:
 Determine how much risk you are willing
to take.
 Choose quality investments that offer
higher returns without an extremely high
risk.
445
Section 8.1
Five Components of Risk

Evaluate the overall risk factor of an investment
by examining five different components of risk:
 Inflation
 Interest rate
 Business failure
 Financial market
 Global investment
446
Section 8.1
Inflation Risk
Investing your money can help you stay ahead
of inflation. However, during periods of rapid
inflation:
 The return from your investments might
not keep up with the inflation rate.
 You lose buying power, and your money
will buy less.
Some investments will protect you from inflation
better than others.
447
Section 8.1
Interest Rate Risk

If you put money in an investment that gives you
a fixed rate of return, the value of your
investment will go down if interest rates go up.
If you have to sell your bonds, you will get less
than you originally paid.
448
Section 8.1
dividends Business Failure Risk

distributions of This type of risk applies to:
money, stock, or
other property
 Common stock
that a  Preferred stock
corporation pays  Corporate bonds
to stockholders
When you buy stocks or corporate bonds, you
are investing in a particular company. Lower
business profits usually mean lower dividends.
449
Section 8.1
Avoiding Business Failure Risk

To avoid losing your investment, you should:
 Do careful research on companies in
which you might invest.
 Invest your money in more than one
company.
450
Section 8.1
Financial Market Risk

Sometimes the prices of stocks, bonds, mutual
funds, and other investments go up or down
because of the overall state of financial markets.
Factors that affect financial markets include:
 Social conditions
 Political conditions
451
Section 8.1
Global Investment Risk

If you plan to invest in companies outside the
United States, take these steps:
 Evaluate international investments as if
they were U.S. investments.
 Consider the currency exchange rate.
Also, keep in mind that the economic and
political stability of a country can affect the value
of your investment.
452
Section 8.1
Investment Income
There are a variety of other types of investments
for income. The safest and most predictable
investments include:
 Certificates of deposit (CDs)
 U.S. Savings Bonds
 U.S. Treasury bills
Other sources of investment include:
 Government bonds
 Corporate bonds
 Preferred stocks
 Stable mutual funds
453
Section 8.1
retained Investment Growth

earnings
The best opportunities for investment growth
profits that a
usually come from:
company
reinvests,  Stocks
usually for  Growth stocks
expansion or to
Growth companies usually reinvest their profits
conduct
research and
rather than paying dividends. Growth that is
development financed by retained earnings usually
contributes to increasing the stock’s value.
454
Section 8.1
investment Investment Liquidity

liquidity
A final factor to consider when choosing
the ability to buy
investments is investment liquidity.
or sell an
investment You may be able to sell some investments
quickly without quickly, but you may not be able to regain your
substantially original investment, due to:
reducing its  Market conditions
value
 Other factors
A low-liquidity investment requires more time to
sell.
455
Section 8.2
Savings and Investment Options
Main Idea
The more you know about different investment
Since stock opportunities and the planning process, the
investments can better able you will be to select a savings or
be risky, why do investment program that meets your needs.
you think people
choose them?
456
Section 8.2
Types of Investments
When you have your personal finances in order,
an emergency fund, money for investments, and
you know how much risk you can take, you can
begin to search different types of investment
alternatives:
 Stocks
 Bonds
 Mutual funds
 Real estate
457
Section 8.2
equity capital Stocks

money that a
business gets from A corporation gets its equity capital from its
its owners in order stockholders, who become owners when they
to operate buy shares of stock in the company.
common stock The two basic types of stock are:
a unit of ownership  Common stock
of a company
 Preferred stock
preferred stock
If a company fails, preferred stockholders
a type of stock that
gives the owner receive dividends first and any assets that are
the advantage of left before common stockholders receive
receiving cash anything.
dividends before
common
stockholders
receive cash
dividends
458
Section 8.2
Investing in Stock
Stock can be an attractive investment because,
as owners, stockholders share in the success of
the company.
However, you should consider several facts
before you invest in stock:
 A corporation does not have to repay you
what you paid for the stock.
 The current value of your stock is partially
determined by how much another
investor is willing to pay for your shares.
 A corporation does not have to pay
dividends.
459
Section 8.2
corporate bond Corporate and Government Bonds

a corporation’s You may also consider investing in bonds.
written pledge to
There are two types of bonds an investor can
repay a specific
amount of money,
consider:
along with interest  A corporate bond
government bond  A government bond
the written pledge When you buy a bond, you are lending money
of a government or to a corporation or government entity for a
a municipality, such period of time.
as a city, to repay a
specific sum of
money with interest
460
Section 8.2
The Value of a Bond

Two key factors affect the value of a bond:
 Whether the bond will be repaid at
maturity
 Whether the corporation or government
entity will be able to pay interest until
maturity
Maturity dates range from 1 to 30 years, and
interest on bonds is usually paid every six
months.
The value of the bond is closely tied to the
ability of the corporation or government agency
to repay the bond at maturity.
461
Section 8.2
mutual fund Mutual Funds

an investment in You may also want to consider joining a mutual
which investors
fund. If one of the fund stocks or other securities
pool their money
to buy stocks,
performs poorly, the loss can be offset by gains
bonds, and other in another stock or security within the mutual
securities fund.
selected by
professional
managers who
work for an
investment
company
462
Section 8.2
Real Estate
The goal of real estate investing is to:
 Own property that increases in value so
that you can sell it at a profit
 Receive rental income
Before making a decision to purchase any
property, ask the following questions:
 Why are the present owners selling?
 Is the property in good condition?
 What is the condition of other properties
in the area?
 Is there a chance that the property will
decrease in value?
463
Section 8.2
diversification Evaluating Investment Alternatives

the process of
As you make your choices, remember it is wise
spreading your
assets among
to diversify.
several different Some financial advisers suggest that you think
types of of your investment program as a pyramid,
investments to where:
reduce risk
 Level 1 provides a solid foundation with
safe investments
 Levels 2 and 3 carry moderate risk
 Level 4 is highly speculative
464
465
Section 8.2
Developing a Personal Investment

Plan
To be a successful investor:
 Develop a plan.
 Put it into action.
Often the follow-through is the most important
component of a successful, long-range,
personal investment plan.
466
Section 8.2
Achieving Your Goals

You may find these steps helpful to get started:
 Establish investment goals.
 Decide how much money you will need to
reach those goals by a particular date.
 Evaluate the risks and potential return for
each investment on your list.
 Choose at least two investments so that
you have some diversity.
 Recheck your investment program
regularly.
If your goals are important to you, you will be
willing to work to attain them.
467
Section 8.3
Reducing Risk and Sources of Information
Main Idea
By becoming an informed investor, you will be
How might able to reach your investment goals.
investing change
your income tax
reporting?
468
Section 8.3
financial planner Financial Planners

a specialist who
There are two main factors to consider when
is trained to offer
specific financial
deciding if you need a financial planner:
help and advice  Your income level
 Your willingness to make your own
financial decisions
If you make less than $45,000 a year, you may
not need a planner’s services.
469
Section 8.3
Types of Financial Planners

There are four main types of financial planners:
 Fee-only planners
 Fee-offset planners
 Fee-and-commission planners
 Commission-only planners
When hiring a financial planner, find out the
exact fees for specific services. Also discuss
how and when the fees will be collected from
you.
470
Section 8.3
Selecting a Financial Planner

Look for a financial planner who will provide
these basic services:
 Assess your current financial situation.
 Offer a clearly written plan with
investment recommendations.
 Discuss the plan with you and answer
questions.
 Help you keep track of your progress.
 Guide you to other financial experts and
services as needed.
471
Section 8.3
Certification of Financial Planners

The requirements for becoming a financial
planner vary from state to state.
Some states:
 Require that financial planners pass an
exam
 Issue licenses to individual planners and
planning companies
 Have no regulations at all
Although a financial planner may have
credentials, not all planners are licensed. You
should research and investigate any financial
planner you might be considering.
472
Section 8.3
Managing Your Investments

Most people do not have professional financial
planners and need to learn how to manage their
own finances.
You can take an active role by taking these
steps:
 Evaluate investments.
 Monitor investments.
 Keep accurate records.
 Consider tax consequences.
Managing your savings and investments
requires ongoing attention.
473
Section 8.3
Evaluating Investments
Always research and evaluate before you invest
so that you can make an informed decision.
While your money is earning, you also need to
continue to evaluate:
 Your current investment
 Future investment opportunities
474
Section 8.3
Monitoring Your Investments

Always keep track of the value of your stocks,
bonds, or mutual funds by checking price
quotations reported:
 On the Internet
 In newspapers
 On financial news programs
Keep a chart of the value of your investments to
check their progress over time.
475
Section 8.3
Keeping Accurate Records

Accurate record keeping helps you notice
opportunities to:
 Increase your profits
 Reduce losses
It can also help you decide whether to:
 Put more money in a stock, bond, or
other investment
 Sell a particular investment
476
A Dollar a Day
Do you know that if you save a dollar a day—less than
what you would spend on a soda and a candy bar—and
save or invest it at 5 percent interest, in five years you will
have more than $2,000? In ten years you will have $4,600!
How much would you have in 40 years?
477
Section 8.3
tax-exempt Tax Considerations

income
In general, investment income falls into three
income that is
categories:
not taxed
tax-deferred
 Tax-exempt
income  Tax-deferred
income that is  Taxable
taxed at a later You must report cash dividends on your tax
date
return as ordinary income.
478
Section 8.3
capital gain Capital Gains and Capital Losses

the profit from Capital gains are taxed according to how long
the sale of you own an asset:
assets such as
stocks, bonds,  Short term (12 months or less)
or real estate  Long term (longer than 12 months)
capital loss You can subtract up to $3,000 a year in capital
the sale of an losses from your ordinary income.
investment for
less than its
purchase price
479
Section 8.3
Sources of Investment Information

Because there is so much investment
information available, both complex and basic,
you need to be selective.
The important thing is to be sure that the source
of advice and information that you receive is:
 Accurate
 Reliable
480
Section 8.3
The Internet and Online Services

Most large investment firms have Web sites
where you can obtain a variety of information
and services, such as:
 Interest rates for certificates of deposit
 Prices of stocks, bonds, and other
securities
 Advice on starting an investment program
 Trading of securities through online
brokers
481
Section 8.3
Newspapers and News Programs

The financial page of your metropolitan
newspaper or The Wall Street Journal is another
source of investment information that is easy to
access.
In addition, you can find economic information
and financial news on:
 Many radio and television stations
 Television channels such as CNN Fn
(Financial)
482
Section 8.3
Business and Government Publications

You can find general news about the economy
as well as information about individual
companies in magazines such as:
 Barron’s
 BusinessWeek
 Forbes
 Fortune
 Harvard Business Review
483
Section 8.3
Other Publications
You can find information and advice designed to
improve your investment skills in magazines
such as:
 Money
 Consumer Reports
 Smart Money
 Kiplinger’s Personal Finance
In addition, national news magazines often
feature stories on the economy and finance.
484
Section 8.3
Government Publications
The United States federal government is also an
excellent resource of information—and much of
it is free. Two sources of useful financial
information are:
 The Federal Reserve Bulletin, published
by the Federal Reserve System
 Survey of Current Business, published by
the Department of Commerce
You can read articles from both of these
publications on the Internet.
485
Section 8.3
prospectus Corporate Reports

a document that The federal government requires that any
discloses
corporation selling new issues of securities must
information
about a
provide investors with a prospectus.
company’s All publicly owned corporations also send
earnings, assets investors quarterly reports and annual reports
and liabilities, its that contain detailed financial data.
products or
services, a
particular stock,
and the
qualifications of
its management
486
Section 8.3
Statistical Averages
You can keep track of the value of your
investments by following one or more
recognized statistical averages, such as:
 The Standard & Poor’s 500 Stock Index
 The Dow Jones Industrial Average
These averages are reported daily online and in
newspapers.
487
Section 8.3
Investor Services
Five widely used and useful publications are:
 Standard & Poor’s Stock and Bond Guide
 Value Line Investment Survey
 Handbook of Common Stocks
 Morningstar Mutual Funds
 Wiesenberger Investment Companies
Yearbook
Both professionals and individual private
investors can refer to these publications to
become well-informed when making investment
decisions.
488
Chapter 8
Key Term Review

 emergency fund  diversification
 speculative investment  financial planner
 dividends  tax-exempt income
 retained earnings
 tax-deferred income
 investment liquidity
 capital gain
 equity capital
 common stock  capital loss
 preferred stock  prospectus
 corporate bond
 government bond
 mutual fund
489
Chapter 8

1. Explain why it is important to have a goal before making
investments.
Before investing, you should set financial goals that are compatible
with your values.
490
Chapter 8

2. Describe sources of funds for investing.
You can obtain money to start investing by:

 Setting aside funds before you buy other things
 Contributing to employer-sponsored retirement plans
and savings programs
 Saving gifts of money and unexpected windfalls
491
Chapter 8

3. Describe a demographic group that may not prefer
investment risk. Describe another demographic group that
may be more comfortable with a greater degree of risk.
Beginning investors may be afraid of the risk associated with

some investments. However, it helps to remember that without
risk, it is impossible to obtain returns that make investments grow.
It may be easier to take risks when you:

 Are younger
 Have more experience as an investor
492
Chapter 8

4. Compare the main types of investment alternatives in terms
of their risk and liquidity.
The following are the main types of investment alternatives:

 Stocks
 Bonds
 Mutual funds
 Real estate
493
Chapter 8

5. Write an investment plan for yourself.
A savings or investment plan starts with a specific, measurable

goal. You can reach that goal through:
 A savings account
 An investment
You might also decide that you should begin saving money in an
emergency fund.
494
Chapter 8

6. Describe the role of the investor in the investment process.
To be a successful investor:
 Develop a plan.
 Put it into action.
495
Chapter 8

7. List four specific sources of financial information.
Five widely used and useful publications are:

 Standard & Poor’s Stock and Bond Guide
 Value Line Investment Survey
 Handbook of Common Stocks
 Morningstar Mutual Funds
 Wiesenberger Investment Companies Yearbook
496
Newsclip: Less Savings
Americans do not save as they once did. Weak savings mean
fewer investments in the economy, and that contributes to slower
economic growth.
497
498
Chapter 9
Stocks
What You’ll Learn

 Section 9.1
 Explain the reasons for investing in common stock.
 Explain the reasons for investing in preferred stock.
 Section 9.2
 Identify the types of stock investments.
 Identify sources of information to evaluate stock
investments.
 Discuss the factors that affect stock prices.
 Section 9.3
 Describe how stocks are bought and sold.
 Explain the trading strategies used by long-term
investors and short-term investors.
499
Stock Certificates
 Q: My parents gave me stock certificates for a graduation

present. Is it a good idea to put them in a safe-deposit box
and save them for retirement?
 A: A safe-deposit box is a good way to store important
documents, but a better option for stock certificates would
be to place them in a brokerage account with a bank or
brokerage firm. This will make it easier for you to buy or sell
shares of these or other stocks. Also, you will receive
statements showing the value of your shares and dividends.
.
500
Section 9.1
Common and Preferred Stocks
Main Idea
Recognizing the reasons for investing in
common and preferred stock will enable you to
What do you
make the best investments for your financial
think it means to
situation.
own stock in a
company?
Video Clip: Why Investors Buy Stock

501
Section 9.1
securities Common Stock

all of the
Investors have a choice of securities.
investments—
stocks, bonds, When investors buy shares of stock in a
mutual funds, company, the company uses that money to:
options, and  Make and sell its products
commodities—
that are bought
 Fund its operations
and sold on the  Expand
stock market People buy and sell stocks because they want
larger returns than they can get from more
conservative investments, such as:
 Government bonds
502
Section 9.1
private Why Corporations Issue Common Stock

corporation
Stock is available from:
a company that
issues stock to a  Private corporations
small group of  Public corporations
people Companies issue common stock to:
public  Raise money to start up their businesses
corporation  Help pay for ongoing activities
a company that
It is up to the corporate board of directors to
sells its shares
openly in stock decide whether any profits will be paid to
markets, where stockholders as dividends.
anyone can buy
them
503
Section 9.1
Why Investors Purchase Common Stock

Most investors purchase common stock to make
money in three different way. They profit when:
 They receive dividends
 The dollar value of their stock appreciates
(increases)
 The stock splits and increases in dollar
value
A stock split occurs when the shares of stock
owned by existing stockholders are divided into
a larger number of shares.
504
UNDERSTANDING STOCKS Investors buy stocks in the
hopes of earning a large return on their investments. What
causes the demand for stock to change?
505
Section 9.1
Voting Rights and Control of the Company

Stockholders are also given certain rights in
return for the money they invest.
These rights include:
 Voting rights at annual meetings
 Preemptive rights
A preemptive right gives current stockholders
the right to buy any new stock a corporation
issues before its stock is offered to the public.
506
Section 9.1
par value Preferred Stock

an assigned
Preferred stockholders should know the amount
dollar value that
is printed on a
of the dividend they will receive. It is either:
stock certificate  A specific amount of money
 A percentage of the par value of the stock
Unlike market value, par value does not change.
507
Section 9.1
Why Corporations Issue Preferred Stock

For some companies, preferred stock is another
method of financing which may attract more
conservative investors who do not want to buy
common stock.
Preferred stockholders:
 Receive limited voting rights
 Usually vote only if the corporation
issuing the stock is in financial trouble
508
Section 9.1
Why Investors Purchase Preferred Stock

Preferred stock is considered a safer investment
than common stock, but not as safe as bonds.
Preferred stocks lack the potential for growth
that common stocks offer.
To make preferred stocks more attractive to
investors, some corporations may offer:
 Cumulative preferred stock
 Convertible preferred stock
 A participation feature
509
Section 9.2
Evaluating Stocks
Main Idea
Knowing how to evaluate, buy, and sell stocks
What type of helps you increase the value of your
stock do you investments.
think would be
best for a person
who is just
beginning to
make
investments?
510
Section 9.2
Evaluating Stocks
Types of Stock Investments

Financial professionals classify most stocks into
the following categories:
 Blue-chip stocks
 Income stocks
 Growth stocks
 Cyclical stocks
 Defensive stocks
 Large-cap stocks
 Small-cap stocks
 Penny stocks
511
Section 9.2
Evaluating Stocks
blue-chip stocks Blue-Chip Stocks

stocks issued by A blue-chip stock is considered a safe
the strongest
investment that generally attracts conservative
and most
respected
investors.
companies, such If you are interested in a blue-chip stock, look
as AT&T, General for a company that shows:
Electric, and  Leadership in an industry
Kellogg
 A history of stable earnings
 Consistency in the payment of dividends
512
Section 9.2
Evaluating Stocks
income stock Income Stocks

a type of stock An income stock pays higher-than-average
with predictable
dividends compared to other stock issues. This
and higher-than-
average
is the type of stock issued by:
dividends  Gas and electric companies
 Companies such as Bristol-Myers Squibb
and Dow Chemical
The buyers of preferred stock are also attracted
to this type of common stock because the
dividends are predictable.
513
Section 9.2
Evaluating Stocks
growth stock Growth Stocks

stock issued by When purchasing growth stocks, look for signs
a corporation
that the company is engaged in activities that
whose potential
earnings may be
produce higher earnings and sales revenues,
higher than the such as:
average  Building new facilities
earnings  Introducing new, high-quality products
predicted for all
the corporations  Conducting recognized research and
in the country development
Stocks issued by these corporations generally
do not pay dividends.
514
Section 9.2
Evaluating Stocks
cyclical stocks Cyclical Stocks

a stock that has When the economy is improving, the market
a market value
value of a cyclical stock usually goes up, and
that tends to
reflect the state
the reverse is also true.
of the economy This is because the products and services of
these companies are linked directly to the
activities of a strong economy.
Stocks issued by Ford and Centex (a
construction firm) are considered cyclical stocks.
515
Section 9.2
Evaluating Stocks
defensive stock Defensive Stocks

a stock that The companies that issue defensive stocks:
remains stable
during declines  Have steady earnings
in the economy  Can continue dividend payments even in
periods of economic decline
Many blue-chip stocks and income stocks, such
as those issued by Procter & Gamble, are
defensive stocks.
516
Section 9.2
Evaluating Stocks
large-cap stock
stock from a Large-Cap and Small-Cap Stocks
corporation that
has issued a The stocks listed in the Dow Jones Industrial
large number of Averages are typically large-cap stocks. These
shares of stock stocks:
and has a large  Are issued by a corporation with a large
amount of
capitalization
number of shares and a large amount of
capitalization
capitalization
 Appeal to conservative investors because
the total amount
of stocks and
they are considered secure
bonds issued by Since small-cap stocks are issued by smaller,
a corporation less-established companies, they are
small-cap stock considered to be a higher investment risk.
a stock issued by
a company with a
capitalization of
$500 million or 517
Section 9.2
Evaluating Stocks
penny stock Penny Stocks

stocks that are A penny stock typically sells for less than $1 a
issued by new
share, although it can sell for as much as $10 a
companies or
companies
share.
whose sales are It is difficult to keep track of a penny stock’s
very unsteady performance because information about them is
hard to find.
Penny stocks should be purchased only by
investors who understand the risks.
518
Section 9.2
Evaluating Stocks
Sources for Evaluating Stocks

There are many sources where you can find
information about stocks before making
investment decisions. Some sources include:
 Newspapers
 The Internet
 Stock advisory services
 Corporate news publications
519
Section 9.2
Evaluating Stocks
Newspapers
Most major newspapers have financial sections
that contain information about stocks that are
listed on major stock exchanges, such as:
 The National Stock Exchange (NSE)
 The Bombay Stock Exchange (BSE)
Newspapers may also cover stocks of local
interest.
520
Section 9.2
Evaluating Stocks
The Internet
Today most corporations have their own Web
sites. The information may be more up to date
and detailed than material from the corporation’s
printed publications.
You can also use search engines to find
information about investing in stocks. Sites
provide:
 General financial news
 Specific information about a company
and its stock’s performance
521
Section 9.2
Evaluating Stocks
Stock Advisory Services

You can also use stock advisory services to
evaluate potential stock investments. A basic
financial report from Mergent’s Handbook of
Common Stocks, for example:
 Contains information about stock prices
and capitalization, earnings, and
dividends
 Provides a detailed description of the
company’s major operations
 Offers current information about net
income and sales revenue
522
Section 9.2
Evaluating Stocks
Mergent’s Handbook of Common Stocks

Other sections in Mergent’s Handbook of
Common Stocks:
 Describe the company’s outlook, or
prospects for the future
 Provide important statistics on the
company for a specific length of time
 List information such as important officers
in the corporation and the location of its
headquarters
523
Section 9.2
Evaluating Stocks
Corporate News Publications

Annual and quarterly reports offer:
 A summary of a corporation’s activities
 Detailed financial information
You do not have to be a stockholder to get an
annual report. You can also get information
about specific companies from financial
publications such as:
 Barron’s
 BusinessWeek
 Fortune
 Smart Money
524
Section 9.2
Evaluating Stocks
bull market Factors that Influence the Price of

a market condition Stock
that occurs when
investors are The overall condition of the stock market will
optimistic about the depend upon whether the market condition is a:
economy and buy  Bull market
stocks
 Bear market
bear market Next you should consider:
a market condition  The company’s profits and losses
that occurs when
investors are  Other numerical measures of the
pessimistic about the company’s financial situation
economy and sell
stocks
525
Section 9.2
Evaluating Stocks
current yield Numerical Measures for a Corporation

the annual dividend of To find out about the health of a corporation,
an investment divided
you can use numerical measures such as:
by the current market
value  Current yield
 Total return
total return
a calculation that  Earnings per share
includes the annual  Price-earnings ratio
dividend as well as
any increase or
decrease in the
original purchase
price of the
investment
526
Section 9.2
Evaluating Stocks
earnings per Earnings Per Share

share Earnings per share:
a corporation’s
net, or after-tax,
 Measures the amount of corporate profit
earnings divided assigned to each share of common stock
by the number of  Gives a stockholder an idea of a
outstanding company’s profitability
shares of
In general, an increase in earnings per share is
common stock
a good sign for any corporation and its
stockholders.
527
Section 9.2
Evaluating Stocks
price- Price-Earnings Ratio

earnings (PE) The price-earnings (PE) ratio is commonly used
ratio
to compare the corporate earnings to the market
the price of one
price of a corporation’s stock.
share of stock
over the last 12 Generally, you should study the price-earnings
months ratio for a corporation over a period of time so
that you can see a range.
528
Section 9.2
Evaluating Stocks
Investment Theories
Over the years theories have developed about
ways to evaluate possible investments. Three
investment theories dominate:
 The fundamental theory
 The technical theory
 The efficient market theory
529
Section 9.2
Evaluating Stocks
The Fundamental Theory

The fundamental theory assumes that a stock’s
real value is determined by looking at the
company’s future earnings.
People who believe in the fundamental theory
also look at:
 The financial strength of the company
 The type of industry the company is in
 Its new products
 The state of the economy
530
Section 9.2
Evaluating Stocks
The Technical Theory

The technical theory is based on the idea that a
stock’s value is really determined by forces in
the stock market itself.
Technical theorists look at factors such as:
 The number of stocks bought or sold over
a certain period
 The total number of shares traded
531
Section 9.2
Evaluating Stocks
The Efficient Market Theory

In the efficient market theory, the argument is
that stock price movements are purely random.
This theory declares that:
 All investors have considered all of the
available information on a stock as they
make their decisions.
 It is impossible for an investor to
outperform the stock market average over
a long period of time.
532
Section 9.3
Buying and Selling Stocks
Main Idea
By understanding the stock markets and buying
How would you and selling techniques, you can cut costs and
go about buying increase your profit.
stock?
533
Section 9.3
Markets for Stocks

To buy common or preferred stock, you usually
have to go through a brokerage firm.
In turn, the brokerage firm must buy the stock in
the:
 Primary markets
 Secondary markets
534
Section 9.3
Primary Markets
The primary market is a market in which
investors purchase new security issues from a
corporation through:
 An investment bank
 Some other representative of the
corporation
An initial public offering (IPO) occurs when a
company sells stock to the general public for the
first time. IPOs are considered a high-risk
investment.
535
Section 9.3
Secondary Markets
Once a company’s stocks have been sold on
the primary market, they can then be sold in the
secondary market.
The secondary market is a market for existing
financial securities currently traded among
investors.
536
Section 9.3
securities Securities Exchanges

exchange Many securities issued by national corporations
a marketplace are first registered and then traded at security
where brokers
exchanges such as:
who represent
investors meet  The National Stock Exchange
to buy and sell  The Bombay Stock Exchange
securities
There are also regional exchanges in:
 Bangalore and
 Other cities that trade stocks of
companies in their respective regions
537
Section 9.3
over-the- Over-the-Counter Market

counter (OTC)
Not all stocks are traded on organized
market
exchanges. Several thousand companies trade
a network of
dealers who buy
their stock in the over-the-counter market.
and sell the Most over-the-counter stocks are traded through
stocks of NASDAQ, an electronic marketplace for more
corporations than 4,000 different stocks.
that are not
listed on a
securities
exchange
538
Section 9.3
How to Buy and Sell Stock

There are many decisions that you need to
make before beginning to buy and sell stock.
You must decide on:
 A brokerage firm
 An account executive
 What type of order—market order, limit
order, or stop order—you want to use to
make your transaction
539
Section 9.3
Brokerage Firms
Today, you can choose:
 A full-service brokerage firm
 A discount brokerage firm
 To trade stocks online
The biggest difference is the amount of
commissions you will be charged when you buy
or sell securities.
540
Section 9.3
Choosing a Brokerage Firm

When choosing a brokerage firm, you should
consider:
 The amount of research information that
will be available to you and how much it
costs
 How much help you will need in order to
make an investment decision
541
Section 9.3
portfolio Account Executives

a collection of all An account executive, or stockbroker, is a
the securities
licensed individual who buyers or sells
held by an
investor
securities. Your account executive will:
 Deal with all types of securities
 Handle your entire portfolio
Remember that account executives can make
errors, so be sure to stay actively involved in
decisions concerning your investments.
542
Section 9.3
Types of Orders
When you are ready to trade a stock, you will
execute an order to buy or sell. You can do this:
 Over the telephone
 On the Internet
 By going to a brokerage firm and placing
your order in person
The types of orders used to trade stocks
include:
 Market orders
 Limit orders
 Stop orders
543
544
Section 9.3
Market Orders
A market order is a request to buy or sell a stock
at the current market value. Because the stock
market is essentially an auction, the account
executive’s representative will try to:
 Get the best price possible
 Make the transaction as soon as possible
Every stock listed on the NYSE is traded at a
computer-equipped trading post on the floor of
the exchange.
545
Section 9.3
Limit Orders
A limit order is a request to buy or sell a stock at
a specified price. You agree to:
 Buy the stock at the best price up to a
certain amount
 Sell at the best price and not below a
certain price
A limit order does not guarantee that the
purchase or sale will be made when the desired
price is reached.
546
Section 9.3
Stop Orders
A stop order is a type of limit order to sell a
particular stock at the next available opportunity
when the market price reaches a specified
amount.
A stop order:
 Does not guarantee that your stock will
be sold at the price you want
 Does guarantee that it will be sold at the
next available opportunity
547
Section 9.3
Computerized Transactions
More and more people are using their
computers to make securities transactions.
You can use a software package or the
brokerage’s Web site to help you:
 Evaluate stocks
 Track your portfolio
 Monitor your portfolio’s value
 Buy and sell securities online
548
Section 9.3
Investment Strategies
Once you purchase stock, the investment may
be categorized as:
 Long term (held for ten years or more)
 Short term (held for one year or less)
Generally, if you hold investments for at least a
year, you are considered an investor.
If you buy and sell investments within short
periods of time, you are a speculator or a trader.
549
Section 9.3
Long-Term Techniques
To avoid loss in your investments, you will want
to use long-term techniques such as:
 The buy-and-hold technique
 Dollar cost averaging
 Direct investment
 Dividend reinvestment
550
Listen Up
It is smart to shop at music stores that let you listen to CDs
before you purchase them. You can also check out your
friends’ music to see if you like it. You will save money by
not buying CDs you will not use.
What are some other types of purchases to which you could
apply this method?
551
Section 9.3
Short-Term Techniques
Investors sometimes use more speculative,
short-term techniques. These include:
 Buying on margin
 Selling short
These methods should be used only by
investors who fully understand the risks.
552
Section 9.3
Selling Short
When you sell short, you:
 Arrange to borrow a certain number of
shares of a particular stock from a
brokerage firm
 Sell the borrowed stock, assuming that it
will drop in value in a reasonably short
period of time
 Buy the stock at a lower price than it sold
for in Step 2
 Use the stock you purchased in Step 3 to
replace the stock that you borrowed from
the brokerage firm in Step 1
If the stock value increases, you will lose
money.
553
Chapter 9
Stocks
Key Term Review

 securities  penny stock
 private corporation  bull market
 public corporation  bear market
 par value  current yield
 blue-chip stock  total return
 income stock  earnings per share
 growth stock  price-earnings (PE) ratio
 cyclical stock  securities exchange
 defensive stock  over-the-counter (OTC) market
 large-cap stock  portfolio
 capitalization
 small-cap stock
554
Chapter 9
Stocks

1. Explain why corporations prefer to issue common stock to
raise funds for their operations.
Companies issue common stock to:

 Raise money to start up their businesses
 Help pay for ongoing activities
555
Chapter 9
Stocks

2. Explain how cumulative preferred and convertible preferred
stock offer advantages to users.
Investors choose preferred stocks because they:

 Are less risky than common stocks
 Provide a steady income in the form of dividends
556
Chapter 9
Stocks

3. Describe why a small-cap stock is more likely to be a growth
stock rather than an income stock.
Since small-cap stocks are issued by smaller, less-established

companies, they are considered to be a higher investment risk.
557
Chapter 9
Stocks

4. Identify the advantages and disadvantages of a stock
advisory service to evaluate a stock.
You can use stock advisory services to evaluate potential stock

investments. Many stock advisory services charge fees for their
information.
558
Chapter 9
Stocks

5. Describe why the price-earnings ratio is a good measure of
a stock investment.
The price-earnings (PE) ratio is commonly used to compare the

corporate earnings to the market price of a corporation’s stock.
A low PE ratio indicates that a stock may be a good investment. A
high PE ratio tells you that it might be a poor investment.
Generally, you should study the price-earnings ratio for a
corporation over a period of time so that you can see a range.
559
Chapter 9
Stocks

6. List the differences among market order, limit order, and
stop order.
A market order is a request to buy or sell a stock at the current

market value.
A limit order is a request to buy or sell a stock at a specified price.
A stop order is a type of limit order to sell a particular stock at the
next available opportunity when the market price reaches a
specified amount.
560
Chapter 9
Stocks

7. Identify the tax advantages of long-term investment
strategies.
To avoid loss in your investments, you will want to use long-term

techniques such as:
 The buy-and-hold technique
 Dollar cost averaging
 Direct investment
 Dividend reinvestment
561
Newsclip: Investor Concern
Despite a growing economy, investor concern has decreased the
popularity of stocks. However, quality stocks are usually sound
even in shaky times.
562
563
Chapter 10
Bonds and Mutual Funds
What You’ll Learn
 Section 10.1
 Describe the characteristics of corporate bonds.
 Identify the reasons corporations sell bonds.
 Explain he reasons governments issue bonds.
 Identify the types of government bonds.
 Section 10.2
 why investors buy corporate bonds.
 Discuss Identify sources of information for selecting bond
investments.
 Section 10.3
 Identify types of mutual funds.
 Section 10.4
 Discuss sources of information for selecting mutual funds.
 Describe the methods of buying and selling mutual funds.
564
Mutual Funds
 Q: I have about $50 a month to invest. What is a good
investment choice for me?
 A: Many mutual fund companies offer systematic investment
programs in which you invest the same amount each month
regardless of changes in the share price. As a result, your
money buys more shares when prices are low and fewer
shares when prices are high. Over time, this strategy can
result in a lower average cost per share; however, it does not
guarantee a profit or protect against a loss.
565
Section 10.1
Corporate and Government Bonds
Main Idea
Understanding bonds and why they are bought
What do you and sold will give you more choices to consider
think when investing your money.
government
bonds are?
566
3
Section 10.1
maturity date Corporate Bonds

the date when a
A corporate bond is a corporation’s written
bond will be
repaid
pledge to repay a bondholder a specified
amount of money with interest.
face value At the maturity date, you:
the dollar
 Cash in the bond
amount that the
bondholder will  Receive a check in the amount of the
receive at the bond’s face value
bond’s maturity The bond’s interest rate, maturity date, and face
value are stated on the bond.
567
Section 10.1
Types of Corporate Bonds

There are several types of corporate bonds,
including:
 Debentures
 Mortgage bonds
 Subordinated debentures
 Convertible bonds
568
Section 10.1
debenture Debentures
a bond that is Most corporate bonds are debentures. Investors
backed only by buy this type of bond because they:
the reputation of
the issuing  Believe that the company that issues
corporation, them is on solid financial ground
rather than by its  Expect the company to repay the face
assets value of the bond and make interest
payments until the bond matures
569
Section 10.1
mortgage bond Mortgage Bonds

a bond that is To make bonds more appealing to conservative
backed by investors, a corporation may also issue
assets of a
mortgage bonds. Mortgage bonds:
corporation
 Are a safer investment than a debenture
because they are backed by corporate
assets
 Can be sold to repay the mortgage
bondholders if the corporation fails to
make good on its bonds
Mortgage bonds usually earn less interest than
debentures because their risk to the investor is
lower.
570
Section 10.1
Subordinated Debentures
A subordinated debenture:
 Is a type of unsecured bond
 Gives bondholders a claim to interest
payments and assets of the company
only after all other bondholders have
been paid
Because subordinated debentures are more
risky than other bonds, investors who buy them
usually receive higher interest rates than other
bondholders.
571
Section 10.1
convertible bond Convertible Bonds

a bond that an You may also choose to invest in convertible
investor can bonds. These types of bonds:
trade for shares
of the  Offer unique flexibility to investors
corporation’s  Often have an interest rate that is 1 to 2
common stock percent lower than interest rates on other
types of corporate bonds
572
A CORPORATE BOND Mobil Corporation issued this bond
with an interest rate of 8.5 percent. What is the face value of
this bond?
573
Section 10.1
Methods Corporations Use to Repay

Bonds
Today, most corporate bonds have a call feature
that allows a corporation to buy back bonds
from bondholders before the maturity date.
Corporations may get the money to call a bond
by:
 Selling stock
 Using profits
 Selling new bonds at a lower interest rate
574
Section 10.1
sinking fund Calling Back Bonds

a fund to which a To ensure that it has enough funds to pay off a
corporation makes bond issue, a company may:
deposits for the
purpose of paying  Set up a sinking fund
back a bond issue  Issue serial bonds
serial bonds When a company calls back its bonds, it may
bonds issued at have to pay bondholders a premium, which is an
the same time but additional amount above the face value of the
which mature on bond.
different dates
575
Section 10.1
Why Corporations Sell Bonds

Corporations sell bonds to:
 Raise money when it is difficult or
impossible to sell stock
 Finance regular business activities
 Reduce the amount of tax a corporation
must pay because the interest paid to
bondholders is tax-deductible
If a corporation files for bankruptcy,
bondholders’ claims to assets are paid before
the claims of stockholders.
576
Section 10.1
Why Investors Buy Corporate Bonds

Although stocks have historically resulted in
greater profits than bonds, many people invest
in bonds because :
 Bonds are safe investments.
 Most bonds provide interest income.
 Bonds may increase in value, depending
on the bond market, overall interest rates
in the economy, and the reputation and
assets of the issuer.
 The face value of a bond is repaid when it
reaches maturity.
577
Savings Mind-Set
It is exciting when you get a raise or finally pay off a loan.
You know you have more money available. Be a smart
saver—stick to your current budget and stash that
newfound money in your savings or investment account.
If you received a $30 per week raise in net pay and were
paid four times per month, how much “extra” money
would you have in ten months from February to
November? Would you save or invest that money? Why or
why not?
578
Section 10.1
Interest Income
Bondholders usually receive interest payments
every six months. The method used by a
company to pay you interest depends on the
type of corporate bond you purchase.
These bond types include:
 Registered bond
 Coupon bond
 Bearer bond
 Zero-coupon bond
579
Section 10.1
registered bond Registered Bonds and Coupon Bonds

a bond Interest checks for registered bonds are mailed
registered in the directly to the bondholder. Only the owner can
owner’s name by
collect money from these bonds.
the company
that issues the A registered coupon bond comes with
bond detachable coupons. With this type of bond:
coupon bond  Only the bond’s owner can collect the
face value.
a bond that is
registered in the  Anyone who holds the coupons can
owner’s name collect the interest.
for only the face
value and not for
interest
580
Section 10.1
bearer bond Bearer Bonds and Zero-Coupon Bonds

a bond that is Anyone who has physical possession of a
not registered in bearer bond and its coupon can collect interest
the investor’s
payments on it. Bearer bonds are no longer
name
issued by corporations.
zero-coupon A zero-coupon bond:
bond
 Is sold at a price far below its face value
a bond that does
not produce  Is redeemed for its full face value at
interest maturity
payments Because you buy it for less than its face value,
you automatically make a profit when your zero-
coupon bond is repaid.
581
Section 10.1
Maturity Value of a Bond

The market value of a corporate bond may
fluctuate before its maturity date.
A bond’s value can be affected by:
 The financial condition of the company
that issues it
 Changes in the economy
 The law of supply and demand
582
Section 10.1
Repayment at Maturity
Corporate bonds are repaid at maturity. After
you purchase a bond, you can choose to:
 Keep the bond until its maturity date and
then cash it in.
 Sell the bond at any time to another
investor.
In either case, the value of the bond is closely
tied to the corporation’s ability to repay it.
583
Section 10.1
A Typical Bond Transaction

Most bonds are sold through:
 Full-service brokerage firms
 Discount brokerage firms
 Online
You can also buy corporate bonds directly from
account executives or brokerage firms.
584
Section 10.1
Purchasing in Primary and Secondary

Markets
Bonds are purchased in the same way as
stocks. Corporate bonds may be purchased in:
 Primary markets
 Secondary markets
Corporate bonds issued by large companies are
traded on the New York Bond Exchange and
American Bond Exchange.
585
Section 10.1
Government Bonds and Securities

Bonds are sold by:
 Private corporations
 The federal government
 State and local governments
The federal government sells bonds and other
securities to:
 Help fund its regular activities and
services
 Finance the national debt
586
Section 10.1
Treasury Bills, Notes, and Bonds

The U.S. Department of the Treasury issues
three basic types of securities:
 Treasury bills (T-bills)
 Treasury notes
 U.S. government savings bonds
U.S. government security bonds can be:
 Held until maturity
 Cashed before the maturity date
You must pay federal income tax on interest you
receive from these investments.
587
Section 10.1
Bonds Issued by Federal Agencies

Bonds are issued by other federal agencies as
well.
While agency bonds are almost risk-free, they:
 Offer a slightly higher interest rate than
securities issued by the treasury
department
 Have an average maturity of about 12
years
588
Section 10.1
municipal bond Bonds Issued by State and Local

a security issued by Governments
a state or local
government to pay Municipal bonds may pay for major projects,
for its ongoing such as the building of:
activities  Airports
 Schools
 Highways
Although municipal bonds are relatively safe, on
rare occasions, governments have defaulted, or
failed to repay, their bonds.
589
Section 10.1
Insured Municipal Bonds

If the risk of default worries you, you might
consider buying insured municipal bonds.
Three large private investors guarantee such
bonds:
 MBIA, Inc.
 The Financial Security Assurance
Corporation
 The American Municipal Bond Assurance
Corporation
590
Section 10.2
Investing in Bonds
Main Idea
Knowing how to read, analyze, and calculate
Do you think bond information in newspapers and annual
buying reports can help you make wise investments.
government
bonds would
free you from
watching your
investments?
591
Section 10.2
Investing in Bonds
Determining Investment Value

Before you make a decision to include bonds in
your investment portfolio, you must learn how to
accurately determine the investment value of a
bond.
You will be able to determine whether a bond is
a good investment by:
 Understanding bond price quotations
 Researching various sources of
information on bonds
 Checking bond ratings
 Calculating the yield of your bond
investment
592
Section 10.2
Investing in Bonds
Bond Price Quotations

Before you buy or sell bonds, you should
become familiar with bond price quotations.
Some valuable sources for bond information
are:
 Local newspapers
 Metropolitan newspapers
 The Wall Street Journal
 Barron’s
593
Section 10.2
Investing in Bonds
Sources of Information on Bonds

As a bondholder, you should always be aware
of the financial stability of the issuer of your
bonds. The most important questions are:
 Will the bond be repaid at maturity?
 Will you receive interest payments until
maturity?
Annual reports provide detailed financial
information about a company.
594
Section 10.2
Investing in Bonds
Annual Reports
As you read an annual report, look for signs of
financial strength or weakness and ask:
 Is the firm profitable?
 Are sales increasing?
 Are long-term liabilities increasing?
 How might the company’s current
activities and future plans affects its
ability to repay bonds?
595
Section 10.2
Investing in Bonds
Other Sources of Information

You can also research possible bond
investments by:
 Reading business magazines
 Consulting reports and research
published by the government to track the
nation’s economy
 Searching the Internet for information
about the financial performance of
particular companies
596
Section 10.2
Investing in Bonds
investment- Bond Ratings

grade bonds
Before you invest in a particular corporate or
bonds that are
municipal bond, you should check its rating.
issued by
financially stable
This rating will give you a good idea of the
companies or quality and risk associated with that bond.
municipalities The highest category of bonds, investment-
grade bonds, are considered safe investments
that will provide a predictable source of income.
597
Section 10.2
Investing in Bonds
yield Yield of a Bond Investment

the rate of To determine the return that a particular bond
return, usually
may produce, investors calculate and track its
stated as a
percentage,
yield. You can measure a bond’s yield by:
earned by an  Calculating its current yield
investor who  Considering the yield to maturity of a
holds a bond for bond
a certain period
of time These calculations allow you to compare returns
on a bond investment with other investments.
598
Section 10.3
Mutual Funds
Main Idea
Understanding the many kinds of mutual funds
Based on its will help you decide which funds might be smart
name, what do investments for you.
you think is the
definition of a
mutual fund?
599
Section 10.3
Mutual Funds
Defining Mutual Funds

A mutual fund is an investment alternative in
which investors use the services of professional
managers to pool their money to buy:
 Stocks
 Bonds
 Other securities
By buying shares in a mutual fund, even an
investor with limited resources can own part of
an entire portfolio of diverse securities.
600
Section 10.3
Mutual Funds
Why Investors Buy Mutual Funds

Reasons for purchasing a mutual fund include:
 Professional management
 Diversification
 Reduction of shareholders’ risk
Because of these advantages, mutual funds
have become extremely popular investments.
601
Section 10.3
Mutual Funds
Types of Mutual Funds

An investment company is a firm that invests the
pooled funds of many investors in various
securities. The firm receives a fee for this
service.
Mutual funds managed by investment
companies are classified as:
 Closed-end funds
 Open-end funds
602
Section 10.3
Mutual Funds
closed-end fund Closed-End Funds

a mutual fund About 6 percent of all mutual funds are closed-
with a fixed
end funds offered by investment companies.
number of
shares that are Shares of closed-end funds are traded:
issued by an  On the floors of stock exchanges
investment
 In the over-the-counter market
company when
the fund is first
organized
603
Section 10.3
Mutual Funds
open-end fund Open-End Funds

a mutual fund with Most mutual funds are open-end funds.
an unlimited number
of shares that are Shares of open-end funds can be:
issued and  Bought and sold on any business day by
redeemed by an contacting the investment company that
investment company manages the mutual fund
at the investors’
request
 Bought and sold at the net asset value
(NAV)
net asset value (NAV) If you buy shares of an open-end fund from an
the amount that one investment company, you gain access to a wide
share of a mutual variety of services.
fund is worth
604
Section 10.3
Mutual Funds
load fund Load Funds

a mutual fund for Mutual funds are classified as either:
which you pay a
commission  Load funds
every time you  No-load funds
buy or sell The advantage of a load fund is that the fund’s
shares
representatives will offer advice and guidance
about when shares of the fund should be bought
or sold.
605
Section 10.3
Mutual Funds
no-load fund No-Load Funds

a mutual fund No-load funds:
that has no
commission fee  Do not charge commissions when you
buy shares
 Have no salespeople
 Offer the same investment opportunities
as load funds
606
Section 10.3
Mutual Funds
Management Fees and Other Charges

Management fees are a fixed percentage of the
fund’s asset value.
Instead of charging investors a fee when they
purchase shares, some mutual funds charge:
 A back-end load, a fee that is charged for
withdrawing money from the fund
 A 12b-1 fee, a fee that helps to pay for
the marketing and advertising of a mutual
fund
607
Section 10.3
Mutual Funds
Categories of Mutual Funds

It can be helpful to sort mutual funds into three
main groups:
 Stock mutual funds
 Bond mutual funds
 Mixed mutual funds
The managers of mutual funds match their
investment portfolios to the investment
objectives of their customers.
608
Section 10.3
Mutual Funds
Stock Mutual Funds

Most mutual funds are part of the stock mutual
funds group.
These funds fall into 14 categories, which
include:
 Aggressive growth funds
 Equity income funds
 Global stock funds
 Growth and income funds
 International funds
 Large-cap funds
 Regional funds
 Utility funds
609
Section 10.3
Mutual Funds
Bond Mutual Funds

Mutual funds in the bond mutual funds group
invest only in bonds.
The bond fund categories are based on the type
of bond the mutual funds purchase and include
the following:
 High-yield (junk) bond funds
 Insured municipal bond funds
 Intermediate corporate bond funds
 Long-term U.S. bond funds
 Municipal bond funds
 Short-term corporate bond funds
610
Section 10.3
Mutual Funds
Mixed Mutual Funds

Mixed mutual funds invest in a mix of stocks and
bonds or in various other types of securities.
These funds fall into three categories:
 Balanced funds
 Money-market funds
 Stock/bond blend funds
A variety of mutual funds managed by one
investment company is called a family of funds.
611
Section 10.4
Investing in Mutual Funds
Main Idea
Knowing how to evaluate, buy, and sell mutual
What would be funds will enable you to invest wisely.
your definition of
capital gain?
Video Clip: Dollars and Sense
612
Section 10.4
Making an Informed Decision

You will be able to determine the best approach
for investing in mutual funds by:
 Considering your financial goals
 Consulting various sources of information
on mutual funds
613
Section 10.4
Considering Your Financial Goals

You can consider several questions when you
are in the process of identifying your investment
goals:
 How old are you?
 What is your family situation?
 How much risk do you want to take?
 How much money do you make now?
 How much money are you likely to make
in the future?
Once you know your investment goals, find a
mutual fund with investment objectives that
match your own.
614
Section 10.4
Information on Mutual Funds

The main sources of information on mutual
funds include:
 Newspapers
 Financial publications
 Professional advice
 Quotations
 Prospectuses
 Annual reports
 Internet
615
Section 10.4
Mutual Fund Quotations

Mutual fund quotations contain information
about a fund’s:
 Net asset value
 Objective
 Performance
 Cost
616
Section 10.4
Mutual Fund Prospectuses

After you have narrowed your search, check out
the prospectuses of the mutual funds that most
interest you.
The prospectus usually provides the following
information:
 A description of the fund’s objective
 The risk factor associated with the fund
 A fee table
 A description of the fund’s past
performance
 A description of services provided to
investors
617
Section 10.4
Annual Reports
Most annual reports contain:
 Detailed financial information about the
fund’s assets and liabilities
 A statement of operations that describes
expenses and day-to-day operating costs
of the fund, a statement of changes in net
assets, and a schedule of investments
 A letter from the fund’s independent
auditors
618
Section 10.4
income Return on Investment

dividends
As a mutual fund shareholder, you may gain
the earnings a
fund pays to
income in one of three ways. You may:
shareholders  Receive income dividends.
 Earn capital gain distributions.
 Make a good return by buying shares at a
low price and then selling them after the
price increases.
619
Section 10.4
Taxes and Mutual Funds

The following are some general guidelines on
how mutual fund transactions are taxed:
 Income dividends are reported along with
all other dividend amounts you have
received. They are taxed as regular
income.
 Capital gain distributions are reported on
your federal income tax return.
 Capital gains or losses that result from
your selling shares in a mutual fund are
reported on your federal income tax
return.
620
Section 10.4
Taxing Mutual Funds

When you pay taxes on your mutual funds, you
should be aware that:
 Almost all investment companies allow
you to reinvest the capital gains
distributions and income dividends you
earn instead of receiving cash.
 You decide when to sell your stocks or
bonds.
Thus, you can pick the tax year when you pay
tax or deduct losses on these investments. You
have no control, however, over when the mutual
fund sells securities.
621
Section 10.4
Buying and Selling Mutual Funds

Mutual funds can provide investors with:
 Income dividends
 Capital gain distributions
 Profits that result from investors’ decision
to sell their shares
Various purchase options and withdrawal
options allow you to manage your mutual fund
investments and profits to help you meet your
financial goals.
622
Section 10.4
Purchase Options
Before you buy shares in a fund, you will need
to consider several different purchase options.
When you buy shares in an open-end mutual
fund from an investment company, you can
choose:
 Regular account transactions
 Voluntary savings plans
 Payroll deduction plans
 Contractual savings plans
 Reinvestment plans
623
Section 10.4
Withdrawal Options
If you choose to invest in mutual funds, you will
also need to know how you can take your
money out of a fund.
Your withdrawal options include:
 Selling shares of closed-end funds to
another investor
 Selling shares in an open-end fund to the
investment company that sponsors the
fund
624
Section 10.4
Withdrawing Money from Mutual Funds

Additional ways of withdrawing money include:
 Investment period withdrawal
 Investment period liquidation
 Asset growth withdrawal
 Dividend and distribution withdrawal
625
Chapter 10
Key Term Review

 maturity date  municipal bond
 face value  investment-grade bonds
 debenture  yield
 mortgage bond  closed-end fund
 convertible bond  open-end fund
 sinking fund  net asset value (NAV)
 serial bonds  load fund
 registered bond  no-load fund
 coupon bond  income dividends
 bearer bond
 zero-coupon bond
626
Chapter 10

1. Explain the advantages of the call feature on bonds to
corporations and to investors.
A corporation may choose to buy back its bonds early when

interest rates drop a certain percentage to keep from paying
bondholders interest at the higher rate.
When a company calls its bonds, it may have to pay bondholders
a premium.
627
Chapter 10

2. Explain why corporations may prefer to issue bonds to raise
funds for their operations.
Corporations sell bonds to:

 Raise money when it is difficult or impossible to sell
stock
 Finance regular business activities
 Reduce the amount of tax a corporation must pay
because the interest paid to bondholders is tax-
deductible
628
Chapter 10

3. Explain how the market value of a bond is determined.
A bond’s value can be affected by:

 The financial condition of the company that issues it
 Changes in the economy
 The law of supply and demand
629
Chapter 10

4. List three examples of reasons state and local governments
might issue bonds.
The federal government sells bonds and other securities to:

 Help fund its regular activities and services
 Finance the national debt
Municipal bonds may pay for major projects, such as the
building of:
 Airports
 Schools
 Highways
630
Chapter 10

5. Describe the characteristics of a municipal bond, including
tax factors.
A municipal bond is a security issued by a state or local

government to pay for its ongoing activities. The interest on
municipal bonds may be exempt from federal taxes. Tax-exempt
status depends on how the funds generated by the bonds
are used.
631
Chapter 10

6. Explain the meaning of bond rating and their impact on
buying decisions.
Before you invest in a particular corporate or municipal bond, you

should check its rating. This rating will give you a good idea of the
quality and risk associated with that bond.
632
Chapter 10

7. Describe the characteristics of a closed-end, open-end, load,
and no-load mutual fund.
A closed-end fund is a mutual fund with a fixed number of shares

that are issued by an investment company when the fund is first
organized.
An open-end fund is a mutual fund with an unlimited number of
shares that are issued and redeemed by an investment company
at the investors’ request.
A load fund is a mutual fund for which you pay a commission
every time you buy or sell shares.
A no-load fund is a mutual fund that has no commission fee.
633
Chapter 10

8. Describe a mutual fund prospectus.
The prospectus usually provides the following information:

 A description of the fund’s objective
 The risk factor associated with the fund
 A fee table
 A description of the fund’s past performance
 A description of services provided to investors
634
Chapter 10

9. Compare the three ways you can purchase mutual funds.
When you buy shares in an open-end mutual fund from an

investment company, you can choose:
 Regular account transactions
 Voluntary savings plans
 Payroll deduction plans
 Contractual savings plans
 Reinvestment plans
635
Newsclip: Reliable Bonds?
A bond fund is a mutual fund comprised mainly of bonds. These
types of funds are usually safe investments with greater
opportunity for returns.
636
637
Chapter 11
Real Estate and Other Investments
What You’ll Learn

 Section 11.1
 Explain the different types of real estate
investments.
 Discuss the advantages and disadvantages of real
estate investments.
 Section 11.2
 Identify the different types of precious metal and
gem investments.
 Describe collectibles investments.
 Analyze the risks of investing in precious metals,
gems, and collectibles.
638
Collecting
 Q: Are collectible action figures a smart investment for
retirement?
 A: Although collecting can be an enjoyable and sometimes
profitable pursuit, collectibles are not a mainstay of
retirement planning. It would be best if you focused your
retirement planning efforts on building a diversified portfolio
that may include stock and bond investments. You could still
use collectibles as a small part of your portfolio, but their
returns are very unpredictable.
639
Section 11.1
Real Estate Investment
Main Idea
Real estate investment opportunities vary
Why do you widely. Consider the advantages and
think so many disadvantages of each type of investment
Americans opportunity.
invest in real
estate?
640
Section 11.1
Real Estate Investments

Real estate has always been a favorite
investment for Americans.
Unlike stocks and bonds, a piece of property is
something you can:
 See
 Touch
 Take pride in
If you are new to the real estate market, you
may be confused by all the different choices you
have.
641
Section 11.1
direct Direct Real Estate Investments

investment
Real estate investments can be either direct or
an investment in
indirect. Direct investments include:
which the owner
holds legal title  Single-family houses
to the property  Duplexes
he or she has
 Apartments
purchased
 Land
 Commercial property
642
Section 11.1
A Home as an Investment
Home ownership is most Americans’ largest
financial asset.
Owning a home is a good investment because:
 Home prices have risen steadily over the
years.
 Most homeowners have mortgages,
which can provide certain tax benefits.
Second homes, or vacation homes, also provide
tax benefits.
643
Section 11.1
commercial Commercial Property

property Some examples of commercial property include:
land and
buildings that
 Duplexes
produce rental  Hotels
income  Office buildings
 Stores
Many investors start by purchasing a small
commercial property. Then they buy larger
properties as the equity in their original
investment increases.
644
Section 11.1
Land
While land investments often promise
tremendous gains, they also pose enormous
risks.
For example, you might not be able to sell your
property at a profit, or even at the price you paid
for it, if:
 Construction in general slows.
 Business activity declines.
Unlike an apartment building, land in urban
areas usually does not produce any income.
645
Section 11.1
indirect investment Indirect Real Estate Investments

an investment in If you want to invest in real estate but do not
which a trustee is
have enough money to purchase property on
appointed to hold
legal title to the
your own, you might want to consider an indirect
property on behalf investment.
of an investor or Indirect investments include:
group of investors  Real estate syndicates
 Real estate investment trusts
 High-risk mortgages
 Participation certificates
646
Section 11.1
syndicate Real Estate Syndicates or Limited

a temporary Partnerships
association of A real estate syndicate invests in real estate. A
individuals or
syndicate may be organized as:
business firms
organized to  A corporation
perform a task  A trust
that requires a
 A limited partnership
large amount of
funds A real estate syndicate offers you and the other
partners a variety of benefits.
647
Section 11.1
participation Participation Certificates

certificate (PC) If you are looking for a risk-free real estate
an investment in investment, then participation certificates might
a group of be a good choice for you
mortgages that You can buy participation certificates from these
have been federal agencies:
purchased by a
 Government National Mortgage
government
Association (Ginnie Mae)
agency
 Federal Home Loan Mortgage
Corporation (Freddie Mac)
 Federal National Mortgage Association
(Fannie Mae)
 Student Loan Marketing Association
(Sallie Mae)
648
Section 11.1
Real Estate Investment: Pros and

Cons
Before you invest in real estate, you will want to
weigh the advantages and disadvantages.
649
Section 11.1
financial Advantages of Real Estate Investments

leverage
The advantages of certain types of real estate
the use of
investments include:
borrowed funds
for direct  Hedge against inflation
investment  Easy entry into commercial property
purposes ownership
 Limited financial responsibility
 Financial leverage
650
Section 11.1
Disadvantages of Real Estate

Investments
Some of the possible disadvantages to real
estate investments include:
 Illiquidity
 Declining property values
 Lack of diversification
 Lack of a tax shelter
 Management problems
Property management can be a full-time job,
and many investors are not willing to take on
that much responsibility.
651
Section 11.1
Investment Options
If you decide that real estate investment is too
risky or too complicated, you might consider
other tangible investments, such as:
 Gold and other precious metals
 Gems
 Collectibles
However, these investments can also be risky.
652
Section 11.2
Precious Metals, Gems, and Collectibles
Main Idea
Understanding the risks and rewards of
Do you think investing in precious metals, gems, and
investments in collectibles will help you build a sound,
precious metals, diversified portfolio.
gems, or
collectibles are
risky or safe?
653
Section 11.2
precious metals Gold

valuable ores
Many people invest their money in precious
such as gold,
platinum, and
metals as a hedge, or protection, against
silver inflation.
The price of gold rises in times of:
 War
 Political unrest
 Inflation
As international tensions ease or the political
situation stabilizes, the price of gold falls.
654
Section 11.2
Silver, Platinum, Palladium, and

Rhodium
Other precious metals that rise in value during
times of political or economic trouble are:
 Silver
 Platinum
 Palladium
 Rhodium
Remember that while stocks, bonds, and other
interest-bearing investments are earning money
for you, precious metals sit in vaults, earning
nothing.
655
Section 11.2
precious gems Precious Gems

rough mineral
Precious gems appeal to investors because of
deposits (usually
crystals) that are
their:
dug from the  Small size
earth by miners  Ease of storage
and then cut and
shaped into
 Great durability
brilliant jewels  Potential as a protection against inflation
656
CROWN JEWELS Throughout history, precious gems have
been associated with great royalty. Why do you think
diamonds, rubies, and other precious stones fascinate
people?
657
Section 11.2
Risks of Investing in Precious Gems

Despite the attraction of precious metals and
gems, the investment risks are sizeable. These
risks include:
 You cannot easily convert diamonds and
other precious gems into cash.
 You may have difficulty determining
whether the gems you are purchasing are
of high quality.
The primary risk is the great fluctuation in prices
of precious gems.
658
Section 11.2
collectibles Collectibles
a type of
Collectibles are another type of investment.
investment that
includes rare
These items offer the knowledgeable collector
coins, works of or investor:
art, antiques,  Pleasure
stamps, rare  An opportunity for profit
books, comic
books, sports Many collectors have been surprised to discover
memorabilia, that items they bought for their own enjoyment
rugs, ceramics, have increased greatly in value while they
paintings, and owned them.
other items that
appeal to
collectors and
investors
659
Section 11.2
Collectibles on the Internet

The Internet has made buying and selling
collectibles efficient and convenient. As an
online buyer or seller, you can easily:
 Search for items to add to your collection.
 Comparison shop.
 Reach people all around the world.
Some drawbacks of online buying include:
 Being unable to examine objects for flaws
or trademarks
 The ever-present danger of fraud
660
661
Collectible Gifts
Suggest to your family and friends that you make gifts for
each other instead of buying them for special days and
holidays. You will all save money, and your gifts may
become family heirlooms.
How much money do you think you could save each year by
making gifts instead of buying them?
662
Section 11.2
Let the Collector Beware

A wise collector must always be alert for scams.
The safest way to steer clear of collectibles-
related fraud is to:
 Learn everything you can about the items
you collect.
 Buy and sell only with reputable dealers
and auction Web sites.
663
Section 11.2
Planning Investments
Investing in collectibles may seem interesting,
but it may not be the best way for you to achieve
your financial goals.
When making investment choices, you should:
 Research the types of investments that
are available.
 Weigh the advantages and
disadvantages of each type of
investment.
 Ask yourself how much risk and
responsibility you are willing to assume.
664
Chapter 11
Key Term Review

 direct investment
 commercial property
 indirect investment
 syndicate
 participation certificate (PC)
 financial leverage
 precious metals
 precious gems
 collectibles
665
Chapter 11

1. Compare and contrast direct and indirect real estate
investments.
The owner of a direct investment in real estate:

 Directly holds the legal title to the residential or
commercial property
 Is responsible for its maintenance and management
An indirect investment is similar to investing in mutual funds,
in that:
 A group of investors buys property.
 Legal title is held by a trustee.
666
Chapter 11

2. List two advantages and two disadvantages of real estate
investments.
Advantages of real estate investments include:

 Its use as a hedge against inflation
 The ease of entering the market
 Limited liability
Disadvantages of real estate investments include:
 Lack of liquidity and diversification
 Risk of declining property values
 Fewer tax incentives
 Potential management problems
667
Chapter 11

3. Describe precious metal and gem investments and why they
remain popular despite their speculative nature.
Precious gems appeal to investors because of their:

 Small size
 Ease of storage
 Great durability
 Potential as a protection against inflation
668
Chapter 11

4. Explain what is meant by the term collectible, and give some
examples of collectible items you or your family may own.
Collectibles are items that appeal to collectors and investors.

Some examples of collectibles include:
 Rare coins
 Works of art
 Antiques
 Stamps
 Rate books
 Comic books
669
Chapter 11

5. Explain why so many fraud complaints are related to online
auctions.
Fraud is an ever-present danger on the Internet because:

 You cannot assess a dealer face-to-face.
 You cannot examine the objects for flaws or
trademarks.
 Some online auction and exchange sites are less
reliable than others.
670
Newsclip: A Piece of Childhood
Animation art, hand-painted images from which cartoons used to
be made, is a popular collectible.
671
672
Chapter 12
Planning Your Tax Strategy
What You’ll Learn

 Section 12.1
 Discuss the importance of tax planning.
 Identify your taxable income.
 Explain deductions and tax credits.
 Explain the W-4 form.
 Section 12.2
 Describe the types of federal income tax forms.
 Section 12.3
 Identify tax strategies.
673
Electronic Taxes
 Q: I would like to file my income tax form electronically. Is it
risky to file through the Internet?
 A: If you are concerned about being charged late penalties
if your tax return is not received by the IRS via the Internet,
you can protect yourself by using filing services that offer a
receipt, such as a confirmation number or e-mail
confirmation.
674
Section 12.1
Income Tax Fundamentals
Main Idea
Taxes are an important part of financial
Why would planning. There are several types of taxes and
planning a tax terms to know for preparing your tax return.
strategy be a
good idea?
675
Section 12.1
Taxes and You

Taxes are an everyday expense of life that allow
your local, state, and federal governments to
provide important services.
These services include:
 Medicare and Medicaid
 The military and the national debt
 Police and fire protection
 Public schools
 Road maintenance
 Parks and libraries
 Safety inspection of foods, drugs, and
other products
676
Section 12.1
tax liability Effective Tax Planning

the total amount Effective tax planning can help you have money
of taxes owed
left after paying taxes and living expenses.
Use several strategies to plan for taxes:
 Find out how the current tax laws and
regulations affect you.
 Maintain complete and accurate tax
records.
 Learn how to make decisions that can
reduce your tax liability.
677
Section 12.1
Types of Taxes
Throughout your life, you will pay different types
of taxes in four major categories:
 Purchases
 Property
 Wealth
 Earnings
678
Section 12.1
Taxes on Purchases
Sales taxes are:
 Added to the prices of most products you
purchase
 Collected by state and local governments
Many states do not charge sales tax on food
and medicine.
679
Section 12.1
Taxes on Property
Real estate property tax is a major source of
income for local governments. This tax is based
on the value of land and buildings.
In some areas of the country, state and local
governments may assess taxes on the value of
property, such as:
 Automobiles
 Boats
 Furniture
 Farm equipment
680
Section 12.1
estate tax Taxes on Wealth

a federal tax The three main types of federal taxes on wealth
collected on the
are:
value of a
person’s  Estate taxes
property at the  Inheritance taxes
time of his or her
 Gift taxes (collected on money or
death
property valued at more than $11,000,
inheritance tax given by one person to another in a
a state tax single year)
collected on the Gifts of any amount that are designated for
property left by a educational or medical expenses are not subject
person to his or
to gift taxes.
her heir(s) in a
will
681
Section 12.1
income tax Taxes on Earnings

the tax on The personal income tax is the federal
wages, salaries,
government’s main source of revenue.
and self-
employed Social Security funds are also collected as a tax
earnings and finance:
 Retirement
 Disability
 Life insurance benefits
The Internal Revenue Service (IRS) is the
federal agency that collects these taxes.
682
Section 12.1
income tax return Understanding Income Taxes

a form on which a
You determine the amount of tax you owe when
taxpayer reports
how much money
filling out your income tax returns. Some
he or she received examples of these forms include:
from working and If the income tax you paid through your
other sources, employer is greater than your tax liability, you
and the exact will receive a refund.
taxes that are
owed
683
Section 12.1
exclusion Gross and Adjusted Gross Income

income that is Gross income, or total income, can include any
not subject to
of the following components:
taxes
 Earned income
 Interest income
 Dividend income
Your gross income can also be affected by
exclusions.
684
Section 12.1
adjusted gross Adjusted Gross Income

income You pay income tax on your adjusted gross
your gross income, not on your gross income.
income after
calculating The reductions, or adjustments to your income,
certain include items such as:
reductions  Contributions to an IRA
 Student loan interest
The correct amount of your adjusted gross
income is important because it is the basis for
other tax calculations.
685
Section 12.1
taxable income Your Taxable Income

your adjusted When you determine your adjusted gross
gross income
income, you can figure out your taxable income.
less any
allowable tax Your income tax is calculated based on the
deductions and amount of your taxable income.
exemptions
686
Section 12.1
tax deduction Tax Deductions

an expense that
you can subtract
You may qualify for certain tax deductions that
from your adjusted can reduce your taxable income. A few of the
gross income to most common itemized deductions include:
figure your taxable
income
 Medical and dental expenses
 Taxes
itemized deduction
a specific expense  Interest
that you deduct  Contributions
from your adjusted
gross income Every taxpayer receives at least the standard
deduction. If you qualify for both the standard
standard
deduction
and itemized deductions, you must choose
an amount of
which one to take.
money set by the
IRS that is not
taxed
687
Section 12.1
exemption Exemptions
a deduction from You will also be able to receive tax deductions
adjusted gross for your dependents. To qualify as a dependent,
income for the
a person must meet all of the following
taxpayer, the
spouse, and
requirements:
qualified  A dependent must not earn more than a
dependents set amount unless he or she is under age
19 or is a full-time student under age 24.
 He or she must be a specified relative or
live in the home of the taxpayer who
claims him or her on the tax return.
 More than half of a dependent’s support
must be provided by the taxpayer who
claims him or her on the tax return.
688
Section 12.1
tax credit Calculating Your Tax

an amount of Once you know your taxable income, you can
money that can
calculate how much income tax you owe by
be subtracted
directly from
using a:
taxes you owe  Tax Table
 Tax Rate Schedule
Your income tax may be reduced by a tax credit.
A tax credit:
 Is an expense that you can subtract from
your adjusted gross income
 Results in a dollar-for-dollar reduction in
the amount of taxes you owe
689
Section 12.1
Making Tax Payments

You can pay your income taxes to the federal
government through:
 Estimated payments
 Payroll withholding payments
People who are self-employed may pay
estimated taxes each quarter.
690
Section 12.1
allowance Payroll Withholding

an adjustment to To fill out a W-4 form, you need to:
the tax withheld  Fill in your name, address, and Social
from your Security number.
paycheck, based
on your marital
 Indicate whether you are single or
status and
married.
whether you  Write the number of allowances you are
have dependents claiming.
 Indicate how much additional money you
wish to have withheld.
 Sign and date the form.
An allowance can reduce the amount of income
taxes your employer withholds, or deducts, from
your paycheck to send to the IRS.
691
Section 12.1
Estimated Payments
If you are self-employed, you will need to make
estimated payments to the government, based
on your estimate of taxes due at the end of the
year.
692
Section 12.1
Claiming Allowances
Claiming few or no allowances on your W-4
form is one way to:
 Get tax refunds from the government.
 Create a “forced savings account.”
693
Section 12.2
Preparing an Income Tax Return
Main Idea
Special information and documents are needed
What factors to prepare income tax returns. You can choose
might determine one of three main federal tax return forms.
whether you
have to file
income taxes?
694
Section 12.2
The W-2 Form

When it is time for you to file your annual
income tax return, your employer will send you a
W-2 form, or Wage and Tax Statement.
This form lists:
 Your annual earnings
 The amount withheld from your
paychecks for federal income taxes,
Social Security, and any applicable state
and local income taxes
695
Section 12.2
Understanding the Federal Income

Tax Return
Before you begin filling out your income tax
return, consider some basic information:
 Who must file
 Deadlines and penalties
 Tax forms
696
Section 12.2
Who Must File?

You are required to file a federal income tax
return if:
 Your income is above a certain amount.
 You are a citizen or a resident of the
United States.
 You are a U.S. citizen who resides in
Puerto Rico.
The amount of your income tax return is based
on your filing status and other factors, such as
your age.
697
Section 12.2
Filing Status Categories

The five filing status categories are:
 Single
 Married, filing a joint return
 Married, filing separate returns
 Head of household
 Qualifying widow or widower
698
Section 12.2
extension Deadlines and Penalties

an extended If you cannot meet the April 15th income tax
deadline for
return deadline, you can file a form by that date
filing an income
tax return
to receive a four-month extension.
Failing to file a required tax return:
 Is a serious violation of the tax code
 Can result in a substantial penalty
699
Section 12.2
Completing the Federal Income Tax

Return
Filling out a federal income tax return does not
have to be difficult as long as you:
 Are prepared
 Have the correct documents and
information
 Understand the form you are using
Make a rough draft of your tax return before you
complete a final draft.
700
Section 12.2
Gathering Information and Documents

Being prepared at tax time means you have all
the necessary documents.
The following checklist of documents will help
you complete a successful tax return:
 Tax forms and instruction booklets
 Copies of your tax returns
 Your W-2 form
 Interest and dividend forms
701
Section 12.2
Filing Your Federal Income Tax Return

You have several ways to file your federal
income tax return:
 Fill out the forms and mail them to the
IRS.
 Use an authorized IRS E-file provider to
transmit your return directly to an IRS
computer.
 Use your personal computer and tax
software to prepare your own tax return
via E-file.
702
Section 12.3
Tax Assistance and Strategies
Main Idea
As your income and investments increase and
Who do you think your personal life changes, preparing your taxes
is an appropriate may become more complex.
professional to
hire for preparing
your taxes?
703
Section 12.3
Tax Assistance
When your tax preparation becomes
complicated, you can find assistance through:
 Professionals and agencies
 A variety of software programs for tax
preparation
 How-to books about tax planning and
completing tax forms
 Personal finance magazines
 The IRS Web site
704
Section 12.3
tax audit Tax Audits

a detailed
The IRS reviews all tax returns for
examination of
your tax return
completeness and accuracy.
by the IRS If your math is incorrect, the IRS may:
 Reconfigure your tax return and send you
either a bill or a refund
 Audit your tax return and request
additional information
The IRS does periodic tax audits to determine
whether taxpayers are paying all of their
required taxes.
705
Section 12.3
Planning Tax Strategies

Smart taxpayers know how to legally minimize
the amount of tax they have to pay.
You can reduce the amount of tax you owe by
using various strategies related to:
 Purchases
 Investments
 Retirement
706
Section 12.3
Consumer Purchasing Strategies

The buying decisions you make can affect the
amount of taxes you pay. For example, if you
purchase a house:
 The interest you pay on your mortgage
and your real estate property taxes are
deductible.
 You can deduct the interest on a home
equity loan.
Some job-related expenses may also be
deducted.
707
Section 12.3
Investment Decisions
Certain investment decisions may:
 Reduce your income tax
 Increase your income
 Lower your taxes
For example, the interest on municipal bonds is
not usually taxed.
Other investments may be tax-deferred, which
means that the income is taxed at a later date.
708
Try Layaway
Some stores offer layaway plans. If you want to buy that
special dress, pair of pants, or coat, ask the store about its
layaway plan. You make installment payments and get the
item when the last payment is made. This is a no-interest
way of paying that does not require a credit card.
If you want to buy a pair of skis that costs $240, how long
will you make monthly payments of $30?
709
Section 12.3
Retirement Plans
Now is the time to start planning for your
retirement.
To encourage early planning, the government
allows you to defer paying taxes on money that
you invest in retirement plans.
710
Section 12.3
Changing Your Tax Strategy

Since tax laws are always changing, your tax
strategies should change too.
As the government allows new deductions or as
deductible amounts change, you should review
your financial plans to always take full
advantage of new tax laws that may reduce the
amount you pay.
711
Chapter 12
Key Term Review

 tax liability  exemption
 estate tax  tax credit
 inheritance tax  allowance
 income tax
 extension
 income tax return
 tax audit
 exclusion
 adjusted gross income
 taxable income
 tax deduction
 standard deduction
 itemized deduction
712
Chapter 12

1. Describe how taxes have an impact on financial planning.
Financial planning involves taxes because they reduce your take

home pay. Other financial decisions also affect the amount of
taxes you pay.
713
Chapter 12

2. Explain how you determine your adjusted gross income and
taxable income.
Adjusted gross income is your gross income after calculating

certain reductions.
These reductions, or adjustments to your income, include items
such as:
 Contributions to an IRA
 Student loan interest
Your taxable income is earned income plus interest and dividend
income minus exclusions, deductions, and exemptions.
714
Chapter 12

3. Describe why you should itemize deductions as opposed to
taking the standard deduction.
You should itemize deductions if this total is greater than the

standard deduction.
A few of the most common itemized deductions include:
 Medical and dental expenses
 Taxes
 Interest
 Contributions
715
Chapter 12

4. Identify the factors to consider when filling out the W-4 form
for your employer.
To fill out a W-4 form, you need to:

 Indicate whether you are single or married.
 Write the number of allowances you are claiming.
 Indicate how much additional money you wish to have
withheld.
 Determine whether you are exempt from paying
income tax.
716
Chapter 12

5. Describe the 1040EZ, 1040A, and 1040 income tax forms.
Form 1040EZ is for filers with:

 No dependents
 Less than a certain amount in taxable income
Form 1040A allows filers to claim deductions for:
 IRA contributions
 Tax credits
Form 1040 must be filed if you are:
 Itemizing deductions
 Have more than a certain amount in taxable income
717
Chapter 12

6. List some tax advantages of retirement investing.
To encourage early planning, the government allows you to defer

paying taxes on money that you invest in retirement plans.
718
Newsclip: Tax Checkup
Tax laws can change each year. Knowing the new rules can help
you save money.
719
720
Chapter 13
Home and Motor Vehicle Insurance
What You’ll Learn
 Section 13.1
 Identify types of risks and risk management methods.
 Explain how an insurance program can help manage risks.
 Describe the importance of property and liability insurance.
 Section 13.2
 Identify the types of insurance coverage and policies
available to homeowners and renters.
 Analyze the factors that influence the amount of coverage
and cost of home insurance.
 Section 13.3
 Identify the important types of motor vehicle insurance
coverage.
 Explain factors that affect the cost of motor vehicle
insurance.
721
Insurance Rates
 Q: My brother is 17 and has an excellent driving record.
Why are his motor vehicle insurance rates higher than rates
for females in his same age group?
 A: Insurance rates are based on an analysis of accident
statistics for all types of drivers. Since young men have a
higher incidence of being involved in accidents than young
women have, insurance rates for young men are more
expensive. Some insurance companies offer discounts for
young adults covered on a parent’s policy.
722
Section 13.1
Insurance and Risk Management
Main Idea
Recognizing the importance of insurance and
What do you think knowing how to develop an insurance program
are the benefits of can protect you from financial loss.
having a good
insurance
program?
Personal Finance Unit 4 Chapter 13 © 2007 Glencoe/McGraw-Hill 723

3
Section 13.1
insurance What Is Insurance?

protection against
Insurance provides protection against many
possible financial
loss
risks, such as:
 Unexpected property loss
policy
 Illness
a contract between
an insurance  Injury
company and a When you purchase an insurance policy, your
person by which insurance company agrees to pay for losses
that person joins a that may happen to you.
risk-sharing group
In return, you will pay the company a premium.
premium
a fee for insurance
724
Section 13.1
risk Types of Risk

the chance of
Some important terms in insurance that you
loss or injury
should know are:
peril  Risk
anything that  Peril
may possibly
cause a loss  Hazard
hazard
anything that
increases the
likelihood of loss
through peril
725
Section 13.1
negligence Common Risks

the failure to The most common risks are:
take ordinary or
reasonable care  Personal risks
to prevent  Property risks
accidents from  Liability risks
happening
Liability risks involve losses caused by
negligence that leads to injury or property
damage.
726
Section 13.1
Risk-Management Methods
Risk management is an organized plan for
protecting:
 Yourself
 Your family
 Your property
It helps reduce financial losses caused by
destructive events.
Insurance is not the only way of dealing with
risk.
727
Section 13.1
Risk Avoidance
Sometimes the ways you choose to avoid risks
will involve serious trade-offs.
In some cases, though, risk avoidance is
practical. For example:
 By taking precautions in high-crime
areas, you might avoid the risk of being
robbed.
 By installing a security system in your
car, you might avoid the risk of having
your car stolen.
728
Section 13.1
Risk Reduction
Although you cannot avoid risks completely, you
can decrease the likelihood that they will cause
you harm.
Some ways of reducing risk include:
 Wearing a seat belt while riding in a car
 Not smoking
 Installing fire extinguishers in your home
 Eating properly and exercising regularly
729
Section 13.1
Risk Assumption
Risk assumption means taking on responsibility
for the negative results of a risk.
It makes sense to assume a risk if:
 You know that the possible loss will be
small.
 You have taken all the precautions you
can to avoid or reduce the risk.
Although self-insurance will not eliminate risks, it
does provide a way of covering losses as an
alternative to an insurance policy.
730
Section 13.1
deductible Risk Shifting

the set amount The most common method of dealing with risk is
that the
to shift it, which means to transfer it to an
policyholder
must pay per
insurance company.
loss on an In exchange for the fee you pay, the insurance
insurance policy company agrees to pay for your losses.
Most types of insurance policies include
deductibles. Deductions are a combination of:
 Risk assumption
 Risk shifting
731
Section 13.1
Planning an Insurance Program

Your personal insurance program should
change along with your:
 Needs
 Goals
The following four steps outline how to plan your
insurance program to meet your needs and
goals.
732
Section 13.1
Step 1: Set Insurance Goals

You should try to come up with a basic risk-
management plan that achieves the following
goals:
 Reduces possible loss of income caused
by premature death, illness, accident, or
unemployment
 Reduces possible loss of property caused
by perils, such as fire or theft, or hazards
 Reduces possible loss of income,
savings, and property caused by personal
negligence
733
Section 13.1
Step 2: Develop a Plan

Planning is a way of taking control of your life
instead of just letting life happen to you.
You must ask four questions as you develop
your risk-management plan:
 What do you need to insure?
 For how much should you insure it?
 What kind of insurance should you buy?
 Which insurance company should you
choose?
734
Section 13.1
Step 3: Put Your Plan into Action

As you put your plan into action, you might
discover that you do not have enough insurance
protection. If that is the case, you can:
 Purchase additional coverage.
 Change the kind of coverage you have.
 Adjust your budget to cover the cost of
additional insurance.
Your goal should be to create an insurance
program that can grow or shrink as your
protection needs change.
735
Section 13.1
Step 4: Review Your Results

You should take time to review a risk-
management program:
 Every two or three years
 Whenever family circumstances change
When you are developing or reviewing a risk-
management plan, ask yourself if you are
providing the financial resources you will need
to protect:
 Yourself
 Your family
 Your property
736
Section 13.1
Property and Liability Insurance in

Your Financial Plan
Most people spend a great deal of money on
their:
 Houses
 Vehicles
 Furniture
 Clothing
 Other personal property
Protecting these items from loss is extremely
important.
737
Section 13.1
Protecting Against Financial Losses

Think of the price you pay for insurance as an
investment in the protection of your most
valuable possessions.
The two main types of risks related to your
personal property are:
 The risk of damage to or loss of your
property
 Your responsibility for injuries to other
people or damage to their property
738
Section 13.1
Property Damage or Loss

Property owners face two basic types of risks.
These risks are:
 Physical damage caused by perils such
as fire, wind, and flooding
 Loss or damage caused by criminal
behavior
Insurance can help you protect yourself from
loss of or damage to your property.
739
DISASTROUS RESULTS Events such as hurricanes and
tornados can cause widespread devastation. What can you
do to protect your property against natural disasters?
740
Section 13.1
liability Liability
legal You can be judged legally responsible for the
responsibility for
financial cost of another person’s losses or
the financial cost
of another
injuries even if the injury or damage was not
person’s losses your fault.
or injuries Usually, if you are found liable in a situation, it is
because negligence on your part caused the
mishap. Examples of such negligence include:
 Letting young children swim in a pool
without supervision
 Cluttering a staircase with things that
could cause someone to slip and fall
741
Section 13.2
Home and Property Insurance
Main Idea
You need an effective risk management plan for
Why would it be your home or apartment and your personal
important to belongings. When purchasing insurance, your
have goal is to get the best protection at the lowest
homeowners cost.
insurance?
742
Section 13.2
homeowners Homeowners Insurance Coverage

insurance
Insuring your residence and its contents is
coverage that
provides
absolutely necessary to protect your investment.
protection for your A homeowners insurance policy provides
residence and its coverage for the following:
associated  The home, building, or any other
financial risks
structures on the property
 Additional living expenses
 Personal property
 Personal liability and related coverages
 Specialized coverages
743
Section 13.2
Buildings and Other Structures

The main purpose of homeowners insurance is
to protect you against financial loss in case your
home is:
 Damaged
 Destroyed
Detached structures on your property are also
covered under a homeowners insurance policy.
744
Section 13.2
Additional Living Expenses

If a fire or other event damages your home,
additional living expense coverage pays for you
to stay somewhere else.
Some policies limit:
 Additional living expense coverage to 10
to 20 percent of the home’s total
coverage amount
 The payment period to a maximum of six
to nine months
745
Section 13.2
Personal Property
Household belongings covered by the personal
property portion of a homeowners insurance
policy include:
 Furniture
 Appliances
 Clothing
Personal property coverage also provides
protection against the loss or damage of articles
that you take with you when you are away from
home.
746
Section 13.2
Household Inventories
If something does happen to your personal
property, you must prove:
 How much it was worth
 That it belonged to you
To make the process easier, you can create a
household inventory, including:
 Video recordings
 Photographs
 Inventory lists
747
Section 13.2
personal Additional Property Insurance

property floater You can purchase a personal property floater if
additional you:
property
insurance that  Own valuable items, such as expensive
covers the musical instruments
damage or loss  Need added protection for computers and
of a specific item related equipment
of high value
The insurance company will require a detailed
description of the item and its worth.
748
Section 13.2
medical Personal Liability and Related

payments Coverages
coverage
insurance that
The personal liability portion of a homeowners
pays the costs of policy protects you and members of your family
minor accidental if others sue you for:
injuries to  Injuries they suffer
visitors on your
 Damage to their property
property
Medical payments coverage pays the costs of
minor accidental injuries to visitors on your
property.
749
Section 13.2
Specialized Coverages
Homeowners insurance usually does not cover
losses from:
 Floods
 Earthquakes
If you purchase a home in an area that has a
high risk of earthquakes or floods, you may
have to buy insurance for those risks.
750
Section 13.2
Renters Insurance
For people who rent, home insurance coverages
include:
 Personal property protection
 Additional living expenses coverage
Renters insurance does not provide coverage
on the building or other structures.
751
Section 13.2
Home Insurance Policy Forms

Home insurance policies are available in several
forms. The forms provide different combinations
of coverage and include:
 The basic form (HO-1)
 The special form (HO-3)
 The tenants’ form (HO-4)
 The comprehensive form (HO-5)
 Condominium owners insurance (HO-6)
752
Section 13.2
Additional Home Insurance Policy Costs

Though some risks are not covered by home
insurance, home insurance policies do include
coverage for additional costs:
 Credit card fraud, check forgery, and
counterfeit money
 Removal of damaged property
 Emergency removal of property to protect
it from damage
 Temporary repairs after a loss to prevent
further damage
 Fire department charges in areas with
such fees
753
Section 13.2
How Much Coverage Do You Need?

You can get the best insurance value by:
 Choosing the right amount of coverage
 Knowing the factors that affect insurance
costs
Your insurance should be based on the amount
of money you would need to rebuild or repair
your house, not the amount you paid for it.
754
Section 13.2
actual cash Methods of Claim Settlements

value
Insurance companies base claim settlements on
the replacement
one of two methods. These methods are:
cost of an item
minus  The actual cash value method
depreciation  The replacement value method
replacement Depreciation is the loss of value of an item as it
value gets older.
the full cost of
repairing or
replacing an
item
755
Section 13.2
Home Insurance Cost Factors

The cost of your home insurance will depend on
several factors, such as:
 The location of the home
 The type of structure and construction
materials used
The amount of coverage and type of policy you
choose will also affect the cost of your home
insurance.
756
Section 13.2
Location of Home
Insurance companies offer lower rates to people
whose homes are close to:
 A water supply
 A fire hydrant
 A good fire department
Rates are higher in areas where crime or severe
weather conditions are common.
757
Section 13.2
Type of Structure
The price of insurance coverage is also
influenced by:
 The type of structure
 The structure’s construction
758
Section 13.2
Price, Coverage Amount, Policy Type

The purchase price of a house directly affects
how much you pay for insurance.
The amount of premium you pay is also affected
by:
 The type of policy you choose
 The amount of coverage you select
 The deductible amount listed on the
policy
759
Section 13.2
Home Insurance Discounts

Most companies offer discounts if a homeowner
takes action to reduce risks to a home.
Your premium and insurance costs may be
lower if you have:
 Smoke detectors
 A fire extinguisher
 Dead-bolt locks
 Alarm systems
760
Section 13.2
Company Differences
A homeowner can save up to 25 percent on
homeowners insurance by:
 Comparing rates from several companies
 Considering service and coverage
State insurance commissions and consumer
organizations can give you information about
different insurance companies.
761
Section 13.3
Motor Vehicle Insurance
Main Idea
Various types of motor vehicle insurance offer
Do you think your different coverages. A variety of factors affect
driving record the cost of insurance.
affects your car
insurance rates?
Why?
762
Section 13.3
Motor Vehicle Bodily Injury

Coverages
Most of the money that motor vehicle insurance
companies pay out in claims goes for:
 Legal expenses
 Medical expenses
 Other costs that arise when someone is
injured
763
Section 13.3
Types of Bodily Injury Coverages

The main types of bodily injury coverages are:
 Bodily injury liability
 Medical payments
 Uninsured motorist’s protection
764
Section 13.3
bodily injury Bodily Injury Liability

liability
Bodily injury liability coverage pays for
insurance that
expenses related to a crash if pedestrians,
covers physical
injuries caused
people in other vehicles, or passengers in your
by a vehicle vehicle are injured or killed.
accident for
which you were
responsible
765
766
Section 13.3
Medical Payments Coverage

Medical payments coverage is insurance for
medical expenses of anyone injured in your
vehicle, including you.
This coverage also provides medical benefits for
you and members of your family:
 While riding in another person’s vehicle
 If any of you are hit by a vehicle
767
Section 13.3
uninsured Uninsured Motorist’s Protection

motorist’s
You can guard yourself and your passengers
protection
against the risk of getting into an accident with
insurance that
covers you and
someone who has no insurance by having
your family uninsured motorist’s protection.
members if you Penalties for driving without insurance generally
are involved in include:
an accident with
 Stiff fines
an uninsured or
hit-and-run  The suspension of driving privileges
driver
768
Section 13.3
Motor Vehicle Property Damage

Coverages
Property damage coverage protects you from
financial loss if:
 You damage someone else’s property.
 Your vehicle is damaged.
It includes property damage liability, collision,
and comprehensive physical damage.
769
Section 13.3
property damage Property Damage Liability

liability
Property damage liability coverage extends to:
motor vehicle
insurance that  Vehicles
applies when  Buildings
you damage the  Equipment such as street signs and
property of
telephone poles
others
It also protects you when you are driving
another person’s vehicle with the owner’s
permission.
770
Section 13.3
collision Collision
insurance
With collision insurance, you will collect money
insurance that
no matter who is at fault.
covers damage
to your vehicle The amount that you can collect is limited to the
when it is actual cash value of your vehicle at the time of
involved in an the accident.
accident
771
Section 13.3
Comprehensive Physical Damage

Comprehensive physical damage insurance
protects you if your vehicle is damaged in a non-
accident situation.
It covers your vehicle against risks such as:
 Fire
 Theft
 Falling objects
 Vandalism
 Hail
 Floods, tornadoes, earthquakes, and
avalanches
772
Section 13.3
no-fault system No-Fault Insurance

an arrangement
To reduce the time and cost of settling vehicle
whereby drivers
who are involved
injury cases, some states are trying a number of
in accidents alternatives, including the no-fault system.
collect money In the no-fault system:
from their own  It does not matter who caused the
insurance
accident.
companies
 Each company pays the insured up to the
limits of his or her coverage.
773
Section 13.3
Other Coverages
Other kinds of available motor vehicle insurance
include:
 Rental reimbursement coverage
 Wage-loss insurance
 Emergency road service coverage
774
Section 13.3
Motor Vehicle Insurance Costs

The average household spends more than
$1,000 for motor vehicle insurance yearly.
To get the best insurance value, you need to
consider:
 Amount of coverage
 Insurance premium factors
 Ways to reduce insurance premiums
775
Section 13.3
Amount of Coverage
The amount that you will pay for insurance
depends on the amount of coverage you
require.
You need enough coverage to protect yourself:
 Legally
 Financially
776
Section 13.3
assigned risk Motor Vehicle Insurance Premium

pool Factors
a group of
people who
Three other factors that influence your
cannot get motor insurance costs are:
vehicle  Vehicle type
insurance  Rating territory
 Driver classification
To deal with driver classification problems,
every state has an assigned risk pool. These
policyholders pay several times the normal
rates.
777
Section 13.3
Reducing Vehicle Insurance Premiums

Two ways in which you can reduce your vehicle
insurance costs are by:
 Comparing companies
 Taking advantage of discounts
No matter what coverage you choose, motor
vehicle insurance is a valuable and mandatory
protection to include in any personal finance
plan.
778
Student Discounts
Many places, such as theaters, zoos, and museums, offer
discount prices to students. You can also get discounts
for buses and subways, movies, and cultural and sporting
events. Be sure to ask before paying full price.
Why do you think businesses offer discounts to
students?
779
Chapter 13
Key Term Review

 insurance  actual cash value
 policy  replacement value
 premium  bodily injury liability
 uninsured motorist’s protection
 risk
 property damage liability
 peril  collision
 hazard  no-fault system
 negligence  assigned risk pool
 deductible
 liability
 homeowners insurance
 personal property floater
 medical payments coverage
780
Chapter 13

1. Identify each type of risk and list the four methods of
managing risk.
Risk is the probability of loss or injury.

Peril is something that may cause a loss.
Hazards increase the probability of loss.
Negligence is failing to take reasonable care to prevent accidents.
Ways of managing risk are:
 Risk avoidance
 Risk reduction
 Risk assumption
 Risk shifting
781
Chapter 13

2. Describe how insurance uses different risk management
methods to reduce risk.
Insurance involves the risk management method of shifting risk: In

exchange for fees, the insurance company pays for losses.
782
Chapter 13

3. Explain how property and liability insurance protect.
Property insurance protects from losses resulting from:

 Natural causes
 Fire
 Criminal activity
Liability insurance covers legal responsibility for the cost of losses
to others.
783
Chapter 13

4. Identify reasons that home mortgage lenders require
homeowners insurance.
A homeowners insurance policy provides coverage for the

following:
 The home, building, or any other structures on the
property
 Additional living expenses
 Personal property
 Specialized coverages
784
Chapter 13

5. Explain the difference between actual cash value and
replacement value.
Actual cash value is the replacement cost of an item minus

depreciation.
Replacement value is the full cost of repairing or replacing an
item.
785
Chapter 13

6. List advantages and disadvantages of the no-fault insurance
system.
In the no-fault system:

 It does not matter who caused the accident.
 Each company pays the insured up to the limits of his
or her coverage.
786
Chapter 13

7. Discuss why lenders require drivers to carry bodily injury
and property damage coverage.
Bodily injury liability coverage pays for expenses related to a

crash if pedestrians, people in other vehicles, or passengers in
your vehicle are injured or killed.
Property damage coverage protects you from financial loss if:
 You damage someone else’s property.
 Your vehicle is damaged.
787
Newsclip: Higher Rates
Car Insurance companies charge higher rates for male teenagers
than for female teenagers.
788
789
Chapter 14
Health, Disability, and Life Insurance
What You’ll Learn

 Section 14.1
 Explain the importance of health insurance in financial
planning.
 Analyze costs and benefits of various health insurance.
 Section 14.2
 Differentiate between private and government health care
plans.
 Section 14.3
 Explain the importance of disability insurance in financial
planning.
 Describe different sources of disability income.
 Section 14.4
 Describe various types of life insurance coverage.
 Identify the key provisions in a life insurance policy.
790
Health Care Costs
 Q: I am a high school student. Why should I be concerned
about my future health care costs now?
 A: Your health care costs, now and in the future, can be
affected by your personal health habits. Many health
problems result from poor habits, such as lack of exercise
or inadequate diet, and may take years to develop. By
establishing good habits now, you can reduce the
likelihood of future health problems and related expenses.
791
Section 14.1
Health Insurance and Financial Planning
Main Idea
Knowing how to determine the type of health
What does major insurance plan that you need can help you meet
medical expense your financial goals even when dealing with
insurance cover? unexpected medical costs.
792
Section 14.1
health insurance What Is Health Insurance?

a form of
Health insurance plans vary, but some of the
protection that
eases the
things that they might cover are:
financial burden  Hospital stays
people may  Doctors’ visits
experience as a
result of illness
 Medications
or injury  Vision and dental care
793
Section 14.1
Group Health Insurance

Most people who have health insurance are
covered under group plans. These plans may be
offered by:
 Employers
 Labor unions
 Professional associations
Group insurance plans cover you and your
immediate family.
794
Section 14.1
Individual Health Insurance

You may want to choose an individual health
insurance plan if:
 You are not offered an employer-
sponsored group insurance plan.
 You are self-employed.
 You are dissatisfied with the coverage
that the group plans provide.
You can buy individual health insurance directly
from the company of your choice.
795
Section 14.1
COBRA
The Consolidated Omnibus Budget
Reconciliation Act of 1986, known as COBRA,
allows an employee who loses his or her job to
keep the former employer’s group coverage for
a set period of time.
Not everyone qualifies for COBRA. In order to
be eligible for the benefits, you have to work for:
 A private company
 A state or local government
796
Section 14.1
Types of Health Insurance Coverage

Several types of health insurance coverage are
available, either through:
 A group plan
 Individual purchase
Some benefits are included in nearly every
health insurance plan; other benefits are less
common.
797
Section 14.1
Basic Health Insurance Coverage

Basic health insurance coverage includes:
 Hospital expense coverage
 Surgical expense coverage
 Physician expense coverage
798
Section 14.1
coinsurance Major Medical Expense Insurance

the percentage of Major medical expense insurance pays the large
the medical
costs involved in:
expenses the
policyholder must  Long hospital stays
pay in addition to  Multiple surgeries
the deductible
To keep premiums lower, most major medical
amount
plans require a deductible or include a
coinsurance provision.
799
Section 14.1
stop-loss provision Stop-Loss Provisions

a provision that Some major medical policies contain a stop-loss
requires the provision.
policyholder to pay
all costs up to a Typically, the policyholder will pay between
certain amount, $3,000 and $5,000 in out-of-pocket expenses
after which the before the coverage begins.
insurance company
pays 100 percent of
the remaining
expenses covered in
the policy
800
Section 14.1
Hospital Indemnity Policies

A hospital indemnity policy pays benefits when
you are hospitalized. Under these policies, you
are paid in cash, which you can spend on
medical or nonmedical expenses as you
choose.
The average person who buys such a policy
usually pays much more in premiums than he or
she receives in payments.
801
Fitness Fun
Expensive exercise clothes may look good, but they
usually do not improve your workout. If you cannot afford
to pay to join a health club, you can get your exercise by
walking or jogging in your neighborhood or at your
school’s track.
How can staying fit save you money?
802
Section 14.1
Dental Expense Insurance

Dental expense insurance provides
policyholders reimbursement for the expenses
of:
 Dental services
 Supplies
Some dental expense policies do not cover X-
rays and cleanings.
803
Section 14.1
Vision Care Insurance

Many insurance companies offer vision care
insurance as part of group plans. Vision care
insurance may cover:
 Eye examinations
 Glasses
 Contact lenses
 Eye surgery
 Treatment of eye diseases
804
Section 14.1
Dread Disease Policies

Dread disease, trip accident, death insurance,
and cancer policies are usually sold:
 Through the mail
 In newspapers
 In magazines
These policies play upon unrealistic fears, and
they are illegal in many states.
805
Section 14.1
Long-Term Care Insurance

Long-term care insurance provides coverage for
the expense of daily help that you may need if
you:
 Become seriously ill or disabled
 Are unable to care for yourself
806
Section 14.1
co-payment Major Provisions in a Health

a flat fee that you Insurance Policy
pay every time
you receive a The following provisions are included in most
covered service health insurance policies:
 Eligibility
 Assigned benefits
 Internal limits
 Co-payment
 Service benefits
 Exclusions and limitations
807
Section 14.1
Choosing Coverage
The type of coverage you choose will be
affected by:
 The amount you can afford to spend on
the premiums
 The level of benefits that you feel you
want and need
 The kind of coverage your employer
offers
Ideally, you should get a basic plan and a major
medical supplement.
808
Section 14.1
Health Insurance Trade-Offs

As you decide which insurance plan to buy, you
should consider the following trade-offs:
 Reimbursement versus indemnity
 Internal limits versus aggregate limits
 Deductibles and coinsurance
 Out-of-pocket limits
 Benefits based on reasonable and
customary charges
809
810
Section 14.2
Private and Government Plans
Main Idea
Understanding plans offered by private
companies and by the government will help you
What is the
choose the plan that best meets your physical
difference between
insurance and financial needs now and as you get older.
provided by
private
organizations and
insurance
provided by the
government?
811
Section 14.2
Private Health Care Plans

Private health care plans may be offered by a
number of sources:
 Private insurance companies
 Hospital and medical service plans
 Health maintenance organizations
 Preferred provider organizations
 Home health care agencies
 Employer self-funded health plans
812
Section 14.2
Private Insurance Companies

Private insurance companies provide health
plans mainly to employers, who in turn offer
them to their employees as an employment
benefit.
These policies typically pay for medical costs by
sending payments directly to the doctor,
hospital, or lab that provides the services.
813
Section 14.2
Blue Cross Hospital and Medical Service Plans

an insurance company Blue Cross and Blue Shield are statewide
that provides hospital organizations similar to private health insurance
care benefits
companies.
Blue Shield The “Blues” provide health insurance to millions
an insurance company of Americans.
that provides benefits
for surgical and
medical services
performed by
physicians
814
Section 14.2
managed care Managed Care

prepaid health According to a recent industry survey, 23
plans that provide
percent of employed Americans are enrolled in
comprehensive
health care to their
some form of managed care, due to rising health
members care costs.
Managed care is offered by:
(HMOs)
 Preferred provider organizations (PPOs)
 Point-of-service plans (POSs)
815
PROMOTING HEALTH HMOs are based on the idea that
preventive services will minimize future medical problems.
What kinds of preventive services do HMOs offer?
816
Section 14.2
health maintenance Health Maintenance Organizations

organizations (HMO) One managed-care option is a health
a health insurance maintenance organization (HMO). HMOs
plan that contracts
typically cover:
with selected
physicians and other  Routine immunizations and checkups
medical  Screening programs
professionals to
 Diagnostic tests
provide health care
services in exchange They also provide customers with coverage for
for a fixed, prepaid surgery, hospitalization, and emergency care.
monthly premium
817
Section 14.2
preferred Preferred Provider Organizations

provider A variation on the HMO is a preferred provider
organization
organization (PPO).
(PPO)
a group of While HMOs require members to receive care
doctors and from HMO providers only, PPOs allow members
hospitals that greater flexibility.
agree to provide
specified
medical services
to members at
prearranged fees
818
Section 14.2
point-of-service Point-of-Service (POS) Plan

(POS) plan A point-of-service (POS) plan combines features
a health of both HMOs and PPOs.
insurance plan
that combines As with an HMO, you choose a plan physician
features of both who:
HMOs and PPOs  Manages your care
 Controls referrals to specialists
You are allowed to seek care outside the
network at a higher charge, as with a PPO.
819
Section 14.2
Home Health Care Agencies

Home care has become one of the fastest-
growing areas of the health care industry, due
to:
 Rising hospital costs
 New medical technology
 The increasing number of elderly people
Home health care providers offer medical care
in a home setting in agreement with a medical
order, often at a fraction of the cost charged by
hospitals for similar services.
820
Section 14.2
Employer Self-Funded Health Plans

Some companies choose to self-insure. A
company that runs its own insurance plan:
 Collects premiums from employees
 Pays medical benefits as needed
 Must cover any costs that exceed the
income from premiums
821
Section 14.2
Government Health Care Programs

Some consumers are eligible for health
insurance coverage under programs offered by
federal and state governments.
The federal program is Medicare, and the
federal and state program is Medicaid.
822
Section 14.2
Medicare Medicare
a federally funded Perhaps the best-known government program is
health insurance
Medicare. Medicare has two parts:
program available
mainly to people  Hospital insurance
over 65 and to  Medical insurance
people with certain
Hospital insurance is funded by part of the
disabilities
Social Security payroll tax.
823
Section 14.2
What Is Not Covered by Medicare?

The expenses that Medicare will not cover
include:
 Certain types of skilled or long-term
nursing care
 Out-of-hospital prescription drugs
 Routine checkups
 Dental care
 Most immunizations
Medicare also limits the types of services it will
offer and the amount it will pay for those
services.
824
Section 14.2
Medicaid Medicaid
a medical Medicaid is administered by the individual
assistance
states, but it is financed by a combination of
program offered
to certain low-
state and federal funds.
income Typical Medicaid benefits include:
individuals and  Physicians’ services
families
 Inpatient hospital services
 Outpatient hospital services
 Lab services
 Skilled nursing and home health services
 Prescription drugs
 Eyeglasses
825
Section 14.2
Government Consumer Health

Information Web Sites
The Department of Health and Human Services
operates more than 60 Web sites that contain a
wealth of reliable information related to health
and medicine.
Some of these sites include:
 Healthfinder
 MedlinePlus
 NIH Health Information
 FDA
826
Section 14.3
Disability Insurance
Main Idea
Disability income insurance is important if you
What might become unable to work.
disability
insurance cover?
827
Section 14.3
disability income Disability Income

insurance
Disability income insurance protects your
coverage that
provides regular
earning power, which is your most valuable
cash income resource.
when you are This kind of coverage is very common today,
unable to work and several hundred insurance companies
due to a offer it.
pregnancy, non-
work-related
accident, or
illness
828
Section 14.3
Sources of Disability Income

Before you buy disability income insurance from
a private insurance company, remember that
you may already have some form of this
insurance.
This coverage may be available through:
 Worker’s compensation if you are injured
on the job
 Your employer
 Social Security
829
Section 14.3
Disability Insurance Trade-Offs

Some of the factors that you should consider as
you look for a health or disability insurance plan
include:
 Waiting or elimination period
 Duration of benefits
 Amount of benefits
 Accident and sickness coverage
 Guaranteed renewability
830
Section 14.3
Your Disability Income Needs

Ideally, you want your disability income to
replace all the income you otherwise would
have earned.
This money should enable you to pay your day-
to-day expenses while you are recovering.
831
Section 14.4
Life Insurance
Main Idea
Making decisions about life insurance and
Who do you think choosing the right policy takes time, research,
would need life and careful thought.
insurance most, a
65-year-old
widower with
grown children or
a single mother
with three young
children?
832
Section 14.4
Life Insurance
beneficiary What Is Life Insurance?

a person named
When you buy life insurance:
to receive the
benefits from an  You agree to pay a certain amount of
insurance policy money—the premium—periodically.
 The company agrees to pay a death
benefit to your beneficiary.
833
Section 14.4
Life Insurance
The Purpose of Life Insurance

Life insurance benefits may be used to:
 Protect the people who depend upon you
from financial losses caused by your
death
 Pay off a home mortgage or other debts
at the time of death
 Provide an education or income for
children
 Make charitable donations after death
 Provide a retirement income
 Accumulate savings
 Pay estate and death taxes
834
Section 14.4
Life Insurance
The Principle of Life Insurance

Over the years, insurance companies have
compiled tables that show an estimate of how
long people live. Using these tables, the
companies:
 Make a rough guess about a person’s life
span
 Set the price of insurance premiums for
him or her accordingly
The sooner a person is likely to die, the higher
the premium he or she will pay to have life
insurance.
835
Section 14.4
Life Insurance
How Long Will You Live?

If history is any guide, you will live longer than
your ancestors lived. In 1900, life expectancy
was:
 46.3 years for an American male
 48.3 years for an American female
By the year 2000, the life expectancy increased
to 74 years for men and 80 years for women.
836
Section 14.4
Life Insurance
Do You Need Life Insurance?

Generally, if your death would cause financial
hardship for somebody, then life insurance is a
wise purchase.
Households with children usually have the
greatest need for life insurance.
837
Section 14.4
Life Insurance
Types of Life Insurance Policies

You can purchase life insurance from:
 Stock life insurance companies, which
are owned by shareholders
 Mutual life insurance companies, which
are owned by their policyholders
Insurance policies can be divided into two types:
term insurance and whole life insurance.
838
Section 14.4
Life Insurance
term insurance Term Insurance

insurance that A term insurance policy pays a benefit only if
provides
you die during the period it covers. Term
protection against
loss of life for
insurance comes in many different forms:
only a specified  Renewable term
term, or a period  Multiyear level term
of time
 Conversion term
 Decreasing term
Term insurance is often the best value for most
consumers.
839
Section 14.4
Life Insurance
whole life insurance Whole Life Insurance

a permanent policy Whole life insurance can serve as an
for which you pay a
investment. With whole life insurance:
specified premium
each year for the rest  Part of each premium you pay is set
of your life aside in a savings account
cash value  When and if you cancel the policy, you
are entitled to the accumulated savings,
in a whole life policy,
the accumulated or cash value
savings to which you Whole life policies are popular because they
are entitled when provide both a death benefit and a savings
and if you cancel the component.
policy
840
Section 14.4
Life Insurance
Types of Whole Life Insurance

Several types of whole life insurance have been
developed to meet the needs of different
customers. These include:
 The limited payment policy
 The variable life policy
 The adjustable life policy
 The universal life insurance
841
Section 14.4
Life Insurance
endowment Other Types of Life Insurance Policies

life insurance that Other types of life insurance policies include:
provides coverage
for a specific period  Group life insurance
of time and pays a  Credit life insurance
sum of money to the  Endowment life insurance
policyholder if he or
she is living at the
end of the
endowment period
842
Section 14.4
Life Insurance
Key Provisions in a Life Insurance

Policy
Study the provisions in your policy carefully and
be sure to update the necessary information as
changes in your life occur.
843
Section 14.4
Life Insurance
Beneficiary Designation
You decide who receives the benefits of your life
insurance policy. The beneficiary could be:
 Your spouse
 Your child
 Your business partner
You can also name contingent beneficiaries,
those who will receive the money if your primary
beneficiary dies before or at the same time as
you do.
844
Section 14.4
Life Insurance
Incontestability Clause
The incontestability clause:
 Says that the insurer cannot cancel the
policy if it has been in force for a
specified period
 Protects the beneficiaries from financial
loss in the event that the insurance
company refuses to meet the terms of the
policy
845
Section 14.4
Life Insurance
Suicide Clause
Many insurance policies state that in the first
two years of coverage, beneficiaries of someone
who dies by suicide receive only the amount of
the premium paid.
Some insurance policies will not provide
benefits at all if a policyholder dies by suicide.
846
Section 14.4
Life Insurance
Riders to Life Insurance Policies

An insurance company can change the
conditions of an insurance policy by adding a
rider to it.
Examples of riders include:
 A waiver of premium disability benefit
 An accidental death benefit
 A guaranteed insurability option
847
Section 14.4
Life Insurance
Insurance Needs
Before you buy any type of insurance, you
should always consider a number of factors,
such as:
 Your source of income
 Financial responsibilities
 Savings
 Net worth
As your life situation and goals change, you
need to regularly evaluate your insurance needs
to determine if you have the right kind of
coverage to support your personal financial
plan.
848
Chapter 14
Key Term Review

 health insurance  Medicaid
 coinsurance  disability income insurance
 stop-loss  beneficiary (insurance)
 co-payment  term insurance
 Blue Cross  whole life insurance
 Blue Shield  cash value
 managed care  endowment
 health maintenance organization (HMO)
 preferred provider organization (PPO)
 point-of-service (POS) plan
 Medicare
849
Chapter 14

1. Explain how increasing co-payments and deductibles affects
premium rates.
The cost of a health insurance policy is affected by the size of the

deductible, which is the set amount that the policyholder must pay
toward medical expenses before the insurance company pays
benefits.
It can also be affected by the terms of the coinsurance provision.
850
Chapter 14

2. Discuss basic health insurance coverage and major medical
expense insurance.
Health insurance plans vary, they might cover:

 Hospital stays and doctors’ visits
 Medications
 Vision and dental care
Major medical expense insurance pays the large costs involved in:
 Long hospital stays
 Multiple surgeries
851
Chapter 14

3. Compare government health care programs and those
offered by private companies.
Private health care plans are offered by:

 Private insurance companies
 Hospital and medical service plans
 Preferred provider organizations
 Home health care agencies
 Employer self-funded health plans
Government health care programs are Medicare and Medicaid.
852
Chapter 14

4. Explain the importance of disability insurance in financial
planning.
Disability insurance provides regular cash income for people who

are unable to work due to:
 Pregnancy
 A non-work-related accident
 Illness
853
Chapter 14

5. Describe the advantages of worker’s compensation.
If your disability is the result of an accident or illness that

occurred on the job, you may be eligible to receive worker’s
compensation benefits. The amount of benefits will depend on:
 Your salary
 Your work history
854
Chapter 14

6. Identify the types of term and whole life insurance.
Term insurance comes in many different forms:

 Renewable term
 Multiyear level term
 Conversion term
 Decreasing term
Whole life insurance is a permanent policy for which you pay a
specified premium each year for the rest of your life.
855
Chapter 14

7. Explain the key provisions of life insurance.
The key provisions in a life insurance policy include:

 Naming a beneficiary
 An incontestability clause
 A suicide clause
 Policy riders
856
A health savings account (HSA) is a plan that allows employees
to save for medical expenses in a tax-free account.
857
858
Chapter 15
Retirement and Estate Planning
What You’ll Learn

 Section 15.1
 Explain the importance of retirement planning.
 Identify retirement living costs and housing needs.
 Section 15.2
 Describe the role of Social Security in planning for
retirement.
 Discuss the benefits offered by employer pension plans.
 Explain various personal retirement plans.
 Section 15.3
 Identify various types of wills.
 Discuss several types of trusts.
 Describe common characteristics of estates.
 Identify the types of taxes that affect estates.
859
Will Power
 Q: My parents do not have a lot of money, so is it really that
important for them to write up a will?
 A: Even if your parents do not have a lot of money, they
should have a will. If they die without a will, their state of
residence will step in and control how their estate is
distributed. It costs somewhere between $200 and $350 to
have an attorney draft a will. The peace of mind it will
provide your parents will be worth the cost.
860
Section 15.1
Retirement Planning
Main Idea
Estimating your retirement living costs and
When do you housing needs will enable you to save or invest
think you should enough money to live comfortably during
begin planning for retirement.
your retirement?
861
Section 15.1
Retirement Planning
Planning for Retirement

It is never too early to start planning for
retirement.
Some of the many myths about retirement are:
 Saving a small amount of money will not
help.
 You will spend less money when you
retire.
 You can depend on Social Security and a
company pension plan to pay your basic
living expenses.
 Your employer’s health insurance plan
and Medicare will cover all your medical
expenses.
862
Section 15.1
Retirement Planning
Setting Long-Range Goals

As you think about your retirement years,
consider your long-range goals. Ask yourself:
 Where do you want to live after you
retire?
 What type of lifestyle would you like to
have?
Then analyze your current financial situation to
determine what you need to do to reach your
long-range goals.
863
Section 15.1
Retirement Planning
Conducting a Financial Analysis

To conduct a financial analysis, you will need to
analyze your:
 Assets
 Liabilities
If you subtract your liabilities from your assets,
you get your net worth. Ideally, your net worth
should increase each year.
864
Section 15.1
Retirement Planning
Reviewing Assets
Review your assets on a regular basis. To stay
on track with your goal, you may need to make
adjustments in your:
 Saving
 Spending
 Investments
As you review your assets, you will also need to
consider the following factors:
 Housing
 Life insurance
865
Section 15.1
Retirement Planning
Retirement Living Expenses

When planning for retirement, estimate how
much money you will need to live comfortably
during your retirement years.
During your retirement years, you may spend
more money on:
 Recreation
 Health insurance
 Medical care
Remember to take inflation into account.
866
Section 15.1
Retirement Planning
Retirement Housing
The place where you live can have a significant
impact on your financial needs. In the years
before retirement, use vacations to explore
areas and cities where you might want to settle.
Meet people who live in the area and learn
about:
 Activities
 Transportation
 Taxes
867
Section 15.1
Retirement Planning
Retirement Relocation Pitfalls

Consider the downsides of moving to a new
location. These might include:
 Getting stuck in a place you do not really
like
 Missing your children, grandchildren,
friends, and relatives left behind
 Making a financial mistake in moving
868
Section 15.1
Retirement Planning
Researching Locations
Here are some tips from specialists on how to
research taxes and other costs before moving to
a new area:
 Contact the local chamber of commerce
for details on area property taxes and the
local economy.
 Contact the state tax department to
research income, sales, inheritance
taxes, and exemptions for retirees.
 Read the Sunday edition of the local
newspaper of the town or city you are
considering.
869
Section 15.1
Retirement Planning
assisted-living Types of Housing

facility (ALF)
Even if you do not move to a new location,
a residence
housing needs may change during retirement.
complex that
provides personal
Many retirees want a home that is:
and medical  Easy and inexpensive to maintain
services for the  Close to public transportation, stores, and
elderly recreation areas
Many elderly people move into assisted-living
facilities during their retirement years.
870
Section 15.2
Planning Retirement Income
Main Idea
Various types of retirement plans are suited to
Besides Social different financial situations and personal needs.
Security, what
other retirement
plans might be
available?
871
Section 15.2
Public Pension Plans

Public pension plans are established by:
 States
 Municipalities
Social Security is a public pension plan
established by the United States government in
1935.
872
Section 15.2
Social Security
Social Security is an important source of
retirement income for many Americans.
The amount of Social Security retirement
benefits you receive is based on your earnings
over the years. Each year the Social Security
Administration will send you:
 A history of your earnings
 An estimate of your future monthly
benefits
873
Section 15.2
Other Public Pension Plans

The federal government provides other special
retirement plans for:
 Federal government workers
 Railroad employees
The Veterans Administration provides pensions
for survivors of people who died while serving in
the armed forces.
874
Section 15.2
Employer Pension Plans

Another possible source of retirement income is
an employer pension plan.
Private employer pension plans vary. If the
company you work for offers one, find out:
 What benefits you will receive
 When you will become eligible to receive
those benefits
875
Section 15.2
defined-contribution
plan Defined-Contribution Plan
an individual retirement With a defined-contribution plan, the employer
account for each contributes a specific amount to the account
employee annually.
401(k) plan Several types of defined-contribution plans are:
a type of retirement  Money-purchase plans
savings plan funded by a
portion of your salary  Stock bonus plans
that is deducted from  Profit-sharing plans
your gross paycheck and  401(k) plans
placed in a special
account
 403(b) plans
876
Section 15.2
vesting Vesting
the right of an One of the most important aspects of employer
employee to keep pension plans is vesting. Vesting occurs at
the company’s
different points in time, depending on company
contributions from
company-
policy.
sponsored plans, After a certain number of years with a company,
even if the you become fully vested, or entitled to receive
employee no 100 percent of the company’s contributions to
longer works for the plan on your behalf.
that employer
877
Section 15.2
defined-benefit Defined-Benefit Plan

plan
A defined-benefit plan does not specify how
a retirement plan
much the employer must contribute each year.
that specifies the
benefits an Instead, your employer’s contributions are
employee will based on how much money the fund will need
receive at for each participant in the plan who retires.
retirement age,
based on total
earnings and
years on the job
878
Section 15.2
Moving to Another Plan

Some pension plans allow “portability,” which
means that you can carry earned benefits from
one pension plan to another when you change
jobs.
Workers are also protected by the Employee
Retirement Income Security Act of 1974
(ERISA), which sets minimum standards for
pension plans.
879
Section 15.2
Personal Retirement Plans

Many people choose to set up personal
retirement plans. Such plans are especially
important to:
 Self-employed people
 Other workers who are not covered by
employer pension plans
Among the most popular personal retirement
plans are individual retirement accounts (IRAs)
and Keogh accounts.
880
Section 15.2
individual Individual Retirement Accounts

retirement
There are various types of IRAs, including:
account (IRA)
a special account  Regular IRA
in which a person  Roth IRA
saves a portion of  Simplified Employee Pension (SEP) IRA
income for
retirement  Spousal IRA
 Rollover IRA
 Education IRA
The biggest benefit of an IRA lies in its tax-
deferred earnings growth.
881
Section 15.2
IRA Withdrawals
When you retire, you can withdraw the money
from your IRA by:
 Taking out all of the money at one time
and letting the entire amount be taxed as
income
 Withdrawing the money from your IRA in
installments and only being taxed on the
amount that you withdraw
882
Section 15.2
Keogh plan Keogh Plans

a retirement plan Keogh plans have various restrictions, including
specially designed
limits on the amount of annual tax-deductible
for self-employed
people and their
contributions you can make.
employees You should get professional tax advice before
using this type of personal retirement plan.
883
Section 15.2
Limits on Retirement Plans

When you retire, you must begin to receive
“minimum lifetime distributions,” withdrawals
from the funds you have accumulated through
your plan.
The amount of the distributions is based on your
life expectancy at the time the distributions
begin.
884
885
Section 15.2
annuity insurance Annuities

a contract purchased
You can buy annuity insurance to supplement
from an insurance
company that
the income you will receive from other types of
guarantees a future retirement plans.
fixed or variable You can choose to purchase an annuity that
payment to the has:
purchaser for a certain
 Single payment
number of years or for
life  Installment payments
The payments you receive from an annuity are
taxed as ordinary income.
886
GOLDEN TIME With continuing revisions in the Social Security
system, many people are thinking ahead and making
arrangements for supplemental income in their golden years.
What advantage does an annuity offer?
887
Section 15.2
Types of Annuities
Annuities may be either:
 Immediate
 Deferred
The rate of return on an annuity is usually tied to
overall interest rates.
888
Section 15.2
Costs of Annuities
There are various choices regarding the type of
annuity and the annuity income it will generate.
You should discuss all of the possible options
with an insurance agent, including:
 Charges
 Fees
 Interest-rate guarantees
Be sure to check the financial health of the
insurance company that offers the annuity.
889
Time to Save
Saving money in a savings or retirement account is the
simplest way to build assets for retirement. Starting to save
while you are young may even allow early retirement. However,
if you have 30 or 40 years until retirement, every year without
saving can subtract from one to five years off retirement.
At what age will you want to retire?
890
Section 15.2
Living on Retirement Income

When the time to retire arrives, you may need to
make some adjustments to your budget or
spending plan.
To do so, you will need to:
 Make sure that you are getting all the
income to which you are entitled.
 Think about any assets or valuables you
might be able to convert to cash or into
other sources of income.
 Re-examine the trade-off between
spending and saving.
891
Section 15.2
Working During Retirement

Retirees can use their skills and time instead of
spending money. After retiring, some people
decide to:
 Work part-time
 Take new full-time jobs
 Keep active and pursue new careers
Work can provide a person with a greater sense
of usefulness, involvement, and self-worth.
892
Section 15.2
heirs Using Your Nest Egg

the people who When should you take money out of your “nest
will have the legal
egg,” or savings, during retirement? The answer
right to your
assets when you
depends on:
die  Your financial circumstances
 Your age
 How much you want to leave to your
heirs
Whatever your situation, you should try to
conserve your retirement fund to make it last.
893
Section 15.3
Estate Planning and Taxes
Main Idea
Different types of wills and trusts protect your
What is your financial interests and those of your family.
definition of a will? Applying strategies for paying estate taxes can
help limit expenses for your heirs.
894
Section 15.3
estate The Importance of Estate Planning

all property and
During your working years, your financial goal is
assets owned by
an individual or
to build your estate by acquiring and
group accumulating money for your current and future
needs.
As you grow older, you will start to think about
what will happen to your hard-earned wealth
after you die. That is when estate planning
becomes important.
895
Section 15.3
estate planning What Is Estate Planning?

the process of
creating a detailed Estate planning is an essential part of retirement
plan for managing planning and financial planning. Its two stages
personal assets to are:
make the most of
them while you are  Building your estate through savings,
alive and to ensure investments, and insurance
that they are  Making sure that your estate will be
distributed wisely
after your death distributed as you wish at the time of your
death
beneficiary (estate)
a person who is
Your beneficiary (estate) is a person you name
named to receive a to receive all or part of your estate.
portion of
someone’s estate
896
Section 15.3
will Legal Documents

a legal declaration An estate plan involves various legal
of a person’s documents, such as a will, which your heirs will
wishes regarding need to receive the money and other assets to
disposal of his or which they are entitled.
her estate after You should collect and organize various
death important papers, including:
 Birth certificates for you, your spouse,
and your children
 Marriage certificates and divorce papers
 Social Security documents
 Safe-deposit box records
 Automobile registrations
897
Section 15.3
intestate Wills
the status of not
One of the most important documents that every
having a valid will
adult should have is a written will.
If you die intestate, your legal state of residence
will control the distribution of your estate without
regard for your wishes.
898
Section 15.3
trust Types of Wills

an arrangement in The four basic types of wills are the:
which a
designated  Simple will
person known as  Traditional marital share will
a trustee  Exemption trust will
manages assets
for the benefit of  Stated dollar amount will
someone else All types of wills usually designate a beneficiary.
An estate can also be held in trust for a family.
899
Section 15.3
probate Wills and Probate

the legal The type of will that is best for your particular
procedure of
needs depends on many factors, including:
proving that a will
is valid or invalid  The size of your estate
 Inflation
 Your age
 Your objectives
No matter what type of will you choose, it is best
to avoid probate.
900
Section 15.3
Formats of Wills
Wills may be either:
 Holographic (handwritten)
 Formal
A statutory will is prepared on a preprinted form,
which is available from:
 Lawyers
 Office-supply stores
 Some stationery stores
901
Section 15.3
executor Writing Your Will

a person who is Some guidelines for writing a will include:
willing and able to
perform the tasks  Work closely with your spouse or partner
involved in to prepare your will.
carrying out a will  Write your will to conform to your current
wishes.
 Do not choose a beneficiary as a witness.
 Consider using percentages instead of
dollar amounts.
 Select an executor who is willing to do
the needed tasks.
902
Section 15.3
guardian Selecting a Guardian

the person who If you have children, your will should name a
accepts the guardian to care for them in the event that:
responsibility of
caring for the  You and your spouse die at the same
children of the time.
deceased and  The children cannot care for themselves.
managing an
estate for the
children until they
reach a certain
age
903
Section 15.3
codicil Altering or Rewriting Your Will

a document that Some reasons to review and change your will
explains, adds, or are:
deletes provisions
in an existing will  You have moved to a new state that has
different laws.
 You have sold property that is mentioned
in the will.
 You have married, divorced, or remarried.
 Potential heirs have died or new ones
have been born.
If you want to make only a few minor changes,
adding a codicil may be the best choice.
904
Section 15.3
living will A Living Will

a legal document
At some point in your life, you may become
in which you state
if you want to be
physically or mentally disabled and unable to act
kept alive by on your own behalf.
artificial means if If that happens, a living will can help ensure that
you become you will be cared for according to your wishes.
terminally ill and
are unable to
make such a
decision
905
Section 15.3
power of Power of Attorney

attorney
If you become seriously ill or injured, you will
a legal document
probably need someone to take care of your:
that authorizes
someone to act  Needs
on your behalf  Personal affairs
This can be done through a power of attorney.
906
Section 15.3
Letter of Last Instruction

A letter of last instruction is legally binding and
allows you to:
 Express preferences for funeral
arrangements
 Include names of the people who are to
be informed of the death
 Let people know the locations of your
bank accounts, safe-deposit box, and
other important items
907
Section 15.3
Trusts
Some of the common reasons for setting up a
trust are to:
 Reduce or provide for payment of estate
taxes
 Avoid probate and transfer your assets
immediately to your beneficiaries
 Free yourself from managing your assets
while you receive a regular income from
the trust
 Ensure that your property serves a
desired purpose after your death
908
Section 15.3
Types of Trusts
There are many types of trusts, including:
 Credit-shelter trusts
 Disclaimer trusts
 Living trusts
 Testamentary trusts
An estate attorney can advise you about the
right type of trust for your needs.
909
Section 15.3
Your Estate
An important step in estate planning is taking
inventory of your assets. Do not forget to
include:
 Jointly owned property
 Life insurance policies
 Employee retirement benefits
 Money owed to you by others
 All of your personal possessions
910
Section 15.3
Joint Ownership
There are three types of joint ownership, each of
which has different tax and estate planning
consequences.
These types allow:
 Spouses to own property as “joint tenants
with the right of survivorship”
 Spouses to own property as “tenants in
common”
 Married couples to own property under
the form of “tenancy by the entirety”
911
Section 15.3
Life Insurance and Employee Benefits

If you have life insurance, the benefits of that
insurance will be counted among the assets in
your estate.
Death benefits from qualified employer pension
plans or Keogh plans are usually excluded from
an estate.
912
Section 15.3
Lifetime Gifts and Trusts

You may give part of your estate as a gift or set
up a trust for your spouse or child.
If you keep any control or use of the gift or trust,
it:
 Remains part of your estate
 Is subject to taxes
913
Section 15.3
Taxes and Estate Planning

Federal and state governments impose various
types of taxes that you must consider in estate
planning.
The four major types of taxes are:
 Estate taxes
 Estate and trust federal income taxes
 Inheritance taxes
 Gift taxes
914
Section 15.3
Estate Taxes
An estate tax is a federal tax collected on the
value of a person’s property at the time of his or
her death.
The tax is based on the fair market value of the
deceased person’s assets, such as:
 Investments
 Property
 Bank accounts
915
Section 15.3
Estate and Trust Federal Income Taxes

In addition to the federal income tax return,
owners of estates and certain trusts must file
federal income tax returns with the IRS.
Taxable income for estates and trusts is figured
in the same manner as taxable income for
individuals.
916
Section 15.3
Inheritance Taxes
Your heirs might have to pay a tax for the right
to acquire the property that they have inherited.
Only state governments impose inheritance
taxes. State laws differ regarding:
 Exemption
 Rates of taxation
917
Section 15.3
Gift Taxes
One way to reduce the tax liability of your estate
is to reduce the size of the estate while you are
alive by giving away portions of it as gifts.
Both the federal and state governments impose
a gift tax, a tax collected on money or property
valued at more than $11,000 given by one
person to another in a single year.
918
Section 15.3
Paying the Tax

Finding enough cash to pay taxes, debts, and
other costs without causing financial hardship
can be very difficult.
You can handle this problem by:
 Obtaining life insurance
 Saving enough cash ahead of time to pay
taxes and expenses when they are due
Your heirs might be able to:
 Sell assets to pay taxes
 Borrow money
919
Section 15.3
Planning for the Future

Estate planning is essential to:
 Ensure that your assets are distributed in
the way you choose
 Make sure that your loved ones are not
left with difficult or costly problems
Planning and saving for your own retirement will
help ensure that your needs are met in your
later years.
920
Chapter 15
Key Term Review

 assisted-living facility (ALF)  beneficiary (estate)
 defined-contribution plan  will
 401(k) plan  intestate
 vesting  trust
 defined-benefit plan  probate
 individual retirement account (IRA)  executor
 Keogh plan  guardian
 annuity (insurance)  codicil
 heirs  living will
 estate  power of attorney
 estate planning
921
Chapter 15

1. Identify three ways expenses decrease at retirement.
When you retire, you may spend less money on:

 Transportation
 Clothing
 Federal income taxes
922
Chapter 15

2. Describe alternative living and housing arrangements for
retirement.
Many retirees want a home that is easy and inexpensive to

maintain, such as:
 A smaller house
 A condominium
 An apartment
923
Chapter 15

3. Identify two reasons Social Security should not be a primary
source of retirement funds.
Social Security was not designed to provide 100 percent of

retirement income.
In addition, current and future revisions to the program may
Reduce retirement benefits in years to come.
924
Chapter 15

4. Define employer-sponsored defined-contribution plans and
defined-benefit plans.
A defined-contribution plan is an individual retirement account for

each employee.
A defined-benefit plan is a retirement plan that specifies the
benefits an employee will receive at retirement age, based on
total earnings and years on the job.
925
Chapter 15

5. Explain the advantages of the Roth IRA over a regular IRA.
Unlike a regular IRA, a Roth IRA allows you to continue to make

annual contributions to your IRA even after age 70½.
926
Chapter 15

6. Explain why creating a living will is an important part of
estate planning.
At some point in your life, you may become physically or mentally

disabled and unable to act on your own behalf.
If that happens, a living will can help ensure that you will be cared
for according to your wishes.
927
Chapter 15

7. Describe the major advantages of trusts.
Some of the common reasons for setting up a trust are to:

 Reduce or provide for payment of estate taxes
 Avoid probate and transfer your assets immediately to
your beneficiaries
 Free yourself from managing your assets while you
receive a regular income from the trust
 Ensure that your property serves a desired purpose
after your death
928
Chapter 15

8. Explain what it means to be an executor of an estate.
An executor is a person who is willing and able to perform the

tasks involved in carrying out a will.
929
Chapter 15

9. List some estate planning methods to reduce inheritance
taxes.
One way to reduce the tax liability of your estate is to reduce the
size of the estate while you are alive by giving away portions of it
as gifts.
930
Social Security reform has been highly debated in the news for
years. Many politicians aim to change the system.
931

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What You’ll Learn

Video Clip: Why Have a Financial Plan?

Business and Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/McGraw- 3

Personal Financial Personal Financial Decisions

goals The financial planning process has six steps to

values Step 2: Develop Your Financial Goals

Step 3: Identify Your Options

opportunity cost Step 4: Evaluate Your Alternatives

liquidity Understanding Risks

Step 5: Create and Use Your Financial

Step 6: Review and Revise Your Plan

Developing Personal Financial Goals

Types of Financial Goals

Time Frame of Goals

service Goals for Different Needs

Guidelines for Setting Goals

Influences on Personal Financial

Life Situations and Personal Values

economics Economic Factors

supply Market Forces

Federal Reserve The Federal Reserve System

Its decisions affect:

inflation Consumer Prices

consumer Consumer Spending

interest Interest Rates

Business and Personal Finance Unit 1 Chapter 1 © 2007 Glencoe/McGraw-Hill 29

Personal and Financial Opportunity

Personal Opportunity Costs

time value of Financial Opportunity Costs

principal Calculating Interest

future value Future Value of a Single Deposit

annuity Deposit Values

Achieving Your Financial Goals

Strategies to Achieve Your Financial

Developing and Using a Financial Plan

Key Term Review

Reviewing Key Concepts

Personal financial planning is arranging to spend, save, and

Reviewing Key Concepts

The six steps of financial planning are

Reviewing Key Concepts

The three most important factors that influence your

Reviewing Key Concepts

An opportunity cost is what is given up when making one choice

Reviewing Key Concepts

The following are eight strategies for achieving financial goals:

What You’ll Learn

job Choosing a Career

Career Decision Trade-Offs

standard of Choosing a Career

trends Opportunity Costs

potential earning Career Training and Skill Development

Checklist for Success

aptitudes Personal Factors

Stages of Career Planning

External Factors and Opportunities

External Influences on Your Career

demographic Social Influences

geographic Geographic Trends