FHCE Lecture Notes August 22, August 24, August 26
FHCE Lecture Notes August 22, August 24, August 26 FHCE 3200
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This 9 page Class Notes was uploaded by Morgan Notetaker on Friday August 26, 2016. The Class Notes belongs to FHCE 3200 at University of Georgia taught by Matthew Goren in Fall 2016. Since its upload, it has received 59 views.
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Date Created: 08/26/16
August 22 Module 1g,h Recap with Goren APR= often quoted by anyone you’re going to go into debt with; annual percent interest rate APR divided by number of payment periods a year, add up all those monthly charges to get APY (Actual interest rate given that there’s going to be compound interest) Ex. APR is 2.4%. Monthly interest rate is 2.4%/ 12= .2% o Take your principal ($1000) and divide by .2% every month o First month is $2. Next month you multiply $1002 by .2% to get $2.004, and so one When you’re on the investment side, they quote the APY to make return sound better When you’re on the debt side, they use APR to make interest seem lower Compounding Interest: The longer you invest, the greater and greater the effect of compounding; see huge increases later on o If you start investing now and maxing out 401K’s, then in your 50’s your investments will be making more than your salary is Module 1i,j,k SMART Goals o Specific: eg. Not just “I want to get fit” o Measurable: Know what success is o Achievable: eg. Instead of quitting cold turkey, do a little bit less each day o Realistic o Time-Bound: Affix certain timeline; give yourself deadlines o Q: The max annual contribution for a ROTH IRA is $5500. This helps people save for all the following reasons except: Trick Question--It’s all Specific: I will save for retirement with this amount of money and I’ll do it by the end of the year Measurable: Did I save this amount of money Achievable: Yes on average income Realistic: Yes Time-Bound: Set to do by the end of the year Setting a Goal: Use a Top-Down Approach o Ex. Buying a car Primary goal = buy reliable car within one year Sub goal = qualify for car loan Task a = increase ay by working more hours Task b = apply for a starter loan to establish repayment history Task c = get prequalified for car loan Sub goal = Identify type of car to buy Sub goal = Get approved for car loan Sub goal = Locate actual car to buy Sub goal = Obtain auto insurance Financial Statements o Net Worth Statement = Balance Sheet Assets (things you own) Liquid: how quickly they can be converted to cash o Current Assets: CD’s, Savings, Money Market o Help in a situation when you need money now Investable: riskier with potential for greater returns across time o Stock, bond, mutual fund o Don’t want to touch unless you need to access them (not very liquid) Personal Use: Tings you pay money for that you use on daily basis o Shampoo, clothes o May have value to you but value is based on how much you can sell them for o Generally worthless on a balance sheet Collectibles: Precious metals, jewelry, art, sculpture, etc. Q: A car that you own is: an asset Liabilities (what you owe) Short Term/ Current: due within a few years Long Term Debt: mortgage, student loans, auto loans Q. Auto Loan is: a liability Net Worth = Total assets – Total liabilities Q. Your income for the year is: neither an asset nor liability; you don’t have it yet Q. How much is your net worth if you own an $8000 car, have a $4000 car loan, and you have $4000 in student loan debt. You also have a DVD collection that you paid $1000 for. You have an income of $22,000. Net Worth: $8000 - $4000 - $4000 +$1000 = $1000 o Income Statement August 24 Module 1i,j,k Cont. Why Is Net Worth Important? o Companies always want to know net worth when determining credit worthiness o Most don’t take into account human capital o Some used human capital to estimate credit rating in the future Financial Ratios Current Assets o Current Ratio = Current Liabilities **Hinted that this will be on test Should be greater than 1.0 Current liabilities: liabilities paid within 1 year If you needed to pay of your liabilities, could you do it with the cash on hand Total Liabilities o Debt Ratio = Total Assets Should be greater than 40% If up to 36%, you are overleveraged (too much debt) Income Statement (Cash Flow Statement) o Where is money coming in, and where is it going out? o How things are going to be changing over time Compare to Balance Sheet, which shows inflow and outflow in that specific moment in time; changes daily o Income sources: Salary, business income, investments o Expenses: Fixed vs. Variable and Essential vs. Discretionary Fixed: Rent, insurance premiums Variable: Hospital, spontaneous trip Essential: Have to have them; home, food, health Discretionary: Help you have higher quality of life but don’t need Try to minimize fixed discretionary expenses (e.g. Netflix subscription) Many overpay for fixed needs Variable discretionary expenses are what makes a high quality of life (e.g. birthdays, vacations) Budgeting o Keeps track of income and expenses o Step 1: Monitor income and expenses over time o Step 2: Estimate how much your income and expenses will be next period o Step 3: Compare actual income and expenses to estimated o Step 4: Monitor and calibrate estimates o Mint.com is very helpful o Decide where you want to be financially, track resources, develop budget (guideline for how to save/spend), compare real spending vs. budgeted spending o Budget categories: Income, Savings, Expenses Module 2a,b: Income Wealth Accumulation o Must spend less than you earn o Income – Expenses = Surplus (or Deficit) o Surplus increases net worth while deficit decreases it o Deficit results from a decrease in assets (prior savings) or an increase in liabilities (borrowing against future income) o Okay to run deficit for short period of time—use some savings to pay it of Periodic Savings Savings o Savings rate: Income = how much of your income you are saving Depends on when you start saving and when you want to retire Savings rate if you want to retire at age 65… If you start in 20’s… 10% If you start in 30’s… 12% If you start in 40’s…20% Average millionaire saves over 20% of their income o Because of Time Value of Money, if you start saving at younger age, you don’t need to save as much Compound growth Savings Strategy for Recent Grads o Start with 4% and commit to save 50% of future pay raises o Way to increase savings while still increasing the income you get o Doesn’t feel like you’re losing money because the only money you’re saving is the money you weren’t already making o “Save More Tomorrow” strategy o Beware: You might need to save more than you originally thought You may be okay living of of $50,000 in retirement so you save for that BUT $50,000 in the future will not be nearly as valuable as it is today Good Debt vs. Bad Debt o Good Debt: mortgage, modest amount of student loans Does not decrease credit score Builds human capital Increases potential for higher income o Bad Debt: Doesn’t increase quality of life or human capital Credit card debt, payday loans, high interest rate loans, most car loans Buying pizza Module 2a,b Cont. Debt o Too much of debt (both good and bad) prevents you from saving o Debt-to-Income Ratio = TOtal Required Debt Paymenx100 GrossIncome Should be less than 36% of gross income o If you had 36% Debt-to-Income Ratio, you may only see about 25% of your salary 20% to taxes, 20% to Social Security, 401k contributions, 36% to debt If you make $100k, you’d only see $25k o Debt can cripple you: force you to not move houses, forces you to not travel, constrains decisions o Be aware of what your investment in yourself is going to get you Will the debt be worth it Will you be able to pay it of Ex. Make sure your student loans will provide an education that will enable you to get a job that will allow you to pay it of Income Portion of Budget o Wage: what employer will pay employee to complete a task Usually based on hourly rate Minimum wage is $7.25; $2.13 for customarily tipped employees o Salary: payment over a period of time o Commission: payment based on the sale of a product or service o Fair Labor Standards Act workers must be paid 1.5x their regular wage if they work overtime (over 40 hrs a week) Exemptions: doctors, lawyers, teachers, outside sales reps, people covered under a collective bargaining agreement Module 2c,d,e Self-Employment o Self-Employed: Work for their own business or a family-run business o Independent or Sub-Contractor: Ex. Consulting You are self-employed when your employer does not withhold FICA taxes If you are responsible for paying all of the Medicare/ etc. taxes then you are self-employed Starting Own Business o Large portion are self-funded (boot-strapped company) o PPT has many links to resources that provide funding o Can get funding from investors o Idea of companies making money has been fading Twitter has lost $200 millions dollars a year for several years Sole-Proprietorship vs. Partnership o Self-Proprietor: you own your own business You make al business decisions You are liable for all consequences Very easy to set up Unlimited liability: business’ debts, lawsuits, and taxes fall on the owner You can lose everything if someone sues you Harder to earn capital; can’t issue stock o Partnership: you are part owner of a business along with other partners Share decisions with partners Profits and losses shared among partners Very easy to set up Unlimited liability: business’ debts, lawsuits, and taxes fall on the owners Harder to earn capital; can’t issue stock o Get some liability protection by having Limited Liability Partnership (LLP), Limited Liability Corporations (LLC), and Corporations (C and S elections) Corporation o Corporation: separate legal entity that is separate from the owners Owners are stockholders Limited Liability Can delay when you get income and, therefore, taxes Separate taxation between corporation and owners Money Made by Self-Employed o Averages out to $44,000 annually o Vey misleading statistic Many get nothing/ lose money o 10% of working population is self-employed o 2/3 of the millionaire population is self-employed
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