Unit Three Notes - Personal Finance

November 6th - Renting & Insurance ● ● ● ● ● Application Process ○ Application (be honest, neat, complete) ○ Rental Fee ○ Letter of Employment ○ Previous landlord reference ○ Drivers License/State ID ○ Before paying application fee, ask about eligibility criteria (age, income & rental history) A landlord can legally refuse an application that is incomplete ○ Inaccurate information is grounds for eviction ○ Can deny due to poor credit or rental history Tips in Major Cities ○ Strong rental application ○ Weekend visit ○ Research neighborhoods ○ Check for scams ○ Networking ○ Check reviews of management company or landlord ○ Look early and be flexible Lease Agreement ○ Rent and other payments ■ How much? Due date? Parking, security deposit? Penalties? Rent increased? ○ Terms of lease ■ How long? End? Move out before? ○ Pets ■ Permitted? Additional fee? Types? ○ Visitors ■ How long? Stay longer? ○ Utilities ■ Who pays? How much? ○ No blank spots ○ Oral promises noted Roommate ○ Roommate agreement ○ Bill Paying Dilemma ■ One responsible person and discuss Plan ■ Open all mail when arrives and choose method, place, process ■ Records of payments ■ Calendar to record weekly activity; bill due dates and amounts ● ● ● ● ● ● ● ● ● Renters Insurance ○ Different than landlord insurance ■ Which only covers building ○ This covers tenants against theft, disaster, etc. ○ Valuable items? ○ High crime neighborhood? ○ Extreme weather? ○ Afford to replace items? Document Conditions ○ Keep log of damaged items ○ Note missing items ○ Everything is in working order before move in Keep Good Records!! Auto Insurance ○ “Largest single exposure to catastrophic losses” ○ Provides liability and property coverage ○ Illegal to operate vehicle without it Types of Auto Insurance ○ Liability ■ Protects you or property you hit ○ Physical ○ Medical ○ Un-Underinsured Motorist Things to keep in mind ○ Ask about Discounts ○ Choose higher deductible ○ Shop around and take time to compare auto insurance policies Homeowners/Renters Insurance ○ Policy for everything ○ Flooding is not covered in any of forms ■ Need special type of forms Renter’s Common Coverages ○ Personal Property ○ Personal Liability ○ Medical Payments to Others ○ Increased/Additional Living Expenses Homeowner’s Common Coverages ○ Dwelling ○ Other Structures ○ Personal Property ○ Increased/Additional Living Expenses ○ Personal Liability ● ● ● ● ● ● ○ Medical Payments to Others Health Insurance ○ Sometimes offered by employers ■ Remember benefits - huge cost savings ○ Many choices Affordable Care Act ○ Give 10 essential benefits ○ Everyone's insurance policy has to have these benefits ○ Required people to have insurance ■ Penalty on taxes Life Insurance ○ Financial protection for dependants ○ Helping Family “Free from financial burdens” ○ Insuring self and family against untimely death Terms Need to Know ○ Policy ■ Contract between issuer and policy holder stating terms and dollar amounts ○ Policy Holder ■ Owner of policy who retains all rights given by the policy ○ Face Amount ■ Amount of coverage given in event of policy holder’s death ○ Death Benefit ■ Amount that will be paid to beneficiary ○ Beneficiary ■ Person(s) who are designated to receive the death benefit ○ Premium ■ Charge to the policyholder for insurance coverage ● Monthly, quarterly or annually ● Annually most likely cheapest Evaluating Needs ○ D - Dependents, Debt, Death ○ I - Income, Business ○ M - Mortgage ○ E - Education, Events ○ Term Insurance ■ Get it when you need it ○ Cash Value ■ Pays benefit at death and includes savings elements ○ Theory of Decreasing Responsibility ■ As older you have less responsibility Different Options have different costs ○ “Buy Term & Invest the Rest” November 8th - Taxes ● ● ● ● ● ● ● Taxes; compulsory charges imposed by government on its citizens ○ Progressive nature of federal income tax ■ Progressive tax; one that requires higher tax rate as income increases “Pay as You Go” ○ Payroll withholding; employer withholds income as a prepayment of individuals tax liability for the year ○ Self Employed Individuals; estimate taxes i advance and submit pay quarterly ■ April, June, September, January Wealth is not what we make, what we keep ○ Only pay taxes on Taxable Income ■ Gross Income ■ Adjusted Gross Income (minus exclusions/adjustments) When to use 1040EZ Form ○ Single or MFJ, under age 65 ○ No Dependants ○ Only tax credit to claim is EITC (EIC) ○ Wages less than $100,000 ○ Taxable interest not over $1,500 1040 A ○ Income less than $100,000 and take standard deduction and/or take adjustments to income or tax credits 1040 ○ Itemize deductions or take adjustments to income or tax credits OR do or do not take contributions to a qualified retirement plan Filing Status ○ Single ■ Single on last day of year ■ do not qualify for another filing status ○ Married Filing Jointly ■ Married and agree to file jointly ○ Married Filing Separately ■ Married but want to be responsible for own tax ■ If it results in less tax than filing joint returns ○ Head of Household ■ Unmarried or “considered unmarried” on last day of the year ■ Paid more than half the cost of keeping up home for a year ■ “Qualifying person” lived with you in home for more than half the year ○ Qualified Widow(er) with Dependant Child ■ 2 years after spouse dies ■ Tax benefits greater than Head of Household ● ● ● ● ● ● Step One: Determine Total Income ○ Wages and Tips ○ Interest (taxable, not tax exempt); 1099-INT Form ○ Dividends ○ Retirement Money ○ Capital Gains ○ Unemployment Schedule D: Capital Gains and Losses ○ Short term gain/loss ■ Sell Asset owned for < one year ■ Taxed as INCOME ○ Long term gain/loss ■ Sell Asset Owned for > one year (12 months) ■ Key = Taxed at lower rate ■ New for 2013 ● Lowest 10 or 15% tax brackets = 0% ● Highest tax bracket = 20% ● Rest is 15%; reduces tax liability ○ Record keeping is needed Step Two: Determine Gross Income after Subtracting Exclusions ○ Reduce “total” income ○ Reduce income BEFORE it comes on paycheck ■ Pre-tax options ○ Determine exclusions ■ Income not subject to taxation Step Three: Subtract Adjustments to Income ○ Reduce “Gross” Income ○ Goal: reduce income BEFORE tax is computed ○ Make adjustments to income ○ “Above the Line Deductions” Step Four: Take Standard OR Itemized Deduction ○ When should you choose a Standard Deduction vs. Itemized Deduction? ○ Both stays with filer Step FIve: Tax Exemptions ○ Personal exemptions for taxpayer and spouse ○ Dependency exemptions for dependents ○ Based on number of people supported on taxpayers income and adjusted for inflation each year ○ Each exemption reduces income that is subject to tax by exemption amount ○ Taxpayers cannot claim an exemption for a person who can be claimed as dependent on another tax return ○ New in 2012 ■ Income Phase Outs!!! ● Step Six: Determine Tax Liability ○ Marginal Tax Rate ■ Tax Rate at which last dollar earned is taxed ■ As income goes up, pay higher tax rate November 14th - Taxes II & Love, Marriage, Money ● ● ● ● ● ● ● ● ● ● Preliminary Tax Liability ○ Determining preliminary tax liability based on taxable income using tax-rate schedule or tax table ○ Taxable Income; amount remaining after subtracting adjustments, deductions, exemptions from gross income Subtract Tax Credits ○ Tax Credits; dollar for dollar subtraction from tax liability ■ Refundable; can reduce taxes to below zero and extra will be returned to taxpayer ■ Non-Refundable; reduces tax liability to zero, if credit is more than tax, extra is NOT refunded to you Tax Deduction ○ Deduction from INCOME Tax Credit ○ Deduction from TAX BILL ○ More powerful thing ○ Given out for very specific things ○ Usually around kids and education Calculate ○ If Estimated Tax Payments are greater than final tax liability… REFUND ○ If Estimated Tax Payments are less than final tax liability… OWE Key Similarities ○ Still need to make choice standard or itemized deduction ○ Still same process in determining taxable income and determining tax liability Key Differences ○ Much simpler form ○ No 1040EZ or 1040A What’s New Section ○ Breaks down all big changes from year before Money and Marriage ○ 80% of life is spent making or spending money ○ “Family origin issues and understanding where partner’s money attitudes come from” Money Personality ○ Spending habits are socialized from upbringing ○ Learned association ● ● ● ● ● ● ■ Positive and negative Spenders vs. Savers ○ Financial opposites attract ■ Know self and know partner ○ Financial opposites don’t always last Pre-Marriage/Union ○ Explore Financial Situation ■ Debt? Student loans? Credit Cards? ■ Fixed expenses? ■ Income and sources of income ■ Financial trouble? ○ Type of Money Manager? ■ Spender or Saver? ○ Review Credit History ○ Review Financial Records ○ Risk Tolerance ○ GOALS After Marriage/Union ○ Schedule regular money meetings ○ Build Emergency Fund (cushion) ○ Inform employers of marriage ○ Financial and legal planning Monetary Decisions ○ Bank Accounts ■ Separate or Joint Accounts? ○ Family Income ■ Single or Dual earning household? ○ Children ■ Work full time/part time? ■ Allowance? ■ Pay for College Money Problems ○ Emotional issues ○ Majority stem from ■ Communication ■ Power ■ Control Lack of Communication ○ Differing ideas ○ Unspoken expectations ○ Unwillingness to talk about money ○ Problems of perception ■ Economic strain ○ ● ● ● ● ● Outline GOALS ■ Long Term: retirement, number of kids, living arrangements,etc. ■ Short Term: Trips, gadgets, cars, etc. Power and Control ○ Money = Power ○ Money used as weapon ○ What you spend money on speaks of what you think is important Marriage Dissolves ○ Standard of living differences ○ Income differences ○ Growth of single parent households ○ Child care issues (financial issues and physical care) Year After Divorce ○ Men’s income tends to increase by 42% ○ Women’s income tends to decrease by 73% ■ Stop working ■ Not working to begin with ■ Primary caregiver of children Planning Pre-Divorce ○ P.O. Box ○ Establish Credit ○ Inventory Assets ○ Choose Attorney ○ Choose Financial Advisor Settlement Issues ○ General ■ Life Insurance ■ Pensions, Retirement Accounts ■ Personal Property ■ Debt ○ Children ■ Child Support ■ Health Insurance (covering children) ■ College/Weddings ■ Taxes ● Who claims children as dependents? ● Who gets refund? November 15th - Student Loans ● ● 44.2 million americans have at least one outstanding student loans About one out of ten students has either defaulted or gone 90+ days delinquent on loans ● ● ● Types of Loans ○ Subsidized ■ Based on need ■ Government pays interest while in school ○ Unsubsidized ■ NOT based on need ■ Borrower is responsible for interest at all times Repayment Options ○ Standard ■ 10 years ○ Graduated Repayment ■ Low beginning payment ■ Increases every 2 years/10 years max payment ○ Extended Repayment ■ 25 to 30 years ■ Triple interest ○ Income Contingent Repayment ■ About 30 years ■ Direct Loan only ○ Income Based (IBR) ■ Partial financial hardship (PFH) - determined annually based on HHS and income ■ Payment is 10-15% of net income over 150% of poverty line, could be as low as $0 ■ Max payment is standard amount at time of going into repayment ■ Balance forgiven after 25 years but taxed ○ Pay As You Earn (PAYE) ■ Only Direct Loan and new borrower ■ PFH - determined annually ■ Payment is 10% of net income and balance forgiven after 20 years but taxed Grace Period ○ Stafford ■ 6 months after graduation ■ Less than ½ time ○ Perkins ■ 9 months after graduation ■ Less than ½ time ■ No longer offered ○ Private ■ Varies based on lender preferences ○ PLUS ■ 2 months after full receipt of loan ● ● ● ● ● ● ● ● ● Loan Interest Calculation ○ Compounded ■ Usually daily ■ Interest rate is divided by number of days in the year ■ Charged each day based on outstanding balance ○ Capitalization ■ Addiction of unpaid interest to the principal (increases amount due) ■ Repayment strategy - pay interest on unsubsidized loans PRIOR to capitalization Borrow Less ○ Borrow only what is needed Voluntary Loan Payments ○ Make payment now ○ Make extra payments to reduce cost ○ Contact servicer for details Most Common Discount ○ ¼ of 1% for automatic payments Deferment ○ Temporarily postponing payments Forbearance ○ Postpones repayment if financial hardship ○ Interest still accumulates Private Loans ○ Issued by lenders such as bank or credit union ○ Typically variable interest rates and no interest ceiling ○ Credit check required ○ Not based on need - don’t have to file FAFSA ○ No borrowing limits ■ Loan max, up to cost of education minus other aid ○ No benefits for death or disability ■ Benefits not equal to federal student loans ■ Designed to fill gap left by other loans Important Players ○ Lender; originates the loan ○ Loan Servicer; sends bills computes interest ○ Guarantee Agency; insures the loan Consolidation ○ Combining several loans into one payment, cannot consolidate Private Loans with Federal Loans ○ Why? ■ Lower fixed rate on variable interest loans ■ Lower monthly payment ■ Multiple lenders to repay ● ● ● ■ Public Service Loan Forgiveness Student Employment ○ Help cover expenses other aid does not Work Study ○ Federal program reimburses employers part of cost of paying student employers ○ Must fill out FAFSA to qualify ○ Can deduct work-study earnings from income on following year’s FAFSA Education Tax Savings ○ Student Loan Interest; deductible up to $2,500 in interest ○ American Opportunity Credit; $2,500 per student ○ Lifelong Learning Credit; $2,000 per taxpayer or return November 20th - Housing ● ● ● ● ● ● Need to know first ○ Review credit report ○ Estimate expenses - know what you can afford ○ Adjust budget to fit costs ○ Calculate before you start Formula for Buyers ○ Annual Salary * 2.5 = Cost of the House ○ Cost of the House / 2.5 = Salary Needed ○ These do not factor ratios or other debts ○ Quick (rough estimate) Pre-qualify for Mortgage ○ A loan to purchase real estate in which property itself serves as collateral ○ Key is to shop around Housing Costs ○ PITI ○ Principle - amount of the loan, money to pay down loan balance ○ Interest - percentage to pay to have loan ○ Taxes - property taxes ○ Insurance - property insurance and/or Private Mortgage Insurance Back End Ratio ○ All monthly debt payments ■ Expenditures for housing, auto and credit payments ○ Gross monthly salary * .38 ○ Total Debt/GMI = Back End Ratio ○ Finds how much total debt one can take on Front End Ratio ○ Lenders Formula ○ Principal, Interest, Taxes, Insurance ○ Gross Monthly Salary * .28 ● ● ● ○ Housing Costs/GMI = Front End Ratio ○ Finds how much maximum housing debt can one take on Common Types of Financing ○ Conventional Mortgage ■ Fixed interest rate ■ Fixed term - typically 15 or 30 year ■ Fixed payment ● Predictable ○ Adjustable-Rate Mortgage ■ Also known as: flexible rate or variable rate mortgage ● Interest rate varies ● Interest varies with broader economy ● Usually 1-3 percentage points below conventional ■ Government Loans - FHA and VA ● Must qualify ● Backed by government ○ FHA: 3% - 5% ○ VA: smaller down payment or no down payment ● Can take longer to process Applying For and Getting Mortgage ○ Pull credit reports ■ All 3 agencies ○ Evaluate 4 C’s ■ Capacity ■ Capital ■ Collateral ■ Credit ○ Pre-approval Letter ■ Outlines what you qualify for ● Make sure you are approved for what you want ○ Once find a house ■ Get Appraisal ● Asses market value of property ■ Lender will issue commitment letter ● Final approval of mortgage loan Search for Home ○ Online and In Person ○ Contact Real Estate Agent - Buyers vs Sellers Agent ○ Once find a home..Terms: ■ Purchase Offer: written offer to purchase ■ Earnest Money: deposit of interest (make offer) ○ As negotiate ■ Counteroffer: legal offer to buy home with contingencies ● ● ● ● ● ● ■ Purchase Contract: formal document that outlines agreement ■ Deed: transfers ownership of property (at closing) After settle on Price ○ Hire own Inspector ○ Hire Attorney ○ Radon Inspection ○ Pest Inspection Amortization Schedule ○ Payment schedule that has each payment going toward principal and interest ○ Equal payment over specific length of time Growing Equity ○ Equity - dollar value of home in excess of what is owed ■ Grows in two ways ● Home Value ● Principal paid down Attend Closing Up-front Closing Costs ○ Closing: final mortgage documents, property is legally transferred ○ Down Payment ■ Portion of housing cost paid up-front ■ Portion not borrowed ■ Traditionally 20% ■ < 20% pay PMI ○ Points ■ Negotiation tool ■ 1% of total mortgage ○ Other Costs ■ Title transfer, title search, and insurance ■ Home inspection ■ Appraisal ■ Attorney fees Private Mortgage Insurance: Monthly Costs ○ PMI: if loan-to-value ratio (LTV) is above 80% ■ Down payment < 20% ○ PMI: protects lender against mortgage default ■ Payment to protect lender ■ Can be cancelled when equity rises about 20% ■ Now may be required for 5 years ■ Can not itemize as deduction on taxes Escrow Account ○ Account set up to hold money collected by lender to pay hazard insurance and property taxes when become due ○ Way for lenders to ensure collateral is secure ○ ● ● ● Divide taxes and insurance in equal monthly amounts for year (part of monthly payments) Loan Options - Housing ○ Second Mortgage ■ Additional loan on home ○ Home Equity Loan ■ Loan on equity you own in home ○ If default on either one - putting home at risk ○ Refinancing Mortgage ■ Obtaining new mortgage and replace existing - all associated fees apply entering new agreement ■ Will have to pay closing costs again Tax Consequences ○ Mortgage and Real Estate Taxes are tax deductible ○ Use a Roth IRA to save funds to buy home ○ Profits from sale of home taxed as capital gain Foreclosure ○ Legal process used by lender to take homeowner’s property to satisfy debt ○ Can result from unpaid mortgage, second mortgage, or homeowner association dues ○ Also occur when property taxes are unpaid November 29th - Estate Planning ● ● ● ● ● ● Estate Planning is process that is used to assist a client in developing and implementing a plan for his or her personal and financial affairs Decedent ○ Person who dies ○ Typically financial plan who it is for Heirs ○ Who the money is left to Devisees or Legatees ○ Someone who is named that receives belonging Trustee ○ If there is a trust ○ Makes decisions for you ○ “Personal Representative” Four Main Areas ○ Patient Advocate ■ Health care setting ■ Makes decisions on your behalf ○ Power of Attorney ■ Help make financial transactions if you are unable ○ ● ● ● ● ● ● ● Last Will and Testament ■ Will goes through probate court ■ Public document ■ Cheaper way to identify who wants what but very public ○ Revocable Trust ■ Costs more money but it is a private document ■ Distribute assets in private way ■ Does not go through probate court ■ Has a trustee in private way Patient Advocate ○ Living Will; provide written health care instructions to agent and health care providers ○ POA for Healthcare ■ Appoint someone to be health care agent to make any necessary health related decisions for you if not able to speak for self Power of Attorney ○ Allows person to choose someone to act in place for financial practices ○ Can allow person to: enter into contracts, create trusts, vote stock, sell property, cash checks, etc. ○ Durable POA: remain effective after incapacity or disability ○ Non-Durable POA: automatically ends if individual loses capacity ○ Springing Power: cannot be used unless/until person is disabled Last Will and Testament ○ Document by which person directs their estate to be distributed upon death ○ Wills are typically cheap to develop ○ Administered through Probate Court (public record) Revocable Trust ○ Sometimes individuals choose trust in addition to will ○ Can be more expensive to develop, but are managed by trustee ○ Not administered through Probate ○ “Fiduciary relationship regarding property and charging person with title to property with equitable duties to deal with it for others benefits” During life ○ Power of Attorning, Patient Advocate ○ Or development of Revocable Trust At Death ○ Revocable Trust and a Last Will and Testament ■ Both important Probate ○ Physical court place ○ Supervised process ○ Allows creditors to present claims against estate ○ ● ● ● Ensures transfer of one’s assets to estate beneficiaries according to Last Will and Testament ○ No will, court will disperse assets based on state law Intestacy ○ When one dies without legal will in place ○ Each state has own rules for disposition, taking into consideration marital status, ownership of assets, etc. ○ Table of Consanguinity Prenuptial Agreement ○ Legally binding agreement between couple, stating how assets would be divided if marriage fails to last Role of a Guardian ○ Person appointed by probate court ○ Make certain decisions about care of another individual ○ Individual must be legally incapacitated individual and imposition of guardianship must be necessary to provide for individuals care ○ Responsible for individuals “care, custody and control” Kahoot ● ● ● ● ● ● ● ● ● ● ● ● Rule of three means checking out three different lenders before making choice Effective trick of trade in buying car is negotiating interest rate after firm price Landlord cannot legally refuse application that is incomplete ○ False In lease the grast must be grass must be cut 1x week, tenants go home and receive fine, who pays? ○ Tenant What term describes person(s) who designated to receive death benefit ○ Beneficiary If you have good credit you may pay less on insurance ○ True John makes $50,000; itemizes $10,000, standard deduction; $13,000, taxable income? ○ $37,000 Quick lender formula!!!!! Maximum housing payment per month ○ (salary/12)*.28 Maximum consumer debt per month ○ (salary/12)*.10 Total Debt per month ○ (salary/12)*.38 Not one of recommended thing before marriage ○ Financial and Legal Planning ● ● ● ● Type of loan that pays more in overall interest due to when interest begins to grow ○ Unsubsidized Federal Loan Standard repayment plan for federal loans ○ 10 years When you die without a will you die in ○ Intestacy