<p>PERSONAL FINANCE NOTES</p><p>SSEPF2 The student will explain that banks and other financial institutions are businesses that channel funds from savers to investors. a. Compare services offered by different financial institutions. b. Explain reasons for the spread between interest charged and interest earned. c. Give examples of the direct relationship between risk and return. d. Evaluate a variety of savings and investment options; include stocks, bonds, and mutual funds. </p><p>Types of Financial Institutions Banks: Institutions for receiving, keeping, and lending money Credit Unions: nonprofit bank owned by its members, often members of a single organization or trade union (example- Richmond County Teachers Credit Union) Savings and Loans associations: banks that accept deposits and specialize in offering long-term financing for homes “Payday” loan company: businesses that offer small, short-term loans that typically have high fees and interest Banks Banks take deposits and make loans. They charge more in interest for their loans than they give in interest for deposits. That is how they make money. Banks generally offer direct deposit, check-writing services, debit and credit cards, loans of all sorts (personal, home equity, business), and a host of other services. Credit Union A credit union provides services similar to a bank; the main difference is that a credit union only provides these services to its members, and these members own and control the institution. Credit unions often have higher saving rates for deposits and also lower interest rates on loans. Savings and Loan This organization is like a focused bank- a savings and loan takes deposits and concentrates on the two areas in its name: savings and (mortgage) loans. Money that is put into a savings and loan is not as easily accesible as in regular banks, but savings rates are higher. “ Payday” Loan Company Suppose you need $50 on Wednesday but won't get paid by your job until Friday. A payday company will give out small loans in return for a portion of the upcoming paycheck. Other small loan companies will give loans and hold your car title for collateral. THESE SHOULD BE AVOIDED AT ALL COSTS SSEPF4 The student will evaluate the costs and benefits of using credit. a. List factors that affect credit worthiness. b. Compare interest rates on loans and credit cards from different institutions. c. Explain the difference between simple and compound interest rates. </p><p>What is a Loan? Loans have 2 components: Principal – The amount of money borrowed Interest – The price paid for the use of borrowed money Interest can be Compound, or Simple Simple Interest: interest is determined annually with the original (principal) loan amount Compound Interest: interest is determined annually with the entire loan amount (principal + any interest that has accrued)</p><p>Borrowing Money (Loans & Credit) Most all loans fall into two categories: secured vs. unsecured. Secured debt is “secured” by collateral (some asset that has value). That means if you default on your loan, the bank will take the collateral. Unsecured debt is not secured with collateral. Generally, this means that the interest rates will be higher. </p><p>Common types of loans/debt Mortgages: Loans for real estate (land, houses, condos, etc.). Secured debt. The collateral is the land, condo, or house. Generally lower interest rates (under 7-8%) Auto Loans: Loans for cars. Secured debt. The collateral is the car. Interest rates generally lower than 10% Credit Cards: Generally used for buying consumer goods & services. Unsecured debt. Interest rates can range from under 10% to over 20% Credit Cards A credit card is a form of open-ended, or revolving, credit. A credit card lets you borrow money on an ongoing basis, up to a prearranged limit. Examples: Mastercard, Visa, Discover Mastercard and Visa are issued by many different banks with many different features/costs. Credit Card basics APR (annual percentage rate): cost of interest over the course of a year APR’s can change. Sometimes cards come with an introductory APR (0% for the first 6 months, then the APR increases). APR’s can be increased by credit card companies if go over your limit or miss a payment Annual Fees: some cards have an annual fee, others do not. Cards with annual fees generally have lower APRs, and vice versa Other fees: late fees, over-limit fees, etc. can quickly add up. RISK RISK is a common theme in economics. Starting a business involves risk. When investing, some options are riskier than others. Banks give loans and set interest rates based upon perceived risk (Credit worthiness) Credit and Risks</p><p>Credit Worthiness: The overall evaluation made by a financial institution regarding the risk in lending you money. This covers your credit score, income, capital, etc. Credit Rating(credit score): Evaluation made by credit bureaus of a borrower’s overall credit history. The higher your credit score, the easier it will be to get a loan. The higher your credit score, the lower your interest rate will be.</p><p>Investments & Risk Savings Account Bonds & CD’s Mutual Funds Individual Stocks Investing money in your friends new business</p><p>Savings Accounts: low risk Savings Account: your money sits in the bank and collects a small amount of interest – usually around 1%. You can access this money pretty easily with little to no penalty. Low to no risk.</p><p>Bonds/CD’s: low risk CD: Certificate of deposit Bonds and CD’s are essentially a IOUs issued by a bank, corporation, or government as a way for them to borrow money. Individuals buy bonds and are paid back with interest later. Corporate bonds are riskier than government bonds Mutual Funds: moderate risk A mutual fund is an investment in an investment company Your money is combined with other peoples’ money and invested in a variety of stocks and bonds. Because it is split between several different investments and combined with others, risk is minimized. Stocks: riskier Stocks: issued by corporations Stocks represent part ownership in a corporation. Two types of stocks: Common Stock: dividends are based on market fluctuations and paid after preferred stockholders are paid Preferred Stock: receive fixed payments/dividends regardless of market fluctuations – also, preferred stockholders are paid first Dividends: payments to stockholders are called dividends. You generally receive dividends when you own a stock and the company grows. Dividends are a portion of a corporations profit paid to stockholders (not all stocks pay dividends) Capital Gains: the profit made when you sell a stock that has increased in price. The government taxes capital gains. Stocks can be risky. Businesses have ups and downs, and their stock prices will fluctuate.</p><p>Investing directly into a business Becoming a partner in a business: high risk, high possible return. Business Partnerships (2 types) General Partnerships Limited Partnerships</p><p>SSEPF5 The student will describe how insurance and other risk-management strategies protect against financial loss. a. List various types of insurance such as automobile, health, life, disability, and property. b. Explain the costs and benefits associated with different types of insurance; include deductibles, premiums, shared liability, and asset protection. </p><p>Insurance In general, all forms of insurance allow a person to pay a small amount of money in the present in order to guard against a potentially disastrous even in the future. Insurance costs usually include: Premium: the amount you pay to the insurance company on a regular basis (monthly, every six months, etc.) Deductible: an amount of expenses that you must pay before the insurance company will cover any expenses Car Insurance Liability: required by law – pays for damages you cause to others when you are at fault Property Damage Bodily Injury Collision: pays for damages to your car/body when you are at fault Comprehensive: pays for damages caused by non-driving related events (examples: vandalism, natural disasters)</p><p>Health, disability, and life insurance</p><p>Health insurance: is designed to pay for medical costs and/or hospitalization or medical emergencies. Disability insurance: is set up to help provide people with an income in case they become injured or unable to work at a job Life insurance: is designed to provide people with money in case a family member unexpectedly passes away.</p>