Personal Finance ~ Middle School Edition

History of Money

Lesson 1 - Cash

Trading, also known as bartering, dates back to the beginning of time.  Initially, money in the form of coins and paper did not exist.  When a person needed or wanted something, they would trade something they owned or a service they knew how to do to get it.  Sometimes people would trade gold or silver to obtain what they needed.  For example, gold or silver might have been traded for livestock.  Different objects were valuable to different people. 

Application Exercise

Have you ever bartered with a friend or sibling? If so, what did you barter?

Lesson 1 - Cash

Bartering became cumbersome, especially for the collection of taxes for governments. Governments also needed as easy way to exchange something of value to obtain goods and services from other governments. Bartering went from commodities (e.g. grains, livestock, etc.) to weapons and tools to coins.  Merchants in Lydia were the first to come up with the idea of creating coins in exchange for goods and services.  King Alyattes of Lydia began minting coins in 600 B.C.  The Chinese, however, were the first to create paper money.  As some people began to amass wealth, they needed a safe place to keep their money.

Application Exercise

Did you know the first coins were created as long ago as 600 B.C.?

Lesson 1 - Cash

Initially, temples provided a place for wealthy people to store their money.  Temples were in the center of the city and the place where people conducted business.  It made sense at the time for people to place their money with the temple for safe keeping as it was occupied all the time and had the capacity to hold people’s money.  Temples were large structures.

Wealthy merchants learned to lend money to people in exchange for a fee or interest.  Temples  gave out loans to people, too.  The idea of holding people’s money in accounts and giving loans to people in need expanded and Rome soon created the first bank; a structure separate from the temples that conducted financial business.  Banks were initially owned by governments.  Over time, most financial business moved from the temples to individual banks. 

Application Exercise

Where did you think people bartered and stored money before the creation of banks?

Lesson 1 - Cash

Jumping forward in time, Adam Smith came along with the idea of a self-regulated economy in 1776.  His idea led to private banks in the United States; banks that were not control by a church or government entity.  His idea also led to cooperative financial institutions.  Cooperatives are associations put together by a group of people.  There are many types of cooperatives such as commodities, utilities (electricity), and shared services to name a few. 

Lesson 1 - Cash

The history of money looked something like this:  bartering —> coins —> paper money —> checks —> plastic cards —> electronic.  When a person thinks of cash, they think of paper money and coins.  Cash in the world of finance, banking, and accounting also includes money in checking and savings accounts, marketable securities, and government bonds.  Checks are also considered a form of cash.  All of these items are considered to be cash because they can be turned into cash quickly or within a year.  In business, a company’s current assets are considered a form of cash.

Lesson 1 - Cash

Today, many people do not use paper money or coins and use a debit card instead.  Debit cards look like credit cards and can be used as such when  making purchases for goods and services such as at a grocery or department store.  Debit cards can also be used as automatic teller machine (ATM) cards at ATMs to withdraw and deposit money into checking and savings accounts.  When a person only has a savings account, they are given an ATM card, which cannot be used as a debit card.  When a debit card is used for a purchase, it debits the money for the purchase from the checking account for which it is attached. 

Application Exercise

Have you seen your parents use a debit or ATM card? Or, have you used either one? If so, when? Explain.

Lesson 1 - Cash

It is important to retain all debit card receipts, whether from an ATM or purchase, to input into a check/account register.  Check, or account, registers are booklets used by account holders to track the transactions in a savings or checking account.  All debits and credits are entered into the register in order to know the balance in the account.  Knowing the balance of an account lessen the risk of overspending. 

Receipts are important to keep in case an item needs to be returned or exchanged at the store and to keep track of expenses.  A person could receive back less money than what they spent on a product when they do not have their receipt when they return an item.  For example, if a person purchased a product for $25 on a Monday and the store put that same product on sale for $20 on Wednesday, the store will only refund $20 to that same person if they try to return that product on Wednesday without a receipt.  Consumers must show proof of how much they paid for the product they wish to return.  Additionally, some companies will only offer store credit for returned items that do not have a receipt.  It is important to retain all receipts if it is possible in case a product needs to be returned to the store.

Application Exercise

Have your parents or you ever returned something to the store?  If so, did they request a receipt?

Lesson 1 - Cash

Interestingly, even with all of the advances of technology, bartering still remains between people.  Also, cash and checks are stilled used.  Many small businesses will only accept checks or paper money as a form of payment.  They do this in order to defer the costs associated with debit and credit card  purchases.  Each time a person uses their debit card, the merchant has to pay transaction fees.  Since checks are still necessary today, it is important to learn how to write checks. 

Learning how to write a check is taught in a future lesson.  The next two lessons explain banks and credit unions.

Exercise 1 - Concept Review

  • Plastic cards were the first form on money.
  • Marketable securities are a form of cash.
  • Checks are considered to be cash.
  • Debit card receipts for purchases can be thrown away immediately.
  • It is necessary to know how to write a check in today’s society.
  • Current assets are not considered a form of cash.
  • An ATM card that is tied to a savings account can be used for purchases.
  • Debit cards are tied to checking accounts, can be used to make purchases at retail stores, and to withdraw and deposit money in checking and savings accounts at ATMs.
  • Many small businesses only accept paper money and checks as a form of payment.
  • Receipts are never necessary for a full refund of a purchase product.

Lesson 2 - Banks

When the word “banking” is mentioned, most people think of commercial banks even if they are referring to their credit union or savings and loan.  Commercial banks have a variety of products for consumers, which include checking accounts, savings accounts, personal and business loans, and deposit accounts such as IRAs and CDs.  Banks are “for-profit” corporations.  For-profit organizations are focused on their operations making a profit.  Banks may pay some of their declared earnings to the stockholders/shareholders of the bank. 

Application Exercise

Which banks are located in your city?

Lesson 2 - Banks

Becoming an Account Holder

Banks do not have any special membership requirements to open an account.  They do require account holders to have good credit and to be 18 years of age or older.  If someone is younger than 18 years old, they would need an adult to open the account with them.  Banks offer a variety of checking and savings account products.  There are a lot of different banks and they each offer their own products, charge their own fees, and have varying interest rates.  Some banks have products that require a minimum balance to avoid monthly service fees, while other banks require an automatic transfer of funds into a savings account to avoid monthly service fees.

Application Exercise

What types of products do the banks offer in your city and what are their fees?

Lesson 2 - Banks

Community Involvement

Most banks are involved in the communities where they are located.  They donate money to clubs and employees get involved in local civic opportunities.  Other community involvement may include teaching financial information at schools or offering first-time homebuyer classes. 

Application Exercise

Have you seen local banks involved in the community in your city?  (Hint: Banners at sports field.) Explain.

Exercise 2 - Concept Review

  • Banks offer a variety of products.
  • All banks offer the same interest rates.
  • Banks require membership to have an account.
  • Banks started in temples.
  • Banks started in the early 1900s.
  • Account holders must be 18 years of age or older or have an adult on the account.
  • Many banks have minimum balance requirements in order to avoid monthly service fees.
  • Banks do not do business loans.
  • Banks are a for-profit business.
  • Employees of banks are usually involved in community activities and/or clubs.

Lesson 3 - Credit Unions

Credit unions offer the same products as banks: checking and savings accounts, loans, and investment products.  It’s important to note that credit unions refer to savings accounts as “share” accounts.  To open an account in a credit union, a person has to qualify for membership of the credit union.  Different credit unions have different membership qualifications. 

Application Exercise

List the names of credit unions are located in your city?

Lesson 3 - Credit Unions

The Start of Credit Unions

Credit unions were created as cooperatives during the time temples and governments operated as banks.  Merchants continued to give loans to people at exorbitant interest rates even with the creation of standardized banks.  These types of lenders are known as “loan sharks.”  During the mid-1800s, loan sharks took advantage of low-income urban workers by placing unreasonable interest rates on the money they lent to the workers.  A group of people in Germany wanted to help out their fellow citizens, so they came together and created the first credit union in 1849.  Their goal was to pool money from its members in the association to loan to workers in need without excessive interest rates.  Quebec, Canada, followed Germany and was the next country to see the creation of a credit union in the early 1900s.

Application Exercise

Are you surprised to learn that credit unions started in the late 1800s? Explain.

Lesson 3 - Credit Unions

Understanding How to Become a Member

Credit unions typically limit their memberships (i.e. known as a field of membership) to people of a particular industry, community, or some other identifiable factor.  For example, some credit unions require all members to be a teacher or a family member of a teacher, while other credit unions allow membership to people who live in a particular region.  Each credit union has their own membership criteria. 

Membership in a credit union requires a membership fee, which is the share an account holder owns, typically $25; however, each credit  union has their own set of fees, which are usually minimal.  The membership fee goes into the new member’s share account.  Each member of a credit union is allowed one vote when voting about credit union business.  This means each member gets only one vote regardless of the number of accounts or how much money they have at a particular credit union.

Application Exercise

What are the different “field of membership” requirements at the credit unions in your city?

Lesson 3 - Credit Unions

Involvement in Communities

Credit unions are usually very involved in the community where they reside.  They are involved in fund drives and offer services to help their members.  Additionally, most credit union employees are members of various clubs in the community. 

Application Exercise

Have you seen any credit unions in your city involved in community events or activities?  Explain.

Exercise 3 - Concept Review

  • Shareholders
    Members are called this and are given one vote in their credit union.
  • Field of membership
    Qualifications that identify who can become a member at a particular credit union.
  • Share account
    Name of a savings account at a credit union.
  • Loan shark
    A person who lends money at exorbitant high interest rates.
  • Membership fee
    The required amount paid to become a member at a credit union.

Income and Expenses

Lesson 4 - Income

Personal Income

Personal income is money received  for   performing  work, providing  services, investments, or  through other  types  of  incidences, such  as child support.  Income is either earned income or unearned income.  All income is taxable by the Internal Revenue Service (IRS).  The exception to this is income received from  others living  in  the same  house for doing things such as  babysitting  siblings, mowing the lawn, or receiving allowance for completing chores.  While these are forms of income, the IRS doesn’t require taxes to be paid on it. 

Application Exercise

What types of income do you receive?  For example, do you babysit, mow lawns, shovel snow, do chores, etc.?

Lesson 4 - Income

Earned income is money received from performing work or providing services.  Money can be in the form of cash or an in-kind object.  An in-kind payment is when a person receives an item in exchange for work performed such as receiving room and board for providing cleaning and childcare services.  In-kind payments are considered to be of equal value for the work performed.  In-kind payments are taxable in states where income is taxable and as federal income taxes.

Application Exercise

Have you ever performed work to receive an item in return?  If so, what did you do and what did you receive?

Lesson 4 - Income

Unearned income, sometimes referred to as passive income, is income that is received when work isn’t performed and services are not provided.  Some examples of unearned income are a cash gift by extended family or friends, retirement benefits, dividends and interest from investments, and child support. 

Application Exercise

Have you ever receive money that you did not earn?

Lesson 4 - Income

Bartering is another type of in-kind payment.  Bartering is when work or an item is exchange for work or something of value.  People, and kids, still barter today.  For example, a family may exchange a bag of oranges off their tree for a bag of nectarines off a neighbors tree.

Application Exercise

Have you ever bartered with a friend, classmate, or family member? If so, what did you barter?

Exercise 4 ~ Vocabulary Review

Matching terms with definitions:

  • Earned Income
    Money received for performing work or providing services.
  • In-Kind
    An item received in exchange for work performed or services provided.
  • IRS
    The governmental agency that receives revenue through the collection of taxes.
  • Revenue
    Cash generated from the sales of goods and services by companies.
  • Unearned Income
    Money received when work isn’t performed or services are not provided. It is sometimes called passive income.
  • Bartering
    Is the same as In-Kind. An item of value or work is exchange for an item or value or work from someone else.

Lesson 5 - Expenses

Expenses   are   costs   spent   on  goods  and  services.  Goods are things like groceries, clothes, toys, books, etc. Services are provided to someone, such as car wash, getting a hair cut, and going to the doctor.  A movie theater is an example of a company that offers both goods and services.  They provide the movie, which is a service and sell food, which is a good.

Application Exercise

What is another type of company that offers both goods and services? What goods and services do they offer?

Lesson 5 - Expenses

Expenses  are  either  fixed,  variable,  or discretionary.  Fixed expenses are costs that do not change from month-to-month or period-to-period.  A month, a quarter, or a year is also known as period of time.  These are costs that  must be  paid even  if  a  person  doesn’t  have  the  money  to  pay  for  them  or  their  income  decreases.  Several examples of fixed expenses are payments for  rent or mortgage, an  auto  loan, the trash bill, etc.

Application Exercise

What are some fixed expenses that your parents pay each month (you may need to ask them)?

Lesson 5 - Expenses

Variable expenses are  expenses that change base on behavior, a person’s income, and/or activity.  Variable expenses increase and decrease according to a person’s wants  and desires, but they are still needed.  For example, a person may spend $50 a week for groceries, but the cost of groceries varies on a person’s food preferences.  A person could decide to no longer eat processed food.  They still need to eat food, but their food choices would change and have a direct effect on how much they spend on groceries.  Variable expenses can also fluctuate with activity.  For instance, most  cell  phone bills have a set cost each month, however, that cost can  increase according to usage outside of the stated plan.  For instance, if a  person  travels  internationally and adds the international plan for a month, their cell phone bill can increase from $30 to $120 depending on the option they choose.   

Utilities bills (e.g. water, electricity, gas) typically have a fixed base cost that is charged each month.  Fees for usage can vary based on how much is consumed each month.  Because of this, utility bills are an example of an expense that must be paid like a fixed expense, but varies in cost based on usage.  

Application Exercise

Name some variable expenses that can increase or decrease in cost based on  a person’s behavior, activity, or income.

Lesson 5 - Expenses

What about costs for eating out, going to the movie theater, or buying trendy clothes?  These costs are called discretionary expenses.  Discretionary  expenses are for things you don’t have to spend money on to live.  Clothes are  necessary, but a person  who has a tight budget can shop for less expensive clothes than the trendy ones.  Going to the movie theater and eating out are optional activities.  They are fun, but not necessary to live. 

Application Exercise

Name some discretionary expenses that people make, but do not need in order to live. 

Exercise 5 Vocabulary Review

  • Discretionary Expenses
    Expenses that are optional.
  • Expenses
    Costs spent for goods and services.
  • Fixed Expenses
    Costs that do not change from month-to-month.
  • Goods
    Toys, books, clothes, autos, and electronics.
  • Services
    Hair cut, tutoring help, going to the dentist.
  • Variable Expenses
    Costs that change based on behavior, income, and/or activity.

Lesson 6 - Savings

Savings is putting money aside for use at some point in the future.  Savings is beneficial for many reasons.  It opens up purchase and/or investment opportunities in the future, meets financial goals, allows for payment of expenses when income is decreased or stopped for a period of time, earns money while not being used, and provides a source of income for retirement. 

Savings is putting money aside for use at some point in the future.  Savings is beneficial for many reasons.  It opens up purchase and/or investment opportunities in the future, meets financial goals, allows for payment of expenses when income is decreased or stopped for a period of time, earns money while not being used, and provides a source of income for retirement. 


Application Exercise

Have you ever saved any money for a special purchase, such as an electronic device or toy? If so, what did you purchase?

Lesson 6 - Savings

The  most  common  way  of  saving money is using a savings account at a financial institution.  Savings  accounts  are  also called deposit accounts.  Every financial institution has a variety of products for savings, which typically includes a regular savings account, money market deposit accounts,  certificate of deposits (CD),  automatic  or  club  savings  accounts,  and,  IRA savings accounts.  Each type of savings account requires a minimum balance and pays varying interest rates.  Banks call the rate used to earn money in deposit accounts “interest rates”; whereas, credit unions  call  the rate for deposit accounts a “dividend rate”.  A dividend is the money paid by a company to their shareholders.

Application Exercise

Do you have a savings account at a financial institution? If so, where?

Lesson 6 - Savings

Regular savings accounts usually have the smallest required minimum balance and pays the least amount of interest.  Money market deposit accounts require a larger minimum balance and pay more  interest.   As long  as  the minimum  balance  is  maintained  in  these two type of savings accounts, a person can withdraw and deposit freely.  However, it’s important to note that Federal law  requires  financial  institutions  to  charge  a  fee  once  a  savings  account exceeds six (6) withdrawals in a given month.

Application Exercise

If you have a savings account, what type of savings accounts is it?  If you do not have a savings accounts, what are the types of savings account are offered at your parents financial institution?

Lesson 6 - Savings

Certificate of Deposits (CDs) function differently than regular savings and money market deposit accounts.   When  a  CD  is  opened, a lump sum of  money  is deposited once and held in the CD savings account for the agreed upon term.  The deposited money must remain in the account until it matures in order to receive all of the earned interest.  The maturity date is the date at the end of the term.  If  any  or  all  of  the money in the CD is withdrawn early, all of the interest earned is forfeited.  CD terms range from 3 to 60 months, or longer.  Interest rates tend to be higher for CD accounts.  The interest rate varies according to how much a person deposits for a set term.  The illustration below shows what a CD product chart looks like:

As  you can  see from  the Illustration  below, if a  person deposits  $1,000 into  3 Month CD, the interest rate would be .30%; whereas, if they deposit $1,000 into a 3 Year CD, the interest rate would be 1.05%.  Depositing a larger sum of money for a longer period of time earns more money. 

Application Exercise

Do you know anyone who has ever had a CD account? Who?  What was the longest term they had for the CD?

Lesson 6 - Savings

Another type of saving’s account that some institutions pay higher interest rates are club accounts, which are basically automatic savings accounts.  These accounts either withdraw a predetermined amount  of money from a checking account or as an automatic paycheck deposit.  The amount withdrawn  is  set by the account  holder;  however,  there  is  sometimes  a  minimum  and/or maximum monthly deposit amount required.  These accounts also require the account holder to leave all deposited funds in the account for the agreed upon term, which is normally a year.  There are a whole variety of club accounts to meet the wide variety of needs of consumers; Christmas/Holiday, Vacation, and Wedding to name a few.

Application Exercise

Have your parents , grandparents, or you ever had a club savings account? If so, what was it called and what was it s purpose?

Lesson 6 - Savings

The last type of savings account discussed for this Chapter is an IRA account,  which will be brief as more information is shared in the Investments Section.  An IRA savings account requires a lump sum deposit and it is used for retirement.  Once money is deposited into an IRA account, it cannot be  withdrawn early without losing  the interest earned and  paying penalties, called an “early withdrawal penalty.” 

Lesson 6 - Savings

Why  do  financial  institutions  pay  people  for  their  deposits?   Why  do the rates vary among institutions?  In simple terms, financial institutions use the money deposited into savings accounts in  their  institution to  fund  the  loans they  give  to  people for houses, autos, credit cards, etc. 

Financial institutions go through cycles of needing more or less deposit funds.  They use interest rates to attract and dissuade people from depositing money. They will offer higher interest  rates  when  they  need more deposits  and lower interest rates when they need fewer deposits. 

Application Exercise

Does the financial institution that your parents use offer IRA deposit accounts?

Exercise 6.1 ~ Vocabulary Review

  • Certificate of Deposit
    A type of savings account.
  • Dividends
    Money paid to a shareholder of a company.
  • Early Withdrawal Penalty
    Incurred when money is taken out of an account before the maturity date.
  • Interest
    Money that is earned from the money put into a savings account.
  • Interest Rate
    The rate paid for money put into a savings account.
  • Loans
    Financial institutions use deposits to fund these.
  • Maturity Date
    The ending date for the term of a CD.
  • Savings Account
    A product used to save money at a financial institution.
  • Shareholders
    A person who receives dividends.

Exercise 6.2

Using the following CD product chart, fill in the blanks below.

1.  The interest rate for a 3-month CD with a $10,000 deposit would be  %.

2.  What CD term would a person need to select to get a rate of 2.20%? 

3.  How much money would a person need to invest to get a rate of 2.05% for a 4-year term? 

4.  Susie chose a 3-year CD that has an interest rate of 1.75%.  Upon maturity of the CD, she has a balance of $52,671.21.  How much was her initial deposit?   How much interest did she make?    

Lesson 7 - Giving

Giving is freely giving something to someone else without the expectation of anything in return.  This can be done through giving money to a  non-profit  organization such  as a church  or the  United Way, giving something   of  material  value  to  a   person  in  need  or   to  a  charitable organization such as a thrift store, or giving time to help others.

Application Exercise

Have you ever given something to someone else without expecting anything in return?

Lesson 7 - Giving

The decision to give is an individual decision and cannot be determined by looking at what others give because incomes, expenses, and available personal time vary.  How much should a person give?  Many live by the Biblical example of a 10% tithe while others gauge how much to give through personal preference.  Sometimes giving money is not possible due to very low  income or no job, but during those times, a person may still be able to give their time. Regardless how much a person gives, giving has positive emotional benefits.  There is a sense of accomplishment when a person in need can be helped.

Application Exercise

How did you feel when you gave something to someone else?

Lesson 7 - Giving

Giving money or material items of value can have a tax benefit for those who are able to claim deductions, which is not usually the case for those who have not purchased a house and had kids.  However, understanding the benefit of deductions for charitable donations is part of personal finance. 

Claiming  personal  deductions  on a tax return  means  itemizing  those  deductions.  Itemizing deductions is listing all allowable deductions in order to lower one’s taxable income.  Lowering taxable income means lowering how much is owed in taxes, or lowering a person’s tax liability.  A tax liability is how much tax is owed.  Personal deductions, such as donations to non-profit organizations can reduce a person’s tax liability. 

Application Exercise

Do you parents itemize their deductions?

Lesson 7 - Giving

Giving money to non-profits such a church or charitable organization is an important aspect of life.  The IRS allows an economic benefit for those who do give in this way.  It is important to remember there is more than an economic benefit. 

Application Exercise

What are some ways to give to others  and/or organizations that do not include money?

Exercise 7 - Vocabulary Review

  • Itemizing deductions is listing all non-allowable deductions in order to lower one’s taxable income.
  • Freely giving something to someone without expecting anything in return describes giving.
  • A tax liability is the amount of tax a person owes.
  • There are many different attitudes towards how much to give.
  • There are positive emotional benefits to the giver when they give to others.
  • Volunteering one’s time to help others is a form of giving.
  • Paying for food in the school cafeteria is a form of giving.
  • There are different opinions about how much a person should give.
  • The IRS allows an economic benefit to those who give money to non-profit organizations.
  • A person should always expect something in return when they give to others.

Assets

Lesson 8 - Assets

An asset  is something of  value.  It  can be  a talent, a  friend, a  material  possession, etc.   Assets, in general, are  different  for different people.  In the world of personal finance, an asset is an item of value that is owned by an individual.  There are different kinds of assets.  There are fixed, tangible, short-term, and long-term assets, which will be discussed in a bit.

Application Exercise

What assets do you have? 

Lesson 8 - Assets

Assets are part of a person’s personal net worth.  Understanding what is owned (assets) is one part of the equation for a person to understand their net worth.  Measuring personal net worth indicates the financial health of a person.  To determine the personal net worth of a person, total liabilities are subtracted from total assets.  Why is this important?  Because if a person’s net worth is a negative, then it shows they have too many debt obligations.  In other words, they would not  have enough assets to sell off in order to pay all of their liabilities.  Liabilities are debts that are owed.  Liabilities are discussed in further detail in Section 4.

Application Exercise

How is personal net worth calculated? 

Lesson 8 - Assets

Fixed assets are tangible items that are held for a long period of time and are not expected to be sold, or converted, to cash.  Examples of fixed assets would be a house, shed, bicycle, lawn mower, personal  property, etc.   Personal property is something  that  can  be moved  from  one  place  to another.  Some examples of personal property are jewelry, computers, furniture, clothing, books, video games, and musical instruments. 

Some fixed assets may increase in value over time such as a house, while some decrease in value over time such as a car.  The value of other fixed assets can fluctuate, such as assets tied to the price of commodities.   For example, the value of jewelry made of gold or silver will increase or decrease with the price of gold or silver in the commodities market.  The commodities market is explained in the Investments section.

Application Exercise

List the fixed assets your family and you own? 

Lesson 8 - Assets

It is important to determine an accurate value for each an asset.  Appraisals determine the value of an item and can be used to determine the value of things like a house, jewelry, antiques, paintings, etc.  An appraisal is when an expert gives an estimated value of property or goods.  A car’s value can be determined through using online websites such as the National Automobile Dealers Association (NADA) website.  Personal property value is a bit tricky as most personal property decreases,  or  depreciates, in  value  over  time.   Depreciation is  when the value  of something decreases.  While some personal  property  items  can  be appraised, it is difficult to give a value to everyday items such as clothing.

Application Exercise

Have  your parents or a family member  ever had anything appraised? If so, what did they have appraised?  

If not, what are some things that could be appraised to determine its value?

Lesson 8 - Assets

Fixed assets can also be tangible or intangible.  Tangible assets have a physical state; they can be identified by touch.  An intangible asset is something that cannot be seen or touched as it doesn’t have a  physical state.  Examples of intangible assets are friendships, patents, copyrights, brand name, intellectual property, and reputation.

Application Exercise

What intangible assets do you own?

Exercise 8 - Vocabulary Review

  • Asset
    Something of value.
  • Fixed asset
    A tangible item typically held for longer than one year.
  • Personal Property
    An item that can be moved from one place to another place.
  • Liability
    That which is owed.
  • Appraisal
    An estimated value of property or good by a expert.
  • Tangible assets
    An asset that can be touched or seen.
  • Personal net worth
    That which indicates a person’s financial health
  • Depreciation
    When the value of an asset decreases.
  • NADA
    National Automobile Dealers Association
  • Intangible assets
    An asset that does not have a physical state, such as a brand name.

Lesson 9 - Short and Long-Term Assets

A short-term asset is an asset that will be sold, or converted to cash, within a year.  Examples of short-term assets are cash, a CD with a maturity date that  is due  within  a year, prepaid  rent or insurance, etc.   Short-term assets are also known as current assets.  An example of a short-term asset for tweens and teens would be buying books, video games, or movies that you plan to sell back within a few months.  These types of assets depreciate over time; therefore, the money spent will not be fully recouped when selling them back.

Application Review

Do you buy products that you sell back? If so, what are they?

Lesson 9 - Short and Long-Term Assets

A prepaid asset is when a bill is paid before it becomes due.  For example, some people will pay their auto insurance for six months or a year at a  time in order to get a significant  decrease in their insurance  rates.   The prepaid  insurance then  becomes  a  short-term asset.    The value of the prepaid  decreases each month  the asset is used.  For example, let’s say the annual cost of auto insurance is $1,200 or $100 per month for an individual and that person paid for the entire year of insurance upfront.  After they have used the insurance for two months, which is a value of $200, their prepaid auto insurance would then  have a value  of $1,000.   If that same  person were to cancel  their  insurance  three  months  into  their  policy  term, they  would  be reimbursed  the difference between the time they used the insurance and the time that remains., which would be $900.

An asset that isn’t originally a short-term asset can become a short-term asset as time passes.  For instance, a 3-year CD would not be a short-term asset when initially started; however, once the maturity of the 3-year CD is within a year, it becomes a short-term asset.

Applications Review

Do you parents prepaid any expenses? If so, which expenses do they prepaid?

Lesson 9 - Short and Long-Term Assets

Long-term assets, also known as fixed assets, were discussed briefly in Lesson 8.  Long-term assets are also known as non-current assets.  Long-term assets are permanent in nature and will not be turned into cash within a year.  For example, long-term investments, a house, land, and a car are all long-term assets as they are not likely to be sold to obtain cash within the next year.  However, things happen and while a person may have a long-term asset they weren’t planning on selling within the next year, sometimes they do sell earlier than expected.

An example of long-term assets for a tweens and teens would be investing in equipment to mow lawns and do yard work to earn money.  Some tweens and teens have purchased “special toys and games” specifically  for babysitting.   It is not uncommon  for a tweens and teens to purchase equipment or tools in order to provide services to others to earn money. 

Application Review

Have  you invested in  equipment or  tools or  materials that  you do not plan to sell in order to provide services to others to earn money? If so, what have you purchased?

Application Review

Can you think of some other long-term assets? (Hint: items used for recreational activities, older furniture, a place to go on vacation that is owned) 

Exercise 9 - Vocabulary Review

  • A short-term asset is an asset that can be sold, or convert to cash, within 24 months.
  • A short-term asset is also known as a prepaid asset.
  • A prepaid asset is when a bill is paid before it becomes due.
  • Long-term assets are also known as fixed, tangible, and noncurrent assets.
  • A person can suddenly decide to sell a long-term asset.
  • A long-term asset is permanent in nature and will not be turned into cash within a year.
  • Short and long-term assets mean the same thing.
  • Buildings and land on a working farm are examples of long-term assets.
  • A vehicle that will be sold within five months is NOT an example of a short-term asset.
  • Rent pre-paid for three years is a long-term asset.

Lesson 10 - Personal Financial Statement - Assets

A Personal Financial Statements (PFS) is a form that is used to determine the net worth of an individual, a married couple, or a company.  PFS’s  come in several different formats with some being  more  detailed  than  others.   The  top section of a PFS contains  the  personal  information  such  as  name,  address, contact information, and social  security  numbers.   The second section  is for listing all assets.   Some PFS’s  separate  current assets from  noncurrent  assets and  then  total  them  for total assets.   The third section  is  for listing  all liabilities.   There may also  be a section to list  income and  contingent liabilities  (to  be explained  in Section 4).  

Lesson 10 - Personal Financial Statement - Assets

Cash on hand at Financial Institutions –any money a person has in cash or in their checking accounts.

Savings Accounts – any money in any type of savings account, which would include CDs.

IRA or Other Retirement Accounts – money in an IRA or any other type of retirement account such as a 401K.

Accounts & Notes Receivable – money that has been loaned to a person or company and is expected to be paid back.

Life Insurance – Cash Surrender Value Only – Some life insurance policies have a cash value that has been built into the policy. 

Stocks and Bonds – the value of stocks and bonds owned by a person.

Real Estate – the value of buildings and land.

Automobile Present Value – value of all owned vehicles (autos, motorcycles, trucks, etc.), this includes those with loans.

Other – Personal Property – value of all personal property such as jewelry, clothing, antiques, appliances, etc.

Other Assets – value of goods not listed such as recreational vehicles and boats.

Exercise 10 - Concept Review

  • Cash on hand at Financial Institutions
    Money on hand and in checking accounts.
  • Savings Accounts
    Money is savings accounts.
  • IRA or Other Retirement Accounts
    Money in IRA, 401K, or other retirement account.
  • Accounts & Notes Receivable
    Money expected to be received from a loan given to a person or company.
  • Life Insurance - Cash Surrender Value Only
    Cash value of life insurance policy.
  • Stocks and Bonds
    The value of stocks and bonds.
  • Real Estate
    The value of buildings and land.
  • Automobile Present Value
    The current value of vehicles.
  • Other - Personal Property
    The value of personal property.
  • Other Assets
    The value of goods not listed in any of the other categories, such as a boat.
  • Total
    The sum of all assets.

Liabilities

Lesson 11 - Liabilities - What is Owed

A liability is being responsible for something.  A liability can also be a hindrance such as a negative attitude or not having a skill to complete a particular  task.   In finance  and  accounting, a liability is a debt or money   that  is  owed.    Remember,  assets  are  owned. 

Application Exercise

Can you think of a liability you may have? (Hint: Perhaps spelling or math  are  not your  best  subjects.  Or, do  you owe a friend or sibling something? Or, maybe you have chores left to do for the week?)

Lesson 11 - Liabilities - What is Owed

A  person can have an item that is both an asset and a liability.  For instance, if a person has a house loan, the value of the house would be an asset because it is owned; however, the loan for the house would be a liability because it is owed.    The equity in the house would be the difference  of  how  much   is  owed  and  the   value of  the house.    In  other  words, equity  is  the value in a property after all loans attached to the property have been subtracted.

Application Exercise

What is another item that a person could have that could be both an asset or a liability? (Hint: Items used for transportation and while on vacations).

Lesson 11 - Liabilities - What is Owed

One goal with finances is to make sure total assets is greater than total liabilities.  In other words, a person would want the value of what they own to be greater than what they owe.  Having more total assets than total liabilities is known as having positive net worth.   Remember, a person’s net worth  is calculated as total assets minus total liabilities.  If a person owes more in liabilities than they own in assets, they would have a negative net worth.

Application Exercise

What is one way a person can keep from having a negative net worth?

Lesson 11 - Liabilities - What is Owed

The absolute best way for a person to make sure they do not have a negative net worth would be to not take out any loans.  However, many people choose to obtain loans for their vehicles and homes.  In order to increase one’s change of having a positive net worth would be to not take on a lot of loans.  Additionally, saving up money and putting a large deposit toward the purchase of products when obtaining a loan can help toward building equity - having more value than money owed in an item that is owned. 

Exercise 11 - Vocabulary Review

  • A negative attitude and lacking in a particular skill would be a personal liability.
  • A liability in finance or accounting is that which is owned.
  • The difference between the value of an item and what is owed on the same item is equity.
  • A positive net worth is having more total liabilities than total assets.
  • A negative net worth is having more total liabilities than total assets.
  • Total assets minus total liabilities equals total net worth.
  • The goal with personal finances is to have more total assets than total liabilities.
  • Being skilled in a particular activity is a personal asset.
  • Any type of loan is a liability.
  • Putting a large deposit toward a loan when making a purchase decreases the chances of having a negative net worth.

Lesson 12 - Short and Long-Term Liabilities

Short-term liabilities are also known as current liabilities.  They are debts or obligations due within one year.  Examples of short-term liabilities are  payday  loans  and  personal  loans  due  within  a  year.   Another   example  of   a  short-term  liability  would   be borrowing money for a snack or small item from someone with an agreement to pay them back within a week. 

Application Exercise

Have you ever borrowed money from someone with the promise to pay them back within a short period of time? If so, who did you borrow from, how much did you borrow, and how long did it take to pay them back?

Lesson 12 - Short and Long-Term Liabilities

Payday loans is an extremely short-term loan for a small amount of money.  A person will borrow money, usually at the highest interest rate allowed by law, until they receive a paycheck to pay the loan back.  Every state has their own payday loan regulations.  It is best to avoid these type of loans due to the extremely high interest and fees incurred.  

Application Exercise

What is the payday loan interest rate allowed in your state? (This site can help you determine the interest rate your state can charge for a payday loan: NCSL

Lesson 12 - Short and Long-Term Liabilities

Credit cards and other types of loans can be a short-term liability if it is required to be paid in full within a year.  As was the case with short-term assets, a long-term liability can become a short-term liability once the paid-off date of the loan comes due within a year. 

There are other short-term liabilities a person has, but they are not listed on a Personal Financial Statement (PFS).  These would be utility bills, cell phone bill, groceries, clothing, etc.  Why aren’t they included?  A  PFS is a personal balance sheet.   While everyday expenses are owed, they can be  changed  by  changing  one’s  circumstances  such  as  moving  to  a  less  expensive  place  or discontinuing or lessening the usage of an item.  Additionally, if a person stops paying a utility bill or cell phone bill, the company will stop allowing the use of those items until the person begins to pay.  A loan is different than these things because it must be paid back regardless of use, non-use, or lack of payment. 

Application Exercise

What are some short-term liabilities you parents pay each month?

Lesson 12 - Short and Long-Term Liabilities

Expenses, such as utility bills, cell phone bill, groceries, household items, etc., would be shown on a Personal Cash Flow Statement (PCFS).   A PCFS measures all of a person’s  inflows (income) and outflows  (expenses), which shows the net  cash flow for a period of time, usually a month.  It’s useful is creating a budget and tracking a person’s spending history.

Lesson 12 - Short and Long-Term Liabilities

Long-term liabilities, also called noncurrent liabilities, is a debt obligation that is due after a year or more. There are many types of long-term liabilities.  Credit cards, personal loans for longer than a year, home equity lines of credit, house loans, auto loans, student loans, and loans on life insurance policies are all examples of long-term liabilities.  Unpaid taxes can also be a long-term liability.  Additionally, a medical bill that will not be paid within a year could be classified as a noncurrent liability.

Application Exercise

Using the information just mentioned, what are some examples of long-term liabilities do?

Lesson 12 - Short and Long-Term Liabilities

Credit  card  debt, personal loans, and personal  lines  of credit  are  usually  classified as Notes Payable to Banks and Others on a PFS.  Loans with regular payments such as every month are known as Installment loans.  Installment loans include loans for recreational vehicles, boats, autos, airplanes, school, etc. Installment loans are usually split between “auto” and “other.”  Installment loans for autos also include lease agreements for cars.  Even though a mortgage has a regular monthly payment, it falls under Mortgages on Real Estate.  Many people have insurance policies that allow for the insured person to take out a loan and these are called Loans on Life Insurance. 

Application Exercise

What are some types of installment loans? Refer to the last slide.

Lesson 12 - Short and Long-Term Liabilities

When  completing the liability section on a PFS, the amounts only include the remaining debt, not the amount of the original loan.   For example, a person may have taken out a loan three years ago for $5,000, but today the remaining balance on that loan is $500.  The remaining obligation of the loan  is  known as  the outstanding  balance  and  is  the  sum  entered  onto  a  PFS  for  the  debt obligation. 


Lesson 12 - Short and Long-Term Liabilities

When a person’s income cannot meet, or pay for, their debt obligations, it is referred to as being overextended.   Income  should  always  be  larger than  debt obligations.  The  larger the  margin between the two, the easier it is  to pay for the  debt  obligations and the  less  stress  a  person endures.  While expenses are not included on a PFS, they should always be accounted for when determining how much debt to incur. 

Lesson 12 - Short and Long-Term Liabilities

There are also liabilities known as contingent liabilities.  Contingent liabilities are obligations that may occur in the future.  In other words, a liability may or may not occur because it is contingent upon something happening.  A contingent liability should not be listed on a PFS unless it’s highly probable it will happen. 

Exercise 12 - Vocabulary Review

  • Payday loans
    Loans with high interest rates that are paid when a person gets their next paycheck.
  • Short-term liability
    Debt or liability that is paid within a year.
  • Long-term liability
    Debt or liability that is due longer than a year.
  • Personal Cash Flow Statement
    Used to measure the cash inflows and outflows of a given period.
  • Outstanding balance
    The remaining obligation on a loan.
  • Installment loans
    Loans that have a recurring monthly payment.
  • Current liabilities
    Another name for short-term liabilities.
  • Over-extended
    Having more expenses than income to meet debt obligations in a given period.
  • Non-current liabilities
    Another name for long-term liabilities.
  • Contingent liabilities
    Liabilities that have a high probability of occurring in the future.

Net Worth & Liabilities on a PFS

As stated in previous lessons, personal net worth is calculated by taking total assets and subtracting total liabilities.  Once a person’s net worth is figured, other ratios can be completed to determine a person’s financial health.  Of course, if a person’s net worth is negative, their financial health is not good and they need some help.  If total assets are greater than total liabilities, a person has enough assets they could sell to pay all of their debt obligations. 

Now it is time to learn how to complete the liability section of a PFS.  The illustration below is the liability section of a PFS.

Notes Payable to Banks and Others – Credit cards, personal loans, and personal lines of credit.

Installment Account (Auto) – includes all outstanding balances for all auto loans, which would include loans for boats, recreational vehicles, airplanes, etc.

Installment Account (Other) – includes student loans or other personal loans.

Mortgages on Real Estates – outstanding balance for all mortgages.

Unpaid Taxes – contains unpaid taxes that will not be paid within a year.

Other Liabilities – this category is for any debt obligations that do not fit into any of the other categories.

Net Worth - the difference between total assets and total liabilities. 

Exercise 13 - Concept Review

  • Notes Payable to Financial Institutions and Others
    Credit cards, personal loans, and personal lines of credit.
  • Installment Account (Auto)
    Includes all outstanding balances for all auto loans, which includes loans for boats, recreational vehicles, airplanes, etc.
  • Installment Account (Other)
    Student loans and personal loans not included in Notes Payable.
  • Mortgages on Real Estates
    Outstanding balance for all mortgages.
  • Unpaid Taxes
    Contains unpaid taxes that will not be paid within a year.
  • Other Liabilities
    Any debt obligations that do not fit into any other categories.
  • Net Worth
    Difference between total assets and total liabilities.

Wages

Lesson 14 - Gross Wages


A gross wage is the monetary funds earned by an employee in exchange for work completed.  Monetary funds is another way of saying money.  Wages can be earned as:

· a fixed wage per hour;

· tips;

· pay per job such as mowing a neighbor’s  lawn or babysitting;

· base pay or salary;

· overtime;

· bonuses;

· commissions;

· profit sharing;

· merit pay; and

· and stock options. 

Application Exercise

Have you earned any wages?  If so, what work did you perform to earn those wages?

Lesson 14 - Gross Wages

A person earns overtime pay once they have worked more than 40 hours in a workweek.  This means a person can work four 10 hour days or three 12-hour days in a given workweek and still not earn overtime pay.  In other words, the 40-hour guideline is based on hours worked in a workweek not the number of hours worked in a day.  Overtime pay is 1 ½ times a person’s hourly wage.  For example, if a person earns $10 an hour as their regular pay, their overtime pay would be $15 an hour, which is (10/2) + 10 = $15.

Application Exercise

Do your parents work overtime?

Lesson 14 - Gross Wages

There is on type of pay where an employer does  not have to pay overtime and that is when a person receives a salary.  Salary pay is considered exempt.  Exempt wages means the employee is exempt  from receiving  overtime pay.   It  is  assumed the employer  is paying a higher wage in exchange for hours worked that exceeds 40 hours in a workweek.  Employees who receive a salary usually have significant experience and/or education. 

Application Exercise

Do your parents earn exempt or non-exempt wages?

Lesson 14 - Gross Wages

Commissions are earned either in addition to a base pay or without a base pay.  Commissions are either a percentage or flat fee paid to an employee for each good or service sold.  Examples of jobs with commissions are auto sales,  real estate sales,  mortgage originators,  commercial lenders, insurance  sales,  personal financial advisors,  and much more.   Most jobs that involve selling products earn commissions. 

Application Exercise

Who do you know that works in a commissions related job?

Application Exercise

Benefits from an  employer are  considered part  of the person’s pay package.   Benefits  are  not typically paid to part-time employees; however, many employers do offer a condensed benefit package  to their part-time employees.   Benefits can include medical and dental  insurance, life insurance, vacation pay, severance pay, retirement, taxes, jury duty pay, and much more. 

Exercise 14 - Vocabulary Review

  • An employee who is paid a salary is considered exempt from overtime pay.
  • Commissions are paid either as a percentage or a flat fee for a good or product sold.
  • Gross wages are the monetary funds earned by an employee in exchange for work completed.
  • Overtime pay is when an employee works more than 40 hours in a workweek.
  • Benefits are considered part of employee’s complete pay package.
  • An employee who is paid hourly is a non-exempt employee.
  • Medical and dental insurance, vacation pay, and retirement are examples of benefits paid by an employer.
  • An employee would not earn overtime pay if they work 10 hours in a day, but only 30 hours during a work week.
  • If Charlie earns $20 per hour as his regular pay, he would earn $30 per hour for each overtime hour worked.
  • Auto and insurance sales are examples of commission based jobs.

Lesson 15 - Deductions - Part I (Taxes & Insurance)

Once an employee has earned gross wages, and before the employer can give  the employee those earned wages,  deductions have to be applied.  Deductions  are considered either mandatory or voluntary.   Taxes are mandatory and insurance deductions are voluntary.  Payroll taxes consist of  Federal  Tax  (withholding),  State  and Local  Tax (withholding),  Social Security   Tax   (also  known  as   FICA),  and  Medicare  Tax.    Insurance deductions can include health; dental; vision; accident, dismemberment, and disability insurance (AD&D); and, life insurance. 

Lesson 15 - Deductions - Part I (Taxes & Insurance)

There are various things that affect an individual’s Federal Withholding including  wage  rate,  which include the number of dependents,  marital  status,  pay frequency,  and  timing  of deductions.  The higher the wage rate, the more Federal withholding.  The IRS has tables that show the percentage of gross wages deducted.  Since this changes, it’s best to look at the tables online. 

Lesson 15 - Deductions - Part I (Taxes & Insurance)

Dependents are qualifying children or relatives as defined by the IRS.  There is a test for both a child and a relative to determine  if they can be a dependent.   Two  important  factors of  claiming  a dependent are 1) no one else is claiming them as their dependent, and 2) they rely on the person claiming them for their support for more than half of a given year.

Application Exercise

Who claims you as a dependent?

Lesson 15 - Deductions - Part I (Taxes & Insurance)

State and Local (city and/or county) taxes vary by state, city, and county.  In fact, in some states, cities,   and   counties,   employees  do   not  have  to   pay   any  state  or  local  taxes.  If a person is interested in knowing if they pay state and local taxes, they can look on their paycheck stub as all deductions are itemized.  Worker’s Compensation (WC) is insurance paid by employers, which pays wages and medical benefits to employees when they have been injured on the job. 

Application Exercise

Are state and local payroll taxes incurred where you live?  If so, what are the tax rates?

Lesson 15 - Deductions - Part I (Taxes & Insurance)

While health insurance is offered by most companies,  dental and vision insurance is not.  Some companies offer these two types of add-on insurances and others don’t.  Many companies pay a portion  of the  health insurance  (and  dental and vision when offered)  monthly premiums for employees.   Other types  of insurance policies offered are AD&D and life insurance.  These are usually at very low rates.  Insurance rates are usually less expensive through an employer than they are if a person obtains it on their own because companies can get discounts for large groups. 

Exercise 15 - Concept Review

  • Property taxes are deducted from gross wages.
  • Some states do not have state income taxes.
  • A neighbor living in a different house can be claim as a dependent.
  • Some companies do not offer dental or vision insurance as a benefit.
  • Employees receive gross wages and pay deductions back to an employer at the end of the year.
  • Auto insurance is offered by most employers.
  • State and local taxes vary by state, county, and city.
  • How much an individual earns determines how much Federal Taxes are paid.
  • To claim a person as a dependent, no one else can be claiming them and they receive over half of their support from the person claiming them.
  • The IRS has tables showing tax percentages on wages earned.

Lesson 16 - Deductions - Part II (Retirement & Garnishments)

Retirement  and garnishments are other types of deductions that could occur.   Retirement  plans can be  government  sponsored,  personal,  or employer  sponsored.   The  most  well-known  government  sponsored retirement  plan  is  Social Security.   Aside  from  Social  Security,  other government  sponsored  retirement plans are  typically for government employees.  The most well-known employer sponsored retirement plan is the 401K.  Other popular employer sponsored retirement plans are profit-sharing, defined benefit pension plans, and Roth 401(k). 

Personal or self-funded retirement plans are simply having money deducted from a paycheck and deposited  directly into a plan.   These are  usually IRAs,  annuities,  or interest  bearing savings account.

Application Exercise

Are you familiar with any of the retirement plans mentioned?  If so, which ones?

Lesson 16 - Deductions - Part II (Retirement & Garnishments)

Garnishments occur when a court orders money to be deducted from the wages of an employee for unpaid  debts.  Garnishments have limits.   There  are  federal  limits  to  how  much  can  be garnished, which is the lesser of 25% of disposable income (gross wages minus deductions) or the amount  of  wages  that  exceeds 30 times the federal minimum wage.   Some states have wage  garnishment laws that are stricter than the federal wage garnishment laws.

Application Exercise

Did you know that a court could order an employer to garnish the wages of an employee?

Lesson 16 - Deductions - Part II (Retirement & Garnishments)

Garnishments, however, are  not the same  as income deduction  orders.   An income deduction order is issued by the court and is like a garnishment in that it is used to deduct money from an employee’s wages for debt obligations; however, an income deduction order is mainly used for Chapter  13   bankruptcies and  child  support.   Additionally, an income deduction order  is not always  limited in how much can be deducted.   Also, the court may issue such an order when a person isn’t behind on payments.   For example, if a person has filed a Chapter 13 bankruptcy, also known as a  wage earner plan,  they have created  a repayment  plan to pay all or some of their outstanding debt to their creditors.   Once this plan is approved by the court, an order for the agreed upon monthly payment may be issued to a person’s employer for a mandatory deduction.  This ensures the person follows the plan.  An income deduction order is sometimes put in place for child  support for the same reasons.  A Chapter 7 bankruptcy can cancel most or all of a person’s unsecured debts such as credit cards, but not secured debts such as a mortgage.  Secured and unsecured debts are discussed in a later section.

Application Exercise

If an individual becomes overextended and chooses to claim a bankruptcy, do you think they should try to create a plan to repay all of their debts or let some of the debts be discharged? Explain.

Exercise 16 - Concept Review

  • Child support is an example of a retirement deduction.
  • Government, employer, and self-funded plans are all examples of retirement plans.
  • An income deduction order is issued by the employer.
  • The wage garnishment limit is he lesser of 25% of disposal income or the amount of wages that exceeds 30 times the federal minimum wage.
  • A Chapter 8 bankruptcy is used to create a payment plan to payback creditors.
  • Social Security is one of the most popular types of government sponsored retirement plans.
  • A Chapter 13 bankruptcy is also known as garnishment deduction plan.
  • An income deduction order is typically used for a Chapter 13 bankruptcy.
  • States cannot set stricter wage garnishment limits than the federal government.
  • Creditors must obtain a judgment from the courts to garnish wages.

Lesson 17 - Net Wages

Once  an  employer  subtracts  all  deductions  from  an  employee’s  gross wages, the resulting amount is the net wages.  The net wages are then paid to the employee.  Net wages is also known as net pay and take home pay.  There are  many websites a person can use to calculate their net pay.   It most likely will not be exact, but it will be a good estimate. 

Lesson 17 - Net Wages

Companies vary their pay frequency.  Pay frequencies can be daily, weekly, bi-weekly, semi-monthly, monthly, quarterly, semi-annually, and annually.  The most popular pay frequencies are weekly, bi-weekly, semi-monthly, and monthly. 

Application Exercise

What is the pay frequency of your parent’s pay?

Lesson 17 - Net Wages

Wages are usually paid either by a check or direct deposit into a savings or checking account.  Most employers prefer paying through direct deposit; however,  a person 17 years old or younger cannot open a savings or checking account at a financial institution without an adult on the account.  Opening an account with a financial institution requires the account holder to sign a contract and minors cannot legally enter into a contract. 

Application Exercise

Do you parents receive their pay using direct deposit or with a paper check?

Lesson 17 - Net Wages

Having savings or checking accounts helps a person manage their money, however, if finding an adult to sign onto an account is not possible, a minor employee can request a paper check as direct deposit is not mandatory and cannot be forced upon an employee.

Application Exercise

Do you have a checking account at a financial institution?  If so, what is the name of the financial institution?

Exercise 17 - Concept Review

  • Employees receive gross wages after deductions are applied.
  • Employees typically receive their pay either by a paper check or direct deposit.
  • Net wages is the sum paid to an employee after deductions are applied to gross wages.
  • Employers can make direct deposit mandatory.
  • A person can open a checking account regardless of their age.
  • Pay frequencies can vary by company.
  • Net wages are also known as take home pay.
  • A savings or checking account can be a useful tool to help manage money.
  • A contract is used when opening a savings or checking account.
  • Minors can open a checking account without an adult.

Checking and Savings Accounts

Lesson 18 - Checking Accounts

Many  people  have checking  accounts,  but there are many that do not.  According to the Federal Deposit Insurance Corporation (FDIC) in their 2013 FDIC National Survey of Unbanked and Underbanked Households, “7.7 percent (1 in 13) of households in the United States were unbanked in 2013.  This proportion represented nearly 9.6 million households.”  That is a lot of households.  The report doesn’t state if it included those who have accounts with other types of financial institutions such as credit unions. 

Application Exercise

Are you surprised that there are that many households without checking accounts?

Lesson 18 - Checking Accounts

Having checking and savings accounts are not mandatory, but they are very useful financial tools.  Many people are concerned about losing their money at a bank or credit union; however, unlike the  run  on the  banks in  the movie  “It’s a Wonderful Life,”  money  in  financial  institutions are insured up to certain dollar amounts. 

Application Exercise

What do you think  the phrase “run on banks” means?

Lesson 18 - Checking Accounts

A run on banks  is when a large number of customers demand to withdraw all or most of their cash from their deposit accounts at the same time.  Most financial institutions do not keep enough cash on  hand  or  have  enough  in  their  reserves  to meet the demand.   The  FDIC  was created  to help prevent a run on banks.  It provides insurance up to $250,000 for each depositor at each insured bank.  The National Credit Union Association (NCUA) also provides insurance up to $250,000 for each share owner (member) for each insured credit union. 

Application Exercise

Do you parents have accounts at a bank , credit union, or both?

Application Exercise

What is the name of the financial institutions they use?

Lesson 18 - Checking Accounts

Remember, to open up any account at a credit union a share (savings) account must be opened first.  Banks do not have this same requirement; although, it’s a good idea to open a savings and checking  account  at  the  same  time  if  a  person  has  no  savings  accounts at  any other  financial institutions.

Lesson 18 - Checking Accounts

When opening up new accounts, most financial institutions require photo  identification, proof of residence, social security number, and date of birth.  A driver’s license or a state identification card will usually satisfy the photo identification,  proof of residence, and date of birth if the person’s current residence matches the address.  Financial institutions will run a person’s information through an online verification program.  If all of their information matches, then the process moves forward.  If any of the information, such as social security number or date of birth, do not match, the financial institution will most likely request to see the original document for the item in question, such as a social security card or birth certificate. 

Lesson 18 - Checking Accounts

The  verification  process  is required  by law.   Once it is  complete,  the financial  institution will obtain a credit report.  Most young adults do not have any sort of credit history, and therefore, no credit  score,  also known as a  FICO score.   If a person does have a credit history,  the financial institution  will  decide if they  qualify for a checking account.   Most  people can open a savings account regardless of their credit history and score.

Application Exercise

Do you parents remember going through this process when they opened up their accounts at a financial institution?

Lesson 18 - Checking Accounts

When opening a checking account for the first time, it’s a good idea to have the institution order checks and a debit card.  The debit card gives access to a person’s checking and savings account even  when  the  institution is closed by using the  ATM.   It’s  important  to  note  that  financial institutions charge fees when you use a foreign ATM.  A foreign ATM is an ATM that is not owned by the financial institution where the account is held) ATM.  When a foreign ATM is used, your financial institution and the institution where you used the ATM will charge a transaction fee of $1 to $5.  These fees can begin to add up if a foreign ATM is used a lot. 

Application Exercise

Have your parents used a foreign ATM  -  an ATM that is owned by a financial institution that is different than where your parents have their checking and savings accounts?

Lesson 18 - Checking Accounts

Debit cards can also be used for purchases at most merchants; however, there are still companies that don’t accept debit cards.  Checks become necessary when a person does not have any cash with them and/or a merchant does not accept debit cards, but will accept a check.  The problem with checks is that most people do not know how to fill out a check.  The next lesson will teach you how to write a check!

Exercise 18 - Concept Review

  • FDIC
    Federal Deposit Insurance Corporation
  • Run on banks
    A large number of customers withdraw all of their cash at the same time.
  • NCUA
    National Credit Union Association
  • $250,000
    The maximum amount insured for each depositor at a financial institution.
  • Foreign ATM
    An ATM being used that is owned by a different financial institution than where a person has their accounts.

Lesson 19 - Writing a Check

The check illustration is a sample blank check.  Look at the number on the check and  match  it  with  the list  below to identify  what each  part of  the  check represents.

1. Name and address of the account holder(s).

2.  Number of the check.  Checks are printed in sequential numerical order.

3.  Date check is written.

4.  Name of payee (e.g. person or company being paid).

5.  Dollar amount being paid written in words.

6.  Dollar amount being paid written in numeric form.

7.  Name of the financial institution where the account is held.

8.  Optional field to state the purpose of the check (i.e. shoes for work).

9.  Signature of the account holder.

10.  Routing number of the financial institution where the account is held.

11. Account number of the checking account that funds are drawn on.

12.  The payee of the check endorses (sign) the back of the check to either deposit or cash the check.  When cashing a check, the payee obtains the amount being paid in cash.

Lesson 19 - Writing a Check

The above illustration is an example of a completed check.

Lesson 19 - Writing a Check

There  is  a   correct   way  to complete the written dollar amount.    The  dollar  part  is written out while the cents part is written as a fraction.  It is always written with the  cents  on  top  and  “100” written on the bottom as shown in the illustration.  Compound  numbers, such as the “25” in  the  illustration,  are  always hyphenated. 

Examples of written numbers for checks are as follows:

· $5.73 – Five and 73/100 ------------------------------------------------------------------------------------------------

· $11.67 – Eleven and 67/100 --------------------------------------------------------------------------------------------

· $463.78 – Four hundred, sixty-three and 78/100 ---------------------------------------------------------------------

· $1,689.45 – One thousand, six hundred, eighty-nine and 45/100 ---------------------------------------------------

· $23,953.84 – Twenty-three thousand, nine hundred, fifty-three and 84/100 ---------------------------------------

· $487,279.30 – Four hundred, eighty-seven thousand, two hundred, seventy-nine and 30/100 ------------------

Application Exercise

It is your turn to try what you just learned.  Write out the following number for a check:  $294.39

Lesson 19 - Writing a Check

Did you write Two hundred, ninety-four and 39/100?  If so, great job!  If not, that is okay.  It takes practice to get it right!  Another important aspect of checking accounts are the fees associated with them.  Every financial institution has their own schedule of fees, so it is important to compare fees before selecting a financial institution.  Fees that may be incurred with a financial institution can be for use of the checking account, going below the required minimum balance, per check used, foreign ATM fees, and much more.  Check with the institution and ask for a copy of their schedule of fees.

Lesson 19 - Writing a Check

In a checking account, the ‘account balance’ doesn’t always match the ‘available balance.’  This is due to the timing of when a merchant puts a hold on funds and when they push through a batch of transactions for the day.  For example, John has a checking account balance of $500.  He purchases a fishing rod from the store, GO Fishing, at 10:00 a.m. for $50 using his debit card.  When he checks his account at 2:00 p.m., it states he has an account balance of $500 and available balance of $450.  GO Fishing put a hold on the $50 purchase, but they won’t run their batch of transactions through their system until later that night, or possibly the next day.  Once GO Fishing runs their batch of transactions through their financial institution, and John doesn’t make any more purchases, his account balance and available balance will match.

Exercise 19 - Concept Review

  • August 26, 2013
  • Panda's Book Shop
  • Fifteen and 49/100 -----------------------
  • 15.49
  • Book for vacation
  • Derek Jones

Exercise 19 - Concept review

  • $386.46 would be written as Three hundred, eighty-six and 46/100 ----------------------------------------------------
  • Financial institution charge various fees for their checking accounts using a Schedule of Fees.
  • The routing number is listed to the left of the account number on a check.
  • Each checking account has an account balance and an available balance.

Lesson 20 - Savings Accounts

The process  of opening a savings account is  relatively the same as a checking, except running a credit report usually isn’t necessary.   Every savings/share account and checking account has its own unique account number. 

Lesson 20 - Savings Accounts

Savings accounts typically do not have a difference between the account balance and the available balance since funds are deposited or withdrawn immediately rather than by using a debit card for purchases or writing checks.  The exception to this is with credit unions.  The membership amount that was required at the time of opening a share account is not available for use to the account holder(s).  For example, if a credit union requires $25 to open a share  account,  that $25 is  shown  in  the account  balance,  but  because the  $25  is  part  of  the membership, it is not available for use.  The $25 is usually returned to the account holder upon closing the account.  One a person opens a share account with a credit union, they can open other accounts without any other required deposit amount.

Lesson 20 - Savings Accounts

Banks, on the other hand, do not have memberships or require membership deposit amounts.  However, many  banks require a  minimum deposit amount  for  some their savings  account products.  Many banks have monthly fees for checking accounts; however, many banks will waive the monthly fee if the account holder sets up an automatic deposit into a savings account each month and maintains a minimum balance.  This encourages the account holder to save money. 

Lesson 20 - Savings Accounts

The insured amount by the FDIC and NCUA also applies to savings accounts.  The insured amount of $250,000 covers each depositor.  Therefore, a married couple could have up to $500,000 insured, $250,000 each, in one account at an insured institution.      

Lesson 20 - Savings Accounts

If a person doesn’t qualify for a checking account due to a low credit score and poor credit history, opening a savings account is the next best step.  Financial institutions will work with people with poor credit histories in order to assist them in working toward opening a checking account in the future.   Many financial institutions will require a savings  account to  be  in  good  standing for a period of time, such as six months.  They may also require the new account holder to meet other goals, such as improving their credit history with no new debt, paying down of debt, and/or an improved FICO score by a certain amount or percentage.

Lesson 20 - Savings Accounts

If a person has to wait to open a checking account, it will mean they will need to manage their money using their savings account.  The one disadvantage to using a savings account, which was stated earlier, is the minimum withdrawal limits for savings accounts set by law. 

A savings account is permitted six withdrawals per month.  Those withdrawals include outgoing transfers.  Once a person has reached six withdrawals or outgoing transfers in a given month, they will most likely be charged a fee by the financial institution.  Each institution charges a different amount.

Exercise 20 - Concept Review

  • Savings usually don’t have a different between the account balance and available balance.
  • A person can never open a savings account if they have a low FICO score.
  • The law has a minimum withdrawal limit for savings accounts.
  • The FDIC is the agency that insures deposits for banks.
  • The FDIC is the agency that insures deposits for credit unions.
  • Opening a savings account is relatively the same process as opening a checking account.
  • The insurable about for each deposit with an insured institution is $275,000.
  • If a person doesn’t qualify for a checking account they can work toward getting a checking account by doing a good job maintaining a savings account.
  • Banks require a membership in order to open any accounts.
  • The minimum withdrawal amount for savings account is six per month.

Lesson 21 - Reconciling Accounts

Reconciling checking accounts each month is extremely important.  Not doing so can result in shortages in the account and incurring fees for insufficient funds, which add up quickly. Insufficient funds is when there is not enough money in an account to cover all of the transactions.  Insufficient funds leads to a  negative amount in the account.

Lesson 21 - Reconciling Accounts

Reconciliation  of a checking  account is making adjustments of the differences between a Statement of Account balance and an account holder’s balance in their checkbook register.   A Statement of Account  is   a   statement provided to  an account  holder each month for each account  they   have   at  a financial  institution.   It lists all of the  transactions that  have occurred in a given  time period, usually a month, for an account.

Lesson 21 - Reconciling Accounts

A checkbook register is used by the account holder to keep track of the debits and credits in an checking or savings account.  To reconcile an account, the account holder matches the debits and credits on the Statement of Account to their checkbook records.  Various tools are used to record the debit  and credit transactions  in a person’s checking account,  such  as a  paper  checkbook register booklet, an Excel spreadsheet, Quicken, etc.

Lesson 21 - Reconciling Accounts

The  illustration above  is a checkbook register.  The  format may  be slightly different  in  various checkbook registers.

1. The date is the date of the transaction or the date on a check.

2.  The TYPE is for the type of transaction:  enter the check number for a check, DEP for a deposit, WD for a withdrawal, DEBIT when a debit card is used for a transaction, or EFT for payments automatically withdrawn from the account.

3.  Description of transaction is the name of the Payee and what was purchased or paid.

4.  Payment/Debit (-) is the amount debited or paid.  This would include any fees assessed on the account and posted to the account by the financial institution.

5.  R and c stand for “reconciled” and “cleared”.  The c box next to the transaction is checked when an item has gone through checking account at the financial institution.  This can be seen by logging into the checking account online or using an app.  The R box next the transaction is checked once the checking account has been reconciled. 

6.  Deposit/Credit (+) is the amount deposited or credited to an account.  This would include any interest earned on the account and posted to the account by the financial institution.

7.  Balance is the remaining or available balance in the account once all transactions have been entered into the register.

Exercise 21 - Concept Review

  • Balance
    The running balance of the account.
  • Statement of Accounts
    A statement provided to an account holder detailing transactions in an account.
  • Define your key...
    Define your answer...
  • WD
    Used to show a withdrawal in an account.
  • Insufficient funds
    When there is a negative balance in an account.
  • “R”
    Shows a transaction in an account register has matched against a Statement of Account.
  • “c”
    Represents when a transaction has gone through an account.
  • Reconciliation
    Measuring a Statement of Account against an account register.
  • DEBIT
    Signifies when a debit card is used.
  • EFT
    Means a debit that is automatically withdrawn.

Investments

Lesson 22 - Stocks

Securities are an investment instrument purchased and sold in the financial market in order to make money by those who buy them; known as investors.  Investors put money into a product or service in hopes they will receive money in return that is greater than the initial investment they made.  Stocks are one type of security and investment.  Stocks represent ownership in a company.  Companies sell stocks to shareholders.  Shareholders are a type of investor and they hold shares, or ownership, of a company with stocks that they purchase.  Companies sell stocks in order to raise money to operate their business. 

Application Exercise

Can you name any companies that sell stocks? (Hint: Fast food chains, box retailers, large corporations.)

Lesson 22 - Stocks

McDonalds, Starbucks, Best Buy, and the Boeing Company are examples of companies that sell stock.  The two main categories of stocks are common and preferred.  Owners of common stocks have ownership and voting rights in a company.  They get to vote for those who are on the board of directors and on company policy issues.  However, they are the last to be paid when a company liquidates; goes out of business and sells all of its assets.   Owners of preferred stocks have ownership in a company, but they do not usually have any voting rights.  On the other hand, if a company liquidates, they get paid before the investors with common stocks.  They also receive dividends before owners of common stocks.  When a person has the right to buy (known as a call option) or sell (known as a put option) a stock for a set price for stated period of time, they have a stock option.  If they do not buy or sell the stock within the allocated time period, the option expires. 

Application Exercise

Do you think it is better to own common or preferred stocks?

Lesson 22 - Stocks

Investors have different preferences.  Depending upon an investor’s investment goals, the company, and the economy, an investor will choose common or preferred stocks accordingly.  One is not necessarily better or worse than the other. 

Remember, dividends are funds that are paid to shareholders of a company.  Dividends are typically paid from the profits of a company.  The board of the directors of a company decides when dividends are paid to shareholders and how much they receive.  The board of directors can also decide to give different classes of stocks (e.g. common and preferred) different dividend amounts, usually calculated as a percentage of the profits. 

Lesson 22 - Stocks

Investors purchase a stock in order to get a return on their money.  They receive a return on their money when they receive a dividend or when there is capital appreciation.  This occurs when an investor sells a stock for a higher price than what he purchased it for.  The difference in the higher sale price less the lower purchase price represents a return to the investor.  But beware!  Stock prices can also go down in value.

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Application Exercise

What factors do you think contribute to a decrease in stock value?

Lesson 22 - Stocks

Stock prices change on a daily basis due to supply and demand in the market.  If more investors buy a stock than those who sell it, then the price increases.  Stock prices decrease if more investors sell a stock than those who buy it.  Buying a stock is called demand and selling a stock is called supply.  Investors decision to buy or sell a stock can be based on personal preference, the news, financial reports of a company, something that happened at a company, etc.  The reasons why investors choose to buy and sell stocks are endless.

Application Exercise

What reasons might you have to want to buy or sell stock of a particular company?

Lesson 22 - Stocks

Stocks are sold in the securities market.  The United States has its own securities markets and the three largest are the New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotation System (Nasdaq), and American Stock Exchange (AMEX).  Examples of commodities exchanges are the New York Mercantile Exchange, Inc., (NYMEX), Chicago Board of Trade (CBOT), and London Commodity Exchange (LCE).  Commodities exchanges trade contracts in agricultural and mineral products such as wheat, corn, cattle, pigs, gold, and silver.

Application Exercise

Have you heard of any of these securities markets?  If so, which ones?

Exercise 22 - Concept Review

  • NYSE
    Acronym for the New York Stock Exchange.
  • Stock Option
    When a person has the right to buy or sell a stock for a set period of time and at a set price.
  • Call
    A person has this when they have a right to buy a stock.
  • Preferred
    A type of stock where the shareholder usually does not have voting rights.
  • Put
    A person has this when they have a right to sell a stock.
  • Common
    A type of stock where the shareholder has voting rights.
  • Dividends
    The money paid from profits to shareholders.
  • Liquidates
    When a company goes out of business and sells all of their assets.
  • Securities
    Instruments that are purchased by investors.
  • Shareholders
    Those that own stocks in a company.
  • Investors
    Those who pay for securities in order to get a higher return than what they invested.

Lesson 23 - Bonds

Bonds are a type of marketable security.  There are corporate, municipal, and government bonds.  A bond is when an investor loans money for an agreed upon period of time to a corporation or government entity.  The investor earns either a variable or fixed interest rate.  The owner of the bond is called a debtholder.  They are also known as creditors. 

Lesson 23 - Bonds

A variable interest rate varies over the period of the loan; whereas, a fixed interest rate stays exactly the same for the entire loan period.  A loan can have a combination of a variable and fixed interest rate.  For example, a loan can have a fixed interest rate for the first 36 months and then switch to a variable interest rate.  Variable interest rates are tied to an index such as U.S. Treasuries.

Application Exercise

What is the difference between a variable and fixed interest rate?

Lesson 23 - Bonds

Just like stocks, corporate and government bonds are traded on the stock exchanges and some are traded over-the-counter (OTC).  OTC simply means the bond is traded using some other tool than one of the stock exchanges.  The major stock exchanges have a list of requirements that a security must meet in order to be traded.  For smaller companies, their stocks and bonds usually don’t meet the list of requirements, so they trade their marketable securities over-the-counter.

Application Exercise

Where could you look to learn more about OTC stocks?

Lesson 23 - Bonds

There are several websites that list OTC stocks, but Investopedia.com would be a good place to learn more about OTC stocks. 

Bonds have a rating system that is a lot like grades.  Standard & Poor’s (S&P), Moody’s, and Fitch are the three most respected bond rating agencies.  Each agency has their own rating system, but their rating criteria's are similar.  The ratings gauge a company’s ability to pay back their debts using their rating system.  They also split their rating systems between long-term and short-term debt.  Their top rating is a strong indicator that a company can repay their debts and their bottom rating represents that a company already has debts in default.  Each agency has a significant number of ratings in their rating system.  A person can learn more about each agency’s rating system by visiting their website.

Application Exercise

How are grades received in school the same as bond ratings?

Lesson 23 - Bonds

Grades received in school show how well a student understands the material.  A top grade of an “A” shows the student knows the material and is performing well and a bottom grade of an “F” shows the student does not know the material very well and needs to perform better. 

Lesson 23 - Bonds

A bond is a debt instrument used by companies and governments.  These entities may issue bonds to fund their operations or expansion.  With most corporate bonds, investors will purchase the bond and then will receive interest payments, called a coupon, usually semi-annually until the maturity date of the bond.  At that time, the investor will receive their principal back as well as the final interest payment. 

Lesson 23 - Bonds

Another type of bond is a zero-coupon bond.  With this bond the investor purchases the bond at a discounted value from its face amount.  Interest builds up over the life of the bond until maturity.  At that time the value of a bond is equal to its face amount.  Government savings bonds are a form of a zero coupon bond.  For example, a zero-coupon bond has a value of $100 and a five-year maturity date.  The investor purchases the bond for $50 and cashes it in for $100 when it matures in five years.  The investor’s yield on the bond is $50. 

Application Exercise

Have you parents or grandparents ever purchased any bonds? If so, what kind?

Lesson 23 - Bonds

A bond yield is the difference of how much the investor paid for a bond and how much they made at maturity.  The different types of bond yields are yield to maturity (YTM), yield to call (YTC), current yield, realized yield, and nominal yield.  The study of these bond yields is outside the scope of this textbook.  It’s important to note, though, that there are many different kinds of bonds with a variety of yields. 

A bond’s par value is the value on the face of the bond.  A $1,000 bond will have a par value of $1,000.  Bonds are sold into the market and may be priced at par, or they may be priced at a premium (a value over par) or a discount (a value under par). 

Exercise 23 - Concept Review

  • A fixed interest rate stays the same for the entire loan period.
  • Bonds are a type of marketable security.
  • The three most respected bond rating agencies are Standard & Poor’s, Moody’s, and Fitch.
  • A variable interest rate varies according to what the investor wants each month.
  • Over-the-counter bonds are traded at counters in the grocery stores.
  • The owner of a bond is called a debtholder.
  • A bond rating measures the ability that bond issuers can repay their debts.
  • Each bond rating agency has the exact same rating system.
  • Bond yield is the difference between how much an investor paid for a bond and how much they receive at maturity.
  • Bonds are either corporate, municipal, or government bonds.

Lesson 24 - Mutual Funds

Another marketable security, a mutual fund, is comprised of a group of stocks, bonds, and other securities.  When an investor purchases a mutual fund, they receive interest in a portion of all the various securities that are held by that fund.  This helps obtain diversification or the action to spread out risk that would be associated with a single stock.  Each shareholder’s ownership percentage in the mutual fund is based on how many shares they own.  Mutual funds are managed by an investment firm or bank, called a money manager.  The job of a money manager is to take the capital of a mutual fund and invest it to make more money.  Capital is the money a person or company has invested to generate income.

Application Exercise

Do your parents or you know anyone who works in investments?

Lesson 24 - Mutual Funds

A mutual fund pays out dividends from the stocks and interest from the bonds that the funds hold.  Shareholders can wait until a mutual fund increases in price and then sell the fund in order to make a profit.  The fund will sometimes sell some of the securities it is comprised of when there has been an increase in price.  When the fund does sell any of the securities that increased in price, it has then incurred a capital gain.  The capital gain is pass to the investors who then have to pay taxes on it.  A capital gain is the increase in a capital asset.  Investors don’t realize the gain until the capital asset, such as securities, is sold.  It is when the capital gain is realized that taxes are incurred.

Lesson 24 - Mutual Funds

The three main types of funds are fixed-income funds, money market funds, and equity funds.  Fixed-income funds are made up of corporate, municipal, and federal bonds.   Equity funds invest in both U.S. and global stocks.  Money market funds are typically comprised of short-term debt securities.  One type of short-term (less than one year) debt security is government treasury bills (T-bills). 

Application Exercise

Have you heard of any of these funds?  If so, which ones?

Lesson 24 - Mutual Funds

The idea behind mutual funds is to allow investors who don’t have enough money to invest in a variety of securities to diversify their investments. Sometimes there are higher costs associated with mutual funds due to the fees charged by the mutual fund manager.   Mutual funds may have various charges associated with them.  Some have fees, or a load, paid to the money manager.  Some funds are no-load funds but they may have trading fees to get out of the fund.  A fund’s performance should always be looked at after any fees are taken out.  There are some companies that monitor the performance of mutual funds.  This allows investors to judge the performance of various funds to see which one they want to purchase. 

Exercise 24 - Concept Review

  • Money manager
    Investment manager for mutual fund
  • Equity funds
    Funds made up of stocks
  • Capital gain
    Increase in a capital asset
  • Money market funds
    Funds of short-term debt securities
  • Diversification
    Spreading risk among several investments
  • Mutual funds
    Group of stocks, bonds, or other securities
  • Capital
    Investments in mutual funds
  • Fixed income funds
    Funds made up of bonds

Lesson 25 - Other Investments

There are many other types of investments, which include investing in the foreign exchange markets (FOREX), real estate, commodities, art, collectibles, future, and options.  Additionally, there are IRAs and CDs.  Starting a business is also an investment.  FOREX, futures, and options are investments that are a bit more complex.  It takes an increased knowledge of the securities market to invest in these. 

Lesson 25 - Other Investments

Investing in real estate can be either a passive or non-passive investment.  Let’s take a moment to review passive and non-passive income.  When the investment is passive, the investor puts very little, or none at all, time into the investment activity. For example, if an investor purchases a commercial or residential property to earn income from leasing the property, they may use a management company to manage the property.  The management company takes care of negotiating the lease with the tenants, maintenance of the property, and collecting rents.  Once rent is received, the management company takes their percentage and mails the rest of the received money to the investor.  This is called mailbox money.  Since the investor doesn’t activity participant in the management of the property, it’s passive income

Lesson 25 - Other Investments

On the other hand, some investors will manage the real estate property they purchase.  They are actively involved in managing the property.  The income earned in this situation is called non-passive income

Application Exercise

Do you know anyone who owns investment property?  If so, do they manage the property or pay to have a company or someone else manage it?

Lesson 25 - Other Investments

It’s important to note investments come with different levels of risk.  Some investors are okay with risk, while others are “risk adverse.”  A risk adverse investor is one who doesn’t want to lose any money or only lose very little money in an investment.  They prefer to invest in products with a lower return on their investment for the assurance they will not lose any money.  Riskier investments tend to have higher returns on an investment, but there is a higher probability the investor will lose some of their money.  Sometimes, they lose  all of  their money in a particular investment.  

Application Exercise

Which would you do? Invest in riskier investments that have a higher return knowing there is a change to lose some or all of your money? Or, invest in an investment with lower returns that have a decreased chance of losing money? Explain.

Lesson 25 - Other Investments

Those investors who are risk adverse will prefer CDs and money-market savings accounts.  Those investors who have a higher tolerance for investment risk will gravitate toward stocks, collectibles, commodities, FOREX, and timeshares. 

Lesson 25 - Other Investments

The above illustration demonstrates the difference between low and high risk.

Each investor has to determine for themselves their tolerance for investment risk and then chose the investment product that matches.  It’s recommended that investors have a diverse portfolio that has investments with varying levels of risk. 

Exercise 25 - Concept Review

  • Passive income is earned by actively participating in the investment.
  • An example of an investment that has increased risk would be stocks.
  • An investor who is risk adverse is someone who has a low tolerance for losing money on investments.
  • Mailbox money is a type of non-passive income.
  • Examples of investments with low to no risk would be IRAs and CDs.
  • FOREX stands for Foreign Exchange Market.
  • An investor who manages their real estate investment earns non-passive income.
  • Investments should not be diversified with high and low risk Investment products.
  • Each investor has to determine their tolerance for investment risk.
  • Starting a business not a type of investment.

Loans

Lesson 26 - Secured Loans

When a person obtains a secured loan they pledge an asset against the loan.  The person borrowing money is known as the borrower and the financial institution or person lending the money is known as the lender.  The pledged asset is known as collateral.  For example, if a person purchases a house or car, they pledge the house or car being purchased as collateral for the loan; the asset is the house or car.  The most common types of secured loans are home loans, auto loans, recreational vehicle loans, and boat loans. 

Application Exercise

Do your parents have any secured loans such as a house or auto loan

Lesson 26 - Secured Loans

The purpose of collateral is to lessen the risk to the lender.  If a person defaults on their loan, the lender can decrease the money they will lose by selling the collateral and paying the monies received against the loan. When a borrower defaults on a loan, they have stopped making their loan payments or become behind on their payments.  Let’s look at the following example to understand better:  A person obtains an auto loan for $5,000 and pledges the vehicle as collateral.  If they default on the loan, the lender will repossessed, or take back, the vehicle.  They will then sell the vehicle.  All of the money they  receive will be applied or paid toward the borrower’s loan.  The borrower will then owe any remaining money due on the loan.

Application Exercise

How do you think a default on a loan affects the relationship between the lender and the borrower?

Lesson 26 - Secured Loans

A default on a loan can put stress on the relationship between a lender and borrower.  Also, a borrower may have difficulty obtaining loans for a couple of years due to a default.  If a borrower cannot make a full or partial payment on their loan one month, they should talk to the lender.  Lenders will usually work with borrowers as long as they get caught up with their payments quickly.

Lesson 26 - Secured Loans

Less common secured loans are when a person uses cash, CDs, or securities as collateral.  With those types of loans, the collateral pledged for the loan is locked and the borrower cannot obtain those funds until the loan is paid and the financial institution releases the collateral. 

Lesson 26 - Secured Loans

Sometimes a borrower will be required to pledge several pieces of collateral for a loan.  This usually occurs when the borrower doesn’t have any or enough money to put toward the loan as a down payment.  Or, if the financial institution has concluded the borrower is a high risk due to being at their job for a short period of time, has a lower than desired credit score, or has late payments on other loans.

Lesson 26 - Secured Loans

Some loans have co-borrowers, also known as obligors.  A co-borrower is another borrower on a loan and has an equal obligation to pay the loan along with the borrower.  Co-borrowers are needed when a borrower doesn’t qualify for the loan on their own.  Or, in the case with a minor person, when they cannot legally enter into a contract on their own.  Loans can have more than one co-borrower. 

Application Exercise

Why is it important to a co-borrower that the borrower makes payments on time and pays everything due on a loan?

Lesson 26 - Secured Loans

It is important that a borrower makes timely payments and meets all of the obligations on a loan because loan defaults have a negative impact on the co-borrowers credit report.  Also, if the borrower cannot meet the obligations of the loan, then the co-borrower has to use their financial resources.  

Lesson 26 - Secured Loans

Other loans have a guarantor, also known as a signatory.  Guarantors are different than co-borrowers in that the guarantor signs on behalf of the borrower and isn’t liable for the loan until the borrower defaults.  Also, the financial institution does not request payment from the guarantor unless the borrower defaults on their loan.  At the time of the default, the financial institution will either request the guarantor makes payments or pay the loan in full, whichever was agreed upon at the time of the loan origination.  A co-borrower is responsible for repayment of the loan from the start of the loan.  A difference between co-borrowers and guarantors is that co-borrowers have a right to use and enjoy the goods purchase with the loan and guarantors do not.  Additionally, guarantors are common with business loans and not as much with personal loans.  Co-borrowers are common on both business and personal loans.

Exercise 26 - Concept Review

  • When a borrower stops making payments on their loan, they have defaulted on their loan.
  • A co-borrower is equally responsible for a loan with the borrower from the start of the loan term.
  • The person who signs on behalf of a borrower and is not obligated on the loan until the borrower defaults is known as a guarantor.
  • A secured loan is one that has collateral.
  • An asset that is used to secure a loan is known as collateral.
  • A co-borrower has full rights to the products purchased.
  • The financial institution who is lending money to a borrower is known as the lender.
  • A borrower can miss zero payments and not be in default.
  • Common secured loans are home, auto, and boat loans.
  • A loan can have an unlimited number of co-borrowers.

Lesson 27 - Unsecured Loans

Unsecured loans are the opposite of secured loans in that these types of loans do not have any collateral protection.  They are considered to be higher risk loans to lenders and usually have higher interest rates, higher monthly payments, or both.

Types of unsecured loans are lines of credit, credit cards, payday loans, loans for medical bills, student loans, and signature loans, to name a few.  Student loans are an anomaly.  While they are a type of unsecured loan, many financial institutions view them as a secured loan when running debt ratios because they have a guarantee from the U.S. government.

Application Exercise

What happens if a borrower defaults on an unsecured loan?

Lesson 27 - Unsecured Loans

If a borrower defaults on an unsecured loan and the lender closes the loan, the lender loses all of the money. Since there is no collateral, the lender cannot sell anything to recoup the money lent to the borrower. 

The most difficult type of unsecured debt for a consumer to pay off is credit cards.  Credit cards are an open-end loan from a financial institution.  An open-end loan is a revolving loan.  Revolving loans do not have a maturity date and the borrower can continue to borrow on the loan up to the credit limit.  The borrower can continue to borrow over and over as the loan is paid down.  They do this by using the available balance.  The available balance is the difference between the credit limit and the outstanding balance.  Without a maturity date, a borrower does not know when their open-end loan will be paid off.  Another type of open-end loan is a line of credit. Closed-end loans, such as house or auto loans, have a maturity date and the paid down portion of the loan is not available to the borrower.

Application Exercise

Do you think credit cards are good loans? Why or why not?

Lesson 27 - Unsecured Loans

The credit card payment structure is inherently designed to pay a large portion toward the interest and a minimal amount toward principal each month. Principal is the amount borrowed or owed on a loan.  This makes it so the principal amount remains close to the same amount each month with the borrower not making any real progress toward paying down the principal amount. 

Application Exercise

Why do financial institutions offer these types of loans?

Lesson 27 - Unsecured Loans

First, there is a demand for them by consumers.  Second, financial institutions are a business and, like any business, they need to generate revenue.  Interest payments on credit cards creates a steady stream of revenue for the credit card issuer.  Financial institutions need revenue to continue to operate.

Lesson 27 - Unsecured Loans

An additional struggle with credit cards is that many consumers use them as a source of cash.  This happens when a consumer uses their credit cards for purchases when they have no available cash.  It is better to wait to purchase products when cash is available than to use credit cards as a source of cash. 

Application Exercise

Do you think it is a good or bad idea to use credit cards as a source of cash? Explain.

Lesson 27 - Unsecured Loans

When a borrower does not pay off their credit cards each month, they create a continual cycle of credit card balances remaining the same or increasing each month.  Eventually, the monthly payment for a credit card becomes easier to make than the total amount of the expenses being incurred.  Once a borrower uses the credit card to its credit limit, they have to decide if they will stop using the credit card or try to get another one.  They also have to figure out how they will repay the credit card debt they have built up.  Many consumers, who are now stuck in a credit card spending and debt cycle, get another credit card.  This cycle is called “living beyond one’s means.”

Application Exercise

What is the best way to not get into a cycle of  continual credit card debt?

Lesson 27 - Unsecured Loans

The best way to avoid the cycle of continual credit card debt would be to not use them.  Overall, credit cards take a long time to pay off if no additional debt is incurred and only the minimum payment is made each month.  A really long, long time - years.  A hefty amount of  interest is paid for the convenience of using a credit card.  Credit card issuers make this possible by setting the minimum payment at a low percentage (1 to 3.5%) of the outstanding balance. 

Lesson 27 - Unsecured Loans

Take a look at the illustration to the right at a sample credit card amortization.  An amortization schedule is a table that shows how a loan is slowly paid off or how an investment increases in value over time.  The illustration is an example of a credit card with a $5,000 outstanding balance, a 14.990% interest rate, and a monthly payment requirement of 2% of the outstanding balance.  As can be seen, after 120 payments, or 10 years, with no additional debt incurred, there remains an outstanding balance of $2,023.92.  Also, $4,951.32 has been paid in interest (almost the entire amount of credit charged) while only $2,976.08 has been paid toward principal.  If the same credit card loan maintained a payment of $100 each month, it would take 79 months, or nearly 8 years, to pay off the credit card.  The combination of a high-interest rate and adjusting monthly payment causes the credit card debt to continue on for years and years.


Application Exercise

What is one way to accelerate paying off credit card debt?

Lesson 27 - Unsecured Loans

Paying more than the minimum due each month is one way to accelerate paying off credit card debt.  The more that is paid above the minimum, the faster the debt is paid.  That sounds easy, but it is not.  Many people do not have the extra funds each month to pay extra toward credit card debt.

Credit cards are a convenient and useful financial tool IF they are paid off each month.  An example of a credit card being a useful tool is for traveling.  It is not recommended to carry large sums of cash while traveling or to use debit cards for security reasons.  Stolen cash cannot be replaced and it is more difficult to replace funds from fraudulent transactions on debit cards. 

Lesson 27 - Unsecured Loans

Another word of warning!  Credit card issuers are offering some great loyalty programs and it is tempting to use their credit card for purchases.  The loyalty programs are great for those who pay off their outstanding balance each month, but for those who don’t, it can be a tremendous financial burden.  The important thing to remember if using a credit card for something like traveling or loyalty programs, is to pay off the debt each month.  

Exercise 27 - Concept Review

  • Revolving
    A loan that does not have a maturity date and the borrower can keep borrowing up to the credit limit.
  • Open-end loan
    Another name for a revolving loan.
  • Closed-end loan
    A loan with a maturity date.
  • Available balance
    The difference between the credit limit and the outstanding balance.
  • Unsecured loans
    Loans that do not have any collateral.
  • Source of cash
    Improper use of credit cards by a borrower.
  • Amortization schedule
    Shows the decrease of a loan balance or the increase of an investment balance plus interest accrued over time.
  • Living beyond one’s means
    When a person is spending more than what they make and has to use credit cards.
  • Can take years to pay off
    Credit cards.
  • Best use of a credit card
    Pay it off each month.

Lesson 28 - Credit Reports

A credit report is a report listing details of a person’s credit history.  It shows their history of loans, history of payments, judgments, liens, and any bankruptcies.  It also shows their current and former addresses.  Additionally, it lists the date and financial institution of any credit reports that have been requested in the past 45 days. 

Application Exercise

Who might request permission to run a credit report?

Lesson 28 - Credit Reports

Lenders, landlords/lessors, employers, and utility companies may require a copy of an applicant’s credit report.  Many people are aware lenders at financial institutions request a copy of a credit report, but they may not realize that others entities require a credit report, too.  Landlords/lessors will request a credit report when considering leasing an apartment or house to a renter/leasee.  Many employers will request permission to obtain a copy of a credit report for a job applicant.  Many utility companies will run a credit report when a person signs up for service.  A good or bad credit report can mean the difference between obtaining a job, getting an apartment, or how much of a deposit has to be put down for a lease or getting utility service.

Lesson 28 - Credit Reports

When a lender sees a list of financial institutions that have requested a credit report for a borrower within a short period of time, they usually  suspect the borrower has been turned down for the requested loan.  Lenders will discuss the credit report with the borrower, but will not give a copy of the credit  report to the borrower.  This is usually because the financial institution pays a fee for each credit report they request; therefore, they own the credit report.  If the borrower thinks there is an error on their credit report, the lender is not able to make any changes or dispute the error. 

Lesson 28 - Credit Reports

If a consumer thinks there is a discrepancy on their credit report, they need to write the reporting agency and dispute any information they think is in error.  If a borrower is denied credit, they will receive a letter in the mail giving them an opportunity to request their credit report.  According to the Fair Credit Reporting Act (FCRA), each credit bureau is required to provide every consumer, 18 years and older, a free copy of their report once a year upon request.  It has to be requested as the credit bureaus do not have to automatically send them to each consumer.

Lesson 28 - Credit Report

The three most popular credit bureaus (listed in no particular order) for personal credit reports are Experian, Equifax, and TransUnion.  Each reporting agency has a different format for their credit reports; however, they report most of the same information and all three agencies report a FICO score.  Each credit reporting agency (credit bureaus) offers a free copy as does Credit Karma and AnnualCreditReport.com.  The websites for the three main credit bureaus are Experian, Transunion, and Equifax.  If a website requests a form of payment, the consumer should request their credit report from a different site.  There is a sample credit report at the end of this lesson.

Lesson 28 - Credit Reports

When lenders review a credit report they are assessing a person’s character.  They try to answer the following questions:

· Has the borrower shown a willingness and ability to pay back their debts on time?

· Does the borrower have any loan defaults?

· How many times has the borrower applied for credit in the past 45 days?

· Does the borrower have a significant amount of debt compared to their income?

Application Exercise

If you were a lender, what questions would you ask a borrower?

Lesson 28 - Credit Reports

Creditors use credit reports to verify the current address and credit history of a borrower.  When a borrower applies for a loan, they are required to list their debts.  Their list of debts should match the credit report; however, private loans, such as a loan with a family member, will not show up on a credit report, but the loan should be disclosed to the lender. 

Lesson 28 - Credit Reports

Credit reports can be quite intimating when viewing one for the first time.  It’s important to look at it section by section and read it thoroughly.  If something doesn’t make sense or appears to be in error, contact the credit bureau that created the report using their contact information on the report or website.

Lesson 28 - Credit Reports

Credit Report Illustration

Exercise 28 - Concept Review

  • A credit report lists the credit history of an individual.
  • The three most popular credit bureaus are Experian, Equifax, and Transunion.
  • Lenders use credit reports to check the work history of a borrower.
  • If a borrower is denied a loan, they will receive a letter in the mail from the credit bureaus.
  • Lenders will give a borrower a copy of their credit report.
  • Every person who is 18 years old or older can receive a free copy of their credit report once a year.
  • If a person thinks there is a discrepancy or error on their credit report, they can dispute it by writing the credit bureaus.
  • Each agency gives a FICO score on each credit report.
  • Credit reports list the history of requested credit reports for the past 45 days.
  • Lenders compare the list of debts on a credit report to the list given by the borrower.

Lesson 29 - FICO Scores

FICO Scores are used by creditors to evaluate a borrower’s credit history and to determine if they will extend credit to a particular borrower.  FICO Scores are based on five components on a 100% scale:  30% is based on the amount owed; 10% is based on new credit obtained; 15% is based upon the length credit history; 35% is regarding payment history; and, the remaining 10% has to do with credit mix. 

Lesson 29 - FICO Scores

The amount owed applies not only to the total amount owed, but how much credit is available to the borrower to how much is currently borrowed.  For example, a person may have $2,000 in available credit, but only have $500 in outstanding balances.  Many people think that paying off their credit card each month will improve their FICO score and it usually doesn’t.  Here’s why.  Each month, creditors report information about their loans with each borrower to one, two, or all three of the credit bureaus.  They report the outstanding balance and the borrower may pay their balance to zero after the financial institution sends their reports to the credit bureaus.  Since this is the case, it may appear that a borrower has high balances or have maxed out their credit cards.  To keep this situation from negatively affecting a person’s FICO score, they need to keep their total amount of outstanding loan balances at 30% or lower of the total available money to them.  For example, if a borrower has a credit card with a $1,000 credit limit, they should not have a balance of more than $300 on the card. 

Lesson 29 - FICO Scores

The new credit component of the FICO score rates how much new credit a person has recently received.  If a person applies for an auto loan, but has recently opened two new credit cards, the financial institution may consider them a high credit risk. 

The FICO score includes how long a person has had established credit.  If a person is new to getting loans, this is reflected in their score.  The longer a person has credit and pays on time, the better their score will be.

Lesson 29 - FICO Scores

Payment history is very important.  While cell phone, utility, and medical bills don’t show up on credit reports if they are paid on time, they will show up on a credit report if a person becomes delinquent and the bill is sent to a collection agency.  Delinquent payments that show up on a credit report have the largest impact on a FICO score at 35%.

The last component of the FICO score is the credit mix.  The credit mix is the combination of loans a person has, which is the mix of secured and unsecured debt.  Many financial institutions require that borrowers have a history of  different types of credit and have paid those loans on time in order to receive a house loan.  Also, they look for a certain number of both secured and  unsecured loans.  Each financial institution has a different set of criteria.

Application Exercise

What did you know about credit reports and the FICO score before reading these lessons?

Lesson 29 - FICO Scores

Each financial institution uses a rating system to extend credit.  Many financial institutions use a risk based lending rating system for personal loans, which means they extend credit based on a borrower’s FICO score and determine the interest rate based on which risk category a borrower’s FICO score falls into.  The rating categories are “A,” “B,” “C,” “D,” “E,” and “R.”  An “R” rating would mean the borrower needs to restore or rebuild their credit before obtaining any sort of credit. 

Lesson 29 - FICO Scores

The illustration to the left shows an example of a financial institution’s rating system based on a borrower’s FICO score.  Each institution using a risk based scale determines the ranges for each of their ratings.  Additionally, some institutions use words like “premier” or “premium” instead of “A Rate” or “B Rate” to define their ranges.


Application Exercise

Has your opinion about credit changed after learning about credit reports and scores? Explain.

Exercise 29 - Concept Review

  • A person’s outstanding credit to available credit should be kept at 30% or less.
  • A FICO score is on based upon seven components.
  • Payment history represents 35% of a person’s FICO score.
  • Credit mix is the combination of the secured and unsecured debt on a person’s credit report.
  • Old credit rates how much new credit a person has recently received.
  • The component of the FICO score are amount owed, new credit, length of credit history, payment history, and credit mix.
  • Risk based lending is when a lender bases the interest rate for a loan on the borrower’s FICO score.
  • Financial institutions who use risk based lending typically use A, B, C, D, E, and R rates.
  • Established credit defines the credit history of a borrower.
  • Every lending institution uses government designated interest rates.

Glossary

Glossary - Appraisal through Dependents

Glossary - Direct Deposit through Itemizing Deductions

Glossary - Laddering through Personal Income

Glossary - Personal Net Worth through Underwriting

Glossary - Unearned Income through Variable Interest Rate