Transcript CUBIC 2016 Personal Finance Day 2x

CUBIC 2016
Day 2
Personal Finance
Tom C. Nelson, PhD
Maymester 2016
The Financial Planning Process
Personal Finance Topics
1)
2)
3)
4)
5)
6)
7)
8)
9)
Financial planning process
Assessing financial position
Basics of personal taxes
Insurance
Managing personal debt
Setting and achieving goals
Retirement topics
Investment topics
Putting it all together
Maymester 2016
The Role of Insurance
4-1 Rationale for Insurance
Concept for Insurance: protecting the financial plan
• Protects downside risk; provides cash flows when
planned cash flows interrupted
– Loss of income
– Unexpected expenses
• Comes at an unavoidable cost (premiums)
• Going without insurance very risky; alternatives?
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The Role of Insurance
4-2 A Review of Insurance
Emergency cash
• 3 – 6 months of cash savings
– Savings, short term bonds, CD’s
– Covers unexpected expenses such as job loss, medical
problems
– Available for unexpected positive opportunities
– Buys time so you don’t have to sell securities when
markets are down
Maymester 2016
The Role of Insurance
4-2 Auto/Homeowner/Renter Insurance
• Auto insurance components
–
–
–
–
Part A:
Part B:
Part C:
Part D:
Liability
Medical expense
Uninsured motorist
Collision (damage to vehicle)
• Premiums based on:
– Car value
– Coverage level
– Deductible
Maymester 2016
The Role of Insurance
4-2 Auto/Homeowner/Renter Insurance
• Homeowner’s insurance policy types
– HO 3: “All risk” (except flood, earthquake, war, etc)
– HO 4: Renters insurance (belongings, liability)
– HO 6: Condo insurance
• Premiums based on:
– Property value
– Coverage level
– Deductible
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Clicker Question
Do you have medical/health insurance?
A.
B.
C.
D.
E.
No
Yes, through my parents
Yes, through my work
Yes, on my own
Don’t know
Maymester 2016
Clicker Question
What is the average total medical cost of a 3
day hospital stay?
A.
B.
C.
D.
E.
$5,700
$9,800
$12,000
$22,500
$30,000
Maymester 2016
The Role of Insurance
4-3 Health Insurance (ACA-Affordable Care Act)
• Key Features
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–
–
–
Mandatory coverage or tax penalty
Standardized level of coverage (example: preventative care)
No pre-existing conditions
Subsidies (reduced premiums) for low income
• Risks of NOT carrying health insurance
–
–
–
–
Increased health risks
Tax penalties
Wreck your financial plan
Wreck your family’s/parents financial plan
Maymester 2016
The Role of Insurance
4-3 Health Insurance (ACA-Affordable Care Act)
• Coverage options
– On parents’ policy to age 26
– Provided through work
– Privately through an “exchange”
• New: no pre-existing conditions exclusion
• Required or tax penalty
Maymester 2016
The Role of Insurance
4-3 Health Insurance (ACA-Affordable Care Act)
• Key terms
– Premium: regular payment for coverage
– Deductible: amount you pay for covered service initially
(for example $2,000 deductible, after which 80% is
covered
– Co-payment: fixed dollar amount paid for certain services
at time of service (example $40 doctor visit)
Maymester 2016
The Role of Insurance
4-3 Health Insurance (ACA-Affordable Care Act)
• Key terms (continued)
– Co-insurance: fixed percent charge paid (example, after
deductible, insurance pays 80%, you pay 20%)
– Out of pocket expense: maximum you pay before
insurance pays 100% of allowed charges.
• Current maximum is $6,350 for individual and $12,700 for
families
• Does not include premiums paid or non-allowed/non-covered
charges
Maymester 2016
The Role of Insurance
4-3 Health Insurance (ACA-Affordable Care Act)
The lower the premium, the higher the out of pocket costs
The higher the premium, the lower the out of pocket costs
Below, the amount paid by plan providers; you pay balance:
Maymester 2016
The Role of Insurance
4-3 Health Insurance (ACA-Affordable Care Act)
Comparing plans—example
Bronze Plan
Silver Plan
Premium
$188/mo
$262/mo
Deductible
$5,750
$3,600
Co-pays
$30-$40
None
Co-insurance
30%
10%
Single OOP max
$6,350
$6,350
Note: Rates may be lower for persons with lower incomes
(through tax credits)
Maymester 2016
The Role of Insurance
4-3 Health Insurance (ACA-Affordable Care Act)
• Other providers of medical care
– Workman’s compensation “workcomp”: state based
payment for work related illness and injury
– Medicare– medical insurance for age 65 up
– Medicaid—medical insurance for low income
– COBRA—medical coverage between jobs
Maymester 2016
The Role of Insurance
4-3 Health Insurance (ACA-Affordable Care Act)
On-line resources
• https://www.healthcare.gov/choose-aplan/comparing-plans/
• http://connectforhealthco.com/
Maymester 2016
Clicker Question
A 30 year old has what chance of a 90+ day
disability prior to age 65?
A.
B.
C.
D.
20%
40%
50%
70%
Maymester 2016
The Role of Insurance
4-4 Disability insurance
• The case for disability insurance
• Policy features
–
–
–
–
Waiting period (example: 3 or 6 months)
Coverage amount (example: 60% of gross income)
Coverage period (example: to age 65)
“your” (first 2 years) versus “any” (after 2 years) occupation
• Methods to reduce premiums—get at work
Maymester 2016
Clicker Question
Do you currently have life insurance?
A.
B.
C.
D.
Yes, and I know amount and type
Yes, but I’m not sure about amount & type
No
I don’t know
Maymester 2016
The Role of Insurance
4-5 Life insurance
• Basic types of insurance
– Term life
– Whole life
– Universal/variable life
Maymester 2016
The Role of Insurance
4-5 A Review of Insurance
Life Insurance
Policy
Type
Coverage
Period
Annual
Premium
Death
Benefit
Cash Value
Term Life
Specified
period 1-30
years
Least
expensive
Fixed benefit
None
Whole
Life
Permanent
protection
Fixed
premium
Fixed benefit
Fixed, based on
policy
Variable
Life
Permanent
protection
Fixed or
variable
premium
Flexible,
based on
investment
account
performance
Depends on
investment
account
performance
Maymester 2016
The Role of Insurance
4-5 Life insurance
• Strategies for use of life insurance—who needs it?
– Married with single wage earner
– Kids
– Own a small business
• Determining coverage amounts
Maymester 2016
The Role of Insurance
4-6 Bundling coverage to reduce cost
• From work, get
– Term life
– Disability
– Medical
• From insurance carrier, get
– Homeowner, Renter’s insurance
– Car insurance
Maymester 2016
Assessing Current Financial Position
Exercise 2A: Select a personal health plan
Go to Colorado Health Exchange link:
http://connectforhealthco.com/
• Select and compare two health plans
• Complete the table given for each plan and indicate
which plan is preferable to you and why (link below).
• Send completed for by e-mail attachment—be sure to
include team number/names in e-mail.
Link to Exercise Assignment
Maymester 2016
Clicker Question
)
Describe your debt situation:
A.
B.
C.
D.
E.
I have virtually no debt
I have student loans
I have credit card balance(s)
I have a mortgage
I have a combination of the above
Maymester 2016
Clicker Question
Have you ever gotten into trouble with credit
cards? (couldn’t afford, missed payments,
could only pay minimum)
A.
B.
C.
D.
No, never
No, but have had “close call”
Yes, in the past
Yes, currently
Maymester 2016
Managing Personal Debt
4-1 Types and Forms of Personal Debt
Average debt for
students that have
debt: $30,000
Maymester 2016
Managing Personal Debt
4-1 Types and Forms of Personal Debt
Revolving credit (credit cards)
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–
–
–
No set pay off date
High variable interest rate
Variable payments
Secured by general credit worthiness
Maymester 2016
Managing Personal Debt
4-1 Types and Forms of Personal Debt
Installment credit (example: car loan)
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–
–
–
Fixed pay off date (intermediate term, 3-7 years)
Fixed payment
Fixed interest rate
Secured by asset and credit worthiness, credit score
Maymester 2016
Managing Personal Debt
5-1 Types and Forms of Personal Debt
Home Mortgage
–
–
–
–
Long term pay off date (10 to 30 years)
Fixed or variable interest rate
Fixed or variable payments
Secured by asset and credit worthiness, credit score
Maymester 2016
Managing Personal Debt
5-2 Use and Role of Personal Debt
Our basic choice and trade-offs
– Save and earn return, forego use of asset to later
– Borrow and pay interest, have use of asset now
If debt is used, the choices are:
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–
–
–
What kind of debt?
For what purpose?
How much is borrowed?
What is total expense?
Maymester 2016
Managing Personal Debt
5-2 Use and Role of Personal Debt
General recommendations
– Avoid on-going credit card debt entirely, pay off monthly
– Don’t use credit cards to “make ends meet”
– Borrow only for “key” asset needs when affordable
• Car, major appliances, furniture, house
• Use fixed rate installment debt, mortgage
How much borrowing is sensible?
Maymester 2016
Managing Personal Debt
5-2 Use and Role of Personal Debt
Selecting good loans—characteristics:
– Credit cards
•
•
•
•
•
Link to bank
No annual fee
No interest if paid monthly
Points/benefit program
Low APR if planning to have continuing balance
– Installment debt
• Consider your bank first
Maymester 2016
Managing Personal Debt
5-2 Use and Role of Personal Debt
Maymester 2016
Managing Personal Debt
5-3 Debt and Time Value of Money Problems
Borrowing creates RISK
– Risk you can’t “perform”/pay on debt
– Risk of loss of asset, foreclosure, repossession
– Risk of opportunity cost
» Funds borrowed now cannot be used for other
purposes later
Maymester 2016
Managing Personal Debt
5-3 Debt and Time Value of Money Problems
Working with your calculator
Maymester 2016
Clicker Question
You’re interested buying a car. If you can secure a loan
for 48 months at 6% annual interest rate You have
saved $3,000 for a down payment and can afford a
payment of $200 per month. What’s the total price
you can pay on the car?
A.
B.
C.
D.
$ 6,600
$ 8,500
$11,500
$14,500
Maymester 2016
Clicker Question
You’re interested buying a car. The total cost of the car
is $27,500 and you have saved $4,000 for a down
payment. A loan proposal is for 60 months at 7%
annual interest. What would your monthly payment
be?
A.
B.
C.
D.
$ 356
$ 465
$ 785
$1,164
Maymester 2016
Clicker Question
You’re considering buying a house. The total cost is
$227,000 and you have saved $25,000 for a down
payment. The mortgage is fixed rate 5.5% for 360
months. What would your monthly payment be?
A.
B.
C.
D.
$ 865
$ 965
$ 1,086
$ 1,147
Maymester 2016
Managing Personal Debt
5-4 Credit Reporting and Managing Debt
Credit file and your rating is important
• Affects whether you get credit
• Affects the cost of credit
• Can affect employment
It’s important to run your own credit report regularly
• What’s going on in report; catch fraud & ID theft
• Check accuracy, correct mistakes
• Who’s checking up on you; running your report
Maymester 2016
Managing Personal Debt
5-4 Credit Reporting and Managing Debt
Factors determining
credit score
Maymester 2016
Managing Personal Debt
5-4 Credit Reporting and Managing Debt
Running your own credit report
• Free report required to be provided annually
• Services: Experian, Equifax, TransUnion
http://annualcreditreport.com
Consumer credit counseling: www.nfcc.org
Maymester 2016
Managing Personal Debt
5-4 Credit Reporting and Managing Debt
FICO SCORE
QUALITY
760-850
EXCELLENT
700-759
VERY GOOD
723
MEDIAN FICO SCORE
660-699
GOOD
687
AVERAGE FICO SCORE
620-659
NOT GOOD
580-619
POOR
Maymester 2016
Assessing Current Financial Position
Exercise 2B: Get your credit history
Go to: http://annualcreditreport.com
Complete the form below and return by e-mail attachment.
Be sure to include team number/names in e-mail.
Link to Exercise Assignment
Maymester 2016