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THE BIG PICTURE

Learn how to maximize your investment returns, protect yourself with insurance, and navigate the car and house buying process. Understand inflation, transaction costs, taxes, retirement plans, insurance options, and more.

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THE BIG PICTURE

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  1. 4 THE BIG PICTURE 4.1 PLUG THE LEAKS 4.2 PROTECT YOURSELF 4.3 A CAR AND A HOUSE

  2. INDUSTRY INDICATORS Procter & Gamble • Innovative marketing research techniques • Growth through acquisitions and product line expansions • Has paid annual dividends since incorporation • For the past 50 years, dividends have increased annually Chapter 4

  3. Lesson 4.1Plug the Leaks Goals • Describe how inflation, transaction costs, and taxes can reduce the returns on investment. • Describe how retirement plans can benefit you. • Calculate nominal and real total returns. Chapter 4

  4. THE BIG THREE • gross salary • total salary • take-home pay • after tax salary • net income • salary available to live on, after work related expenses are considered Chapter 4

  5. INFLATION • You should seek out investments that have a rate of return that is higher than inflation. Chapter 4

  6. FEES AND TRANSACTION COSTS • Long-term Investing • buy high-quality growth stocks and hold on to them • Zero Transaction Costs • stock purchased directly from a corporation • low cost purchasing plans • Low Turnover Rates • choose funds with low turnover rates Chapter 4

  7. TAXES • Over the course of a lifetime, taxes will have a tremendous impact on the amount of investment money you can accumulate. • Tax-sheltering retirement plans are a savvy investment. Chapter 4

  8. RETIREMENT PLANS AND TAXES • The U.S. Congress has established tax-deferred and tax-reducing retirement plans to encourage people to save for retirement. Chapter 4

  9. 401(K) AND 403(B) PLANS • tax-deferred retirement savings plans offered by employers • a percentage of earned income can be contributed • employers may match a portion of employee contributions • investment gains are not taxed until withdrawn Chapter 4

  10. INDIVIDUAL RETIREMENT ACCOUNTS (IRAS) • for workers who are not covered by an employer-sponsored retirement plan • Traditional IRA • Roth IRA Chapter 4

  11. Chapter 4

  12. OTHER TAX SAVING OPTIONS • SEP IRAs and Keogh Plans • Life Insurance Contracts: Tax Deferred Chapter 4

  13. NOMINAL AND REAL TOTAL RETURNS • Smart life-long investors try to: • outperform inflation • hold down investment costs and fees • pay as little of their growing wealth as possible in taxes Chapter 4

  14. Lesson 4.2Protect Yourself Goals • Explain what insurance is and how it works. • Describe the major kinds of insurance people need. Chapter 4

  15. WHAT IS INSURANCE? • Insurance provides protection against the following types of financial loss: • loss of income • medical expenses • damaged property • lawsuit Chapter 4

  16. HOW DOES INSURANCE WORK? • Insurance works by pooling the money of policyholders. • premium • the policyholder’s contribution for insurance coverage Chapter 4

  17. AUTOMOBILE INSURANCE • Bodily Injury Liability Coverage • Property Damage Liability Coverage • Medical Payments Coverage • Uninsured/Underinsured Motorist Coverage • Comprehensive Coverage • Collision Coverage Chapter 4

  18. HEALTH INSURANCE • Annual Deductible • annual amount of medical bills you must pay • Co-Insurance (Co-Pay) • the percent of medical costs the insured person must pay • Maximum Coverage • the lifetime limit on the total amount your insurance will pay Chapter 4

  19. DENTAL AND VISION CARE INSURANCE • Employers may provide insurance for: • dental care • vision care Chapter 4

  20. DISABILITY INSURANCE • a portion of a salary is provided to a worker who is unable to work due to accident or injury Chapter 4

  21. LONG-TERM CARE INSURANCE • Long-term care insurance covers: • nursing home care • home care Chapter 4

  22. LIFE INSURANCE • Life insurance provides financial protection to your dependants. Chapter 4

  23. TERM INSURANCE • the simplest and least expensive form of insurance • can buy coverage for a specific amount of time • if death occurs during coverage period, beneficiary receives insurance payment Chapter 4

  24. CASH VALUE INSURANCE • In addition to a death benefit, a cash value is built up over time. • the cash value can be borrowed against • Whole Life • Variable Whole Life • Universal Life Chapter 4

  25. PROPERTY INSURANCE • Property insurance covers real property and personal property. • Market Value • Replacement Value Chapter 4

  26. LIABILITY INSURANCE • Protects you from potential losses due to legal actions taken against you because of some alleged negligence. Chapter 4

  27. BUYING INSURANCE • Compare policies. • Use an experienced agent who is registered as a chartered life underwriter. • Insurance is crucial to your long-term financial health. Chapter 4

  28. Lesson 4.3 A Car and a House Goals • Describe steps to take when you are ready to buy a car. • Distinguish among the three basic types of home mortgages. • Identify the advantages of home ownership. Chapter 4

  29. CONTRASTING THE TWO PURCHASES • car • depreciates • house • appreciates Chapter 4

  30. BUYING A CAR • Before buying a car, go through the step-by-step analytical process like the one described in lesson 1.1. Chapter 4

  31. 1. SET A GOAL 2. ACQUIRE KNOWLEDGE • Determine how much you can afford to spend. • Research used cars. 3. COMPARE ALTERNATIVES 4. CHOOSE A STRATEGY 5. MAKE A COMMITMENT 6. KEEP FLEXIBLE Chapter 4

  32. PURCHASING A HOUSE • Buying a house is one of the most important investment decisions you will ever make. • The investment skills you are currently learning can help you acquire money for the down payment. Chapter 4

  33. THE INVESTMENT ADVANTAGE OF BUYING A HOUSE • equity • the amount of your house that you actually own • Increasing Equity • As you pay off your mortgage, your equity in your home increases. • As your property value increases, your equity increases. Chapter 4

  34. THE TAX ADVANTAGES OF BUYING A HOUSE • Because mortgage interest is tax deductible, people can afford larger monthly mortgage payments than they can afford in rent. • Since 1997, most people do not have to pay federal income tax on the gains received from selling a primary residence. • A $250,000 gain is tax-free for single people. • A $500,000 gain is tax-free for married people. Chapter 4

  35. AFFORDING A HOUSE • Current monthly income • Expected future monthly income • The down payment • Current mortgage interest rates • The price of the house • Other debts and obligations you may have • The length of the mortgage Chapter 4

  36. Generally, monthly housing payments should not exceed 30% of gross monthly income. • Upper limits for all debt payments are often capped at 35%-36% of gross income. Chapter 4

  37. THE DOWN PAYMENT • down payment • amount of money paid at closing • private mortgage insurance (PMI) • normally required on loans that have a down payment of less than 20% Chapter 4

  38. FIXED RATE MORTGAGES • With a fixed rate mortgage, the interest rate and monthly payments stay constant over the life of the loan • When interest rates are low, it is good to get a fixed rate mortgage. Chapter 4

  39. ADJUSTABLE RATE MORTGAGES (ARM) • an adjustable interest rate • monthly housing payments may fluctuate • The initial ARM rate may be lower than a fixed mortgage rate. • may have a “cap limit” • may be convertible to a fixed rate Chapter 4

  40. BALLOON MORTGAGES • typically 5 to 7 years • mortgage must be paid in full at end of loan • interest rates normally a slight amount less than fixed rate mortgage • popular for buyers who plan to move before balloon payment is due Chapter 4

  41. ADDITIONAL INFORMATION SOURCES FOR HOME BUYERS • Klipinger’s Buying & Selling a Home • J.K. Lasser’s Guide to Buying Your First Home • How to Buy Your Own Home in 90 Days • Century 21 Guide to Buying Your Home • 100 Questions Every First-Time Home Buyer Should Ask • The 106 Common Mistakes Homebuyers Make (And How to Avoid Them) • Buy Your First Home Now Chapter 4

  42. SUMMARY • 4.1 PLUG THE LEAKS • 4.2 PROTECT YOURSELF • 4.3 A CAR AND A HOUSE Chapter 4

  43. PERFORMANCE INDICATORS EVALUATED • Explain financial characteristics of the mutual fund. • Explain how the number of stocks in a mutual fund affects performance. • Explain the relationship of turnover rate to investment strategy and brokerage fees. Chapter 4

  44. Define the importance of analyzing companies when making investments. • Explain the importance of long-term investments. • Demonstrate an understanding of investments. • Explain a strategy for analyzing an investment fund. Chapter 4

  45. THINK CRITICALLY • Why should the stocks from a mutual fund be from diversified sectors of the economy? • Why should a mutual fund have at least 50 different stocks? • What does the turnover rate tell about a mutual fund? • What is the disadvantage of selling and buying stocks frequently? Chapter 4

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