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Personal Finance

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  1. Personal Finance E150: Schansberg

  2. Goals, Basics -where are you at financially? satisfaction scale; strength/weakness -personal goals and strategies for achieving those goals? -general challenges: short-run vs. long-run -opportunity costs of time and money -time value of money -financial advisors (as a type of middleman, info provider) -asset, liability (stock); income, expenses (flow) -car and home as both asset and liability

  3. Long-term spending -“count the costs” of debt—and avoid it when possible -buying a car: want vs. need; used vs. new (vs. lease); size of down payment vs. monthly payment -buy vs. rent a house: major expenses either way! moving soon? • -want vs. need; new vs. used; SR vs. LR (size of family); importance of location • -financing: • payment generally less than one-third of income • 20% down payment vs. private mortgage insurance (PMI) as monthly expense and fixed cost to end • difference in payments for 10 vs. 15 vs. 30 year loans • fixed vs. variable interest rates; “points” (and length of time to re-coup) • tax deductibility (HMID): paying a bank $100 to save $X in taxes • debt, but also an asset • closing costs every time you buy/sell (eats equity!) • escrow/save for property taxes; commuting

  4. Wealth, Income, Budget Tools • income vs. disposable income • cost of living and geography • general budget, including taxes (payroll, income, property, personal property), payroll deductions (including health insurance), spend, save, give—now and ten years from now • checking account, debit cards, credit cards • “emergency accounts”—3-6 months of expenses

  5. Investment Tools Principles: • risk, liquidity, and rate of return (including tax advantages) • diversification • power of compound interest (revisited from HW #2a-b) • vs. danger of compound interest • and usefulness of starting/avoiding early • see: context-specific investments (e.g., by age, need $X in six months, single vs. family, house if moving in a few years) Tools: • savings accounts, money market, CD’s • govt, municipal and corporate bonds • common and preferred stocks • mutual funds vs. individual stocks and trying to “beat the market” • whole vs. term life insurance—with family (when?) • retirement accounts at work: defined benefit (pension) vs. defined contribution (vesting) • retirement accounts outside of work: 401k, traditional IRA, Roth IRA (see also: 529’s) See also: importance of will; role of executor and power of attorney