Budgeting and Goal Setting 27715 20231031183226

Budgeting and Goal Setting / Course Introduction
Course Introduction
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Budgeting and Goal Setting / Course Introduction
Course Overview
Course Introduction
This course is designed to review basic math operations and how they're used in real-life
situations. The course consists of three lessons, each designed to further your knowledge
of how math is used in everyday life. You’ll review the basic operations found in math.
You'll focus on everyday situations, such as calculating your salary, evaluating payment
options, and designing a personal budget to track your income and expenses. You'll also
explore ways to save and invest your money and design a master plan for your personal
life.
External
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Course Materials
All of your course materials are included in this course experience. You'll find it easiest to
study this course by following these steps:
1. Look over the syllabus, paying close attention to the course and lesson objectives.
2. Read each objective. Pay close attention to main concepts and de nitions.
3. Complete each assignment as you come to it.
4. When you've completed each section, look over the lesson review.
5. When you're con dent you understand the material, complete the lesson exam.
Course Objectives
By the end of this course, you'll be able to
Apply basic math skills to everyday life
Determine best practices for money management
Analyze nancial areas of your life

Budgeting and Goal Setting / Money Management
Money Management

Lesson 2 Overview
You may have been handling your own money for some time, or you may be just beginning
to do so. Either way, the information presented in this lesson will make your money
handling easier and more efficient. With this new knowledge, you’ll be able to make more
intelligent decisions regarding your budget, purchases, credit, loans, and other financial
aspects of your life. You work hard for your money. It’s only sensible to make the most of it
through wise money management.
Before you need to worry about how to handle your money, you obviously must have some
money to handle! So, this lesson begins with a discussion on securing a job, which will
most likely be your primary source of income.
There’s a lot of helpful material ahead, so let’s get started.

Lesson Objectives
Describe the basic math operations needed for a job search
Calculate salary and purchase costs
Identify the total costs of payment options
Develop a spending budget and record-keeping plan
List homeowner expenses

Calculate Salary and Purchase Costs

Salary and Purchases
Determining Your Salary
There are several ways in which your income may be determined:
By an hourly rate
By a weekly, monthly, or annual rate
By straight commission
By a base salary plus a commission
Let’s look briefly at each method.
Hourly Rate
The most common method of calculating wages is the hourly rate. When paid at an hourly
rate, an employee usually punches a time clock or fills out a time sheet to record the
number of hours worked. The number of hours is then multiplied by the hourly rate to
determine the money earned for that time period.
For example, if Mike, who earns $10.50 per hour, worked 40 hours each week, he would
calculate his weekly earnings this way:
40 × $10.50 = $420.00
According to the Fair Labor Standards Act, FLSA, employees of companies involved in
interstate (between states) business must be paid time-and-a-half (overtime) for all hours
worked beyond the regular 40 hours each week. There are exceptions to the rule. For
more information, access the Department of
Labor’s(http://www.dol.gov/general/topic/wages/overtimepay) website.
Using the FLSA rule, let’s calculate Mike’s pay if he were to work 50 hours during one
week.
Regular pay = 40 × $10.50 = $420.00
Overtime hours = 50 – 40 = 10 hours
Overtime pay rate = 11/2 × $10.50 = $15.75
Overtime pay = 10 × $15.75 = $157.50
Total pay = $420.00 + $157.50 = $577.50
Weekly, Monthly, or Annual Rate

An employee is sometimes paid a fixed amount for a week, month, or year. Employees in
management positions are usually paid this way. Salaries aren’t affected by the number of
hours worked, and the employee isn’t paid overtime. But some sort of recording system
may be used (an electronic form, for example), to monitor the employee’s working hours.
IT'S THE LAW
A minimum rate of pay is set by federal law. This rate changes from time to
time. If you have any questions concerning this rate, you may contact
US Department of Labor
Employment Standards Administration
Wage and Hour Division
Frances Perkins Building
200 Constitution Ave., N.W.
Washington, DC 20210
The Wage and Hour Division(http://www.dol.gov/whd/) can also give you

information on child labor protection laws, overtime pay, and equal pay for
equal work (regardless of sex).
Straight Commission
Salespeople who are paid a straight commission receive no set salary. Rather, they’re paid
a percentage of the total sales they make.
For example, let’s say that a bicycle salesperson working on a straight commission sold (in
a single day) six bicycles priced at $180 each. If he receives a 7% commission, his
earnings for that day would be calculated this way:
Commission for each bicycle = 7% × $180 = 0.07 × $180 = $12.60
Commission for six bicycles = 6 × $12.60 = $75.60
Therefore, for one day, this salesperson earned $75.60.
Base Salary Plus a Commission
Salespeople who work on salary plus commission are guaranteed a minimum base salary,
plus a commission on all sales over a specified amount, or sometimes on total sales. Let’s
look at a couple of example situations that illustrate the method used to calculate this type

of income.
Suppose that John Blum receives a base salary of $200 per week and a 4% commission
on all sales. Let's figure his total earnings for a week in which he sold $1,500 worth of
merchandise
4% of $1,500 = 0.04 x $1,500 = $60 Calculate John's commission.
To determine the total earnings, add the commission

$200 + $60 = $260
to the weekiy salary.
Let's say that Jill Wysok is paid a base salary of $235 per week, plus a 3% commission on
all sales over $600. If her sales for the week totaled $950, you would figure her salary in
this manner:
$950 - $600 = $350 Determine the amount over $600.
3% of $350 = 0.03 x $350 = $10.50 Calculate the commission of $350.
To determine the total earnings, add the commission

$235.00 + $10.50 = $245.50
to the weekiy salary.
Deductions
You may have heard of someone who found a summer job working in a grocery store 30
hours a week for $7.25 per hour. At the end of the first week she eagerly awaited her
$217.50 pay. Imagine her dismay when she received a paycheck for only $165.21. It
seems that this young person never learned about deductions.
Deductions are the amounts taken out of a salary for taxes, medical insurance, union dues,
charity contributions, retirement funds, and so on. The salaries we previously discussed
were gross salaries—that is, total salaries before deductions are subtracted. The money
you actually receive after deductions are taken is the net salary, or take-home pay.
The taxes that are deducted from your salary may be collected by local governments (city,
borough, township, parish), state governments, or the federal government.
Federal Taxes

There are three types of federal taxes—FICA (Federal Insurance Contributions Act),
Medicare tax, and income tax.
1. The FICA tax is also known as the Social Security tax, since it’s your contribution
to your own government life insurance plan, disability insurance plan, and
retirement fund. The FICA tax is based on a changing (usually increasing) rate
and a changing (usually increasing) wage.
2. The Medicare tax is withheld for the purpose of hospital insurance. The
employee’s portion of Medicare is matched by his or her employer, and there’s
currently no ceiling on the earned income wage base, as there is with FICA.
3. Thefederal income tax helps the federal government to operate. As you probably
know, the IRS (Internal Revenue Service) is the agency that collects the tax. The
amount of income tax you pay depends primarily on your total earnings and the
number of exemptions you claim. An exemption is a tax break for each person
you support.
When you’re hired, your employer asks you to list your exemptions. If you’re single, for
example, and you support only yourself, you’re allowed one exemption (yourself). A
married couple has two exemptions; if they have two children, they would have four
exemptions. The more exemptions you have, the less the tax that’s taken from your pay.
When you prepare your annual tax form, you can find out what you’re to pay in yearly tax
from income tax tables similar to the one in the figure below. You must first determine your
total gross income and your total exemptions. Your employer must furnish you with a W-2
form showing your total annual earnings from the preceding year and the total of the taxes
deducted. If more tax was withheld than you owe, you’ll receive a refund. If less tax was
withheld, you’ll owe the balance.

If your income doesn’t exceed a certain amount, you can use a tax table like this one to
figure your yearly income tax. Click here to have an enlarged view of the tax table and also
to know what a tax table contains."
(https://courses.portal2learn.com/d2l/common/dialogs/quickLink/quickLink.d2l?
ou=17692&type=coursefile&fileId=2013+Tax+Table.html)

Let’s look at an example.
Suppose that one year Mae Browning's taxable income is $24,442, and $3,546 was with-
held for federal income taxes during that year. Mae is single and supports only herself.
Using the sample tax table shown in Figure 5, let's determine her tax.
Look under the heading "If line 37 (taxable income) is—." Mae's taxable income of $24,442
falls into the range of "at least $24,400 but less than $24,450." Next look at the "Single"
column under the heading "Your tax is—." Mae finds that her tax is $3,218. Since she had
$3,546 withheld from her pay, she's due a refund of $328 ($3,546 – $3,218 = $328). Mae
will receive this refund after she files her income tax form.
Determining the tax you owe isn’t as simple as in the preceding example. There are many
categories of deductions that may apply to you, which change your taxable income.
Complete instructions come with the tax form you receive. Study them carefully.
Since tax laws change often and the directions are extremely complex, you may want to
consult a professional tax preparer. The comparatively small cost of such a consultation
may save you money, and the preparer will answer any questions you may have.
State and Local Income Taxes
Depending upon where you live, state and local income taxes may be deducted from your
pay. These taxes are usually at a fixed rate, such as 1% or 3%.
Other Deductions
In addition to taxes, you should be aware of other possible deductions that will affect your
take-home pay.
Hospitalization
If you belong to a group health insurance plan through your employer, the premiums are
deducted from your pay. Since medical costs are continually rising, health insurance is
practically a necessity.
Union Dues
If you belong to a union, your dues may be deducted from your pay.
Pension Plan
Your company may have a retirement plan to which you contribute. There are three types
of qualified plans: pension, profit sharing, and stock bonus plans. Pension plan benefits are
generally measured by and based on factors such as years of service and employee
compensation. A deferred-arrangement plan, also known as a 401(k) plan, allows

participants to make contributions to a profit-sharing or stock bonus plan, usually without

being taxed on the earnings contributed to the plan. These contributions are also usually
matched at a certain percentage by the employer.
Calculating Net Pay
As you learned earlier, your net (take-home) pay is your gross pay minus all deductions. To
illustrate how net pay is figured, let’s use the example of Tyrone Jones, whose weekly
gross pay is $480.77. He has the following deductions:
FICA tax $29.81 1.45%
1.45% Medicare tax 6.97
Federal withholding (income) tax 63.62
Charities fund 1.00
2% state tax 9.61
1% city tax + 4.81
Total deductions $115.82
Gross pay $480.77
Total deductions — 115.82
Net pay $364.95
Purchases
During the course of your life, you’ll purchase a wide variety of items. For some purchases
you’ll pay cash, for some you’ll write checks, and for others you may use a credit or debit
card. To be sure you get the most for your money, it’s important to become familiar with

sales taxes, unit prices, and credit charges. All of these factors affect the price you actually
pay for your purchases.
A credit card allows you to purchase items and pay for them later; a debit
card, on the other hand, is like paying cash. The amount of your purchases
is deducted from your bank or credit union account.
Sales Taxes
A sales tax is levied in most states and some cities as a percentage of the purchase price
of retail items. The tax is usually collected by the retailer selling the item and is then
passed on to the agency levying the tax. Retail food items are usually exempted from such
sales taxes, as are items of clothing in some states.
Let’s see how sales tax is figured.
Suppose Ruthann Channing bought a $49.95 dress, a $30.00 blouse, and an $11.00 slip. If
there's a 6% sales tax on clothes in her state, what's the total cost of her purchases?

$49.95 + $30.00 + $11.00 = $90.95 Calculate the total cost.
6% of $90.95 = .06 x $90.95 = $5.46 Calculate the sales tax.
Add the sales tax to the cost of the items. The total
$90.95 + $5.46 = $96.41
cost of Ruthann's purchases is $96.41.
REAP THE REWARDS OF RESEARCH
When you’re shopping for complex, expensive items such as stereos, cars,
vacuum cleaners, and so on, it can be difficult to determine which brand is
best. Very often, the cheapest brand doesn’t remain the cheapest for long,
when repair bills or premature replacement are figured in. On the other
hand, purchasing the most expensive, deluxe model doesn’t necessarily
guarantee you years of trouble-free service, either.
Wouldn’t it be easier to make an intelligent consumer decision if you were

able to “test drive” every popular brand for a month or maybe even a year?
Obviously, no dealers or retailers would allow you to use their merchandise
for personal research of this sort; however, you do have access to the
results of this type of extensive research right at your newsstand and on
your computer.
Consumer magazines and websites are available let you compare the
quality, price, and performance of several brands of quite an array of items
—from mouthwashes to microwave ovens to money market funds! The
producers of these publications do thorough tests and investigations of all
products before describing and rating them. A consumer magazine that’s
available nationally is Consumer Reports(http://www.consumerreports.org).
So, if you’re faced with making a major purchase, take advantage of the
research compiled in these magazines and on the Web. The time you
invest now may prevent headaches—and unnecessary expense—for years
to come.
Unit Prices

If three bunches of celery were selling for $3.85 in one store and two bunches of celery
(the same size) cost $3.40 in another store, could you determine which store had the
cheaper celery? You could if you figured out the unit price of each bunch.
A unit price is the price of a single item. To determine the unit price, divide the price by the
number of units or items. Then round off any fraction of a cent to the nearest whole cent.
Thus, in the first store, one bunch of celery would cost $3.85 ÷ 3 = $1.283 or $1.28. In the
second store, a bunch would cost $3.40 ÷ 2 = $1.70.
The celery example is a simple one, because the cost of the celery bunches wasn’t
determined by their size. But what if the size or weights are different? You must then find a
unit of size or weight common to both items. Here’s an example.
If a 16 oz (ounce) can of one brand of beans is priced at $1.50 and a 12 oz can at $1.33,
which is cheaper per ounce? To calculate the price per ounce of each can, divide the price
by the number of ounces.
$1.50 ÷ 16 = $0.09 Determine the price of the 16 oz can.
$1.33 ÷ 12 = $0.11 Determine the price of the 12 oz can.
So, per ounce, the first brand is cheaper. Of course you must consider other factors, such
as the quality of each brand and the quantity you want to buy. But by comparing unit
prices, you can at least determine which brand is least expensive per unit.
In the past, it was up to the consumer to calculate and compare unit prices. Because of
growing pressure from consumer groups, grocery stores must now display the unit prices
for each item they sell. Be sure to look for these unit prices. They can usually be found on
the edge of the shelf that holds the item. You’ll shop more intelligently by comparing unit
prices.

Key Points and Links
Key Points
Income can be earned by an hourly rate; by a weekly, monthly or annual rate; by straight commission; or by a base
salary plus a commission.
A gross salary is the total amount earned before deductions are subtracted. Net salary is the amount earned after
deductions are subtracted.
Money may be deducted for federal, state, and local taxes.
A sales tax is levied in most states and some cities as a percentage of the purchase price of retail items.
Wise research can help you make better purchasing decisions.
A unit price is the price of a single item.
Links
Wage Laws(http://www.dol.gov/whd/)

Practice: Calculate Salary and Purchase Costs
This practice is ungraded, and you can take it as many times as you want. For
written responses, you can type your answers in the box. When you finish, click
“View Feedback” to expand sample answers that you can compare to your answers.
You won’t be allowed to go back and click “View Feedback” again, so be sure to
note of topics you may need to study more. Because this is a self-check practice,
you won’t receive a score.
Question 1 (1.00 Points)
Exercise
Based on what you've read, answer the following questions.
1. Jose Ramirez worked 38 hours last week at a pay rate of $7.25 per hour. What was his gross pay?
2. Bill Green, a storm-door salesman, sold $5,000 worth of doors and received a commission of $400. What was
his rate of commission? (Remember the basic formula p = br, in which p = percentage, b = base, and r =
percent.)
3. With a base salary of $250 and a commission of 4% of all sales, compute Cindy Nelson’s salary for the
following weeks:
Base Total
Week Sales Commission
Salary Salary
1 $250.00 $890.00 ? ?
2 $250.00 $1,126.00 ? ?
3 $250.00 $975.00 ? ?
4 $250.00 $824.00 ? ?
4. Suppose you worked 45 hours at a rate of $7.25 per hour, plus overtime pay (time-and-a-half) for any hours
over 40. You also received a 2% commission on the $800 of china tableware you sold. Your paycheck lists
$324.25 as your gross earnings. Is that correct?
5. Arlene Grossman earns $235 per week. Her federal income tax is $36.00. Her FICA tax is 6.2%. Arlene is also
subject to a 3% state income tax and a 1% city tax. What’s her net pay?

6. Will Brown, who pays weekly union dues of $3.00, earns $289 per week. His federal income tax is $39.13 and
his FICA tax is 6.2%. He pays a 4% state income tax, a $15.00 annual city tax, and 2% of his pay to his
retirement fund. What’s his net income for the week he pays the city tax?
(Long answer)

Identify the Total Costs of Payment Options

Buy Now, Pay Later
If you’re like most people, there will be times when you may not be able to pay for your
purchases by cash or check, especially if they’re rather expensive. You’ll then use a plan in
which you “buy now and pay later.” Examples of such plans include an installment plan, a
department-store charge card, a credit card, or a loan from a bank, finance company, or
credit union. Whatever source you use, you’re borrowing money at a specified interest rate.
You must repay both the money you borrowed and the interest charged on that money. So,
you should become aware of just what percent of interest you pay on any money you
borrow. Note: Every time you purchase an item and don’t pay for it by cash, check, or
debit, you’re borrowing money, no matter what term is used. (Sometimes a check may be
based on borrowed money, as we’ll discuss later.)
Credit Cards
The major purpose of credit cards is to increase sales. For the banks and other institutions
issuing these cards, the interest charges and the discounts received from merchants
create a tremendous source of income. For industrial groups, such as oil companies, credit
cards can ensure customer loyalty to their brands.
For consumers, credit cards provide instant access to many goods and services they
couldn’t otherwise obtain. They also eliminate the need to carry cash. (Debit cards also
eliminate the need to carry cash. Today, cash isn’t often used to make purchases such as
groceries.)
Because credit cards come from many sources, for separate purposes, consumers were
loaded with too many cards and received separate billings from each card every month.
Visa and MasterCard allowed for the consolidation these separate billings. Two other all-
purpose cards are American Express and Discover.
Retail Cards
You may not think of your utility bills (gas, electricity, and water) and other common bills as
extensions of credit, but they are. You use the goods or services before you pay for them.
Service charges are applied to late payments.
Another form of retail credit is the department-store charge account. You’re billed at the
end of each month for any purchases you’ve made. Interest calculations are often
complex. APRs (annual percentage rates) on store cards are typically around 20%,
depending on your credit score. For specific rates and interest calculations, refer to the
terms and conditions provided by the company issuing the credit.
You may also purchase on the installment plan, which extends the period of payment. You
pay so much down and so much per month for a specified period of time, with interest

rates added. The seller retains ownership of the purchase until all payments are made.
Installment purchases are usually made for larger items, like appliances.
Personal Finance Companies
Sometimes a person needs immediate cash because of an unanticipated expense. A

personal finance company, or small-loan company, may provide the answer to such a
need. These companies lend money on your signature alone. They’re fast and convenient,
since all that’s usually required is a steady income and a long-time residence at one
address. Another point in your favor is home ownership.
Many people turn to personal loan companies because they’re private. No one is looking
over your shoulder while you’re making an application. Larger loans carry a smaller interest
rate, but small loans from such companies could carry an annual interest rate of 36% or
more, depending on the state you live in. So, the major disadvantage of personal finance
loans is the high interest rates.
Bank Loans
Banks extend loans for a variety of purposes. Banks usually ask many more questions
than the personal finance company. The following material provides information on three
types of bank loans: personal loans, home-improvement loans, and overdraft loans.
Personal Loans
Banks, like personal finance companies, grant personal loans to applicants who meet their
requirements. Usually, such personal loans, on your signature alone, are limited to 20% of
your annual income. For example, if your annual income is $30,000, the most you could
borrow on your signature is 20% of $30,000, or $6,000.
Home-Improvement Loans
Loans may also be obtained from a bank for needed home repairs or improvements. The
sum you can borrow is usually larger than that for a personal loan and runs for a longer
period of time. You must assure the bank that you’ll use the money for the intended
purposes.
Overdraft Loans
In the past, if a checking account was overdrawn—that is, if checks were written for more
money than was in the account—the check was returned to the issuer with a charge for
handling the check. But now, the issuer can arrange beforehand for the bank to honor a
check, within a certain limit (say, $500), covering that check or any other checks with bank

funds. Those funds become an overdraft loan from the bank. Such an arrangement is
called a credit line.
Life Insurance Loans
Some life insurance policies generate reserves of money that can be borrowed by the
policyholder. Such loans can be obtained quickly without the borrower being investigated
or having to state why he or she needs the money.
The disadvantage of such loans is obvious. When you take out a life insurance policy, you
do it because you think you need that protection. When you borrow that money and don’t
pay it back, you (and your family) no longer have that protection.
Credit Unions
Your fellow employees or club members may operate a credit union. Credit unions are non-
profit institutions operated at low cost to offer loans at low interest rates to credit union
members. Federal credit unions are insured for up to $250,000 for each individual account.
Pawnshops
A pawnshop is usually the last resort for obtaining money. A person who needs money
surrenders a possession of some value, like a camera or ring, to the pawnbroker in return
for a sum of money that’s a fraction of the item’s value. To reclaim the pawned item, the
borrower must repay the sum plus interest of 20% or more, usually within a year.
Otherwise, the item is sold.
Payday Loans
When all other sources of obtaining money fail, an individual may turn to borrowing money
against their next paycheck. Individuals in this position may turn to what’s referred to as a
payday lender. Payday lenders are known for charging very high interest rates. These
lenders require an individual to pay the amount borrowed from the next paycheck in full.
This is often very difficult for those suffering financial difficulties. If a borrower is unable to
make the payment in full, the payday lender charges hefty fees on top of the already high
interest rate. The interest and fees from such loans, especially if repayment is delayed,
may amount to two or three times the original amount borrowed.
There have been calls for increased regulation to ensure borrowers are not being taken
advantage of. If you turn to a payday lender be sure to read all of the terms of the loan
carefully before accepting the loan.
Interest Rates

Before you consider purchasing something on the installment plan or other credit plan, you
should determine the true interest rate you’re paying.
The Truth in Lending Act requires that sellers disclose the amount or percent of interest
charged for any credit purchase. You can compare the interest rate you’ll pay with the
interest rate for money borrowed from other sources. (Remember that you’re still
“borrowing” money when paying on an installment plan.)
You can determine the interest rate for any credit purchase by using the following formula,
which is employed by the Federal Reserve System.
R = 2 ml⁄P(n + 1)
in which,
R = actual yearly rate of interest
m = number of installment payments per year (monthly, 12 payments; or weekly, 52

payments)
I = interest or installment charges
P = amount borrowed
n = number of payments to be made
Now let’s see how we can apply the formula in an actual situation.
Suppose Mr. Martin bought a sweater priced at $45.00. He accepted credit terms of $5.00
down and $2.85 per week for 16 weeks. The extra cost on the credit plan was equal to
what actual yearly rate of interest? Let’s find out. First, determine what information you
have and what you need:
2 ml
R =
P (n + 1)
R = unknown yearly rate of interest
m = 52 (since payments are weekly)
P = $45.00 − $5.00 = $40.00 Since he has put $5.00 down, he is nancing only
$40.00.

I = ($2.85 × 16) − $40.00 =
$45.60 − $40.00 = $5.60 To calculate the amount of interest charged, multiply

the weekly payment ($2.85) by the number of
payments (16). From this subtract the principal.
n = 16
Let’s substitute this information into the formula and perform the calculations.
2(52)(5.60)
R = = 0.85647, or 0.8565 rounded off
40(16 + 1)
0.8565 = 85.65% Change your answer to a percent.
So, we’ve determined that Mr. Martin paid a whopping 85.65% interest on his sweater!
You’ll probably be amazed at the very high rate of interest charged in many of the so-called
“easy” plans.
Your Credit Rating
If you’re included in the 60% or more of the population who buy now and pay later, one of
your most precious possessions is a good credit rating. No matter what legitimate source
(other than an insurance policy) you may use to borrow money or obtain credit, your record
will be investigated. This investigation is usually conducted through a credit reporting
agency. The agency gathers and evaluates data about your personal and financial
character. These credit reporting agencies are called credit bureaus.
You’ll be given a credit rating based on such factors as your job, your residence, your
marital status, your bank accounts, and your credit record. Any failure in the past to have
paid bills (utilities, department stores, car payments, and so on) on time will probably be
discovered and will influence your rating.
If you apply for credit and are denied it, you have a legal right to find out what it was in your
credit record that caused the problem. To find out your current credit score, request a free
report from at least one of the three major credit reporting agencies. Specific information
can be found at USA.gov(http://www.usa.gov). Once you’ve received your credit record,
closely examine your file. If you find items in it that are false, undocumented, or more than
seven years old, you can insist they be removed from your file and that an amended report
be sent to the person or company who had requested your credit rating. Also, if you
discover a charge on your bill that you know you didn’t make, you can question that
charge.

KEEPING YOUR CREDIT RATING
Once you’ve acquired a good credit rating, strive to keep it. A guideline for
most people is that your payments—interest and principal (amount
borrowed)—should never exceed 20% of your net income. Some personal
finance experts believe 20% to be too high, considering it a danger point, so
it’s wise to think of 20% as your absolute outside limit.
The major rule to maintaining a good credit rating is to be punctual with

your payments. Always pay on time. And be sure the check doesn’t bounce
(get returned by the bank because of insufficient funds). A bounced check
will affect your rating more adversely than a late payment.

Actual Yearly Interest Rate
Read assigned reading in 2.3 under Interest Rate, then watch Actual Yearly Interest
Rate(https://www.youtube.com/embed/pVQyQd79q78?rel=0&showinfo=0) for more
instructions on how to calculate the actual yearly interest rate (R) using the special formula
given.

Key Points
Key Points
Credit is available to consumers through a wide variety of options, including credit cards, retail credit, personal
nance companies, banks, life insurance, credit unions, and pawnshops.
When someone purchases something on an installment plan or some other credit plan, that person will pay
interest on the money borrowed.
A credit bureau is an agency that evaluates individuals’ credit ratings.

Practice: Identify the Total Costs of Payment Options
Exercise
Find the difference between the cash price and the payment plan and calculate the
interest rate for the following questions.
1. A food processor for $149.50 cash, or $5.00 down and $10.00 per month for 15 months
2. A television for $675.00 cash, or $52.00 down and $120.00 per month for 6 months
3. A smartphone for $150.00 cash, or $25.00 down and $12.00 per month for 11 months
4. Bedroom furniture for $1,985.00 cash, or $400 down and $74.00 per month for 24 months
5. A jacket for $75.00 cash, or $25.00 down and $4.75 per week for 11 weeks
6. e Smiths bought new furniture that cost $3,298.00. e store o ered them an option of putting $600 down
and making equal payments of $300 a month for 10 months. Use the Federal Reserve System formula to nd
the APR the Smiths will pay for taking this plan.
(Long answer)

Develop a Spending Budget and Record-Keeping Plan

Budgeting and Keeping Accurate Records
If you’re like most individuals, you have less money than you need to buy everything you
want. Therefore, you must decide how you’ll spend your resources. Budgeting and record
keeping will help you to determine if you’re spending your money efficiently to get what you
want. These steps will also help you adjust your spending habits so you can work toward a
financial goal, whether your goal is debt-free living or a trip around the world.
Why Budget?
Do you have mixed reactions to the word budget? After reading this section, you should
have very positive feelings about making a budget. A well-thought-out budget can prevent
excessive debts and disagreements over money. Knowing your family’s resources and
exactly how they’re going to be spent can lead to more pleasant, open family relations and
a healthier attitude toward money management.
A budget is a plan for spending your money. It tells you where you’ll spend your money and
in what amounts. But first, you have to determine your total income, so you’ll know how
much you have available to spend.
Income
To make up a budget, you’ll have to estimate your total income from all sources. Figure
your net income—the money you take home after taxes and deductions. If your income
exceeds your expenses, the budgeting process is easy. However, since your expenses will
almost undoubtedly exceed your income, you must decide what your priorities are and
what you want the most. Then you must adjust your expenses to match your income—
which is the purpose of a budget.
Budget Categories
A budget usually covers your pay period—one week, two weeks, or a month. To prepare a
budget, group all expenditures under general categories and then determine how much
you plan to spend in each category. The following groups include most expenditures.
They’re broad groups that will be broken down later.
Food purchased from restaurants, cafeterias, and vending machines, as well as from grocery stores
Clothing and its cost of upkeep (laundry and dry-cleaning)
Transportation, including all car expenses—payments, insurance, gas, oil, repairs—and plane, train, or bus fares
Housing, which includes rent or mortgage payments, repairs and improvements, insurance, and property taxes
Household operations such as utilities, supplies, payments for furniture or appliances, and so on

Health expenses, including health insurance, doctors’ fees, and medicine
Education, which includes tuition, books, supplies, and student fees
Recreation, including entertainment, vacations, magazines, and materials for hobbies
Gifts and contributions given for birthdays or Christmas, or to churches and charities
Savings, which includes payments for life insurance, savings accounts, bonds, individual retirement accounts, and
so on
Miscellaneous, which encompasses any recurring expenditures that don’t seem to t into any other category
Involving all family members in establishing nancial goals makes budgeting more pleasant and increases cooperation.
The important point here is that you become aware of all of your expenses. Including your
entire household in the preparation of a budget can also be very helpful. For a household
budget to be effective, each family member needs to be aware of the general financial
picture.
Types of Expenses
Think of your expenses as falling into two categories—fixed expenses and flexible
expenses. Fixed expenses are those bills you must pay every month in which the amount
due can’t be changed. Flexible expenses are those that change from month to month and
over which you can exercise some measure of control.
The category—fixed or flexible—into which you place each item depends to some extent
on your goals and your lifestyle. For example, some people may place all of their utilities—
electricity, gas, water, telephone—under fixed expenses. They might think that they have

little or no control over them, or they may have no desire to change them. Others, when
they start budgeting and find they’re spending too much for their utilities, might consider
them flexible expenses over which they can exert some control. So, it’s really up to you
where you place each expenditure.
Most people place all debts (car, furniture, credit payments), insurance premiums,
mortgage or rent, and taxes under fixed expenses. Some also place utilities under fixed
expenses. All other expenses—including food and clothing—are considered flexible
expenses.
Budget Sheet
Now you’re ready to prepare a budget sheet, which will serve both as a plan for what you
want to spend and as a check on what you actually do spend.
Here’s a good process to get started:
1. Group all of your expenditures into the budget categories listed previously.
2. Divide the categories into xed and exible expenses, as shown in the sample budget sheet that follows, which is
broken down by months. You can make your budget for a week or two weeks, depending on how often you’re paid.
3. Collect and add up all the bills for a xed period of time—say, one month.
4. Divide each expense by your pay period. For example, if your monthly rent is $500 and you’re paid twice a month,
you’ll budget $500 ÷ 2 = $250 for rent for each pay period. For such expenses, you should save the money so it will
be available when the payment is due.
5. Once you’ve determined the categories and periods, gather all of your records (cash receipts, charge slips, and
cancelled checks) to determine how much you’re now spending in each area. en look at exible expenses, and
decide whether this is the amount you actually want to spend. You can budget the amount that you feel you should
be spending there.
6. When you’ve budgeted all of your expenses, add them up. If they exceed your income, you’ll have to decide where
you should cut back to balance your budget.
7. At the end of each pay period, ll in the “actual” column by adding the amounts from your cash, charge, and check
records. If you discover a category (recreation, perhaps) that seems excessively high, you might want to break that
down into a separate listing of each expense to determine which of them can be eliminated or reduced.
IMPULSE BUYING
Are you an impulse buyer? During a shopping trip, do you buy many more
items than you need or can afford? If so, plan before you shop. Make a list
of the items you actually need. Try to stick to that list when you shop. Check
off each item as you find it. When there are no more items on your list, go
directly to the checkout.

Every three months (or more often, if you desire), you can add up your expenses and
examine your budget sheet to see how nearly you succeeded in keeping them to the
budgeted amounts. If there are large differences, sit down and think about the problem or
discuss it with the other family members who are involved. You’ll have to decide what steps
you can take to bring expenses into line. Or you may find you have to budget more realistic
amounts to be in line with what you actually spend.
The important point of a budget is that it makes you aware of what you’re spending. You
may not change your spending habits, but you’ll at least know where your money goes.

All expenditures can be divided into xed expenses and exible expenses, as shown on this budget form that can be used for a four-month
period.
Keeping Records
You pay for most of your purchases either with cash, debit card, or check. For budgeting
purposes, you should keep records of all such transactions so you know exactly what
you’ve spent. You should also keep a record of the total cash received by the family or
household.
The following paragraphs describe some important records.
Record of Income
Most people and families have only one or two major sources of income, so their incomes
can be easily determined. However, if you have several sources of income, you may wish
to keep records like the sample in the figure below.
Income Record
Date Source Amount
Jan. 4 Janice, net income, Dec. 15-31 $329.00
5 Rebate from appliance purchase 30.00
7 Jim, net income, Dec. 15-31 492.13
8 Garage Sale 92.56
Total $943.69
Cash Records
You need to keep records of all items for which you pay cash. Even though most of the
amounts may be small, they can add up to a significant percent of your budget. Each cash
payment can be recorded on a form like the one shown below.

Checking Account Records
Most of your income will probably be deposited in a checking account. This eliminates your
having to carry large amounts of cash, while providing a record of all payments made by
check or debit card.
You deposit money in your checking account and then write checks or use a debit card that
draws from that account when you pay your bills. The amount for which you write checks
should never exceed the amount you deposit in your checking account. If it does, you’ll
have to pay a penalty for each overdrawn check (unless you’ve arranged for overdraft
protection).
As you write each check, make a record of it on the check stub or ledger contained in your
checkbook. Subtract each check from your balance. Add any deposits to your balance.
Balancing Your Checkbook
Each month, most banks send a paper or electronic statement of your deposits and
withdrawals. Some banks also return your cancelled checks, although this practice is
becoming less common.
It’s important to reconcile the bank statement with your checkbook balance by comparing
the deposits and withdrawals shown on the bank statement with those in your checkbook.
When they agree, place a small check mark near each.

Subtract all checks written and add all deposits to determine the current checking account balance, as shown here.
If there’s a difference between your balance and the bank’s balance, it may be due to
outstanding checks—that is, checks that you wrote that haven’t yet reached your bank.
Look through your checkbook to see if any of your listed checks are omitted in the bank
statement. Deduct those from the bank statement.
Also, the bank statement may include service charges, which you should deduct from your
checkbook balance. If your balance still doesn’t equal that of the bank, check both your
math and the bank’s.
The first time you reconcile your checkbook balance with the bank’s figures, the job may
seem tedious. But you’ll soon learn to do it quickly. It’s not wasted time—keeping an
accurate checkbook register can save you the embarrassment and expense of an
overdrawn check. Also, you may find the bank has erred in listing your deposits and
withdrawals.
Let’s use an example to illustrate the steps involved in balancing your checkbook. Suppose
that Jim Janus had a balance of $255.25 in his checkbook. His monthly bank statement
showed a balance of $289.60. He put a check mark in front of every check listed in both his
checkbook and bank statement. He discovered that three checks he had written were not
yet listed on his bank statement—#321 for $9.30, #322 for $11.05, and #323 for $9.00. He
also noticed an ATM surcharge of $5.00 that was not on his bank statement. To determine
if his balance was correct, here’s how Jim arranged the items:

Monthly bank Checkbook balance after deducting checks =

statement balance = $289.60 $260.25
Check #321 − 9.30 ATM surcharge 5.00
Check #322 − 11.05 $255.25
Check #323 − 9.00
Checkbook balance
after deducting checks = 260.25
Since Jim’s actual balance and his checkbook balance are the same, Jim’s checkbook is
correct. He would, of course, look for those three outstanding checks and the ATM
surcharge on his next monthly bank statement.

Key Points
Key Points
A budget is a plan for spending and saving your money.
Fixed expenses are those bills you must pay every month in which the amount due can’t be changed. Flexible
expenses are those that change from month to month and over which you can exercise some measure of control.
Keeping careful records is an important part of the budgeting process.
An individual’s checkbook should be reconciled every time he or she receives a statement.

Practice: Develop a Spending Budget and Record-Keeping Plan
Exercise
1. For the month of June, Mae Green budgeted the following amounts: $180 for food, $475 for rent, $15 for
transportation, $50 for insurance, $65 for utilities, $25 for a gift for her sister, $150 for a car payment, and $30
for clothing. She actually spent $182 for food, $475 for rent, $12 for transportation, $65 for insurance, $68 for
utilities, $12.50 for the gift, $150 for the car payment, and $36 for clothing. Did Mae stay within the total
amount allocated for her budget?
2. Eleanor Raymond works full time while her husband, Peter, attends college and works part time. eir
income for the last two weeks consisted of an August 17 paycheck of Eleanor’s for $380.48, $16.50 for a
birthday present Peter returned on August 19, Peter’s paycheck on August 21 for $120.00, Peter’s sale of some
of his college textbooks on August 23 for $13.65, and a check from Peter’s father for $100.00 that arrived
August 25. Record and total Eleanor and Peter’s income for this two-week period.
3. During the period of October 1 to 15, Cathy Powers spent the following: October 1, rent, $540; October 6,
electricity, $48.55; October 7, food, $34.15; October 8, dinner at the China Palace, $12.80; October 12, blouse,
$18.95; October 14, food, $38.60; October 15, magazine, $2.00, and batteries, $6.50. Make a cash record of her
expenses and total them.
4. MarieHernandez’s checking account balance is $250.65. She then writes check

#346 on July 14 in the amount of $21.95 for a bathing suit. On July 16 she writes
check #347 for $48.50 to cover her bus fare. Check #348 to the Sunset Motel is
for $75.60. She deposits $55.00 on July 18 when she returns from her weekend
vacation. Use the figure below to list all transactions and calculate Marie’s new
balance.
Check Transaction Payment Deposit

Date Balance
Number Description Amount Amount
$250.65

5. Grace Peters spent $230 of her net income of $825 on food. What percent of her net income does the food
represent? (Round your answer to the nearest tenth of a percent.)
(Long answer)

List Homeowner Expenses

Your Home
Whether you rent an apartment or house or whether own your own home, you’ll incur
expenses related to that dwelling. If you’re to stay within your budget, your total home
expenses shouldn’t exceed 20% to 25% of your net income.
Whether you rent or buy your home depends on many factors—whether your job requires
you to move often, the possibility of a change in the family’s size or status, the availability
of rental property, your family’s feelings about owning a home, local economic conditions,
and so on.
Renting, of course, allows you greater mobility. If the neighborhood deteriorates or you get
a much better job in a different locale, your family can easily move to a better
neighborhood or different town.
Renting may be cheaper than buying, but in the end you have nothing to show for it. The
money you pay on a mortgage, however, goes toward a home that you will eventually own.
In addition, a family that owns its own home may feel more physically and socially secure.
Buying a home requires quite a bit of capital at the start. There are expenses such as
inspections, appraisal fees, points (a percentage of the purchase price paid to the bank),
closing costs, taxes, and recording fees. All of these items add up. You should be sure
you’re prepared to handle such expenses before deciding to buy a house.
The term capital refers to the value of accumulated goods. In the case here,
it refers to money.
You can make an intelligent decision on the home ownership question only after
considering all of these factors. Talk with both renters and owners to see what problems
they encounter. Then sit down and list all of the advantages and disadvantages of each
before deciding.
Service Bills
Whether you own or rent your home, you’ll have service bills. These may include electricity,
gas, water, and telephone charges. These bills may come once a month or every two
months.
The amounts of electricity, gas, and water you use are measured by meters. Your bills are
based on the meters’ records. You should know how to check these bills for accuracy, in

case you feel a bill is in error. You might want to read your own meters to verify the
readings shown on your bills. Several types of meters are used to record the amount of
gas, water, and electricity you use.
Electricity
Electricity is measured in kilowatt-hours (kwh). Some elective meters are arranged like an
odometer (mileage indicator) on a car, with only the numbers showing for the actual
reading.
Other meters have dials like the one shown in the figure below. The dials on an electric
meter are read from left to right, and the reading is taken from the last figure the pointer
has passed. Since the pointer always follows the value of the numbers, the first and third
clocks go counterclockwise, and the second and fourth (as you’re reading left to right) go
clockwise. The kwh you’re charged for is the difference between the new reading and the
previous reading. You’re charged at a certain rate for these kilowatt-hours. A state tax or
surcharge will probably be added.
Let’s look at an example.
Let’s say Mrs. Anderson’s previous meter

reading on January 1 was 1,875. Her meter
reading on February 1 is shown in the figure
here. How many kilowatt-hours of electricity
did she use during January?
The dials are read from left to right, using the last number passed. The first dial, which
swings counterclockwise, reads 2. The second is 1. The third is 9 and the fourth is 8.
Therefore, Mrs. Anderson’s current meter reading is 2,198.
To determine the kilowatt-hours used in January, subtract the previous reading from the
current reading.
2,198 – 1,875 = 323 kwh
Mrs. Anderson used 323 kwh in January.
Gas
Gas for cooking or heating is measured in cubic feet. As with electricity, the dials are read
from left to right and the amount used is multiplied by a standard rate per cubic foot.
Water
Water is measured by the cubic foot or the gallon. Measuring devices vary in different
places, as do methods and periods of billing. Usually the consumer is billed every quarter

(three months). So divide your quarterly bill by three to find your monthly rate for budgeting
purposes.
The water utility company, as well as the electric company, usually charges a minimum
amount regardless of how much you use. Any additional charge is figured by determining
the amount that actually was used—the current reading minus the previous reading (as
with the electric bill).
Here’s an example.
Suppose your current meter reading for October 29 is 623 (representing thousands of
gallons). If your previous reading for August 1 was 619, how much water did you use for
this billing period?
623 – 619 = 4
Since the number represents thousands of gallons, you used 4,000 gallons of water in
three months.
Oil
Fuel oil is usually delivered by a truck that contains a meter. The delivery person reads the
meter before and after delivering the oil to determine the number of gallons that you
received. The meter shows the number of gallons used to the nearest tenth of a gallon.
The number of gallons is multiplied by the current rate per gallon to determine your bill.
Let’s say the top portion of your oil bill looks like this:
Reading No. Gallons
112 00000
113 00722
The underlined digits represent the nearest tenth, so the oil company delivered 72.2
gallons. If the current rate of fuel oil is $3.799 per gallon, your bill would be 72.2 × $3.799 =
$274.29.
Phone
Landline use has become less common as cell phone reliability and range has improved.
Landline service is often bundled or sold with television and internet packages. If you
maintain a landline and have a cell phone, you may want to take a closer look at your
landline charges. Be sure to calculate your landline charges separate from your television

and internet charges. You may find the savings from cancelling your phone outweigh the
benefits of keeping it.
Cell phone costs vary from carrier to carrier. It’s wise to shop around from time to time to
ensure you are getting the best price for the features you want. Competition for consumers
has led to better deals being offered.
Your phone bill is issued monthly. It lists your basic or recurring charges, plus any
additional services or features that you opt to use. If you decided to use a payment plan for
your cell phone, the monthly charge will be listed on your statement. Phone bills also list
taxes, surcharges, and regulatory fees that may be applied.
Homeowner Expenses
If you own your own home, you’ll have more expenses than someone renting a home.
You’ll be financially responsible for all repairs and improvements made on that home. You’ll
also have to pay taxes and carry insurance. Since most homes are mortgaged, you’ll
probably be making mortgage payments, too.
Mortgages
Most homes are purchased, in part, with money borrowed from a bank or other source.
That money, which is usually borrowed for 20 or 30 years, carries an annual interest rate.

Usually, the money is repaid in monthly installments that repay a small part of the loan plus
the interest on the balance of the loan. This sort of loan is called a mortgage, which means
that the borrower signs a note giving the lender rights to the property. If the borrower fails
to make payments, the lender can take possession of the property.
Usually the borrower must deposit money for taxes and property insurance with the lender.
This process is referred to as the escrowing of money.
An escrow account is established to pay for a future expense. In the case of

home ownership, escrow accounts are set up to pay for insurance and
taxes. Your lender adds the cost for insurance and taxes on top of
your mortgage payment, maintains your escrow account, and pays the total
amount required by the due date.
When the homeowner pays off the mortgage, the cancelled mortgage is returned to him or
her. When that happens, tax officials should be notified that property tax bills should be
sent to the homeowner, instead of the mortgage holder.
Taxes
The district in which your home is located levies a property tax on that home. There may
be several separate property taxes—one for the local government, one for the school
district, and usually one for the county.
A property tax is based on the assessed value of your property. The assessed value may
be less than the market value. Market value is the price you could get if you sold your
home.
In some communities, the tax rate is expressed in mills, one for each $1.00 of assessed
value. (One mill equals 1⁄10 of a cent, or 1⁄1,000 of a dollar). In other situations, the rate is a
fixed number of dollars for each $1,000 of assessed value. Here's an example.
Bill and Marie Jenkins own property that’s assessed at 80% of its $70,000 market value. If
the tax rate is 23 mills, we would determine their property tax this way:
Assessed value = 80% of $70,000 = $56,000
One mill = $0.001 per $1.00 of assessed value
23 mills = 23 × $0.001 = $0.023
Tax = $56,000 × $0.023 = $1,288

Insurance
Before you sign the final papers for your new home, be sure you’ve acquired insurance to
protect yourself against loss due to fire or other causes.
Home insurance rates are usually a certain amount per $1,000 of insured value. This
amount varies with your location and the availability of water and firefighting equipment.
To illustrate the method used to determine insurance premiums, we’ll calculate the
Winstons’ annual premium for insuring their house and furniture for $68,000. The rate is
$0.60 per $100, so we would first determine the number of times $100 is contained in
$68,000:
$68,000 ÷ $100 = 680
Premium = 680 × $0.60 = $408

Tax Mills
Read the assigned readings for lesson 2.5 under Homeowner Expenses - Taxes, then
watch this video for more instructions on how to calculate property taxes.
External
iframeembed=true&playerId=kaltura_player&entry_id=1_magotsp2&flashvars[streamerType]=auto&flashvars[localizationCode]=en&flashvars[lead

Key Points
Both owning and renting a home involves many bills including electricity, gas, water, oil, telephone, taxes, and
insurance.
Links
How to Balance a Checkbook (http://www.wikihow.com/Balance-a-Checkbook)

Practice: List Homeowner Expenses
Exercise
Calculate the amount of property tax Alice Brown owes on her home, which has an
assessed value of $90,000. The tax rate in her community is $31.00 per $1,000 of
assessed value.
(Long answer)

Unit Review
In this Review, you’ll complete practice activities, which may include a Practice Quiz, to
help you test your knowledge. The Review activities and Practice Quiz are ungraded. You
can complete the Review activities and Practice Quiz as many times as you want. When
you feel ready, you can complete the graded assessment.

Try to define the term before you flip the card. You should write down the term and definition in
your notebook. Consider making your own note cards to study with.
Capital Definition: The value of accumulated goods
Escrow account Definition: An account that's established to pay for a future expense
Proportion Definition: Two ratios that are equivalent
Definition: Also known as the average, the statistical mean is found

Statistical Mean by adding all measures together and dividing by the number of
measures.
Mode Definition: The measure that occurs most often
Definition: Amounts taken directly out of gross wage earnings for

Deductions
medical insurance, union fees, taxes, and so on
Median Definition: A measure that's in the exact middle of all measures taken
Definition: Related measures that are used to calculate for one

Time, Rate, and Distance another Time = Distance ÷ Rate Rate = Distance ÷ Time Distance =
Rate × Time
Definition: Earnings based on sales, services provided, or some

Commission similar measure. Commissions may comprise one's sole income, or
they can be combined with a base salary.
Unit Price Definition: The price of an individual item
Definition: A tax levied as a percentage of the selling price of a retail

Sales Tax
purchase
Definition: Known for charging exceptionally high interest rates,

payday lenders require borrowed money to be repaid by your next
Payday Lender
paycheck, and service charges and interest rates may amount to
twice or three times as much as you originally borrow
Definition: R = 2 ml/P(n + 1) in which:R = actual yearly rate of

interestm = number of installment payments per year (monthly, 12
Interest Rate Formula
payments; or weekly,52 payments)I = interest or installment
chargesP = amount borrowedn = number of payments to be made
Definition: A predictive score of your ability to pay back debts you

Credit Rating
take on for buy now, pay later purchases
Definition: A low-cost, nonprofit financial instution that offers low

Credit Union
interest loans to members
Definition: Requires that sellers disclose what buyers get charged for
Truth In Lending Act
credit purchases
Definition: A plan for spending your money based on total income

Budget
and likely expenses
Definition: Expenses that don't change and are due at regular

Fixed Expenses
intervals, such as mortgage payments
Definition: Expenses that change from month to month, such as

Flexible Expenses
groceries or fuel

Record of Income Definition: An itemized list of income sources and amounts
Definition: Comparing your bank statement balance with your

Balancing Your Checkbook
income/spending record
Definition: Bills for expenses such as fuel oil, electricity, telephone,

Service Bills
and water/sewer
Definition: A kind of home buying loan in which the lending institution

Mortgage (usually a bank) holds ownership of the property until the loan is paid
in full
Definition: Local taxes that vary depending on a property's location

Property Taxes
and assessed value

Practice Quiz: Money Management
This Practice Quiz is ungraded, and you can take it as many times as you want.
When you finish, you’ll be able to view whether your answer was correct or
incorrect. Click “View Feedback” after each item to see an explanation for the
correct answers. You won’t be allowed to go back and click “View Feedback” again,
so be sure to note of topics you may need to study more.
Five crates hold 20 pounds of materials. Jen set up this problem to find how many
pounds of materials one crate holds:
5/ = 1/x
20
Which of the following best describes how Jen will continue to solve the problem?
(Choose one)
a) Cross multiply, 5x = 20
b) Multiply across, 5 = 20x
c) Add across, 6 = 20x
d) Cross add, 5 + x = 21
To prepare for a job test, Joan has to find the sum of 10 different scores for her
friends, then divide by 10. Which of these best describes what Joan had to find?
(Choose one)
a) Median
b) Mode
c) Rate
d) Mean
Cam was offered a job. He was offered $13.50 per hour plus time-and-a-half for any
hours he works over 40 hours in one week. What will Cam's gross salary be if he

works 45 hours in one week?
(Choose one)
a) $641.25
b) $540.00
c) $607.50
d) $911.25
Charlie bought an airplane ticket for $288.00. The tax on the ticket was 7.5%, and he
had to pay an additional $26 in fees. Which of the following shows how much
Charlie will pay in total?
(Choose one)
a) 288 + (288 × 0.75) + 26
b) 288 - (288 × 0.75) + 26
c) 288 - (288 ÷ 0.75) + 26
d) 288 + (288 ÷ 0.75) – 26
A fuel company charges $120 for an annual fee and $125 a month for 12 months.
What's the total cost of fuel for 12 months?
(Choose one)
a) $1,620
b) $2,940
c) $1,500
d) $1,440
Rahm used a payment plan to purchase wood for a home project. The wood he
bought cost $500. The clerk at the store offered him this payment plan instead.

Money Down Cost per Month for 12 Months
$50 $55
What's the difference in cost between the cash price and the payment plan?
(Choose one)
a) $210
b) $160
c) $395
d) $110
Krystal made a budget for her expenses for four weeks in this table.
Expense Amount
Food $350
Gas $120
Rent $700
Clothes ?
Krystal gets paid $750 every two weeks. She wants to save money for next month's rent
but she also needs clothes. Does Krystal have enough money left over for clothes and
savings for rent?
(Choose one)
a) Yes, she has $330 left over.
b) No, she still needs $330 to pay her bills.

c) No, she still needs $420 to pay her bills.
d) Yes, she has $1,170 left over.
Carlos is creating a budget for the month. He wrote a list of the different categories
that he will include in his budget.
Food $250
Home improvements $600
Gas $120
Textbooks $210
Car repairs $400
Carlos earned $1,400 for the month to pay for his expenses. What's the minimum amount
of money he needs to stay within his budget?
(Choose one)
a) $180
b) $580
c) $1,580
d) $1,400
If you stay within your budget, what's the maximum percentage that your home
expenses should not exceed of your net income?
(Choose one)
a) 25%
b) 5%

c) 10%
d) 35%
What type of expenses are mortgages, taxes, and property insurance?
(Choose one)
a) Home owner
b) Flexible
c) Service
d) Personal

Lesson 1 Exam
Open Link

Budgeting and Goal Setting / Personal Finance
Personal Finance

Lesson 3 Overview
By now, you should be acquiring a vision of the “big picture,” the master plan that you’ll use
to manage your money. In this lesson, you’ll add to that learning by studying different
financial areas of your life—your car, your personal insurance, and your savings and
investment plans.
After absorbing this material, you may want to organize your own master plan, following
the suggestions given at the end of this lesson.

Lesson Objectives
Determine the total cost of a car
Di erentiate types of insurance and money-saving options
Use a calculator or computer to solve real-world problems
Develop nancial life goals and the steps required to meet them

Determine the Total Cost of a Car

Your Car
To some people, having a car is as important as having a place to live. The mobility a car
gives them makes it a highly prized item. Because a car is a very expensive possession,
it’s important to take a realistic look at some of the costs and decisions involved in car
ownership.
Will you buy a new car or a used one? Cost, of course, will be a major factor in your
decision. Do you have, or can you borrow, the $20,000 or more needed for a new car? If
your present financial situation doesn’t warrant purchasing a new car, you may be able to
buy a used one. Then, in a few years, you can purchase a new one when your financial
situation improves. However, you may never want to buy a new car—there are advantages
and disadvantages involved in buying both a new car and a used car.
Buying a New Car
First, you can assume that a new car will be in better condition than one that has already
been used by another person. But this doesn’t mean that the new car will be free from
defects. Any car can be a lemon. However, most new cars are covered by warranties,
which state that the dealer who sold you the car will pay certain repair and maintenance
costs for a given length of time. Most warranties last for at least 36 months or 36,000 miles,
whichever comes first. You should also know that there are lemon laws in effect to protect
consumers from defective new cars.
Lemon laws provide a method of compensation for individuals who have

purchased a car or some other product that fails to meet standards of
quality and performance.
Some new-car dealers also offer extended service contracts, which you can purchase. You
may consider such a contract if you intend to keep your car for a long time. If you do plan
to keep the car for an extended period, a new car may be best since you can control the
maintenance costs to some extent. You’ll know exactly what has happened with the car
since delivery from the dealer.
Sounds great, doesn’t it? But before you rush out to buy a new car, consider some other
factors, such as depreciation and insurance rates.
Depreciation is the decline in the market value of your car. This decline begins as soon as
you purchase the car and drive it home. The car continues to decline in worth as time goes
by.

Cars usually depreciate the most in the first two years. In general, a new car depreciates
30% in two years. Therefore, in two years, a car you paid $20,000 for will be worth $20,000
× (100% – 30%) = $14,000. Of course, the rate of depreciation varies widely, as does the
actual resale value of that car. The resale value depends, in large part, on the condition of
the car at the time it’s being sold.
In addition, insurance rates are higher for a new car than for a used one. The reason is
apparent—a new car is more expensive to replace if it’s involved in an accident.
After weighing the facts, suppose you decide to buy a new car. At this point, don’t just rush
to the nearest showroom. Instead, rush to your nearest newsstand, or search the Internet,
to check out your options.
Depreciation
As you just learned, the instant you drive a new car off the lot it depreciates in value. A
general rule is that a car depreciates in value at a rate of about 15% per year. Being able to
calculate a car’s depreciation value can help in both selling and buying a car. In either
case, you can calculate the current value of a car based on its original selling price and the
amount of time the car has been driven. Let’s look at a few examples on how to use
depreciation to calculate a car’s current value.
Example: Three years ago John bought a new truck for $32,499 and now he wants to sell
it. Use a total depreciation rate of 27% to calculate the price that John should be able to
sell the truck for.
Solution:
$32,499 × .27 = $8,774.73 Multiply the original price of the truck by the
depreciation value to nd how much the car’s value
has decreased.
$32,499 − $8,774.73 = $23,724.27 Subtract that depreciation value from the original
selling price to calculate the current value of the
truck.
Example: A used car has a marked price of $12,349. After some research, you discover
that the car is 5 years old and was originally sold for $22,987. Calculate the depreciation
rate of the car.
Solution:

$22,987 − $12,349 = $10,638 To determine the amount the car has depreciated,
subtract the current price from the original price.
$22,987x = $10,638 To nd the depreciation rate (x), set up a basic

equation as shown here.
10, 638
x=
22, 987
x = .4628, or 46.28% Perform the necessary calculations. After 5 years,

the car has depreciated at a rate of 46.28%.
Research Your Options
Before you buy a new car, you should study consumer magazines and other publications
that compare safety, fuel efficiency, and comfort of various makes and models of cars.
Some of these publications are the Consumer Reports’ New Car Rating & Review and
magazines like Motor Trend, Car and Driver, and Road & Track. Prices of cars and their
available options are also found in periodicals like
Automobile(http://www.automobilemag.com) and Autofacts(http://www.auto-facts.org).
The fuel efficiency of a car is the average distance it can travel for each unit
of fuel it consumes. This is an important consideration as a long term cost
of your car, since the lower a car’s fuel efficiency rating is, the more money
you’ll have to spend at the gas station.
When you’ve studied the market, sit down and think about what you want in a car before
going to look at new cars. Begin by asking yourself these questions:
How much can I (or do I want to) pay for a car? To answer this question, you should nd out how much money
you can obtain for a down payment and what monthly loan payments you can a ord.
What optional equipment do I want? Some options, such as a backup camera, are valuable for safety’s sake.
Others, like heated power side mirrors, are fairly expensive to buy and repair. So, consider each option carefully
before you talk to the car salesperson.
What type of car do I want? is choice depends on how you’ll be using the car. You would want a di erent type
of car for running around town than you would for long, frequent business trips. A minivan is probably

unnecessary if you’re single, and a two-door sports car is impractical if you have small children.
Once you’ve carefully considered your answers to these questions, you’re ready to visit car
showrooms—but only to look, not to buy. Try to choose those within a reasonable distance
of your home since you’ll be going there for checkups, inspections, and repairs.
You may want to visit several showrooms and test-drive several different cars. Compare
their turning and braking ability. Compare their prices, dealer preparation costs, warranties,
and gas mileage ratings. Also, check online for information on the reputations of specific
new-car dealers.
CHECKLIST FOR TEST DRIVING
When you’re test-driving either a new or used car, be sure to check for the
following:
How is visibility from the driver’s seat? Can you see clearly when using the inside and outside
rearview mirrors?
Do any of the windows cause distortion of your vision?
Is the ventilation system adequate without air conditioning?
Are the controls easy to see? Are they easy to reach, even with the seat belt fastened?
How does the seat t you? Can it be adjusted to t just right?
Is the motor quiet?

Do the brakes bring the car to a smooth stop in a short distance?
If you think about your personal circumstances and your type of driving,
you’ll come up with additional questions for this list. For example, if you live
in a hilly area, does the car have enough power to efficiently handle those
hills?
The Price
Many factors will affect the price you pay: your ability to bargain with the salesperson;
whether you’re buying a car the dealer already has on hand (he or she may be anxious to
get rid of it); the time of year (salespeople are looking for sales during holidays and before
the spring/summer rush); how popular a model is; and where you live (big-city dealers
have higher overhead costs than those in the suburbs).
Once you have a firm price from a car salesperson, add the tax (which should only be
applied to the price of the car and optional features), car licensing fee, and registration fee
to determine its full cost. Then go home and compare the price with other cars you’ve
shopped for. Finally, review all factors and decide which car you want.
Calculating the Cost of A Car
Let’s say Janice is going to buy a new car for $21,865.00, with options costing $732.00.
The registration fee is $30.00, and the car license costs $25.00. Finally, her state has a 5%
sales tax. How much will Janice pay for this car?
$21,865.00 + $732.00 = $22,597.00 Add the prices of the car and the options.
$22,597.00 × .05 = $1,129.85 To calculate the sales tax, multiply the total cost of
the car by 5% (.05).
$22, 597.00
1, 129.85
30.00
To determine the total cost of the car, add the prices
+ 25.00
––––––––––––– of the car, the tax, the registration fee, and the car
$ 23, 781.85 license fee.
Before you go back to buy the car, you must decide on two additional factors—financing
and insurance. Just as you’ve shopped around for the car, now you’ll shop around for
financing and insurance.

Financing
If you pay cash for the car, that’s great. No finance charges will be involved. But most
people borrow at least some money to buy a car. When you have an idea what the car will
cost, decide how much you can afford as a down payment. Then, find out which sources
will loan you the rest of the money.
Make the down payment as large as you can and the loan period as short as you can
manage. Both will cut down on the finance charges.
Usually, the lowest interest rates can be obtained from a credit union (if you’re a member)
or a bank. The highest rates are usually from a car dealer or car finance company. Ask
each possible loan source for its APR (annual percentage rate).
Calculating Percentage Rate
Let’s calculate the APR for financing a car that costs $25,975, on which the purchaser has
placed $2,500.00 as a down payment and will borrow the remaining $23,475 ($25,975 −
2,500 = $23,475). The monthly payments will be $489.00 for five years. Use the formula
below to calculate the annual, or yearly, percentage rate:
2ml
R =
P (n + 1)
in which,
R = Percentage rate
m = Number of payments per year
I = Interest charges
P = Amount borrowed
n = Total number of payments
For this calculation, you are looking for
R = Unknown percentage rate
Here’s what you know:
m = 12 (payments are monthly)
P = $25,975 − $2,500.00 = $23,475 (Amount borrowed Is the total cost minus the down
payment.)
n = 5 × 12 = 60 (Find the total payments)

I = $489 × 60 − $23,475 = $5,865 (Multiply the amount for each monthly payment and
the total payments, then subtract the amount
borrowed.)
2 × 12 × 5, 865 Substitute the values into the equation and perform

= 0.0982 = 9.8%
23, 475(60 + 1) the math.
To make an accurate comparison among a number of loan providers, be sure the amount
of the loan and the repayment period are the same from each source. Write down the APR
for each source to see which has the best—that is, the lowest—rate. Your listing might look
something like this:
Car Dealer ________%
Automobile Finance
________%
Company
Bank A ________%
Bank B ________%
Credit Union ________%
When you go back to the car dealer, you’ll already have decided where you want to obtain
your loan.
Car Insurance
Car insurance policies include a variety of provisions, as explained here. Depending upon
the state where you live, some provisions are mandatory and others aren't.
If your car collides with another car or object, collision insurance pays for the damages over the amount of your
deductible. e deductible, usually $250–$1000, ($500 average) is the amount of money you must pay before the
insurance company picks up the balance of the claim. e agent lending you money to buy a car usually insists on
collision insurance.
If you have liability insurance, your insurance company pays the claims against you if your car injures one or more
people or if it damages property. Generally, liability insurance is mandatory because it protects the injured person
from incurring large expenses. States that don’t require liability insurance may require proof that you could pay a
claim. e amount of liability insurance required varies from state to state.
Comprehensive insurance covers your car if it’s damaged by re, ood, vandalism or if it’s stolen.

Medical coverage pays your medical bills if you’re injured in your car.
In addition, some states have no-fault insurance laws, under which your insurance
company pays you whether or not the accident was your fault. Your insurance agent will
know your state’s requirements.
TIPS FOR REDUCING CAR INSURANCE RATES
Drive defensively and with care to minimize the number and severity of accidents you may
have. When you present a claim to your company, there’s a good chance your insurance rates
will rise no matter who causes the accident.
Drivers under the age of 26 pay the highest insurance rates because they have the highest
accident rate. If you’re under 26, check with your state insurance commission to see if there
are lowered rates for individuals who take driver education classes, defensive-driving
courses, and so on.
Regardless of your age, you can save on insurance premiums—and the cost of a car—by
buying a less expensive model.
Increase your deductible, which is the amount you agree to pay whenever you have an
insurance claim. But be sure that you have resources to pay the deductible amount in case
you have a claim.
Back to the Dealer
Now, armed with your decisions on a loan and insurance, you return to the car dealer.
Before signing any papers and accepting the car, however, check the car to be sure it’s the
one you ordered or the one you looked at before. Check with the salesperson to see if the
car has been serviced. If possible, get a signed copy of the dealer preparation checklist,
which itemizes the things a dealer is supposed to do when the car arrives from the factory.
Next, test-drive the car, again using the checklist for test-driving. If possible, have small
problems corrected before accepting the car. If there are any major problems, don’t accept
the car.
Buying a Used Car
Now, let’s look at buying a used car. As mentioned earlier, a car usually depreciates the
most in the first year or so. Therefore, you can save the most on the initial cost of a car by
purchasing one that’s at least one year old. It’s important to determine that the car has
been well maintained, however, or your savings could quickly evaporate.
“Let the buyer beware!” is a phrase that’s commonly used in relation to making purchases.
This statement is especially applicable to the used-car marketplace. You may be looking at

a beautiful, shiny exterior that conceals any number of different problems. Consider the
following conditions that would generally not be evident from a visual inspection:
e car has been in an accident.
e odometer (mileage indicator) has been turned back, a practice that illegal.
e car may not be repairable, or it may require expensive repairs.
e car has been exposed to rough usage (a police car or taxi, for example).
Used Car Guides
Many of the new-car suggestions we’ve discussed also apply to the purchase of a used
car: shop around for the loan and insurance, find the best rates for each, and figure out
exactly what you want in a car. There are many used-car guides that will give you an idea
of what a used car of a certain make and year might cost. Many banks use the National
Automobile Dealers Association (NADA) used car guides(http://www.nadaguides.com). You
can consult that guide yourself to see the average prices of different models of cars. Keep
in mind that the book prices are just estimates. The price may be more or less, depending
on the individual car’s condition and mileage, and on the demand for that particular make
and model.
Sources
You can buy a used car from three major sources—an individual, a used-car dealer, or a
new-car dealer. Let’s look at each one of these options.
Individual
You may purchase a car from someone you know or from someone who has advertised a
car for sale. These are private-party sales. You would probably be able to buy the car at a
lower price from a private party than from a car dealer. Also, the individual may be willing to
tell you about the car’s maintenance record.
If the car is in good condition, it may be a good buy. But if not, you’ll have to pay for any
necessary repairs—and you’ll have no contract or warranty.
Make sure the car owner has documentation to show that he or she owns the car. You’ll
thus avoid taking possession of a car that may be stolen or is about to be repossessed by
a finance company.
Used-Car Dealer
Buying a car from a used-car dealer has both advantages and disadvantages. On the
positive side, used-car dealers generally have reasonable prices, and they’ll help you with
financing. In addition, they often give limited warranties, usually 30 days or 1,000 miles.

On the negative side, the financing rates of used-car dealers will probably be higher than
elsewhere. Also, they often get their cars from wholesalers, so they’re not always familiar
with the former owners. Those cars may be damaged or abused, or they may have been
used by taxi companies or police departments. In addition, the probability that the
odometer has been set back increases when you buy a used car from a dealer.
To avoid some of these negatives, make sure that you deal with a reputable dealer. You
may also consider asking the dealer for a vehicle history report from a company such as
Carfax. This could significantly lower your chances of buying a used car that’s a lemon.
New-Car Dealer
Since new-car dealers sell used cars that are traded in, they often know the history of the
cars and their maintenance records. They may also be willing to tell you the name and
address of the previous owner of the car you’re interested in. Then you can talk with the
owner and learn its repair history and how it was used. In addition, new-car dealers
generally have more complete facilities for repairs than do used-car dealers.
Two other possible sources for used cars are rental agencies and
government surplus organizations.
No matter where you buy a car, be sure to test-drive it. Use the checklist given previously.
If possible, have a mechanic you trust examine the car. If that isn’t possible, ask a
mechanic to tell you what trouble spots to look for. Or you can find a list of potential
problem areas to check and test in consumer-oriented magazines from your library or
bookstore.
If you receive a warranty, be sure to read it carefully. Also, if any problems arise, get back
to the seller within the warranty period. If you can’t obtain satisfaction, try your local
consumer protection agency. You’ll find such agencies on the Web. Search this
index(http://www.usa.gov/state-consumer) of state and local consumer agencies.

Total Cost of Purchasing a New Car
Read assigned readings for 3.1, Buying a New Car - The Price, then watch this video for
more examples on how to calculate the cost of buying a new car.
External
iframeembed=true&playerId=kaltura_player&entry_id=1_sr02dqbp&flashvars[streamerType]=auto&flashvars[localizationCode]=en&flashvars[lead

Calculating APR
Read the assigned readings for 3.1, Buying a New Car - Financing, then watch this video
for more explanation on how to calculate APR using the formula given.
External
iframeembed=true&playerId=kaltura_player&entry_id=1_262ub0jj&flashvars[streamerType]=auto&flashvars[localizationCode]=en&flashvars[leadW

Key Points
A new car is generally in better condition than a used one.
A warranty states that a dealer who sells you a car will pay certain repair and maintenance costs for a given length
of time.
Lemon laws provide a method of compensation for individuals who have purchased a car or some other product
that fails to meet standards of quality and performance.
Depreciation is the decline in the value of your car.
Insurance rates are higher for a new car than for a used car.
Before you make a large purchase like an automobile, be sure to study consumer publications, either online or in
print, that compare safety, performance, and comfort.
Follow the checklist for test driving.
Shop around for the best deal if you have to borrow money for a car.
To calculate the annual percentage rate, use this equation:
Links
Automobile(https://www.automobilemag.com/)
Auto-Facts(https://www.auto-facts.org/)
NADA Guides(https://www.nadaguides.com/)
Used Car Guide(https://www.usa.gov/state-consumer)

Practice: Determine the Total Cost of a Car
Exercise
1. Daniel Potter bought a new car for $20,000.00. Two years later, he wanted to sell it. He was o ered $14,650.00
for it. If he sold it for that amount, what was his depreciation rate?
2. Daniel is now going to buy another new car. It will cost him $22,000.00. e options he chooses add $625.00 to
its cost. e car license and registration together cost $40.00. e state where he lives has a 6% sales tax. What
is the total cost of the car?
3. John Simone is buying a used car for a total cost of $11,805.00. He’s making a down payment of $1,500.00 and
borrowing the remainder. If he makes monthly payments of $343.00 for three years, what APR has he paid?
(Long answer)

Differentiate Types of Insurance and Money-Saving Options

Your Personal Insurance
Before you study the specific types of insurance, let’s take a closer look at just what
insurance is. This information will help you to understand and apply the material that
follows.
What Is Insurance?
All insurance is based upon a principle called division of risk. In other words, if a loss to an
individual or to several individuals is shared by a large number of individuals, the loss won’t
be an excessive burden to any one person. We can illustrate this concept and show how it
works by a very simple example.
Suppose 1,000 people seeking protection from a common danger, such as fire, pay $1.00
per week into a fund. The total yearly contribution to this fund will be $52,000.00. It’s
understood that they’ll use this fund to pay the losses incurred by any one of the
contributors due to fire. Thus, if one of the participants suffers a loss, say of $5,000.00,
they’ll pay that person $5,000.00. In doing this, they’ve actually divided his loss among
1,000 persons so that each individual’s share is only $5.00.
It’s obvious that the larger the group of participants, the larger will be the total fund
provided to meet the risks, and the greater will be the division of risk. All insurance is
based on this concept of division, or distribution, of risk. Insurance companies are formed
to receive the money paid into funds like the one in our illustration. These companies
invest the money received so that it will increase by earning interest. The insurance
company then pays the losses whenever they occur.
Another basic concept of insurance is that there’s always a contract issued. Every person
who buys insurance receives from the insurance company a contract called a policy. The
person who buys insurance is called the insured, and the company providing the insurance
is called the insurer.
The insured and the insurer are required by the insurance policy to do certain things. The
insured agrees to make a specified payment or payments called premiums, and the insurer
agrees to pay for certain losses if they occur, up to an agreed amount, which is called the
face value of the policy.
In the remainder of this assignment, you’ll examine three types of insurance: life insurance,
insurance for personal possessions, and health insurance.
Life Insurance

To determine your insurance needs, think about the people who depend on you for their day-to-day needs.
The major reason for buying life insurance is to provide your dependents with an income if
you die. To determine if you need life insurance, ask yourself this question: Is there
someone who will have a difficult time financially if I were to die? If the answer to this
question is yes, you need life insurance. If you have no dependents, you may still want
enough insurance to cover your death costs and any debts you leave behind.
A dependent is a person for whom you are financially responsible. Usually,

your dependents will be other members of your household such as children,
a spouse, or an elderly parent.
A life insurance policy is a contract that requires certain premium payments by the insured
and obligates the insurance company to pay a certain sum called the face value of the
policy when the individual dies. The beneficiary is the person or people to whom the face
value of the policy will be paid. If no beneficiary is named in the policy, the amount of the
policy is paid to the estate of the insured.
With insurance such as fire insurance, the insurer pays a claim only when there’s a loss.
You’ve seen this in the case of car insurance, since the insurance company must pay only
when an accident or theft occurs. Life insurance is a little different since the death of the
insured is sure to happen, and the insurance company will be required to pay the entire
face value of the policy, assuming the policy is in effect at the time of death. Hence, the big

question in life insurance isn’t if there will be a loss, as it is in auto insurance, but when the
face value of the policy will have to be paid in full.
Actuaries (specialists in the mathematics of insurance) can predict with great accuracy how
many deaths will occur in a large group of individuals each year. They can also estimate
the life expectancy (how long a person will live) for a man or a woman of a certain age. By
using these facts and some very complicated mathematics, actuaries can determine the
rate of premium for the various kinds of life insurance policies.
Types of Life Insurance Policies
The common types of life insurance policies are term, whole-life, limited-payment, and
endowment life insurance. Term life insurance is sold for a fixed number of years. This type
of insurance policy has no cash value, and no payment is made by the company unless the
insured dies within the period for which the policy is in force. At the end of the term, both
premiums and insurance cease. Premiums on term insurance are the lowest of all
premiums, but you must remember that a term policy gives protection only for a limited
time. This period of time may be 1, 5, 10, 15, or 20 years, and the premiums are due
annually for the term of the policy.
The cash value of an insurance policy is the amount the policyholder

receives when he or she cancels the contract.
With whole-life insurance, the insured agrees to pay a specified premium each year until
his or her death. The policy provides low-cost protection for the life of the insured. An
advantage of whole-life insurance is that it accumulates a reserve of money that you can
borrow. You can collect its entire cash value, as well, but then, of course, you would have
no insurance protection.
A limited-payment life insurance policy requires premium payments for a fixed amount of
time, such as 20 years, but the insured is covered for his or her whole life.
With endowment life insurance, the insured pays premiums and is insured for a fixed time,
such as 20 years. At the end of this time, the insured is paid cash for the amount of the
policy.
Your Life Insurance Needs
The financial obligations of a young couple decrease as time passes and their children
grow up and their mortgage is paid off. Thus, term insurance (with its lower premiums)
might be a wise choice in their long-range insurance plans. Term insurance could be used

in combination with a whole-life policy to increase coverage during the years of greatest
financial obligation.
To help you to determine how much insurance you need, list all of the debts or obligations
you would leave—mortgage, car payments, education for your children, and so on. Then
consider your assets—any savings or investments, social security benefits, retirement
funds, and any benefits from a group insurance plan. Finally, consider how much it will take
to keep your dependents financially secure until they can take care of themselves. Make
these assessments before you seek a life insurance agent to help you plan your insurance
needs, so you’ll know specifically what those needs are. Try to find an insurance agent who
has been around for a while, preferably two years or longer. You’ll also want one who has
had professional training, which is indicated by the letters CLU (Chartered Life Underwriter)
on his or her business card or letterhead.
Ask around about insurance agents, just as you would about car dealers. Your employer or
someone experienced in the financial field may be able to recommend a good agent.
Life insurance rates vary from company to company, so you may want to compare rates.
Since rates also vary by the age of the insured and the type of policy, be sure you are
comparing similar policies.
Insuring Your Personal Possessions
If you own a home, your house insurance probably also covers your personal possessions
—the contents of that home, such as furnishings, clothing, and so on— but check to be
sure.
If you’re renting, you should purchase an insurance policy to cover your furnishings (if
they’re your own) and your other personal possessions: clothing, jewelry, antiques,
paintings, a boat, and so on.
When purchasing insurance for personal possessions, be sure to check the policy to see
which things are excluded from the policy. For example, the policy may limit or exclude
coverage of such items as paintings, antiques, jewelry, and firearms. Also, determine if an
item is covered if it’s removed from your residence. For example, if you have expensive
jewelry and it’s stolen from a hotel, will your insurance cover the theft?
Health Insurance
Types of Policies
Medical costs have increased dramatically in the last decade. Having to pay the cost of a
major illness could bankrupt a person or family, so health or medical insurance is
practically a necessity.
There are many different types of insurance companies offering varied levels of coverage,
including options such as HMOs (Health Maintenance Organizations), private insurance

companies, Medicare, and Medicaid. As with any purchase, your decision about health
insurance should be made carefully. Be sure to gather all relevant information so you can
make an educated decision.
There are two types of health insurance policies that complement each other. The first type
offers basic coverage. This type of insurance pays for at least part of the hospital costs and
fees for the doctor, the surgeon, and other services while you’re in the hospital.
The second type of policy offers major medical coverage. This type of insurance provides
coverage (usually 75 to 80 percent) for major illnesses or accidents that aren’t paid for by
basic coverage.
Which Policy Is Best for You?
Once again, the best advice is to shop around. Not all policies offer the same rates or the
same coverage. If you can obtain group coverage (from your employer, professional
society, or other group), you’ll probably get lower rates. Your employer also might pick up
part or all of the premium cost.
If you're purchasing health insurance as an individual, look at well-established group plans

like Blue Cross and Blue Shield. If the premiums are too high for your budget, shop around
for lower rates. Remember, however, that benefits usually decrease as rates do.
No matter what health insurance policy you’re evaluating, consider the following items:
Some policies have waiting periods during which any new illness isn’t covered.
This waiting period could be from one month to six months from the policy’s date
of enforcement. Usually, maternity coverage doesn’t begin for nine months to one
year from that date.
Read your policy carefully to be sure just what coverage is offered. You don’t want
any surprises when you need to make a claim on your policy.
Changing Needs
If you’re young, you may still be covered by your parents’ insurance. If not, you’ll have to
provide your own coverage. If you marry and have children, be sure your policy includes
your spouse and children. If you’re covered by Medicare (for those who are over age 65 or
disabled), you may need to supplement it to cover the areas that Medicare doesn’t. That
supplementary coverage usually can be obtained rather inexpensively from an organization
such as Blue Cross.
Whatever policy you choose, be sure it includes basic hospitalization and major medical
protection. Also, choose a policy in which exclusions, waiting periods, and clauses
regarding preexisting conditions are kept to a minimum.

Your Savings
Acquiring the Savings Habit
Perhaps you acquired the habit of saving when you were a child and a wise grandmother
gave you a toy bank with coins in it. Or perhaps your parents started a savings account for
you, to which you added any gifts of money you received. Or maybe you opened your own
savings account when you got your first baby-sitting job.
As an adult, you should continue that savings habit. Your savings will provide emergency
funds or pay for something you want in the future.
If you haven’t yet acquired the savings habit, begin today, or at least make the decision to
start as soon as possible. Even if the amount you save seems ridiculously small to you, it’s
a beginning. And, if you save regularly, every payday, you’ll be amazed at how those
savings will mount up. Also, you’ll have acquired the ability to save, an asset you’ll possess
throughout your life.
A painless way to save is through a payroll deduction plan for savings

bonds or a credit union. Inquire to see what possibilities your employer
offers.
Where Should I Put My Savings?
You certainly shouldn’t keep your savings under the rug or in an old cookie jar in the
kitchen. There are two reasons for this: first, the savings aren’t safe; second, hidden
money doesn’t earn interest. You want your savings where it will work for you. But where?
Today, many institutions and organizations compete for your savings dollars. So once
again, you should shop around to see where your money will earn the most dollars.
But there’s more to consider than the highest rate of return for your dollar. You must also
decide how safe you want your savings dollars to be. Of equal importance is how easily
you can access your money if you need it. So, let’s look at some of the places for saving
money, such as commercial banks, credit unions, and US savings bonds.
Commercial Banks

Commercial banks offer a wide range of services for your banking needs—savings
accounts, checking accounts, loans, and so forth.
Since the rate of interest paid on a savings account varies from bank to bank, check to see
which bank in your area offers the highest rate. In addition, it’s important to find out how
the interest is computed, when the interest is compounded, and when it’s credited.
How Interest Is Computed
Some banks pay interest on the lowest balance in the account during the interest period.
Others pay from day of deposit to day of withdrawal, which is a better arrangement for you.
When Interest Is Compounded
Compounding refers to the process of adding the interest to the principal so that the
interest will also earn interest from then on. The more often the interest is compounded,
the higher it will be.
When Interest Is Credited
Interest may be calculated, but not yet credited to your account. Daily crediting, of course,
is best, since the interest will be added to the principal each day.
A savings account may have some strings attached to it. Some banks charge a fee if you
make several withdrawals from a savings account during one interest period. Other banks
require a minimum balance before they pay any interest.
A checking account, on the other hand, is a demand deposit—that is, you can withdraw
money from it whenever you write a check. However, checking accounts don’t generally
accrue interest. At banks that do offer interest on checking accounts, you often have to
maintain a certain balance in your account in order to receive the interest.
Commercial banks also offer certificates of deposit (CDs) that carry an interest rate higher
than that for a savings accounts. But they also carry a heavy penalty if you withdraw your
money before the end of the period you agree to. So ask questions about all of the points
mentioned before you choose a commercial bank for saving your money.
The accounts in most commercial banks are insured by the FDIC (Federal
Deposit Insurance Corporation) for up to $250,000.00 per account (or one
depositor’s total accounts in one bank).

Credit Unions
A credit union is a group of people who agree to save their money together and to make
loans to each other at a relatively low rate of interest. Usually, there’s a common bond
between members—they work together or belong to the same professional union, club, or
church.
The interest rates on savings in a credit union are usually higher than those of other
savings institutions. And individual accounts are insured in most credit unions, just as they
are in commercial banks.
One advantage of belonging to a credit union where you work is that the deposits can
usually be deducted from your paycheck. Another advantage is that you can easily get a
loan when you need it.
Like most institutions, however, credit unions have their disadvantages. First, they may
have limited locations and ATMs. Second, they generally don’t offer as many services as
banks do. And finally, all credit unions are not necessarily insured by the National Credit
Union Administration.
US Savings Bonds
Savings bonds are issued by the United States government, with a promise to pay a
certain amount to the holder of the bond on a certain date.
The buyer of a Series EE bond is paid a fixed rate of interest for up to 30 years. Series EE
bonds are a safe investment and provide a way to save small amounts regularly, especially
if your employer has a payroll savings plan.
The interest on Series I savings bonds is calculated by combining a fixed rate and the
inflation rate. The rate can and usually does change twice a year. Interest can be earned
for up to 30 years.
The inflation rate is the percentage increase in the price of goods and
services, usually calculated annually.
Each type of bond can be cashed in after one year. However, if a bond is cashed before
five years, three months interest will be deducted.
Investments

When you first begin saving your money, you should put it into a comparatively safe place,
such as those just mentioned. That money then will be readily available for your short-term
personal needs. Banks, credit unions, and savings bonds are safe, but they don’t allow
your money to grow as fast as it could with other investments. Depending on the current
inflation rate, your money could actually be shrinking instead of growing. For example if
your savings yield 3% interest and the inflation rate is 5%, your money isn’t growing fast
enough to keep pace with the economy. To make your money grow, you should strive for
an interest rate greater than the inflation rate. To achieve this goal, you must invest your
money, which involves putting your money into the market in order to profit from a potential
return. Remember, however, that investing money involves a degree of risk—that is, you
may lose your money. Therefore, you shouldn’t invest money that you can’t afford to lose.
Most financial advisers suggest that you should save enough money to cover expenses for
six months before considering investing.
Let’s say that you’ve saved regularly and you now have enough money to live on
comfortably for six to eight months if your present income were cut off. You may also have
saved enough for that new car you want to purchase or for that trip to the Bahamas next
winter.
That takes care of next year. But what about beyond that? Do you want to make a further
effort to ensure your future with an income beyond what you actually earn? If so, then
you’re ready to invest your money.
You’re also ready to set some financial goals. How much of your income are you willing to
set aside for savings and investment purposes? Ten percent? Five percent? Determine the
amount that you can live with and discipline yourself to stick with it. Next, determine how
much you’ll put into savings and how much you’ll invest.
Once you’ve made those determinations, you’re ready to decide what your investment
goals are. These goals may be for short-term fast growth, for steady long-term growth, or
for a flow of interest on dividends as income. Younger people, especially if they’re single or
newly married, will probably want short-term fast growth. But most people, especially as
they approach middle age, want steady long-term growth that will make life a little easier
financially as they grow older. Older investors are interested in the income their
investments will provide, to supplement their decreased income at retirement.
Once you’ve decided on your goals, you must decide how much of a risk you’re willing to
take. All investments involve an element of risk, but some are riskier than others. However,
the greater the risk, the greater the reward may be. You must weigh the risk against the
potential return.
Once you’ve decided that you do want to invest some of your savings or income, your next
step is to learn about the investment market. This will be a lifelong, continuing process,
especially if you want to closely supervise your investments.
First, you should become aware of the world around you and of general economic trends.
Read a daily or weekly newspaper, such as The New York Times or The Wall Street
Journal, that has a good financial section. This section will contain information about
current economic and business conditions, as well as current stock market quotations. You
might also want to read a weekly or monthly business magazine, such as U.S. News &

World Report, to become aware of broader business trends and what’s happening in the
global marketplace.
Once you’ve familiarized yourself with the current economic climate, it’s time to gain a
basic understanding of the stock market.
The Stock Market
When a new company is formed or when an already established company needs money
for expansion or for an expensive project, it may decide to seek that money from outside
investors. In exchange for money, the investors are issued stock, a share in the company’s
ownership. If the value of each share of stock is stated on the stock certificate, this value is
the par value of the stock, and the stock is called par value stock. On the other hand, if no
value of the shares is given on the stock certificate, the stock is called no par stock.
Kinds of Stock
The main classes of stock, based on the way dividends are paid on the stock, are
common, preferred, and cumulative preferred.
Common stock receives an equal part of the profits on each share to be distributed after all
other obligations of a company have been satisfied. Thus, if there are 1,000 shares of
common stock, and if $5,000.00 is to be distributed to the holders of this stock, each share
will receive a dividend of $5.00. If the par value of the stock is $100.00, the company may
declare a dividend of 5% instead of $5.00 per share. Notice that 5% of $100 and $5.00
mean the same thing.
Preferred stock has a definite dividend rate that must be paid before any dividend is paid
on the common stock. The rate of dividend is often given when referring to such stocks.
For example, 6% preferred is stock that will receive as interest 6% of the par value. These
dividends aren’t guaranteed, but if any profit is to be distributed, the stockholders having
preferred stock must be paid before a dividend is declared on common stock.
Sometimes, the dividend paid doesn’t equal the rate stated on the stock. That’s a chance
that the owner of preferred stock must take.
Cumulative preferred stock is preferred stock on which unpaid dividends may accumulate.
That is, if the full dividend wasn’t paid, the unpaid part of that dividend—as well as any
additional dividend due—must be paid when the earnings of the corporation are sufficient
to do so.
Buying Stocks
The people who make a business of buying and selling stocks are called stockbrokers.
Stockbrokers charge a fee for buying or selling for others. This fee, called brokerage, may
be stated in terms of so many cents per share or as a percent of either the selling price or
the purchase price. If you turn to the stock quotations on the financial page of your

newspaper, you’ll see figures like 55, 44, 32, and so forth. These prices are the market
values, or the market prices, of the stock listed. If you read these quotations for several
days, you’ll notice that the market values of some stocks change from day to day. This
change in price is due to market conditions—a reflection of the eagerness of people to
either buy or sell certain stocks. When the market value of a stock is greater than the par
value, we say that the stock is selling above par. When the market price is less than the
par value, the stock is selling below par.
Investors buy stock with two thoughts in mind. One is to have their investment earn a good
rate of interest in dividends; the other is to have their investment increase in value because
of a rise in the price of the particular stock they bought. In other words, they hope that the
corporation will continue to pay good dividends or that the market value of the stock will go
higher. If you buy stock for this latter reason, you would probably sell it when the market
value had increased enough to give you a desirable profit.
For example, suppose that Mr. Jones bought 100 shares at 15¼. This means that he paid
$15.25 per share, or a total of $1,525.00, not counting the brokerage fee. Let’s imagine
that the market price of this same stock rose to 19⅛ in several months. Now Mr. Jones can
sell his 100 shares of stock for $1,912.50, which will give him a profit of $387.50, or 25.4%,
on his original investment. Of course, payment of brokerage fees, both on the purchase
and on the sale, and the taxes collected by state and federal governments on the sale of
stocks would decrease the profit somewhat.
Don’t jump to the conclusion that buying stocks is the complete answer to your investment
needs. And don’t let the preceding illustration blind you to the possibility that Mr. Jones
might have lost money. If the market value of his stock had dropped a few points, or if the
company had paid no dividends, he wouldn’t have sold at a profit, nor would he have
received any interest on his investment.
That’s the lure of the stock market. You never know for sure whether the stock is going to
go up or down. The risk involved is balanced by the hope that you can buy low and sell
high.
The Stockbroker
Perhaps you’ve studied business and economic conditions and followed trends in the stock
market. You now have a feel for what’s going on.That’s fine. But perhaps you can’t (or
shouldn’t) decide which stock is best for you all by yourself. You need some professional
help. The best source for this help is a reliable stockbroker.
At the beginning of your investment career, you would probably be wise to find a full-
service broker. In addition to access to the market, a full-service broker can offer you
experience, a research staff, and other information. A discount broker, whose fee may be
lower than a full-service broker, will probably offer only access to the market, without any
consultation or advisory services.
Also, you’ll probably want a broker or brokerage house with branches throughout the
country and with a seat on one of the national markets, such as the New York Stock
Exchange. The New York Stock Exchange is one of two national markets where the stocks
of the largest companies are traded each day. (The other large exchange is the NASDAQ,

the National Association of Securities Dealers Automated Quotations.) The stocks of

smaller companies are traded on regional exchanges located in cities such as Boston, Los
Angeles, Chicago, and Philadelphia. Some stocks are sold via computer and
telecommunication transactions—the over-the-counter market. As mentioned before, you
can track the action of stocks daily in the financial section of any major newspaper.
You should be aware that brokers have conflicting interests. On one hand, they’ll advise
you on what and when to buy or sell. On the other hand, their salaries are based on the
quantity of stock that they’re able to buy or sell for you. It may happen that a broker’s
suggestions to buy or sell may be motivated by desire for commission, rather than by your
best interests. So, it’s important that you find a reputable broker. Inquire about brokers
through the people you trust who are engaged in handling finances.
Bonds
The essential difference between stocks and bonds is simply that stocks represent
ownership and bonds represent a particular kind of debt incurred. You learned earlier that a
stockholder is a part owner. Now you’ll see that a bondholder is a creditor. A bond is a
long-term promissory note issued by a government (federal, state, city, county, and so
forth) or by a corporation for the purpose of borrowing money.
Bonds are issued with a par value, or face value, of usually $1,000.00 or more. Most bonds
provide for a definite rate of interest, which is generally paid semiannually.
The maturity of a bond is the date on which the organization promises to repay the amount
borrowed. The term of a bond may be short term, up to five years, medium term, five to 12
years, or long term, more than twelve years.
Bonds, just like stocks, are bought and sold through brokers who charge fees for their
services. Taxes and other charges are additional expenses that enter into every bond
transaction. Bond prices fluctuate on the market just as stock prices do. Here again, these
price changes reflect the eagerness of the owners to buy or sell, exactly as they do in the
case of stock prices.
Bonds are referred to by naming the issuing company, the rate of interest, and the maturity
date. Thus, 4% bonds of the LOD Railroad maturing in 2020 would be called “LOD 4%–
20.” Also, when bonds are quoted at 961/2, for instance, it means that the price is $96.50
for each $100.00 of par value.
Bonds are considered safe and conservative investments for people who are more
interested in a steady income rather than in rapid growth. However, bonds carry some risk,
just as any investment does. Will the bond issuer be able to pay interest and repay the
loan? Also, if you have to sell the bond before it’s due, what price will you get?
To find out what level of risk a company or government represents, you can consult a
service, such as Standard & Poor’s Rating Services or Moody’s, for their rating of that
company or government.

The price you’ll get if you sell your bond before it’s due depends on the current market. If
bonds are being sold at a higher percent interest than yours, you’ll have to sell yours for
less than its face value. If bonds are being sold at a lower interest, then you may be able to
sell it for more.
Mutual Funds
What Are Mutual Funds?
When you start to invest, you may have limited funds at your disposal. Therefore, you may
have to limit your investment to one stock, rather than the safer alternative of owning
stocks from several companies. Also, perhaps you don’t have the time or aren’t really
interested in studying the market. Or maybe you haven’t found a broker that you feel is
right for you.
For these reasons, you may be interested in a mutual fund, a company or organization run
by investment managers. Along with thousands of other investors, you buy shares in the
fund. Your money is then invested by the managers in a diversity of stocks, bonds, and
other securities. This ability to diversify, along with the intelligent management it provides,
gives the mutual fund an advantage that the individual investor doesn’t possess.
You receive dividends from your mutual fund shares, just as you do from other
investments. You can either collect those dividends or reinvest them.
If you’re interested in investing in a mutual fund, consider consulting Morningstar, a leading

provider of independent investment research. It provides ratings of performance by various
mutual funds.
Mutual Fund Fees
Some mutual funds carry a fee for handling your investment; others don’t.
Some mutual funds, called load funds, carry a service charge, which is a percentage of
your investment.
For example, if Jane Benton invested $2,000.00 in the Grant Mutual Fund, which carries
an 8% sales charge, she would calculate it this way:
Sales charge: 8% of $2,000.00 = $160.00

Actual investment: $2,000.00 – $160.00 = $1,840.00
No-load funds, on the other hand, carry no sales charge, but you may have to pay an
annual management fee. So, if Jane also invested $2,000.00 in the Black Mutual Fund,
which carries a 0.5% management fee, her fee would be 2,000.00 × 0.5% = $10.00.
Types of Mutual Funds

There are three common types of mutual funds:
Growth funds invest in stocks and bonds that will increase in value, rather than generate dividends.
Income funds, as the name implies, invest in stocks that will generate steady dividends.
Money market funds, during times that interest rates rise rapidly, provide larger dividends than other investments.
During times of falling interest rates, though, the value of the funds decreases. But the rate of interest paid will still
be comparatively higher than other investments.
Reevaluating Your Investments
Just as you need to reevaluate your budget from time to time, so you’ll also need to
reevaluate your savings and investment portfolio (your collection of savings and
investments). Your salary may change, your status may change (you may get married or
have a child), economic conditions may change, and so forth.
So, you would be wise to go back periodically (perhaps once or twice a year) to reexamine
your original goals to see if they need changing. Do you have more or less money to
invest? Will your excess funds soon be used for making mortgage payments rather than
investing in a mutual fund? You should examine these and other aspects of your life to see
how they affect your financial planning.
Adjust your goals to current conditions. Then see what changes may be needed in your
savings and investment program. Seek help from someone whose financial know-how you
trust. Then, make the necessary changes.
Retirement Planning
“Retirement?” you say. “But I’m half a lifetime away from retirement.” That may be true, but
you’ll probably spend a quarter of your life in retirement. So, your retirement planning
should begin when you start working.
Your income at retirement could come from one or more of these sources: social security
benefits, a company or union pension plan, or your investments. Let’s take a brief look at
each.
Social Security
By law, you must contribute a FICA (Federal Insurance Contributions Act) tax each payday.
This tax is used to fund Social Security and Medicare. You’ll receive full monthly benefits if
you retire at age 67, and reduced payments if you retire from age 62 through 66.
Even with full benefits, you may find your social security check insufficient to cover your
living costs. Therefore, you should plan now for some supplementary income to make your
life more pleasant upon retirement. Two possibilities are pension plans and investments.

Pension Plans
You may work for a company or belong to a union that has a pension plan. The amount of
your pension is usually determined by the number of years you work for an employer, your
average salary, and the vesting provisions. Vesting means a period of time must elapse
before you’re entitled to benefits upon retirement. Each plan has its own vesting
requirements. In one plan, you may be vested, or entitled to benefits, after 20 years. In
another, you may be vested a certain percent for each year you work.
For example, let’s say Betsy Wilson’s company has the following vesting procedure for its
pension plan: Employees are 50% vested after 10 years and vested 5% more each
subsequent year. After 10 years, 100% – 50% = 50% vesting remains. So at 5% a year,
the remaining vesting will take 50% ÷ 5% = 10 years. Therefore, total vesting will take 10 +
10 = 20 years.
Carefully read your employer’s pension plan, if there is one, to see just what conditions it
sets forth. You’ll probably find that you lose your pension benefits if your employment is
interrupted.
Your vested benefits are insured by a public corporation, just as the FDIC insures your
bank savings. If your company goes bankrupt, you’ll still receive your benefits.
Investments
In addition to social security and pension benefits, you may, upon retirement, receive
income from any investments you’ve made. The profits from most of those investments are
taxed as income. But what if there were an investment for which the taxes were deferred
until a later time—say retirement, or age 70? Theoretically, at that age your income would
be less and you would be in a lower income bracket. There is such a tax-deferred
investment—an IRA (individual retirement account). This type of arrangement is called a
tax shelter—probably the best one available to you as an individual investor.
You can invest up to $5,500.00 per year in an IRA, plus an additional $1,000 if you’re age
50 or older. The $5,500.00 ceiling will increase with time. If possible, you should invest the
maximum amount allowed each year.
If you make traditional IRA contributions and meet IRS income and eligibility requirements,
you can deduct your full contribution from your income on your federal income tax form,
and you can defer taxes on your money’s earnings. The IRA funds rapidly increase in
value, as interest is compounded (interest on interest) on your earnings.

Key Points
Key Points
Liability insurance pays the claims against you if your car injures one or more people or if it damages property.
Comprehensive insurance covers your car if it’s damaged by re or if it’s stolen.
Medical coverage pays your medical bills if you’re injured in your car.
Make sure to follow the tips for keeping your car insurance rates as low as possible.
Used cars can have hidden problems; be sure to check them out as carefully as you can.
All insurance basically involves a division of risk.
A life insurance policy is a contract that requires certain premium payments by the insured and obligates the
insurance company to pay a certain sum called the face value of the policy when the individual dies.
e bene ciary is the person or people to whom the face value of the policy will be paid.
e common types of life insurance policies are term, whole-life, limited-payment, and endowment life insurance.
Take time to carefully consider your life insurance needs, considering such things as your debts and obligations,
assets, retirement, and people who depend on you.
ere are two types of health insurance policies that complement each other: basic coverage and major medical
coverage.
Health insurance needs may vary with your age.
A good way to save money is through a payroll deduction plan.
When determining where to keep the money you’re saving, consider how the interest is computed, when the
interest is compounded, and when the interest is credited.
A credit union is a group of people who agree to save their money together and to make loans to each other at a
relatively low rate of interest.
Savings bonds are issued by the US government, with a promise to pay a certain amount to the holder of the bond
on a certain date.
Investing money in the stock market or in mutual funds may provide greater returns than keeping money in a bank
or credit union; however, the risks involved with investing are greater.
e main classes of stock, based on the way dividends are paid on the stock, are common, preferred, and
cumulative preferred. Common stock receives an equal part of the pro ts on each share to be distributed after all
other obligations of a company have been satis ed. Preferred stock has a de nite dividend rate that must be paid
before any dividend is paid on the common stock. Cumulative preferred stock is preferred stock on which unpaid
dividends may accumulate.
e people who make a business of buying and selling stocks are called stockbrokers.
e fee that stockbrokers charge for buying or selling for others is called brokerage.
A full-service broker provides access to the market, experience, a research sta , and other information. A discount
broker, whose fee may be lower than a full-service broker, will probably o er only access to the market, without
any consultation or advisory services.
A bond is a long-term promissory note issued by a government (federal, state, city, county, and so forth) or by a
corporation for the purpose of borrowing money.
A mutual fund is an investment company that uses the money you invest to purchase a diversity of stocks, bonds,
and other securities.
A load fund charges a fee that’s a percentage of your investment. A no-load fund carries no sales charge, but may
charge an annual management fee.

e three common types of mutual funds are growth funds, income funds, and money market funds.
Savings for retirement include social security, pension plans, and investments.

Practice: Differentiate Types of Insurance and Money-Saving

Options
Exercise
The Buzz Tool Company issued 1,000 shares of common stock.
1. If the total value of this issue was $50,000.00, what's the par value of each share?
2. If the Buzz stock is quoted at 491⁄4, what's the market price?
3. Is the Buzz stock selling above or below par?
4. If the Buzz Tool Company has just declared an annual dividend of $5.00 per share, what will the dividend be
on 20 shares?
5. Suppose you paid 411⁄8 for 72 shares of Buzz stock and sold them at 491⁄4. e total brokerage fee was 1⁄8
dollar per share and all other charges amounted to $32.52.
a. What was the amount of your pro t?
b. What was the percent of pro t, based on your investment?
6. Statewhether each of the following is primarily a savings (S), investment (I), or

retirement (R) device by assigning the appropriate letter to each.
a. Corporation bonds
b. IRA
c. US Series EE bonds
d. Savings account
e. Common stock
f. Mutual funds
g. Credit union
h. Savings and loan association
(Long answer)


Develop Financial Life Goals and the Steps Required to Meet Them

Your Master Plan
Beginning Your Plan
By now, you’ve considered many aspects of your life that involve finances—your job,
purchases, financial records, budgets, home, car, life insurance, and savings and
investments. Now let’s take an overview of your finances to see how they fit together. You
then can develop a master plan for your financial spending.
You’ve learned about budgeting, which involves determining how much you make each
week or month. You’ve learned to calculate your income and plan for expenses. Your
master plan will go beyond your weekly or monthly planning. It will help you to think about
goals for a longer period of time—for a year, or for several years.
A Little Dreaming
First, sit down and think about your long-range plans, some of the things you would like to
do or to have. Do a little fantasizing: “If I could, I’d like to . . .” Go to college? Travel to
Hawaii? Buy a recreational vehicle? Get a new wardrobe? Or maybe something more
practical and closer to home, like upgrading the quality of your food or home? New menus
or slipcovers may temporarily help in these areas. People's goals vary tremendously. It's
what's important to you that matters.
Now, write down all of your ideas. Choose several that you feel are within your financial
grasp.
List the ideas in the order of their importance to you. For example, the first item on the list
should be the idea that’s most important to you. If you share a budget or plan with
someone else, you may want to make separate lists of ideas. Then compare them and
discuss how you can adjust the differences.
Goals
Here’s a good process to follow to establish goals:
1. Look over your list to see if these are the ideas that you really want to turn into long-range goals.
2. Estimate how much each goal will cost.
3. Determine how long you’re willing to wait to achieve each goal.
4. Divide the cost by the number of years for your plan. e result will give you an idea of how much you’ll have to
save each year to reach the goal if you decide to save for it instead of borrowing the money. You may decide to
borrow the money and obtain your goal right away.
5. If you decide to borrow the money, determine how much the loan will cost you in payments. Let’s look at an
example.

PLANNING YOUR SAVINGS
Perhaps you would like to enjoy camping with your family or friends. Setting goals will help you realize your dreams.
Let’s say that Don wants to buy a travel trailer in three years, when his
children will be old enough to enjoy a camping vacation. The vehicle he’s
interested in costs $19,000.00. He figures that in three years the price will
rise, because of inflation, to about $21,500.00. He wants to save enough
money in those three years to make the down payment for a third of the
cost.
Let’s determine how much Don must save every year.
Down payment = ⅓ of $21,500.00 = $7,166.67

Savings per year (for three years) = $7,166.67 ÷ 3 = $2,388.89
Adjusting Your Goals
Once you’ve decided how much your goal or goals will cost, return to your annual budget.
To determine the annual savings necessary, multiply the amount you are currently saving

by 12 (if it’s a monthly budget) or by 52 (if it’s a weekly budget).
Are the savings you’ve already planned for sufficient to meet both your emergency needs
and your savings for your goal? If not, you may have to take a closer look at the flexible
expenses in your budget to see where you can trim spending to increase your savings.
Take the flexible-expense section of your budget and list the categories in the order of their
importance to you. Is recreation more important to you than education? Do household
repairs take priority over your gift-giving?
When you’ve listed the categories in order of importance, focus on the lower priorities to
see how you can reduce the money you spend there. Can you trim $250.00 from gift-giving
by making some presents yourself this year? Join a car pool to cut your transportation
costs? Find a co-op or discount store to lower the cost of household supplies? If the goal is
one you really want to achieve, you’ll learn to be creative in trimming your expenses.
At this point, you may be thinking that long-range planning is rather involved. It may seem
so in the beginning. But with practice you’ll learn to plan more easily the steps necessary to
achieve your goals. And if those goals are important to you, you’ll work to achieve them.
Half of the pleasure of working with goals is dreaming and planning to achieve them. The
other half is in achieving them!
You must review your master plan often, just as you do your weekly or monthly budget. Are
you achieving your goals? Do they need revising?
Help with Your Master Plan
You’ll find that there are some devices you can use, or steps you can take, to help in your
budgeting and planning:
A planning center in a quiet corner of your house where you can keep all records and bills together will shorten
the time you need to handle your nances. Provide yourself with a at surface on which to write, a chair, a place to
keep current bills (variety stores sell holders for mail and bills), a le case or deep drawer for important records,
and a record book. (Incidentally, when you receive a bill, open it and write its due date on the envelope. You can
then le your bills in your “current bills” holder by due date so you won’t miss one.)
A simple calculator will make your math operations a lot easier.
If you already have a computer or are thinking of buying one, invest in a program for setting up your budget on the
computer. ese programs are great time-savers once they’re set up.
Are you in debt? Do you need assistance in digging your way out? You might get help from a community family-
service agency, nancial planner, or credit union if you’re a member. ey’ll help you set a budget and master plan
goals. Once you’ve set up your goals, you’ll nd it easier to cope with your money concerns. You’ll know that
you’re doing something positive to improve your nancial situation.
After you’ve applied the planning and spending principles you’ve learned, you’ll find that
you’re slowly but surely gaining control of your finances. With intelligent planning and
frequent review, you’ll find that you know where your money is going, and that you’re
directing your spending and saving. And that’s the way it should be: money should be your
servant, not the other way around.

Key Points
A master plan for your nancial spending involves your job, purchases, nancial records, budgets, home/car/life
insurance, and savings and investments.
Link
How to Balance a Checkbook(http://www.wikihow.com/Balance-a-Checkbook)

Practice: Develop Financial Life Goals and the Steps Required to

Meet Them
Exercise
Julie wants to purchase a new home in six years. She thinks that she can purchase
a nice home in a good neighborhood for $60,000. She wants to save enough money
in those six years to make the down payment of 25%. Determine how much Julie
must save every month.
(Long answer)

Unit Review
In this Review, you’ll complete practice activities, which may include a Practice Quiz, to
help you test your knowledge. The Review activities and Practice Quiz are ungraded. You
can complete the Review activities and Practice Quiz as many times as you want. When
you feel ready, you can complete the graded assessment.

Try to define the term before you flip the card. You should write down the term and definition in
your notebook. Consider making your own note cards to study with.
Definition: Laws that provide a method of compensation for

Lemon Laws individuals who have purchased a product that fails to meet
standards of quality and performance
Definition: The average distance a car can travel for each unit of fuel
Fuel Efficiency
it consumes
Dependent Definition: A person for whom one is financially responsible
Definition: The amount of money one receives upon cancelling an

Cash Value
insurance policy
Definition: The percentage increase in the prices of goods and

Inflation Rate
services, usually calculated annually
Definition: The decline in market value of a vehicle over time,

Depreciation
beginning with initial purchase
Definition: A required service with a variety of coverage options,

Car Insurance which requires regular payments in return for
accident reimbursement
Definition: A process that saves on the initial cost of a car in

Used Car Buying exchange for the expectation that the vehicle will have some "wear
and tear"
Definition: In insurance, the sharing of losses of a small number of

Division of Risk
individuals by a larger collective
Definition: Insurance that pays your dependents in the event of your

Life Insurance
death
Definition: An investment made up of various stocks, bonds, and/or

Mutual Fund securities that's managed for the investor by a specific company or
organization
Definition: A microcomputer specifically designed to perform

Calculator
mathematical functions
Definition: Things you would like to do or buy at some point in the

Long-Range Financial
future, possibly after a long period of time, such as afford a college
Plans
education, buy a sports car, or build a vacation home

Practice Quiz: Personal Finance
This Practice Quiz is ungraded, and you can take it as many times as you want.
When you finish, you’ll be able to view whether your answer was correct or
incorrect. Click “View Feedback” after each item to see an explanation for the
correct answers. You won’t be allowed to go back and click “View Feedback” again,
so be sure to note of topics you may need to study more.
Petra bought a car. She wrote the different expenses associated with it in this table.
Expense Cost
Car $19,600
Registration Fee $425
Insurance $45 per month
What are the total expenses for the car after 6 months?
(Choose one)
a) $20,295
b) $20,070
c) $20,555
d) $20,265
Molly is going to buy a car. This table shows the cars available.
Car Color Price of Car Cost of Options

Blue $18,790 $625
Red $17,490 $425
Gold $19,678 no options
White $18,650 $525
The _______ car is the most expensive.
(Choose one)
a) gold
b) blue
c) red
d) white
On which of these policies will an insurer pay if there's a loss?
(Choose one)
a) Fire and auto
b) Life and health
c) Life and fire
d) Health and auto
Kikko wants to see her money grow as quickly as possible. Which of these would be
the best choice for her?
(Choose one)
a) Mutual fund
b) Credit union

c) Savings bond
d) Bank
Which money saving option represents ownership?
(Choose one)
a) Stocks
b) Bonds
c) Commodities
d) Annuities
Rick has saved $680 for a trip. He spent $240 on plane tickets. Then, his friend gave
him $50 more to spend on his trip. Which of the following shows how Rick can enter
this into his calculator to find how much money he has altogether?
(Choose one)
a) [ON/C] [680] [–] [240] [+] [50]
b) [ON/C] [240] [–] [680] [+] [50]
c) [ON/C] [240] [+] [680] [–] [50]
d) [ON/C] [680] [+] [240] [–] [50]
Which of these is considered a computer's "brain"?
(Choose one)
a) Central processing unit
b) Storage device
c) Microchip
d) Input device

Kim discovered it would cost a total of $4,500 for her to take her family on a
vacation. She wants to plan for three years and also wants to add 10% of the total
cost for any additional costs. Which of these shows how Kim should save her
money each year?
(Choose one)
a) Divide $4,500 by 3 and add $4,500 times 0.10
b) Multiply $4,500 by 3 and add $4,500 times 0.10
c) Divide $4,500 by 3 and add $4,500 times 10
d) Multiply $4,500 by 3 and subtract $4,500 times 0.10
Samira wants to create a weekly budget. She knows how much she wants to save
for a whole year. Which number should she divide the total savings for to find the
value of savings for one week?
(Choose one)
a) 30
b) 52
c) 12
d) 365
Tricia saved money, but the amount she saved didn't meet both her emergency
needs and savings for her goal. Which of these would be best for Tricia to do next?
(Choose one)
a) Look at her flexible expenses and prioritize
b) Spend more money on flexible expenses
c) Incur more debt and use a credit card
d) Delete her food budget

Lesson 2 Exam
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Budgeting and Goal Setting / Course Introduction

© 2023 PF High School, LLC Page: 1 of 111

3. Complete each assignment as you come to it.

By the end of this course, you'll be able to

Apply basic math skills to everyday life

Determine best practices for money management

Analyze nancial areas of your life

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There’s a lot of helpful material ahead, so let’s get started.

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Describe the basic math operations needed for a job search

Calculate salary and purchase costs

Identify the total costs of payment options

Develop a spending budget and record-keeping plan

List homeowner expenses

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Calculate Salary and Purchase Costs

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Salary and Purchases

Determining Your Salary

There are several ways in which your income may be determined:

By a weekly, monthly, or annual rate

By a base salary plus a commission

Let’s look briefly at each method.

Regular pay = 40 × $10.50 = $420.00

Overtime hours = 50 – 40 = 10 hours

Overtime pay rate = 11/2 × $10.50 = $15.75

Overtime pay = 10 × $15.75 = $157.50

Total pay = $420.00 + $157.50 = $577.50

Weekly, Monthly, or Annual Rate

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IT'S THE LAW

The Wage and Hour Division(http://www.dol.gov/whd/) can also give you

Commission for each bicycle = 7% × $180 = 0.07 × $180 = $12.60

Commission for six bicycles = 6 × $12.60 = $75.60

Therefore, for one day, this salesperson earned $75.60.

Base Salary Plus a Commission

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4% of $1,500 = 0.04 x $1,500 = $60 Calculate John's commission.

To determine the total earnings, add the commission

$950 - $600 = $350 Determine the amount over $600.

3% of $350 = 0.03 x $350 = $10.50 Calculate the commission of $350.

To determine the total earnings, add the commission

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Let’s look at an example.

State and Local Income Taxes

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participants to make contributions to a profit-sharing or stock bonus plan, usually without

Calculating Net Pay

FICA tax $29.81 1.45%

1.45% Medicare tax 6.97

Federal withholding (income) tax 63.62

Charities fund 1.00

2% state tax 9.61

1% city tax + 4.81

Total deductions $115.82

Gross pay $480.77

Total deductions — 115.82

Net pay $364.95

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