{"id":292,"date":"2018-12-27T19:24:01","date_gmt":"2018-12-28T00:24:01","guid":{"rendered":"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/chapter\/chapter-14-personal-finances-exploring-business\/"},"modified":"2020-01-06T09:58:31","modified_gmt":"2020-01-06T14:58:31","slug":"chapter-14-personal-finances-exploring-business","status":"publish","type":"chapter","link":"https:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/chapter\/chapter-14-personal-finances-exploring-business\/","title":{"raw":"Chapter 12: Personal Finances","rendered":"Chapter 12: Personal Finances"},"content":{"raw":"<div class=\"part\" id=\"chapter-14-personal-finances\">\r\n<div class=\"part-title-wrap\">\r\n<p class=\"part-title\" style=\"text-align: left\"><img src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/14-collage-1024x1024.jpg\" class=\"aligncenter wp-image-1471\" alt=\"image\" style=\"font-weight: bold;text-align: center;font-size: 0.8em\" width=\"293\" height=\"293\" \/><\/p>\r\n\r\n<\/div>\r\n<div class=\"ugc part-ugc\">\r\n<div class=\"caption\" style=\"text-align: center;font-size: .8em;max-width: 500px\">\r\n<div class=\"informalfigure small block\" id=\"collins-ch14_s00_fx01\">Colin \u2013 DSC02066 \u2013 CC BY-SA 2.0; Pictures of Money \u2013 Piggy Bank \u2013 CC BY 2.0; Linus Bohman \u2013 Keys. \u2013 CC BY 2.0; Vicki \u2013 Sold it \u2013 CC BY-NC-ND 2.0.<\/div>\r\n<\/div>\r\n&nbsp;\r\n<p id=\"collins-ch14_p01\" class=\"nonindent para editable block no-indent\">Do you wonder where your money goes? Do you have trouble controlling your spending? Have you run up the balances on your credit cards or gotten behind in your payments and hurt your credit rating? Do you worry about how you\u2019ll pay off your student loans? Would you like to buy a new car or even a home someday and you\u2019re not sure where the money will come from? If you do have extra money, do you know how to invest it? Do you know how to find the right job for you, land an offer, and evaluate the company\u2019s benefits? If these questions seem familiar to you, you could benefit from help in managing your personal finances. This chapter will provide that help.<\/p>\r\n\r\n<div class=\"section\" id=\"collins-ch14_s00\" xml:lang=\"en\">\r\n<h2 class=\"title editable block\">Where Does Your Money Go?<\/h2>\r\n<div class=\"bcc-box bcc-highlight\" id=\"collins-ch14_s00_n01\">\r\n<h3 class=\"title\">Learning Objectives<\/h3>\r\n<ol id=\"collins-ch14_s00_l01\" class=\"orderedlist\">\r\n \t<li>Offer advice to someone who is burdened with debt.<\/li>\r\n \t<li>Offer advice to someone whose monthly bills are too high.<\/li>\r\n<\/ol>\r\n<\/div>\r\n<p id=\"collins-ch14_s00_p01\" class=\"nonindent para editable block\">Let\u2019s say that you\u2019re single and twenty-eight. You have a good education and a good job\u2014you\u2019re pulling down $60K working with a local accounting firm. You have $6,000 in a retirement savings account, and you carry three credit cards. You plan to buy a house (maybe a condo) in two or three years, and you want to take your dream trip to the world\u2019s hottest surfing spots within five years (or, at the most, ten). Your only big worry is the fact that you\u2019re $70,000 in debt, mostly from student loans, your car loan, and credit card debt. In fact, even though you\u2019ve been gainfully employed for a total of six years now, you haven\u2019t been able to make a dent in that $70,000. You can afford the necessities of life and then some, but you\u2019ve occasionally wondered if you\u2019re ever going to have enough income to put something toward that debt.[footnote]Financial planner Elissa Buie helped to develop <em class=\"emphasis\">USA TODAY\u2019s Financial Diet<\/em>. USA TODAY\u2019s Financial Diet, which ran in USA Today in 2005 (accessed November 10, 2011). Go to http:\/\/www.usatoday.com\/money\/perfi\/basics\/2005-04-14-financial-diet-excercise1_x.htm and use the embedded links to follow the entire series. [\/footnote]<\/p>\r\n<p id=\"collins-ch14_s00_p02\" class=\"indent para editable block no-indent\">Now let\u2019s suppose that while browsing through a magazine in the doctor\u2019s office, you run across a short personal-finances self-help quiz. There are two sets of three statements each, and you\u2019re asked to check off each statement with which you <em class=\"emphasis\">agree<\/em>:<\/p>\r\n\r\n<ul id=\"collins-ch14_s00_l02\" class=\"itemizedlist editable block\">\r\n \t<li><strong class=\"emphasis bold\">Part 1<\/strong><\/li>\r\n \t<li>If I didn\u2019t have a credit card in my pocket, I\u2019d probably buy a lot less stuff.<\/li>\r\n \t<li>My credit card balance usually goes up at the holidays.<\/li>\r\n \t<li>If I really want something that I can\u2019t afford, I put it on my credit card or sign up for a payment plan.<\/li>\r\n<\/ul>\r\n<ul id=\"collins-ch14_s00_l03\" class=\"itemizedlist editable block\">\r\n \t<li><strong class=\"emphasis bold\">Part 2<\/strong><\/li>\r\n \t<li>I can barely afford my apartment.<\/li>\r\n \t<li>Whenever something goes wrong (car repairs, doctors\u2019 bills), I have to use my credit card.<\/li>\r\n \t<li>I almost never spend money on stuff I don\u2019t need, but I always seem to owe a balance on my credit card bill.<\/li>\r\n<\/ul>\r\n<p id=\"collins-ch14_s00_p03\" class=\"indent para editable block no-indent\">At the bottom of the page, you\u2019re asked whether you agreed with <em class=\"emphasis\">any<\/em> of the statements in Part 1 and <em class=\"emphasis\">any<\/em> of the statements in Part 2. It turns out that you answered yes in both cases and are thereby informed that you\u2019re probably jeopardizing your entire financial future.<\/p>\r\n<p id=\"collins-ch14_s00_p04\" class=\"indent para editable block no-indent\">Unfortunately, personal-finances experts tend to support the author of the quiz: if you agreed with any statement in Part 1, you have a problem with splurging; if you agreed with any statement in Part 2, your monthly bills are too high for your income.<\/p>\r\n\r\n<div class=\"section\" id=\"collins-ch14_s00_s01\">\r\n<h2>Building a Good Credit Rating<\/h2>\r\n<p id=\"collins-ch14_s00_s01_p01\" class=\"nonindent para editable block\">So, you have a financial problem: according to the quick test you took, you\u2019re a splurger and your bills are too high for your income. How does this put you at risk? If you get in over your head and can\u2019t make your loan or rent payments on time, you risk hurting your credit\u2014your ability to borrow in the future.<\/p>\r\n<p id=\"collins-ch14_s00_s01_p02\" class=\"indent para editable block no-indent\">Let\u2019s talk about your credit. How do potential lenders decide whether you\u2019re a good or bad credit risk? If you\u2019re a poor credit risk, how does this affect your ability to borrow, or the rate of interest you have to pay, or both? Here\u2019s the story. Whenever you use credit, those you borrow from (retailers, credit card companies, banks) provide information on your debt and payment habits to three national credit bureaus: Equifax, Experian, and TransUnion. The credit bureaus use the information to compile a numerical credit score, generally called a FICO score; it ranges from 300 to 900, with the majority of people falling in the 600\u2013700 range. (Here\u2019s a bit of trivia to bring up at a dull party: FICO stands for Fair Isaac Company\u2014the company that developed the score.) In compiling the score, the credit bureaus consider five criteria: payment history\u2014do you pay your bills on time? (the most important), total amount owed, length of your credit history, amount of new credit you have, and types of credit you use. The credit bureaus share their score and other information about your credit history with their subscribers.<\/p>\r\n<p id=\"collins-ch14_s00_s01_p03\" class=\"indent para editable block no-indent\">So what does this do for you? It depends. If you paid your bills on time, carried only a reasonable amount of debt, didn\u2019t max out your credit cards, had a history of borrowing, hadn\u2019t applied for a bunch of new loans, and borrowed from a mix of lenders, you\u2019d be in good shape. Your FICO score would be high and lenders would like you. Because of your high credit score, they\u2019d give you the loans you asked for at reasonable interest rates. But if your FICO score is low (perhaps you weren\u2019t so good at paying your bills on time), lenders won\u2019t like you and won\u2019t lend you money (or would lend it to you at high interest rates). A low FICO score can raise the amount you have to pay for auto insurance and cell phone plans and can even affect your chances of renting an apartment or landing a particular job. So it\u2019s very, very, very (the last \u201cvery\u201d is for emphasis) important that you do everything possible to earn a high credit score. If you don\u2019t know your score, here is what you should do: go to <a class=\"link\" target=\"_blank\" href=\"https:\/\/www.quizzle.com\" rel=\"noopener noreferrer\">https:\/\/www.quizzle.com\/<\/a> and request a free copy of your credit report.<\/p>\r\n<p id=\"collins-ch14_s00_s01_p04\" class=\"indent para editable block no-indent\">As a young person, though, how do you build a credit history that will give you a high FICO score? Your means for doing this changed in 2009 with the passage of the Credit CARD Act, federal legislation designed to stop credit card issuers from treating its customers unfairly.[footnote]Irby, L., \u201c10 Key Changes of the New Credit Card Rules,\u201d About.com, http:\/\/credit.about.com\/od\/consumercreditlaws\/tp\/new-credit-card-rules.htm (accessed November 10, 2011).[\/footnote] Based on feedback from several financial experts, Emily Starbuck Gerson and Jeremy Simon of CreditCards.com compiled the following list of ways students can build good credit.[footnote]Gerson, E. S., and Jeremy M. Simon, \u201c10 Ways Students Can Build Good Credit,\u201d CreditCards.com, http:\/\/www.creditcards.com\/credit-card-news\/help\/10-ways-students-get-good-credit-6000.php (accessed November 10, 2011).[\/footnote]<\/p>\r\n\r\n<ol id=\"collins-5300-20111128-105646-487930\" class=\"orderedlist editable block\">\r\n \t<li><em class=\"emphasis\">Become an authorized user on your parents\u2019 account.<\/em> According to the rules set by the Credit CARD Act, if you are under age twenty-one and do not have independent income, you can get a credit card in your own name <strong class=\"emphasis bold\">only<\/strong> if you have a cosigner (who is over twenty-one and does have an income). This is a time when a parent can come in handy. Your parent could add you to his or her credit card account as an authorized user. Of course, this means your parent will know what you\u2019re spending your money on (which could make for some interesting conversations). But, on the plus side, by piggybacking on your parent\u2019s card you are building good credit (assuming, of course, that your parent pays the bill on time).<\/li>\r\n \t<li><em class=\"emphasis\">Obtain your own credit card.<\/em> If you can show the credit card company that you have sufficient income to pay your credit card bill, you might be able to get your own card. It isn\u2019t as easy to get a card as it was before the passage of the Credit CARD Act, and you won\u2019t get a lot of goodies for signing up (as was true before), but you stand a chance.<\/li>\r\n \t<li><em class=\"emphasis\">Get the right card for you.<\/em> If you meet the qualifications to get a credit card on your own, look for the best card for you. Although it sounds enticing to get a credit card that gives you frequent flyer miles for every dollar you spend, the added cost for this type of card, including higher interest charges and annual fees, might not be worth it. Look for a card with a low interest rate and no annual fee. As another option, you might consider applying for a retail credit card, such as a Target or Macy\u2019s card.<\/li>\r\n \t<li><em class=\"emphasis\">Use the credit card for occasional, small purchases.<\/em> If you do get a credit card or a retail card, limit your charges to things you can afford. But don\u2019t go in the other direction and put the card in a drawer and never use it. Your goal is to build a good credit history by showing the credit reporting agencies that you can handle credit and pay your bill on time. To accomplish this, you need to use the card.<\/li>\r\n \t<li><em class=\"emphasis\">Avoid big-ticket buys, except in case of emergency.<\/em> Don\u2019t run up the balance on your credit card by charging high-cost, discretionary items, such as a trip to Europe during summer break, which will take a long time to pay off. Leave some of your credit line accessible in case you run into an emergency, such as a major car repair.<\/li>\r\n \t<li><em class=\"emphasis\">Pay off your balance each month.<\/em> If you cannot pay off the balance on your credit card each month, this is likely a signal that you\u2019re living beyond your means. Quit using the card until you bring the balance down to zero. When you\u2019re first building credit, it\u2019s important to pay off the balance on your card at the end of each month. Not only will this improve your credit history, but it will save you a lot in interest charges.<\/li>\r\n \t<li><em class=\"emphasis\">Pay all your other bills on time.<\/em> Don\u2019t be fooled into thinking that the only information collected by the credit agencies is credit card related. They also collect information on other payments including phone plans, Internet service, rental payments, traffic fines, and even library overdue fees.<\/li>\r\n \t<li><em class=\"emphasis\">Don\u2019t cosign for your friends.<\/em> If you are twenty-one and have an income, a nonworking, under-age-twenty-one friend might beg you to cosign his credit card application. Don\u2019t do it! As a cosigner, the credit card company can make you pay your friend\u2019s balance (plus interest and fees) if he fails to meet his obligation. And this can blemish your own credit history and lower your credit rating.<\/li>\r\n \t<li><em class=\"emphasis\">Do not apply for several credit cards at one time.<\/em> Just because you can get several credit cards, this doesn\u2019t mean that you should. When you\u2019re establishing credit, applying for several cards over a short period of time can lower your credit rating. Stick with one card.<\/li>\r\n \t<li><em class=\"emphasis\">Use student loans for education expenses only, and pay on time.<\/em> For many, student loans are necessary. But avoid using student loans for noneducational purposes. All this does is run up your debt. When your loans become due, consolidate them if appropriate and don\u2019t miss a payment.<\/li>\r\n<\/ol>\r\n<p id=\"e916.collins-ch14_s01_s03_s01_p08\" class=\"indent para editable block no-indent\">What if you\u2019ve already damaged your credit score\u2014what can you do to raise it? Do what you should have done in the first place: pay your bills on time, pay more than the minimum balance due on your credit cards and charge cards, keep your card balances low, and pay your debts off as quickly as possible. Also, scan your credit report for any errors. If you find any, work with the credit bureau to get them corrected.<\/p>\r\n\r\n<\/div>\r\n<div class=\"section\" id=\"collins-ch14_s00_s02\">\r\n<h2 class=\"title editable block\">Understand the Cost of Borrowing<\/h2>\r\n<p id=\"collins-ch14_s00_s02_p01\" class=\"nonindent para editable block\">Because your financial problem was brought on, in part, because you have too much debt, you should stop borrowing. But, what if your car keeps breaking down and you\u2019re afraid of getting stuck on the road some night? So, you\u2019re thinking of replacing it with a used car that costs $10,000. Before you make a final decision to incur the debt, you should understand its costs. The rate of interest matters a lot. Let\u2019s compare three loans at varying interest rates: 6, 10, and 14 percent. We\u2019ll look at the monthly payment, as well as the total interest paid over the life of the loan.<\/p>\r\n\r\n<div class=\"informaltable block\">\r\n<table class=\" aligncenter\" style=\"border-spacing: 0px;height: 64px\" cellpadding=\"0\">\r\n<thead>\r\n<tr style=\"height: 16px\">\r\n<th style=\"height: 16px;width: 671.906px\" colspan=\"4\">$10,000 Loan for 4 Years at Various Interest Rates<\/th>\r\n<\/tr>\r\n<tr style=\"height: 16px\">\r\n<th style=\"height: 16px;width: 274.906px\">Interest Rate<\/th>\r\n<th style=\"height: 16px;width: 114.906px\">6%<\/th>\r\n<th style=\"height: 16px;width: 116.906px\">10%<\/th>\r\n<th style=\"height: 16px;width: 116.906px\">14%<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr style=\"height: 16px\">\r\n<td style=\"height: 16px;width: 274.906px\">Monthly Payment<\/td>\r\n<td style=\"height: 16px;width: 114.906px\">$235<\/td>\r\n<td style=\"height: 16px;width: 116.906px\">$254<\/td>\r\n<td style=\"height: 16px;width: 116.906px\">$273<\/td>\r\n<\/tr>\r\n<tr style=\"height: 16px\">\r\n<td style=\"height: 16px;width: 274.906px\">Total Interest Paid<\/td>\r\n<td style=\"height: 16px;width: 114.906px\">$1,272<\/td>\r\n<td style=\"height: 16px;width: 116.906px\">$2,172<\/td>\r\n<td style=\"height: 16px;width: 116.906px\">$3,114<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n<p id=\"collins-ch14_s00_s02_p02\" class=\"indent para editable block no-indent\">If your borrowing interest rate is 14 percent, rather than 6 percent, you\u2019ll end up paying an additional $1,842 in interest over the life of the loan. Your borrowing cost at 14 percent is more than twice as much as it is at 6 percent. The conclusion: search for the best interest rates and add the cost of interest to the cost of whatever you\u2019re buying before deciding whether you want it and can afford it. If you have to borrow the money for the car at the 14 percent interest rate, then the true cost of the car isn\u2019t $10,000, but rather $13,114.<\/p>\r\n<p id=\"collins-ch14_s00_s02_p03\" class=\"indent para editable block no-indent\">Now, let\u2019s explore the complex world of credit cards. First extremely important piece of information: not all credit cards are equal. Second extremely important piece of information: watch out for credit card fees! Credit cards are a way of life for most of us. But they can be very costly. Before picking a credit card, do your homework. A little research can save you a good deal of money. There are a number of costs you need to consider:<\/p>\r\n\r\n<ul id=\"collins-ch14_s00_s02_l01\" class=\"itemizedlist editable block\">\r\n \t<li><em class=\"emphasis\">Finance charge<\/em>. The interest rate charged to you often depends on your credit history; those with good credit get the best rates. Some cards offer low \u201cintroductory\u201d rates\u2014but watch out; these rates generally go up after six months.<\/li>\r\n \t<li><em class=\"emphasis\">Annual fee<\/em>. Many credit cards charge an annual fee: a yearly charge for using the card. You can avoid annual fees by shopping around (though there can be trade-offs: you might end up paying a higher interest rate to avoid an annual fee).<\/li>\r\n \t<li><em class=\"emphasis\">Over-limit fee<\/em>. This fee is charged whenever you exceed your credit line.<\/li>\r\n \t<li><em class=\"emphasis\">Late payment fee<\/em>. Pretty self-explanatory, but also annoying. Late payment fees are common for students; a study found students account for 6 percent of all overdraft fees.[footnote]Brackey, H. J., \u201cStudents Burdened by Overdraft Charges, Group Says,\u201d Wisdom of the Rich Dad, http:\/\/www.richdadwisdom.com\/2007\/12\/students-burdened-by-overdraft-charges\/ (accessed November 11, 2001).[\/footnote] One way to decrease the chance of paying late is to call the credit card company and ask them to set your payment due date for a time that works well for you. For example, if you get paid at the end of the month, ask for a payment date around the 10th of the month. Then you can pay your bill when you get paid and avoid a late fee.<\/li>\r\n \t<li><em class=\"emphasis\">Cash advance fee<\/em>. While it\u2019s tempting to get cash from your credit card, it\u2019s pretty expensive. You\u2019ll end up paying a fee (around 3 percent of the advance), and the interest rate charged on the amount borrowed can be fairly high.<\/li>\r\n<\/ul>\r\n<p id=\"collins-ch14_s00_s02_p04\" class=\"indent para editable block no-indent\">An alternative to a credit card is a debit card, which pulls money out of your checking account whenever you use the card to buy something or get cash from an ATM. These cards don\u2019t create a loan when used. So, are they better than credit cards? It depends\u2014each has its advantages and disadvantages. A big advantage of a credit card is that it helps you build credit. A disadvantage is that you can get in over your head in debt and possibly miss payments (thereby incurring a late payment fee). Debit cards help control spending. Theoretically, you can\u2019t spend more than you have in your checking account. But be careful\u2014if you don\u2019t keep track of your checking account balance, it\u2019s easy to overdraft your account when using your debit card. Prior to July 2010, most banks just accepted purchases or ATM withdrawals even if a customer didn\u2019t have enough money in his or her account to cover the transaction. The banks didn\u2019t do this to be nice, and they didn\u2019t ask customers if they wanted this done\u2014they just overdrafted the customer\u2019s account and charged the customer a hefty overdraft fee of around $35 through what they call an \u201coverdraft protection program\u201d.[footnote]Chu, K., \u201cDebit Card Overdraft Fees Hit Record Highs,\u201d USA Today, January 24, 2007, http:\/\/www.usatoday.com\/money\/perfi\/credit\/2007-01-24-debit-card-fees_x.htm (accessed November 11, 2011).[\/footnote] Overdraft fees can be quite expensive, particularly if you used the card to purchase a hamburger and soda at a fast-food restaurant.<\/p>\r\n<p id=\"e917.collins-5300-20111128-110359-894259\" class=\"indent para editable block no-indent\">The Federal Reserve changed the debit card rules in 2010, and now banks must get your permission before they enroll you in an overdraft protection program.[footnote]Board of Governors of the Federal Reserve System, \u201cWhat You Need to Know: Bank Account Overdraft Fees,\u201d Board of Governors of the Federal Reserve System, http:\/\/www.federalreserve.gov\/consumerinfo\/wyntk_overdraft.htm (accessed November 10, 2011).[\/footnote] If you opt in (agree), things work as before: You can spend or take out more money through an ATM machine than you have in your account, and the bank lets you do this. But it charges you a fee of about $30 plus additional fees of $5 per day if you don\u2019t cover the overdraft in five days. If you don\u2019t opt in, the bank will not let you overdraft your account. The downside is that you could get embarrassed at the cash register when your purchase is rejected or at a restaurant when trying to pay for a meal. Obviously, you want to avoid being charged an overdraft fee or being embarrassed when paying for a purchase. Here are some things you can do to decrease the likelihood that either would happen:[footnote]Prater, C., \u201cConsumers to Fed: Stop Debit Card Overdraft Opt-In \u2018Scare\u2019 Tactics: New Debit Card Overdraft Rules Slated to Start July 1, 2010,\u201d CreditCards.com, http:\/\/www.creditcards.com\/credit-card-news\/debit-card-overdraft-fee-opt-in-rules-1282.php (accessed November 10, 2011).[\/footnote]<\/p>\r\n\r\n<ul id=\"collins-5300-20111128-110534-439149\" class=\"itemizedlist editable block\">\r\n \t<li>Ask your bank to e-mail or text you when your account balance is low.<\/li>\r\n \t<li>Have your bank link your debit card account to a savings account. If more money is needed to cover a purchase, the bank will transfer the needed funds from your savings to your checking account.<\/li>\r\n \t<li>Use the online banking feature offered by most banks to check your checking account activity.<\/li>\r\n<\/ul>\r\n<\/div>\r\n<div class=\"section\" id=\"collins-ch14_s00_s03\">\r\n<h2 class=\"title editable block\">A Few More Words about Debt<\/h2>\r\n<p id=\"collins-ch14_s00_s03_p01\" class=\"nonindent para editable block\">What should you do now to turn things around\u2014to start getting out of debt? According to many experts, you need to take two steps:<\/p>\r\n\r\n<ol id=\"collins-ch14_s00_s03_l01\" class=\"orderedlist editable block\">\r\n \t<li>Cut up your credit cards and start living on a cash-only basis.<\/li>\r\n \t<li>Do whatever you can to bring down your monthly bills.<\/li>\r\n<\/ol>\r\n<h3><span class=\"title-prefix\">Figure 12.1 Visa Credit Card<\/span><\/h3>\r\n<div class=\"caption\" style=\"text-align: center;font-size: .8em;max-width: 500px\">\r\n<div class=\"figure small editable block\" id=\"collins-ch14_s00_s03_f01\">\r\n<p class=\"indent\"><a><img src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/14.0.4.jpg\" alt=\"A shredded credit card\" class=\"aligncenter size-full wp-image-1473\" width=\"500\" \/><\/a><\/p>\r\n\r\n<\/div>\r\n<\/div>\r\nLiving on a cash-only basis is the first step in getting debt under control.[footnote]F<span style=\"font-size: 14pt\">rankieleon \u2013 <\/span><a href=\"https:\/\/www.flickr.com\/photos\/armydre2008\/16286816560\" style=\"font-size: 14pt\">won\u2019t hurt you no more<\/a><span style=\"font-size: 14pt\"> \u2013 CC BY 2.0<\/span>[\/footnote]<span style=\"font-size: 14pt\"><\/span>\r\n<p class=\"indent para editable block no-indent\">Step 1 in this abbreviated two-step personal-finances \u201cplan\u201d is probably the easier of the two, but taking even this step can be hard enough. In fact, a lot of people would find it painful to give up their credit cards, and there\u2019s a perfectly logical reason for their reluctance: the degree of pain that one would suffer from destroying one\u2019s credit cards probably stands in direct proportion to one\u2019s reliance on them.<\/p>\r\n<p id=\"collins-ch14_s00_s03_p03\" class=\"indent para editable block no-indent\">As of May 2011, total credit card debt in the United States is about $780 billion, out of $2.5 trillion in total consumer debt. Closer to home, one recent report puts <em class=\"emphasis\">average credit card debt per U.S. household<\/em> at $16,000 (up 100 percent since 2000). The 600 million credit cards held by U.S. consumers carry an average interest rate on these cards of 15 percent.[footnote]CreditCards.com, \u201cCredit Card Statistics, Industry Facts, Debt Statistics,\u201d CreditCards.com, http:\/\/www.creditcards.com\/credit-card-news\/credit-card-industry-facts-personal-debt-statistics-1276.php (accessed November 10, 2011).[\/footnote] Why are these numbers important? Primarily because, <em class=\"emphasis\">on average<\/em>, too many consumers have debt that they simply can\u2019t handle. \u201cCredit card debt,\u201d says one expert on the problem, \u201cis clobbering millions of Americans like a wrecking ball,\u201d[footnote]Wyden, R., quoted in \u201cAvoiding the Pitfalls of Credit Card Debt\u201d (Center for American Progress Action Fund, 2008), http:\/\/www.americanprogressaction.org\/issues\/2008\/avoiding_pitfalls.html (accessed September 13, 2008).[\/footnote] and if you\u2019re like most of us, you\u2019d probably like to know whether your personal-finances habits are setting you up to become one of the clobbered.<\/p>\r\n<p id=\"collins-ch14_s00_s03_p04\" class=\"indent para editable block no-indent\">If, for example, you\u2019re worried that your credit card debt may be overextended, the American Bankers Association suggests that you ask yourself a few questions:[footnote]Lipton, J., \u201cChoking On Credit Card Debt,\u201d Forbes.com, September 12, 2008, http:\/\/www.forbes.com\/finance\/2008\/09\/12\/credit-card-debt-pf-ii-in_jl_0911creditcards_inl.html (accessed November 11, 2011).[\/footnote]<\/p>\r\n\r\n<ul>\r\n \t<li style=\"list-style-type: none\">\r\n<ul id=\"collins-ch14_s00_s03_l02\" class=\"itemizedlist editable block\">\r\n \t<li>\r\n<p class=\"no-indent\">Do I pay only the minimum month after month?<\/p>\r\n<\/li>\r\n \t<li>\r\n<p class=\"no-indent\">Do I run out of cash all the time?<\/p>\r\n<\/li>\r\n \t<li>\r\n<p class=\"no-indent\">Am I late on critical payments like my rent or my mortgage?<\/p>\r\n<\/li>\r\n \t<li>\r\n<p class=\"no-indent\">Am I taking longer and longer to pay off my balance(s)?<\/p>\r\n<\/li>\r\n \t<li>\r\n<p class=\"no-indent\">Do I borrow from one credit card to pay another?<\/p>\r\n<\/li>\r\n<\/ul>\r\n<\/li>\r\n<\/ul>\r\n<p id=\"collins-ch14_s00_s03_p05\" class=\"indent para editable block no-indent\">If such habits as these have helped you dig yourself into a hole that\u2019s steadily getting deeper and steeper, experts recommend that you take three steps as quickly as possible:[footnote]Lipton, J., \u201cChoking On Credit Card Debt,\u201d Forbes.com, September 12, 2008, http:\/\/www.forbes.com\/finance\/2008\/09\/12\/credit-card-debt-pf-ii-in_jl_0911creditcards_inl.html (accessed November 11, 2011).[\/footnote]<\/p>\r\n\r\n<ol id=\"collins-ch14_s00_s03_l03\" class=\"orderedlist editable block\">\r\n \t<li><em class=\"emphasis\">Get to know the enemy<\/em>. You may not want to know, but you should collect all your financial statements and figure out exactly how much credit card debt you\u2019ve piled up.<\/li>\r\n \t<li><em class=\"emphasis\">Don\u2019t compound the problem with late fees<\/em>. List each card, along with interest rates, monthly minimums, and due dates. Bear in mind that paying late fees is the same thing as tossing what money you have left out the window.<\/li>\r\n \t<li><em class=\"emphasis\">Now cut up your credit cards (or at least stop using them)<\/em>. Pay cash for everyday expenses, and remember: swiping a piece of plastic is one thing (a little too easy), while giving up your hard-earned cash is another (a little harder).<\/li>\r\n<\/ol>\r\n<p id=\"collins-ch14_s00_s03_p06\" class=\"indent para editable block no-indent\">And, if you find you\u2019re unable to pay your debts, don\u2019t hide from the problem, as it will not go away. Call your lenders and explain the situation. They should be willing to work with you in setting up a payment plan. If you need additional help, contact a nonprofit credit assistance group such as the National Foundation for Credit Counseling (<a class=\"link\" href=\"http:\/\/www.nfcc.org\">http:\/\/www.nfcc.org<\/a>).<\/p>\r\n\r\n<\/div>\r\n<div class=\"section\" id=\"collins-ch14_s00_s04\">\r\n<h2 class=\"title editable block\">Why You Owe It to Yourself to Manage Your Debts<\/h2>\r\n<p id=\"collins-ch14_s00_s04_p01\" class=\"nonindent para editable block\">Now, it\u2019s time to tackle step 2 of our recommended personal-finances miniplan: do whatever you can to bring down your monthly bills. As we said, many people may find this step easier than step 1\u2014cutting up your credit cards and starting to live on a cash-only basis.<\/p>\r\n<p id=\"collins-ch14_s00_s04_p02\" class=\"indent para editable block no-indent\">If you want to take a gradual approach to step 2, one financial planner suggests that you perform the following \u201cexercises\u201d for one week:[footnote]Financial planner Elissa Buie helped to develop <em class=\"emphasis\">USA TODAY\u2019s Financial Diet.[\/footnote]<\/em><\/p>\r\n\r\n<ul id=\"collins-ch14_s00_s04_l01\" class=\"itemizedlist editable block\">\r\n \t<li>Keep a written record of everything you spend and total it at week\u2019s end.<\/li>\r\n \t<li>Keep all your ATM receipts and count up the fees.<\/li>\r\n \t<li>Take $100 out of the bank and don\u2019t spend a penny more.<\/li>\r\n \t<li>Avoid gourmet coffee shops.<\/li>\r\n<\/ul>\r\n<p id=\"collins-ch14_s00_s04_p03\" class=\"indent para editable block no-indent\">Among other things, you\u2019ll probably be surprised at how much of your money can become somebody else\u2019s money on a week-by-week basis. If, for example, you spend $3 every day for one cup of coffee at a coffee shop, you\u2019re laying out nearly $1,100 a year. If you use your ATM card at a bank other than your own, you\u2019ll probably be charged a fee that can be as high as $3. The average person pays more than $60 a year in ATM fees, and if you withdraw cash from an ATM twice a week, you could be racking up $300 in annual fees. As for your ATM receipts, they\u2019ll tell you whether, on top of the fee that you\u2019re charged by that other bank\u2019s ATM, your <em class=\"emphasis\">own<\/em> bank is <em class=\"emphasis\">also<\/em> tacking on a surcharge.[footnote]Sun Trust Banks, \u201cMoney Management\u201d (2008), http:\/\/www.suntrusteducation.com\/toolbox\/moneymgt_spendless.asp (accessed September 16, 2008)[\/footnote][footnote]SavingAdvice.com, \u201cReduce ATM Fees\u2014Daily Financial Tip,\u201d SavingAdvice.com, April 5, 2006, http:\/\/www.savingadvice.com\/blog\/2006\/04\/05\/10533_reduce-atm-fees-daily-financial-tip.html[\/footnote][footnote]Loeb, M., \u201cFour Ways to Keep ATM Fees from Draining Your Bank Account,\u201d MarketWatch (June 14, 2007), http:\/\/www.marketwatch.com\/news\/story\/four-ways-keep-atm-fees\/story.aspx?guid=%7BEFB2C425-B7F8-40C4-8720-D684A838DBDA%7D (accessed November 11 2011)[\/footnote][footnote]Rosenberger, K., \u201cHow to Avoid ATM Fees,\u201d Helium (2008), http:\/\/www.helium.com\/items\/1100945-how-to-avoid-atm-fees (accessed November 11, 2011).[\/footnote]<\/p>\r\n<p id=\"collins-ch14_s00_s04_p04\" class=\"indent para editable block no-indent\">If this little exercise proves enlightening\u2014or if, on the other hand, it apparently fails to highlight any potential pitfalls in your spending habits\u2014you might devote the next week to another exercise:<\/p>\r\n\r\n<ul id=\"collins-ch14_s00_s04_l02\" class=\"itemizedlist editable block\">\r\n \t<li>Put all your credit cards in a drawer and get by on cash.<\/li>\r\n \t<li>Take your lunch to work.<\/li>\r\n \t<li>Buy nothing but groceries and gasoline.<\/li>\r\n \t<li>Use coupons whenever you go to the grocery store (but don\u2019t buy anything just because you happen to have a coupon).<\/li>\r\n<\/ul>\r\n<p id=\"collins-ch14_s00_s04_p05\" class=\"indent para editable block no-indent\">The obvious question that you need to ask yourself at the end of week 2 is, \u201chow much did I save?\u201d An equally interesting question, however, is, \u201cwhat can I do without?\u201d One survey asked five thousand financial planners to name the two expenses that most consumers should find easiest to cut back on. <a class=\"xref\" href=\"#collins-ch14_s00_s04_f01\">Figure 12.2 \u201cReducible Expenses\u201d<\/a> shows the results.<\/p>\r\n\r\n<h3><span class=\"title-prefix\">Figure 12.2<\/span> Reducible Expenses<\/h3>\r\n<div class=\"caption\" style=\"text-align: center;font-size: .8em\" id=\"collins-ch14_s00_s04_f01\">\r\n<p class=\"indent\"><a><img src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/f1d2c19e19ad24831792a3ee7ebfcb51.jpg\" alt=\"Reducible Expenses (from lowest to highest): health club dues, computer, software, movie rentals, buying CDs, books, other (including buying a less expensive car, taking a less extravagant vacation, eliminating impulse clothes purchases), gifts, cell phone use, cable TV costs, buying one less takeout dinner, and eating one less dinner out\" style=\"max-width: 497px\" \/>\r\n<\/a><\/p>\r\n\r\n<\/div>\r\n<p id=\"collins-ch14_s00_s04_p06\" class=\"indent para editable block no-indent\">You may or may not be among the American consumers who buy thirty-five million cans of Bud Light each and every day, or 150,000 pounds of Starbucks coffee, or 2.4 million Burger King hamburgers, or 628 Toyota Camrys. Yours may not be one of the 70 percent of U.S. households with an unopened consumer-electronics product lying around.[footnote]Arrington, M., \u201ceBay Survey Says Americans Buy Crap They Don\u2019t Want,\u201d TechCrunch, August 21, 2008, http:\/\/techcrunch.com\/2008\/08\/21\/ebay-survey-says-americans-buy-crap-they-dont-want\/ (accessed November 11, 2011).[\/footnote] And you may or may not be ready to make some major adjustments in your personal-spending habits, but if, at age twenty-eight, you have a good education and a good job, a $60,000 income, and a $70,000 debt\u2014by no means an implausible scenario\u2014there\u2019s a very good reason why you should think hard about controlling your modest share of that $2.5 trillion in U.S. consumer debt: your level of indebtedness will be a key factor in your ability\u2014or inability\u2014to reach your longer-term financial goals, such as home ownership, a dream trip, and, perhaps most important, a reasonably comfortable retirement.<\/p>\r\n<p id=\"collins-ch14_s00_s04_p07\" class=\"indent para editable block no-indent\">The great English writer Samuel Johnson once warned, \u201cDo not accustom yourself to consider debt only as an inconvenience; you will find it a calamity.\u201d In Johnson\u2019s day, you could be locked up for failing to pay your debts; there were even so-called debtors\u2019 prisons for the purpose, and we may suppose that the prospect of doing time for owing money was one of the things that Johnson had in mind when he spoke of debt as a potential \u201ccalamity.\u201d We don\u2019t expect that you\u2019ll ever go to prison on account of indebtedness, and we won\u2019t suggest that, say, having to retire to a condo in the city instead of a tropical island is a \u201ccalamity.\u201d We\u2019ll simply say that you\u2019re more likely to meet your lifetime financial goals\u2014whatever they are\u2014if you plan for them. What you need to know about planning for and reaching those goals is the subject of this chapter.<\/p>\r\n\r\n<div class=\"bcc-box bcc-success\" id=\"collins-ch14_s00_s04_n01\">\r\n<h3 class=\"title\">Key Takeaways<\/h3>\r\n<ul id=\"collins-ch14_s00_s04_l03\" class=\"itemizedlist\">\r\n \t<li>Before buying something on credit, ask yourself whether you really need the goods or services, can afford them, and are willing to pay interest on the purchase.<\/li>\r\n \t<li>Whenever you use credit, those you borrow from provide information on your debt and payment habits to three national credit bureaus.<\/li>\r\n \t<li>The credit bureaus use the information to compile a numerical credit score, called a FICO score, which they share with subscribers.<\/li>\r\n \t<li>The credit bureaus consider five criteria in compiling the score: payment history, total amount owed, length of your credit history, amount of new credit you have, and types of credit you use.<\/li>\r\n \t<li>\r\n<p class=\"nonindent para\">As a young person, you should do the following to build a good credit history that will give you a high FICO score.<\/p>\r\n\r\n<ul id=\"collins-ch14_s00_s04_l10\" class=\"itemizedlist\">\r\n \t<li>Become an authorized user on your parents\u2019 account.<\/li>\r\n \t<li>Obtain your own credit card<\/li>\r\n \t<li>Get the right card for you.<\/li>\r\n \t<li>Use the credit card for occasional, small purchases<\/li>\r\n \t<li>Avoid big-ticket buys, except in case of emergency.<\/li>\r\n \t<li>Pay off your balance each month.<\/li>\r\n \t<li>Pay all your other bills on time.<\/li>\r\n \t<li>Don\u2019t cosign for your friends.<\/li>\r\n \t<li>Do not apply for several credit cards at <em class=\"emphasis\">one time<\/em>.<\/li>\r\n \t<li>Use student loans for education expenses only, and pay on time.<\/li>\r\n<\/ul>\r\n<\/li>\r\n \t<li>To raise your credit score, you should pay your bills on time, pay more than the minimum balance due, keep your card balances low, and pay your debts off as quickly as possible. Also, scan your credit report for any errors and get any errors fixed.<\/li>\r\n \t<li>If you can\u2019t pay your debt, explain your situation to your lenders and see a credit assistance counselor.<\/li>\r\n \t<li>Before you incur a debt, you should understand its costs. The interest rate charged by the lender makes a big difference in the overall cost of the loan.<\/li>\r\n \t<li>The costs associated with credit cards include finance charges, annual fees, over-limit fees, late payment fees, and cash advance fees.<\/li>\r\n \t<li>The Federal Reserve changed the debit card rules in 2010 and now banks must get your permission before they enroll you in an overdraft protection program.<\/li>\r\n \t<li>If you have a problem with splurging, cut up your credit cards and start living on a cash-only basis.<\/li>\r\n \t<li>If your monthly bills are too high for your income, do whatever you can to bring down those bills.<\/li>\r\n<\/ul>\r\n<\/div>\r\n<div class=\"bcc-box bcc-info\" id=\"collins-ch14_s00_s04_n02\">\r\n<h3 class=\"title\">Exercise<\/h3>\r\n<p class=\"nonindent simpara\">(AACSB) Analysis<\/p>\r\n<p id=\"collins-ch14_s00_s04_p08\" class=\"indent para\">There are a number of costs associated with the use of a credit card, including finance charges, annual fee, over-limit fee, late payment fee, and cash advance fee. Identify these costs for a credit card you now hold. If you don\u2019t presently have a credit card, go online and find an offer for one. Check out these costs for the card being offered.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<div class=\"chapter standard\" id=\"slug-14-1-financial-planning\">\r\n<div class=\"chapter-title-wrap\">\r\n<h1 class=\"chapter-title\" style=\"text-align: center\">Financial Planning<\/h1>\r\n<\/div>\r\n<div class=\"ugc chapter-ugc\">\r\n<div class=\"bcc-box bcc-highlight\" id=\"frank-ch14_s01_n01\">\r\n<h3 class=\"title\">Learning Objectives<\/h3>\r\n<ol id=\"frank-ch14_s01_l01\" class=\"orderedlist\">\r\n \t<li>Define <em class=\"emphasis\">personal finances<\/em> and <em class=\"emphasis\">financial planning<\/em>.<\/li>\r\n \t<li>Explain the <em class=\"emphasis\">financial planning life cycle<\/em>.<\/li>\r\n \t<li>Discuss the advantages of a college education in meeting short- and long-term financial goals.<\/li>\r\n \t<li>Describe the steps you\u2019d take to get a job offer and evaluate alternative job offers, taking benefits into account.<\/li>\r\n \t<li>Understand the ways to finance a college education.<\/li>\r\n<\/ol>\r\n<\/div>\r\n<p id=\"frank-ch14_s01_p01\" class=\"nonindent para editable block\">Before we go any further, we need to nail down a couple of key concepts. First, just what, exactly, do we mean by personal finances? <em class=\"emphasis\">Finance<\/em> itself concerns the flow of money from one place to another, and your personal finances concern your money and what you plan to do with it as it flows in and out of your possession. Essentially, then, personal finance is the application of financial principles to the monetary decisions that you make either for your individual benefit or for that of your family.<\/p>\r\n<p id=\"frank-ch14_s01_p02\" class=\"indent para editable block no-indent\">Second, monetary decisions work out much more beneficially when they\u2019re planned rather than improvised. Thus our emphasis on financial planning\u2014the ongoing process of managing your personal finances in order to meet goals that you\u2019ve set for yourself or your family.<\/p>\r\n<p id=\"frank-ch14_s01_p03\" class=\"indent para editable block no-indent\">Financial planning requires you to address several questions, some of them relatively simple:<\/p>\r\n\r\n<ul id=\"frank-ch14_s01_l02\" class=\"itemizedlist editable block\">\r\n \t<li>What\u2019s my annual income?<\/li>\r\n \t<li>How much debt do I have, and what are my monthly payments on that debt?<\/li>\r\n<\/ul>\r\n<p id=\"frank-ch14_s01_p04\" class=\"indent para editable block no-indent\">Others will require some investigation and calculation:<\/p>\r\n\r\n<ul id=\"frank-ch14_s01_l03\" class=\"itemizedlist editable block\">\r\n \t<li>What\u2019s the value of my assets?<\/li>\r\n \t<li>How can I best budget my annual income?<\/li>\r\n<\/ul>\r\n<p id=\"frank-ch14_s01_p05\" class=\"indent para editable block no-indent\">Still others will require some forethought and forecasting:<\/p>\r\n\r\n<ul id=\"frank-ch14_s01_l04\" class=\"itemizedlist editable block\">\r\n \t<li>How much wealth can I expect to accumulate during my working lifetime?<\/li>\r\n \t<li>How much money will I need when I retire?<\/li>\r\n<\/ul>\r\n<div class=\"section\" id=\"frank-ch14_s01_s01\">\r\n<h2 class=\"title editable block\">The Financial Planning Life Cycle<\/h2>\r\n<p id=\"frank-ch14_s01_s01_p01\" class=\"nonindent para editable block\">Another question that you might ask yourself\u2014and certainly would do if you were a professional in financial planning\u2014is something like, \u201cHow will my financial plans change over the course of my life?\u201d <a class=\"xref\" href=\"#frank-ch14_s01_s01_f01\">Figure 12.3 \u201cFinancial Life Cycle\u201d<\/a> illustrates the financial life cycle of a typical individual\u2014one whose financial outlook and likely outcomes are probably a lot like yours.[footnote]Keown, A. J., Personal Finance: Turning Money into Wealth, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007), 8\u201311.[\/footnote] As you can see, our diagram divides this individual\u2019s life into three stages, each of which is characterized by different life events (such as beginning a family, buying a home, planning an estate, retiring). At each stage, too, there are recommended changes in the focus of the individual\u2019s financial planning:<\/p>\r\n\r\n<ul id=\"frank-ch14_s01_s01_l01\" class=\"itemizedlist editable block\">\r\n \t<li>In stage 1, the focus is on building wealth.<\/li>\r\n \t<li>In stage 2, the focus shifts to the process of preserving and increasing the wealth that one has accumulated and continues to accumulate.<\/li>\r\n \t<li>In stage 3, the focus turns to the process of living on (and, if possible, continuing to grow) one\u2019s saved wealth.<\/li>\r\n<\/ul>\r\n<h3><span class=\"title-prefix\">Figure 12.3<\/span> Financial Life Cycle<\/h3>\r\n<div class=\"caption\" style=\"text-align: center;font-size: .8em;max-width: 500px\">\r\n<div class=\"figure full large-height editable block\" id=\"frank-ch14_s01_s01_f01\">\r\n<p class=\"indent\"><a><img src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/e0fde0ae7a3ebc8b2f427ba3989a80b9.jpg\" alt=\"Financial Life Cycle\" style=\"max-width: 497px\" \/>\r\n<\/a><\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<p id=\"frank-ch14_s01_s01_p02\" class=\"indent para editable block no-indent\">At each stage, of course, complications can set in\u2014say, changes in such conditions as marital or employment status or in the overall economic outlook. Finally, as you can also see, your financial needs will probably peak somewhere in stage 2, at approximately age fifty-five, or ten years before typical retirement age.<\/p>\r\n\r\n<div class=\"section\" id=\"frank-ch14_s01_s01_s01\">\r\n<h2 class=\"title editable block\">Choosing a Career<\/h2>\r\n<p id=\"frank-ch14_s01_s01_s01_p01\" class=\"nonindent para editable block\">Until you\u2019re eighteen or so, you probably won\u2019t generate much income; for the most part, you\u2019ll be living off your parents\u2019 wealth. In our hypothetical life cycle, however, financial planning begins in the individual\u2019s early twenties. If that seems like rushing things, consider a basic fact of life: this is the age at which you\u2019ll be choosing your career\u2014not only the sort of work you want to do during your prime income-generating years, but also the kind of lifestyle you want to live in the process.[footnote]Keown, A. J., Personal Finance: Turning Money into Wealth, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007), 8\u201311.[\/footnote]<\/p>\r\n<p id=\"frank-ch14_s01_s01_s01_p02\" class=\"indent para editable block no-indent\">What about college? Most readers of this book, of course, have decided to go to college. If you haven\u2019t yet decided, you need to know that college is an extremely good investment of both money and time.<\/p>\r\n<p id=\"frank-ch14_s01_s01_s01_p03\" class=\"indent para editable block no-indent\"><a class=\"xref\" href=\"#frank-ch14_s01_s01_s01_t01\">Table 12.1 \u201cEducation and Average Income\u201d<\/a>, for example, summarizes the findings of a study conducted by the U.S. Census Bureau.[footnote]U.S. Census Bureau, \u201cOne-Third of Young Women Have Bachelor\u2019s Degrees\u201d (U.S. Department of Commerce, January 10, 2008), http:\/\/www.census.gov\/Press-Release\/www\/releases\/archives\/education\/011196.html (accessed September 18, 2008).[\/footnote] A quick review shows that people who graduate from high school can expect to increase their average annual earnings by about 49 percent over those of people who don\u2019t, and those who go on to finish college can expect to generate 82 percent more annual income than that. Over the course of the financial life cycle, families headed by those college graduates will earn about $1.6 million more than families headed by high school graduates who didn\u2019t attend college. (With better access to health care\u2014and, studies show, with better dietary and health practices\u2014college graduates will also live longer. And so will their children.)[footnote]U.S. Census Bureau, \u201cOne-Third of Young Women Have Bachelor\u2019s Degrees\u201d (U.S. Department of Commerce, January 10, 2008), http:\/\/www.census.gov\/Press-Release\/www\/releases\/archives\/education\/011196.html (accessed September 18, 2008).[\/footnote]<\/p>\r\n\r\n<div class=\"wp-nocaption\">\r\n<div class=\"table block caption\" id=\"frank-ch14_s01_s01_s01_t01\">\r\n<h3 class=\"nonindent title\"><span class=\"title-prefix\">Table 12.1<\/span> Education and Average Income<\/h3>\r\n<table style=\"border-spacing: 0px\" cellpadding=\"0\">\r\n<thead>\r\n<tr>\r\n<th>Education<\/th>\r\n<th>Average income<\/th>\r\n<th>Percentage increase over next-highest level<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>High school dropout<\/td>\r\n<td>$20,873<\/td>\r\n<td>\u2014<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>High school diploma<\/td>\r\n<td>$31,071<\/td>\r\n<td>48.9%<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>College degree<\/td>\r\n<td>$56,788<\/td>\r\n<td>82.8%<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Advanced higher-education degree<\/td>\r\n<td>$82,320<\/td>\r\n<td>45.0%<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n<p id=\"frank-ch14_s01_s01_s01_p04\" class=\"indent para editable block no-indent\">And what about the debt that so many people accumulate to finish college? For every $1 that you spend on your college education, you can expect to earn about $35 during the course of your financial life cycle.[footnote]Hansen, K., \u201cWhat Good Is a College Education Anyway?\u201d Quintessential Careers (2008), http:\/\/www.quintcareers.com\/college_education_value.html (accessed November 11, 2011).[\/footnote] At that rate of return, you should be able to pay off your student loans (unless, of course, you fail to practice reasonable financial planning).<\/p>\r\n<p id=\"frank-ch14_s01_s01_s01_p05\" class=\"indent para editable block no-indent\">Naturally, there are exceptions to these average outcomes. You\u2019ll find English-lit majors stocking shelves at 7-Eleven, and you\u2019ll find college dropouts running multibillion-dollar enterprises. Microsoft cofounder Bill Gates dropped out of college after two years, as did his founding partner, Paul Allen. Current Microsoft CEO Steve Ballmer finished his undergraduate degree but quit his MBA program to join Microsoft (where he apparently fit in among the other dropouts in top management). It\u2019s always good to remember, however, that though exceptions to rules (and average outcomes) occasionally modify the rules, they invariably fall far short of disproving them: in entrepreneurship as in most other walks of adult life, the better your education, the more promising your financial future. One expert in the field puts the case for the average person bluntly: educational credentials \u201care about being employable, becoming a legitimate candidate for a job with a future. They are about climbing out of the dead-end job market\u201d.[footnote]Ramsay, J. G., Perlman Center for Learning and Teaching, quoted by Katharine Hansen, \u201cWhat Good Is a College Education Anyway?\u201d Quintessential Careers (2008), http:\/\/www.quintcareers.com\/college_education_value.html (accessed November 11, 2011).[\/footnote]<\/p>\r\n<p id=\"frank-ch14_s01_s01_s01_p06\" class=\"indent para editable block no-indent\">Finally, does it make any difference <em class=\"emphasis\">what<\/em> you study in college? To a perhaps surprising extent, not necessarily. Some career areas, such as engineering, architecture, teaching, and law, require targeted degrees, but the area of study designated on your degree often doesn\u2019t matter much when you\u2019re applying for a job. If, for instance, a job ad says, \u201cBusiness, communications, or other degree required,\u201d most applicants and hires will have those \u201cother\u201d degrees. When poring over r\u00e9sum\u00e9s for a lot of jobs, potential employers look for the degree and simply note that a candidate has one; they often don\u2019t need to focus on the particulars.[footnote]Roth, J. D., \u201cThe Value of a College Education,\u201d Get Rich Slowly, January 10, 2008, http:\/\/www.getrichslowly.org\/blog\/2008\/01\/10\/the-value-of-a-college-education\/ (accessed November 11, 2011).[\/footnote]<\/p>\r\n<p id=\"frank-ch14_s01_s01_s01_p07\" class=\"indent para editable block no-indent\">This is not to say, however, that all degrees promise equal job prospects. <a class=\"xref\" href=\"#frank-ch14_s01_s01_s01_f01\">Figure 14.4 \u201cTop 25 Fastest-Growing Jobs, 2006\u20132016\u201d<\/a>, for example, summarizes a U.S. Bureau of Labor Statistics projection of the thirty fast-growing occupations for the years 2006\u20132016. Veterinary technicians and makeup artists will be in demand as never before, but as you can see, occupational prospects are fairly diverse.[footnote]http:\/\/data.bls.gov\/cgi-bin\/print.pl\/news.release\/ecopro.t06.htm (November 11, 2011).[\/footnote]<\/p>\r\n\r\n<h3><span class=\"title-prefix\">Figure 12.4<\/span> Top 25 Fastest-Growing Jobs, 2006\u20132016<\/h3>\r\n<div class=\"caption\" style=\"text-align: center;font-size: .8em;max-width: 500px\">\r\n<div class=\"figure full full-height editable block\" id=\"frank-ch14_s01_s01_s01_f01\">\r\n<p class=\"indent\"><a><img src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/2fa0a12f17526ba76c8a6367cb90b736.jpg\" alt=\"Top 25 Fastest-Growing Jobs, 2006-2016 (from lowest to highest): dental assistants, marriage and family therapists, mental health and substance abuse social workers, mental health counselors, dental hygienists, forensic science technicians, pharmacy technicians, physical therapist assistants, gaming surveillance officers and gaming investigators, social and human service assistants, financial analysts, skin care specialists, substance abuse and behavioral disorder counselors, veterinarians, medical assistants, makeup artists, theatrical and performance artists, personal financial advisors, veterinary technologists and technicians, computer software engineers, applications, home health aides, personal and home care aides, network systems and data communications analysts\" style=\"max-width: 497px\" \/>\r\n<\/a><\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<p id=\"frank-ch14_s01_s01_s01_p08\" class=\"indent para editable block no-indent\">Nor, of course, do all degrees pay off equally. In <a class=\"xref\" href=\"#frank-ch14_s01_s01_s01_t02\">Table 12.2 \u201cCollege Majors and Average Annual Earnings\u201d<\/a>, we\u2019ve extracted the findings of a study conducted by the National Science Foundation on the earnings of individuals with degrees in various undergraduate fields.[footnote]Penrice, D., \u201cMajor Moolah: Adding Up the Earnings Gaps in College Majors,\u201d N.U. Magazine, January 1999, http:\/\/www.northeastern.edu\/magazine\/9901\/labor.html (accessed November 11, 2011).[\/footnote][footnote]Harrington, P., and Andrew Sum, \u201cThe Post-College Earnings Experiences of Bachelor Degree Holders in the U.S.: Estimated Economic Returns to Major Fields of Study,\u201d in Learning and Work on Campus and on the Job: The Evolving Relationship between Higher Education and Employment, ed. S. Reder, B. A. Holland, and M. P. Latiolais (in preparation).[\/footnote] Clearly, some degrees\u2014notably in the engineering fields\u2014promise much higher average earnings than others. Chemical engineers, for instance, can earn nearly twice as much as elementary school teachers, but there\u2019s a catch: if you graduate with a degree in chemical engineering, your average annual salary will be about $67,000 <em class=\"emphasis\">if you can find a job related to that degree<\/em>; if you can\u2019t, you may have to settle for as much as 40 percent less.[footnote]Penrice, D., \u201cMajor Moolah: Adding Up the Earnings Gaps in College Majors,\u201d N.U. Magazine, January 1999, http:\/\/www.northeastern.edu\/magazine\/9901\/labor.html (accessed November 11, 2011).[\/footnote] (Supermodel Cindy Crawford cut short her studies in chemical engineering because there was more money to be made on the runway.)<\/p>\r\n\r\n<div class=\"wp-nocaption\">\r\n<div class=\"table block caption\" id=\"frank-ch14_s01_s01_s01_t02\">\r\n<h3 class=\"nonindent title\"><span class=\"title-prefix\">Table 12.2<\/span> College Majors and Average Annual Earnings<\/h3>\r\n<table style=\"border-spacing: 0px;width: 789px\" cellpadding=\"0\">\r\n<thead>\r\n<tr>\r\n<th style=\"width: 139.906px\">Major<\/th>\r\n<th style=\"width: 225.906px\">Average Earnings with Bachelor\u2019s Degree<\/th>\r\n<th style=\"width: 131.906px\">Major<\/th>\r\n<th style=\"width: 225.906px\">Average Earnings with Bachelor\u2019s Degree<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td style=\"width: 139.906px\">Chemical engineering<\/td>\r\n<td style=\"width: 225.906px\">$67,425<\/td>\r\n<td style=\"width: 131.906px\">History<\/td>\r\n<td style=\"width: 225.906px\">$45,926<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 139.906px\">Aerospace engineering<\/td>\r\n<td style=\"width: 225.906px\">$65,649<\/td>\r\n<td style=\"width: 131.906px\">Biology<\/td>\r\n<td style=\"width: 225.906px\">$45,532<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 139.906px\">Computer engineering<\/td>\r\n<td style=\"width: 225.906px\">$62,527<\/td>\r\n<td style=\"width: 131.906px\">Nursing<\/td>\r\n<td style=\"width: 225.906px\">$45,538<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 139.906px\">Physics<\/td>\r\n<td style=\"width: 225.906px\">$62,104<\/td>\r\n<td style=\"width: 131.906px\">Psychology<\/td>\r\n<td style=\"width: 225.906px\">$43,963<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 139.906px\">Electrical engineering<\/td>\r\n<td style=\"width: 225.906px\">$61,534<\/td>\r\n<td style=\"width: 131.906px\">English<\/td>\r\n<td style=\"width: 225.906px\">$43,614<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 139.906px\">Mechanical engineering<\/td>\r\n<td style=\"width: 225.906px\">$61,382<\/td>\r\n<td style=\"width: 131.906px\">Health technology<\/td>\r\n<td style=\"width: 225.906px\">$42,524<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 139.906px\">Industrial engineering<\/td>\r\n<td style=\"width: 225.906px\">$61,030<\/td>\r\n<td style=\"width: 131.906px\">Criminal justice<\/td>\r\n<td style=\"width: 225.906px\">$41,129<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 139.906px\">Civil engineering<\/td>\r\n<td style=\"width: 225.906px\">$58,993<\/td>\r\n<td style=\"width: 131.906px\">Physical education<\/td>\r\n<td style=\"width: 225.906px\">$40,207<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 139.906px\">Accounting<\/td>\r\n<td style=\"width: 225.906px\">$56,637<\/td>\r\n<td style=\"width: 131.906px\">Secondary education<\/td>\r\n<td style=\"width: 225.906px\">$39,976<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 139.906px\">Finance<\/td>\r\n<td style=\"width: 225.906px\">$55,104<\/td>\r\n<td style=\"width: 131.906px\">Fine arts<\/td>\r\n<td style=\"width: 225.906px\">$38,857<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 139.906px\">Computer science<\/td>\r\n<td style=\"width: 225.906px\">$52,615<\/td>\r\n<td style=\"width: 131.906px\">Philosophy<\/td>\r\n<td style=\"width: 225.906px\">$38,239<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 139.906px\">Business management<\/td>\r\n<td style=\"width: 225.906px\">$52,321<\/td>\r\n<td style=\"width: 131.906px\">Dramatic arts<\/td>\r\n<td style=\"width: 225.906px\">$37,091<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 139.906px\">Marketing<\/td>\r\n<td style=\"width: 225.906px\">$51,107<\/td>\r\n<td style=\"width: 131.906px\">Music<\/td>\r\n<td style=\"width: 225.906px\">$36,811<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 139.906px\">Journalism<\/td>\r\n<td style=\"width: 225.906px\">$46,835<\/td>\r\n<td style=\"width: 131.906px\">Elementary education<\/td>\r\n<td style=\"width: 225.906px\">$34,564<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 139.906px\">Information systems<\/td>\r\n<td style=\"width: 225.906px\">$46,519<\/td>\r\n<td style=\"width: 131.906px\">Special education<\/td>\r\n<td style=\"width: 225.906px\">$34,196<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n<p id=\"frank-ch14_s01_s01_s01_p09\" class=\"indent para editable block no-indent\">In short, when you\u2019re planning what to do with the rest of your life, it\u2019s a good idea to check into the fine points and realities, as well as the statistical data. If you talk to career counselors and people in the workforce, you might be surprised by what you learn about the relationship between certain college majors and various occupations. Onetime Hewlett-Packard CEO Carly Fiorina majored in medieval history and philosophy.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<div class=\"section\" id=\"frank-ch14_s01_s02\">\r\n<h2 class=\"title editable block\">Financing a College Education<\/h2>\r\n<p id=\"frank-ch14_s01_s02_p01\" class=\"nonindent para editable block\">Let\u2019s revisit one of the facts included in the earlier discussion: for every $1 that you spend on your college education, you can expect to earn about $35 during the course of your financial life cycle. And let\u2019s say you\u2019re convinced (as you should be) that getting a college degree is a wise financial choice. You still have to deal with the cost of getting your degree. We\u2019re sure this won\u2019t come as a surprise: attending college is expensive\u2014tuition and fees have gone up sharply, the cost of books has skyrocketed, and living expenses have climbed. Many students can attend college only if they receive some type of financial aid. Though the best way to learn what aid is available to you is to talk with a representative in the financial aid office at your school, this section provides an overview of the types of aid offered to students. Students finance their education through scholarships, grants, education loans, and work-study programs.[footnote]Witmer, D., \u201cThe Basics of Financial Aid for College,\u201d About.com, http:\/\/parentingteens.about.com\/od\/collegeinfo\/a\/financial_aid.htm (accessed November 11, 2011).[\/footnote] We\u2019ll explore each of these categories of aid:<\/p>\r\n\r\n<ul id=\"frank-ch14_s01_s02_l01\" class=\"itemizedlist editable block\">\r\n \t<li><em class=\"emphasis\">Scholarships<\/em>, which don\u2019t have to be repaid, are awarded based on a number of criteria, including academic achievement, athletic or artistic talent, special interest in a particular field of study, ethnic background, or religious affiliation. Scholarships are generally funded by private donors such as alums, religious institutions, companies, civic organizations, professional associations, and foundations.<\/li>\r\n \t<li><em class=\"emphasis\">Grants<\/em>, which also don\u2019t have to be repaid, are awarded based on financial need. They\u2019re funded by the federal government, the states, and academic institutions. An example of a common federal grant is the Pell Grant, which is awarded to undergraduate students based on financial need. The maximum Pell Grant award for the 2011\u201312 award year (July 1, 2011, to June 30, 2012) is $5,550.[footnote]Federal Student Aid, \u201cFederal Pell Grant,\u201d http:\/\/studentaid.ed.gov\/PORTALSWebApp\/students\/english\/PellGrants.jsp?tab=funding (accessed November 11, 2011).[\/footnote]<\/li>\r\n \t<li><em class=\"emphasis\">Education loans<\/em>, which must be repaid, are available to students from various sources, including the federal government, states, and academic institutions. While recent problems in the credit markets have made college loans more difficult to obtain, most students are able to get the loans they need.[footnote]Snyder, S., \u201cCollege lending tight but available,\u201d The Philadelphia Inquirer, August 18, 2008, http:\/\/www.philly.com\/inquirer\/education\/20080818_College_lending_tight_but_available.html (accessed November 11, 2011).[\/footnote] The loans offered directly to undergraduate students by the federal government include the need-based, subsidized Federal Stafford, the non\u2013need-based unsubsidized Federal Stafford, and the need-based Federal Perkins loans. With the exception of the unsubsidized Federal Stafford, no interest accrues while the student is enrolled in college at least part time. There are also a number of loans available to parents of students, such as the Federal Parent PLUS program. Under this program, parents can borrow federally guaranteed low-interest loans to fund their child\u2019s education.<\/li>\r\n \t<li>Work-study is a federally sponsored program that provides students with paid, part-time jobs on campus. Because the student is paid based on work done, the funds received don\u2019t have to be repaid.<\/li>\r\n<\/ul>\r\n<\/div>\r\n<div class=\"section\" id=\"frank-ch14_s01_s03\">\r\n<h2 class=\"title editable block\">Find a Great Job<\/h2>\r\n<p id=\"frank-ch14_s01_s03_p01\" class=\"nonindent para editable block\">As was highlighted earlier, your financial life cycle begins at the point when you choose a career. Building your career takes considerable planning. It begins with the selection of a major in college and continues through graduation as you enter the workforce full time. You can expect to hold a number of jobs over your working life. If things go as they should, each job will provide valuable opportunities and help you advance your career. A big challenge is getting a job offer in your field of interest, evaluating the offer, and (if you have several options) selecting the job that\u2019s right for you.[footnote]This section is based in part on sections 13 and 14 of the Playbook for Life by The Hartford. The Playbook can be found on line at http:\/\/www.playbook.thehartford.com (accessed November 11, 2011).[\/footnote]<\/p>\r\n\r\n<div class=\"section\" id=\"frank-ch14_s01_s03_s01\">\r\n<h2 class=\"title editable block\">Getting a Job Offer<\/h2>\r\n<p id=\"frank-ch14_s01_s03_s01_p01\" class=\"nonindent para editable block\">Most likely your college has a career center. The people working there can be a tremendous help to you as you begin your job search. But most of the work has to be done by you. Like other worthwhile projects, your job search project will be very time-consuming. As you get close to graduation, you\u2019ll need to block out time to work on this particularly important task.<\/p>\r\n<p id=\"frank-ch14_s01_s03_s01_p02\" class=\"indent para editable block no-indent\">The first step is to prepare a r\u00e9sum\u00e9, a document that provides a summary of educational achievements and relevant job experience. Its purpose is to get you an interview. A potential employer will likely spend less than a minute reviewing your r\u00e9sum\u00e9, so its content should be concise, clear, and applicable to the job for which you\u2019re applying. For some positions, the person in charge of hiring might read more than a hundred r\u00e9sum\u00e9s. If you don\u2019t want your r\u00e9sum\u00e9 kicked out right away, be sure it contains no typographical or grammatical errors. Once you\u2019ve completed your r\u00e9sum\u00e9, you can use it to create different versions tailored to specific companies you\u2019d like to work for. Your next step is to write a cover letter, a document accompanying your r\u00e9sum\u00e9 that explains why you\u2019re sending your r\u00e9sum\u00e9 and highlights your qualifications. You can find numerous tips on writing r\u00e9sum\u00e9s and cover letters (as well as samples of both) online. Be sure your r\u00e9sum\u00e9 is accurate: never lie or exaggerate in a r\u00e9sum\u00e9. You could get caught and not get the job (or\u2014even worse\u2014you could get the job, get caught, and then get fired). It\u2019s fairly common practice for companies to conduct background checks of possible employees, and these checks will point out any errors. In effect, says one expert, \u201cyou jeopardize your future when you lie about your past\u201d.[footnote]Isaacs, K., \u201cLying on Your Resume: What Are the Career Consequences?,\u201d Monster.com, http:\/\/insidetech.monster.com\/careers\/articles\/3574-lying-on-your-resume-what-are-the-career-consequences (accessed November 11, 2011).[\/footnote]<\/p>\r\n<p id=\"frank-ch14_s01_s03_s01_p03\" class=\"indent para editable block no-indent\">After writing your r\u00e9sum\u00e9 and cover letter, your next task is to create a list of companies you\u2019d like to work for. Use a variety of sources, including your career services office and company Web sites, to decide which companies to put on your list. Visit the \u201ccareer or employment\u201d section of the company Web sites and search for specific openings.<\/p>\r\n<p id=\"frank-ch14_s01_s03_s01_p04\" class=\"indent para editable block no-indent\">You could also conduct a general search for positions that might be of interest to you, by doing the following:<\/p>\r\n\r\n<ul id=\"frank-ch14_s01_s03_s01_l01\" class=\"itemizedlist editable block\">\r\n \t<li>Visiting career Web sites, such as <a class=\"link\" href=\"http:\/\/www.monster.com\">Monster.com<\/a>, <a class=\"link\" href=\"http:\/\/www.wetfeet.com\">Wetfeet.com<\/a>, or <a class=\"link\" href=\"http:\/\/www.careerbuilder.com\">Careerbuilder.com<\/a> (which maintain large databases of openings for all geographical areas)<\/li>\r\n \t<li>Searching classified ads in online and print newspapers<\/li>\r\n \t<li>Attending career fairs at your college and in your community<\/li>\r\n \t<li>Signing up with career services to talk with recruiters when they visit your campus<\/li>\r\n \t<li>Contacting your friends, family, and college alumni and letting them know you\u2019re looking for a job and asking for their help<\/li>\r\n<\/ul>\r\n<p id=\"frank-ch14_s01_s03_s01_p05\" class=\"indent para editable block no-indent\">Once you spot a position you want, send your r\u00e9sum\u00e9 and cover letter (tailored to the specific company and job). Follow up in a few days to be sure your materials got to the right place, and offer to provide any additional information. Keep notes on all contacts.<\/p>\r\n\r\n<h3>Figure 12.5 Preparing for an Interview<\/h3>\r\n<div class=\"caption\" style=\"text-align: center;font-size: .8em;max-width: 500px\" id=\"frank-ch14_s01_s03_s01_f01\">\r\n<p class=\"indent\"><a><img src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/14.1.0.jpg\" alt=\"A man trying looking in a mirror while trying on a suit before his interview\" class=\"aligncenter size-full wp-image-1475\" width=\"500\" \/><\/a><\/p>\r\n\r\n<\/div>\r\nPreparing well for an interview can make it easier to relax and help the interviewer get to know you.[footnote]Yaniv Yaakubovich \u2013 <a href=\"https:\/\/www.flickr.com\/photos\/armydre2008\/16286816560\">Trying my suite before the interview<\/a> \u2013 CC BY-ND 2.0[\/footnote]\r\n<p id=\"frank-ch14_s01_s03_s01_p06\" class=\"indent para editable block no-indent\">When you\u2019re invited for an interview, visit to the company\u2019s Web site and learn as much as you can about the company. Practice answering questions you might be asked during the interview, and think up a few pertinent questions to ask your interviewer. Dress conservatively\u2014males should wear a suit and tie and females should wear professional-looking clothes. Try to relax during the interview (though everyone knows this isn\u2019t always easy). Your goal is to get an offer, so let the interviewer learn who you are and how you can be an asset to the company. Send a thank-you note (or thank-you e-mail) to the interviewer after the interview.<\/p>\r\n\r\n<\/div>\r\n<div class=\"section\" id=\"frank-ch14_s01_s03_s02\">\r\n<h2 class=\"title editable block\">Evaluating Job Offers<\/h2>\r\n<p id=\"frank-ch14_s01_s03_s02_p01\" class=\"nonindent para editable block\">Let\u2019s be optimistic and say that you did quite well in your interviews, and you have two job offers. It\u2019s a great problem to have, but now you have to decide which one to accept. Salary is important, but it\u2019s clearly not the only factor. You should consider the opportunities the position offers: will you learn new things on the job, how much training will you get, could you move up in the organization (and if so, how quickly)? Also consider quality of life issues: how many hours a week will you have to work, is your schedule predictable (or will you be asked to work on a Friday night or Saturday at the last minute), how flexible is your schedule, how much time do you get off, how stressful will the job be, do you like the person who will be your manager, do you like your coworkers, how secure is the job, how much travel is involved, where\u2019s the company located, and what\u2019s the cost of living in that area? Finally, consider the financial benefits you\u2019ll receive. These could include health insurance, disability insurance, flexible spending accounts, and retirement plans. Let\u2019s talk more about the financial benefits, beginning with health insurance.<\/p>\r\n\r\n<ul id=\"frank-ch14_s01_s03_s02_l01\" class=\"itemizedlist editable block\">\r\n \t<li>Employer-sponsored health insurance plans vary greatly. Some cover the employee only, while others cover the employee, spouse, and children. Some include dental and eye coverage while others don\u2019t. Most plans require employees to share some of the cost of the medical plan (by paying a portion of the insurance premiums and a portion of the cost of medical care). But the amount that employees are responsible for varies greatly. Given the rising cost of health insurance, it\u2019s important to understand the specific costs associated with a health care plan and to take these costs into account when comparing job offers. More important, it\u2019s vital that you have medical insurance. Young people are often tempted to go without medical insurance, but this is a major mistake. An uncovered, costly medical emergency (say you\u2019re rushed to the hospital with appendicitis) can be a financial disaster. You could end up paying for your hospital and doctor care for years.<\/li>\r\n \t<li>Disability insurance isn\u2019t as well known as medical insurance, but it can be as important (if not more so). Disability insurance pays an income to an insured person when he or she is unable to work for an extended period. You would hope that you\u2019d never need disability insurance, but if you did it would be of tremendous value.<\/li>\r\n \t<li>A flexible spending account allows a specified amount of pretax dollars to be used to pay for qualified expenses, including health care and child care. By paying for these costs with pretax dollars, employees are able to reduce their tax bill.<\/li>\r\n \t<li>There are two main types of <em class=\"emphasis\">retirement plans<\/em>. One, called a defined benefit retirement plan, provides a set amount of money each month to retirees based on the number of years they worked and the income they earned. This form of retirement plan was once very popular, but it\u2019s less common today. The other, called a defined contribution retirement plan, is a form of savings plan. The employee contributes money each pay period to his or her retirement account, and the employer matches a portion of the contribution. Even when retirement is exceedingly far into the future, it\u2019s financially wise to set aside funds for retirement.<\/li>\r\n<\/ul>\r\n<div class=\"bcc-box bcc-success\" id=\"frank-ch14_s01_s03_s02_n01\">\r\n<h3 class=\"title\">Key Takeaways<\/h3>\r\n<ul id=\"frank-ch14_s01_s03_s02_l02\" class=\"itemizedlist\">\r\n \t<li><em class=\"emphasis\">Finance<\/em> concerns the flow of money from one place to another; your <em class=\"emphasis\">personal finances<\/em> concern your money and what you plan to do with it as it flows in and out of your possession. <strong class=\"emphasis bold\">Personal finance<\/strong> is thus the application of financial principles to the monetary decisions that you make, either for your individual benefit or for that of your family.<\/li>\r\n \t<li><strong class=\"emphasis bold\">Financial planning<\/strong> is the ongoing process of managing your personal finances to meet goals that you\u2019ve set for yourself or your family.<\/li>\r\n \t<li>\r\n<p class=\"nonindent para\">The <em class=\"emphasis\">financial life cycle<\/em> divides an individual\u2019s life into three stages, each of which is characterized by different life events. Each stage also entails recommended changes in the focus of the individual\u2019s financial planning:<\/p>\r\n\r\n<ol id=\"frank-ch14_s01_s03_s02_l03\" class=\"orderedlist\">\r\n \t<li>In stage 1, the focus is on <em class=\"emphasis\">building<\/em> wealth.<\/li>\r\n \t<li>In stage 2, the focus shifts to the process of <em class=\"emphasis\">preserving and increasing<\/em> the wealth that one has accumulated and continues to accumulate.<\/li>\r\n \t<li>In stage 3, the focus turns to the process of <em class=\"emphasis\">living on<\/em> (and, if possible, continuing to grow) one\u2019s saved wealth.<\/li>\r\n<\/ol>\r\n<\/li>\r\n \t<li>According to the model of the financial life cycle, financial planning begins in the individual\u2019s early twenties, the age at which most people choose a <em class=\"emphasis\">career<\/em>\u2014both the sort of <em class=\"emphasis\">work<\/em> they want to do during their income-generating years and the kind of <em class=\"emphasis\">lifestyle<\/em> they want to live in the process.<\/li>\r\n \t<li>College is a good investment of both money and time. People who graduate from high school can expect to improve their average annual earnings by about 49 percent over those of people who don\u2019t, and those who go on to finish college can expect to generate 82 percent more annual income than that. The area of study designated on your degree often doesn\u2019t matter when you\u2019re applying for a job: when poring over r\u00e9sum\u00e9s, employers often look for the degree and simply note that a candidate has one.<\/li>\r\n \t<li>The first step in your job search is to prepare a <strong class=\"emphasis bold\">r\u00e9sum\u00e9<\/strong>, a document that provides a summary of educational achievements and relevant job experience. Your r\u00e9sum\u00e9 should be concise, clear, applicable to the job for which you are applying, and free of errors and inaccuracies.<\/li>\r\n \t<li>A <strong class=\"emphasis bold\">cover letter<\/strong> is a document that accompanies your r\u00e9sum\u00e9 and explains why you\u2019re sending your r\u00e9sum\u00e9 and highlights your qualifications.<\/li>\r\n \t<li>\r\n<p class=\"nonindent para\">To conduct a general search for positions that might be of interest to you, you could:<\/p>\r\n\r\n<ol id=\"frank-ch14_s01_s03_s02_l04\" class=\"orderedlist\">\r\n \t<li>Visit career Web sites, such as Monster.com, Wetfeet.com, or Careerbuilder.com.<\/li>\r\n \t<li>Search classified ads in online and print newspapers.<\/li>\r\n \t<li>Attend career fairs at your college and in your community.<\/li>\r\n \t<li>Talk with recruiters when they visit your campus.<\/li>\r\n \t<li>Contact people you know, tell them you\u2019re looking for a job, and ask for their help.<\/li>\r\n<\/ol>\r\n<\/li>\r\n \t<li>When you\u2019re invited for an interview, you should research the company, practice answering questions you might be asked in the interview, and think up pertinent questions to ask the interviewer.<\/li>\r\n \t<li>\r\n<p class=\"nonindent para\">When comparing job offers, consider more than salary. Also of importance are quality of life issues and benefits. Common financial benefits include health insurance, disability insurance, flexible spending accounts, and retirement plans.<\/p>\r\n\r\n<ol id=\"frank-ch14_s01_s03_s02_l05\" class=\"orderedlist\">\r\n \t<li><em class=\"emphasis\">Employer-sponsored health insurance<\/em> plans vary greatly in coverage and cost to the employee.<\/li>\r\n \t<li>Disability insurance pays an income to an insured person when he or she is unable to work for an extended period of time.<\/li>\r\n \t<li>A <em class=\"emphasis\">flexible spending account<\/em> allows a specified amount of pretax dollars to be used to pay for qualified expenses, including health care and child care. By paying for these costs with pretax dollars, employees are able to reduce their tax bill.<\/li>\r\n<\/ol>\r\n<\/li>\r\n \t<li>There are two main types of <em class=\"emphasis\">retirement plans<\/em>: a defined benefit plan, which provides a set amount of money each month to retirees based on the number of years they worked and the income they earned, and a defined contribution plan, which is a form of savings plan into which both the employee and employer contribute. A well-known defined contribution plan is a 401(k).<\/li>\r\n<\/ul>\r\n<\/div>\r\n<div class=\"bcc-box bcc-info\" id=\"frank-ch14_s01_s03_s02_n02\">\r\n<h3 class=\"title\">Exercise<\/h3>\r\n<p class=\"nonindent simpara\">(AACSB) Analysis<\/p>\r\n<p id=\"frank-ch14_s01_s03_s02_p02\" class=\"indent para\">Think of the type of job you\u2019d like to have. Describe the job and indicate how you\u2019d go about getting a job offer for this type of job. How would you evaluate competing offers from two companies? What criteria would you use in selecting the right job for you?<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<div class=\"chapter standard\" id=\"slug-14-2-time-is-money\">\r\n<div class=\"chapter-title-wrap\">\r\n<h1 class=\"chapter-title\" style=\"text-align: center\">Time Is Money<\/h1>\r\n<\/div>\r\n<div class=\"ugc chapter-ugc\">\r\n<div class=\"bcc-box bcc-highlight\" id=\"frank-ch14_s02_n01\">\r\n<h3 class=\"title\">Learning Objectives<\/h3>\r\n<ol id=\"frank-ch14_s02_l01\" class=\"orderedlist\">\r\n \t<li>Explain <em class=\"emphasis\">compound interest<\/em> and <em class=\"emphasis\">the time value of money<\/em>.<\/li>\r\n \t<li>Discuss the value of getting an early start on your plans for saving.<\/li>\r\n<\/ol>\r\n<\/div>\r\n<p id=\"frank-ch14_s02_p01\" class=\"nonindent para editable block\">The fact that you have to choose a career at an early stage in your financial life cycle isn\u2019t the only reason that you need to start early on your financial planning. Let\u2019s assume, for instance, that it\u2019s your eighteenth birthday and that on this day you take possession of $10,000 that your grandparents put in trust for you. You could, of course, spend it; in particular, it would probably cover the cost of flight training for a private pilot\u2019s license\u2014something you\u2019ve always wanted but were convinced that you couldn\u2019t afford for another ten or fifteen years. Your grandfather, of course, suggests that you put it into some kind of savings account. If you just wait until you finish college, he says, and if you can find a savings plan that pays 5 percent interest, you\u2019ll have the $10,000 plus another $2,209 to buy a pretty good used car.<\/p>\r\n<p id=\"frank-ch14_s02_p02\" class=\"indent para editable block no-indent\">The total amount you\u2019ll have\u2014 $12,209\u2014piques your interest. If that $10,000 could turn itself into $12,209 after sitting around for four years, what would it be worth if you actually held on to it until you did retire\u2014say, at age sixty-five? A quick trip to the Internet to find a compound-interest calculator informs you that, forty-seven years later, your $10,000 will have grown to $104,345 (assuming a 5 percent interest rate). That\u2019s not really enough to retire on, but after all, you\u2019d at least have some cash, even if you hadn\u2019t saved another dime for nearly half a century. On the other hand, what if that four years in college had paid off the way you planned, so that (once you get a good job) you\u2019re able to add, say, another $10,000 to your retirement savings account every year until age sixty-five? At that rate, you\u2019ll have amassed a nice little nest egg of slightly more than $1.6 million.<\/p>\r\n\r\n<div class=\"section\" id=\"frank-ch14_s02_s01\">\r\n<h2 class=\"title editable block\">Compound Interest<\/h2>\r\n<p id=\"frank-ch14_s02_s01_p01\" class=\"nonindent para editable block\">In your efforts to appreciate the potential of your $10,000 to multiply itself, you have acquainted yourself with two of the most important concepts in finance. As we\u2019ve already indicated, one is the principle of compound interest, which refers to the effect of earning interest on your interest.<\/p>\r\n<p id=\"frank-ch14_s02_s01_p02\" class=\"indent para editable block no-indent\">Let\u2019s say, for example, that you take your grandfather\u2019s advice and invest your $10,000 (your <em class=\"emphasis\">principal<\/em>) in a savings account at an annual interest rate of 5 percent. Over the course of the first year, your investment will earn $512 in interest and grow to $10,512. If you now reinvest the entire $10,512 at the same 5 percent annual rate, you\u2019ll earn another $537 in interest, giving you a total investment at the end of year 2 of $11,049. And so forth. And that\u2019s how you can end up with $104,345 at age sixty-five.<\/p>\r\n\r\n<\/div>\r\n<div class=\"section\" id=\"frank-ch14_s02_s02\">\r\n<h2 class=\"title editable block\">Time Value of Money<\/h2>\r\n<p id=\"frank-ch14_s02_s02_p01\" class=\"nonindent para editable block\">You\u2019ve also encountered the principle of the time value of money\u2014the principle whereby a dollar received in the present is worth more than a dollar received in the future. If there\u2019s one thing that we\u2019ve stressed throughout this chapter so far, it\u2019s the fact that, for better or for worse, most people prefer to consume now rather than in the future. This is true for both borrowers and lenders. If you borrow money from me, it\u2019s because you can\u2019t otherwise buy something that you want at the present time. If I lend it to you, it\u2019s because I\u2019m willing to postpone the opportunity to purchase something I want at the present time\u2014perhaps a risk-free, ten-year U.S. Treasury bond with a present yield rate of 3 percent.<\/p>\r\n<p id=\"frank-ch14_s02_s02_p02\" class=\"indent para editable block no-indent\">I\u2019m willing to forego my opportunity, however, only if I can get some compensation for its loss, and that\u2019s why I\u2019m going to charge you interest. And you\u2019re going to pay the interest because you need the money to buy what you want to buy. How much interest should we agree on? In theory, it could be just enough to cover the cost of my lost opportunity, but there are, of course, other factors. Inflation, for example, will have eroded the value of my money by the time I get it back from you. In addition, while I would be taking no risk in loaning money to the U.S. government (as I would be doing if I bought that Treasury bond), I am taking a risk in loaning it to you. Our agreed-on rate will reflect such factors.[footnote]Gallager, T. J., and Joseph D. Andrews Jr., Financial Management: Principles and Practice, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2003), 34, 196.[\/footnote]<\/p>\r\n<p id=\"frank-ch14_s02_s02_p03\" class=\"indent para editable block no-indent\">Finally, the time value of money principle also states that a dollar received today starts earning interest sooner than one received tomorrow. Let\u2019s say, for example, that you receive $2,000 in cash gifts when you graduate from college. At age twenty-three, with your college degree in hand, you get a decent job and don\u2019t have an immediate need for that $2,000. So you put it into an account that pays 10 percent compounded <em class=\"emphasis\">and<\/em> you add another $2,000 ($167 per month) to your account every year for the next eleven years<sup>1<\/sup>. The left panel of <a class=\"xref\" href=\"#frank-ch14_s02_s02_t01\">Table 12.3 \u201cWhy to Start Saving Early (I)\u201d<\/a> shows how much your account will earn each year and how much money you\u2019ll have at certain ages between twenty-three and sixty-seven. As you can see, you\u2019d have nearly $52,000 at age thirty-six and a little more than $196,000 at age fifty; at age sixty-seven, you\u2019d be just a bit short of $1 million. The right panel of the same table shows what you\u2019d have if you hadn\u2019t started saving $2,000 a year until you were age thirty-six. As you can also see, you\u2019d have a respectable sum at age sixty-seven\u2014but less than half of what you would have accumulated by starting at age twenty-three. More important, even to accumulate that much, <em class=\"emphasis\">you\u2019d have to add $2,000 per year for a total of thirty-two years, not just twelve<\/em>.<\/p>\r\n\r\n<div class=\"wp-nocaption\">\r\n<div class=\"table block caption\" id=\"frank-ch14_s02_s02_t01\">\r\n<h3 class=\"nonindent title\"><span class=\"title-prefix\">Table 12.3<\/span> Why to Start Saving Early (I)[footnote]<em class=\"emphasis\">Source<\/em>: Data from Consumer Credit Counseling Service of Maryland and Delaware Inc., \u201cPower of Saving Early\u201d (2008), <a class=\"link\" href=\"http:\/\/www.cccs-inc.org\/tools\/tools_saving_early.php\">http:\/\/www.cccs-inc.org\/tools\/tools_saving_early.php<\/a> (accessed November 15, 2008).[\/footnote]<\/h3>\r\n<table style=\"border-spacing: 0px\" cellpadding=\"0\">\r\n<thead>\r\n<tr>\r\n<th><\/th>\r\n<th colspan=\"3\">Savings accumulated from age 23, with deposits of $2,000 annually until age 67<\/th>\r\n<th colspan=\"3\">Savings accumulated from age 36, with deposits of $2,000 annually until age 67<\/th>\r\n<\/tr>\r\n<tr>\r\n<th>Age<\/th>\r\n<th>Annual deposit<\/th>\r\n<th>Annual interest earned<\/th>\r\n<th>Total saved at the end of the year<\/th>\r\n<th>Annual deposit<\/th>\r\n<th>Annual interest earned<\/th>\r\n<th>Total saved at the end of the year<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>23<\/td>\r\n<td>$0.00<\/td>\r\n<td>$0.00<\/td>\r\n<td>$0.00<\/td>\r\n<td>$0.00<\/td>\r\n<td>$0.00<\/td>\r\n<td>$0.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>24<\/td>\r\n<td>$2,000<\/td>\r\n<td>$200.00<\/td>\r\n<td>$2,200<\/td>\r\n<td>$0.00<\/td>\r\n<td>$0.00<\/td>\r\n<td>$0.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>25<\/td>\r\n<td>$2,000<\/td>\r\n<td>$420.00<\/td>\r\n<td>$4,620<\/td>\r\n<td>$0.00<\/td>\r\n<td>$0.00<\/td>\r\n<td>$0.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>30<\/td>\r\n<td>$2,000<\/td>\r\n<td>$1,897.43<\/td>\r\n<td>$20,871.78<\/td>\r\n<td>$0.00<\/td>\r\n<td>$0.00<\/td>\r\n<td>$0.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>35<\/td>\r\n<td>$2,000<\/td>\r\n<td>$4,276.86<\/td>\r\n<td>$47,045.42<\/td>\r\n<td>$0.00<\/td>\r\n<td>$0.00<\/td>\r\n<td>$0.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>36<\/td>\r\n<td>$0.00<\/td>\r\n<td>$4,704.54<\/td>\r\n<td>$51,749.97<\/td>\r\n<td>$2,000<\/td>\r\n<td>$200.00<\/td>\r\n<td>$2,200.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>40<\/td>\r\n<td>$0.00<\/td>\r\n<td>$6,887.92<\/td>\r\n<td>$75,767.13<\/td>\r\n<td>$2,000<\/td>\r\n<td>$1,221.02<\/td>\r\n<td>$13,431.22<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>45<\/td>\r\n<td>$0.00<\/td>\r\n<td>$11,093.06<\/td>\r\n<td>$122,023.71<\/td>\r\n<td>$2,000<\/td>\r\n<td>$3,187.48<\/td>\r\n<td>$35,062.33<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>50<\/td>\r\n<td>$0.00<\/td>\r\n<td>$17,865.49<\/td>\r\n<td>$196,520.41<\/td>\r\n<td>$2,000<\/td>\r\n<td>$6,354.50<\/td>\r\n<td>$69,899.46<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>55<\/td>\r\n<td>$0.00<\/td>\r\n<td>$28,772.55<\/td>\r\n<td>$316,498.09<\/td>\r\n<td>$2,000<\/td>\r\n<td>$11,455.00<\/td>\r\n<td>$126,005.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>60<\/td>\r\n<td>$0.00<\/td>\r\n<td>$46,338.49<\/td>\r\n<td>$509,723.34<\/td>\r\n<td>$2,000<\/td>\r\n<td>$19,669.41<\/td>\r\n<td>$216,363.53<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>65<\/td>\r\n<td>$0.00<\/td>\r\n<td>$74,628.59<\/td>\r\n<td>$820,914.53<\/td>\r\n<td>$2,000<\/td>\r\n<td>$32,898.80<\/td>\r\n<td>$361,886.65<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>67<\/td>\r\n<td>$0.00<\/td>\r\n<td>$90,300.60<\/td>\r\n<td>$993,306.53<\/td>\r\n<td>$2,000<\/td>\r\n<td>$40,277.55<\/td>\r\n<td>$442,503.09<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n<p id=\"frank-ch14_s02_s02_p04\" class=\"indent para editable block no-indent\">Here\u2019s another way of looking at the same principle. Suppose that you\u2019re twenty years old, don\u2019t have $2,000, and don\u2019t want to attend college full-time. You are, however, a hard worker and a conscientious saver, and one of your (very general) financial goals is to accumulate a $1 million retirement nest egg. As a matter of fact, if you can put $33 a month into an account that pays 12 percent interest compounded[footnote]This 12 percent interest rate is not realistic for today\u2019s economic environment. It\u2019s used for illustrative purposes only.[\/footnote], you can have your $1 million by age sixty-seven. That is, <em class=\"emphasis\">if you start at age twenty<\/em>. As you can see from <a class=\"xref\" href=\"#frank-ch14_s02_s02_t02\">Table 12.4 \u201cWhy to Start Saving Early (II)\u201d<\/a>, if you wait until you\u2019re twenty-one to start saving, you\u2019ll need $37 a month. If you wait until you\u2019re thirty, you\u2019ll have to save $109 a month, and if you procrastinate until you\u2019re forty, the ante goes up to $366 a month.[footnote]Keown, A. J., Personal Finance: Turning Money into Wealth, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007), 23.[\/footnote]<\/p>\r\n\r\n<div class=\"wp-nocaption\">\r\n<div class=\"table block caption\" id=\"frank-ch14_s02_s02_t02\">\r\n<h3 class=\"nonindent title\"><span class=\"title-prefix\">Table 12.4<\/span> Why to Start Saving Early (II)[footnote]<em class=\"emphasis\">Source<\/em>: Arthur J. Keown, <em class=\"emphasis\">Personal Finance: Turning Money into Wealth<\/em>, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007), 23.[\/footnote]<\/h3>\r\n<table style=\"border-spacing: 0px\" cellpadding=\"0\">\r\n<thead>\r\n<tr>\r\n<th>First Payment When You Turn<\/th>\r\n<th>Required Monthly Payment<\/th>\r\n<th>First Payment When You Turn<\/th>\r\n<th>Required Monthly Payment<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20<\/td>\r\n<td>$33<\/td>\r\n<td>30<\/td>\r\n<td>$109<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>21<\/td>\r\n<td>$37<\/td>\r\n<td>31<\/td>\r\n<td>$123<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>22<\/td>\r\n<td>$42<\/td>\r\n<td>32<\/td>\r\n<td>$138<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>23<\/td>\r\n<td>$47<\/td>\r\n<td>33<\/td>\r\n<td>$156<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>24<\/td>\r\n<td>$53<\/td>\r\n<td>34<\/td>\r\n<td>$176<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>25<\/td>\r\n<td>$60<\/td>\r\n<td>35<\/td>\r\n<td>$199<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>26<\/td>\r\n<td>$67<\/td>\r\n<td>40<\/td>\r\n<td>$366<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>27<\/td>\r\n<td>$76<\/td>\r\n<td>50<\/td>\r\n<td>$1,319<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>28<\/td>\r\n<td>$85<\/td>\r\n<td>60<\/td>\r\n<td>$6,253<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>29<\/td>\r\n<td>$96<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n<p id=\"frank-ch14_s02_s02_p05\" class=\"indent para editable block no-indent\">The moral here should be fairly obvious: a dollar saved today not only starts earning interest sooner than one saved tomorrow (or ten years from now) but also can ultimately earn a lot more money in the long run. Starting early means in your twenties\u2014early in stage 1 of your financial life cycle. As one well-known financial advisor puts it, \u201cIf you\u2019re in your 20s and you haven\u2019t yet learned how to delay gratification, your life is likely to be a constant financial struggle\u201d.[footnote]Clements, J., quoted in \u201cAn Interview with Jonathan Clements\u2014Part 2,\u201d All Financial Matters, February 10, 2006, http:\/\/allfinancialmatters.com\/2006\/02\/10\/an-interview-with-jonathan-clements-part-2\/ (accessed November 11, 2011).[\/footnote]<\/p>\r\n\r\n<div class=\"bcc-box bcc-success\" id=\"frank-ch14_s02_s02_n01\">\r\n<h3 class=\"title\">Key Takeaways<\/h3>\r\n<ul id=\"frank-ch14_s02_s02_l01\" class=\"itemizedlist\">\r\n \t<li>The principle of <strong class=\"emphasis bold\">compound interest<\/strong> refers to the effect of earning interest on your interest.<\/li>\r\n \t<li>The principle of the <strong class=\"emphasis bold\">time value of money<\/strong> is the principle whereby a dollar received in the present is worth more than a dollar received in the future.<\/li>\r\n \t<li>The principle of the time value of money also states that a dollar received today starts earning interest sooner than one received tomorrow.<\/li>\r\n \t<li>Together, these two principles give a significant financial advantage to individuals who begin saving early during the financial-planning life cycle.<\/li>\r\n<\/ul>\r\n<\/div>\r\n<div class=\"bcc-box bcc-info\" id=\"frank-ch14_s02_s02_n02\">\r\n<h3 class=\"title\">Exercise<\/h3>\r\n<p class=\"nonindent simpara\">(AACSB) Analysis<\/p>\r\n<p id=\"frank-ch14_s02_s02_p06\" class=\"indent para\">Everyone wants to be a millionaire (except those who are already billionaires). To find out how old you\u2019ll be when you become a millionaire, go to <a class=\"link\" href=\"http:\/\/www.youngmoney.com\/calculators\/savings_calculators\/millionaire_calculator\">http:\/\/www.youngmoney.com\/calculators\/savings_calculators\/millionaire_calculator<\/a> and input these assumptions:<\/p>\r\n<p id=\"frank-ch14_s02_s02_p07\" class=\"indent para\">Age: your actual age<\/p>\r\n<p id=\"frank-ch14_s02_s02_p08\" class=\"indent para\">Amount currently invested: $10,000<\/p>\r\n<p id=\"frank-ch14_s02_s02_p09\" class=\"indent para\">Expected rate of return (interest rate): 5 percent<\/p>\r\n<p id=\"frank-ch14_s02_s02_p10\" class=\"indent para\">Millionaire target age: 65<\/p>\r\n<p id=\"frank-ch14_s02_s02_p11\" class=\"indent para\">Savings per month: $500<\/p>\r\n<p id=\"frank-ch14_s02_s02_p12\" class=\"indent para\">Expected inflation rate: 3 percent<\/p>\r\n<p id=\"frank-ch14_s02_s02_p13\" class=\"indent para\">Click \u201ccalculate\u201d and you\u2019ll learn when you\u2019ll become a millionaire (given the previous assumptions).<\/p>\r\n<p id=\"frank-ch14_s02_s02_p14\" class=\"indent para\">Now, let\u2019s change things. We\u2019ll go through this process three times. Change only the items described. Keep all other assumptions the same as those listed previously.<\/p>\r\n\r\n<ol id=\"frank-ch14_s02_s02_l02\" class=\"orderedlist\">\r\n \t<li>Change the interest rate to 3 percent and then to 6 percent.<\/li>\r\n \t<li>Change the savings amount to $200 and then to $800.<\/li>\r\n \t<li>Change your age from \u201cyour age\u201d to \u201cyour age plus 5\u201d and then to \u201cyour age minus 5.\u201d<\/li>\r\n<\/ol>\r\n<p id=\"frank-ch14_s02_s02_p15\" class=\"indent para\">Write a brief report describing the sensitivity of becoming a millionaire, based on changing interest rates, monthly savings amount, and age at which you begin to invest.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<div class=\"chapter standard\" id=\"slug-14-3-the-financial-planning-process\">\r\n<div class=\"chapter-title-wrap\">\r\n<h1 class=\"chapter-number\" style=\"text-align: center\">The Financial Planning Process<\/h1>\r\n<\/div>\r\n<div class=\"ugc chapter-ugc\">\r\n<div class=\"bcc-box bcc-highlight\" id=\"frank-ch14_s03_n01\">\r\n<h3 class=\"title\">Learning Objectives<\/h3>\r\n<ol id=\"frank-ch14_s03_l01\" class=\"orderedlist\">\r\n \t<li>Identify the three stages of the <em class=\"emphasis\">personal-finances planning process<\/em>.<\/li>\r\n \t<li>Explain how to draw up a personal <em class=\"emphasis\">net-worth statement<\/em>, a personal <em class=\"emphasis\">cash-flow statement<\/em>, and a personal <em class=\"emphasis\">budget<\/em>.<\/li>\r\n<\/ol>\r\n<\/div>\r\n<p id=\"frank-ch14_s03_p01\" class=\"nonindent para editable block\">We\u2019ve divided the financial planning process into three steps:<\/p>\r\n\r\n<ol id=\"frank-ch14_s03_l02\" class=\"orderedlist editable block\">\r\n \t<li style=\"text-align: left\">Evaluate your current financial status by creating a net worth statement and a cash flow analysis.<\/li>\r\n \t<li style=\"text-align: left\">Set short-term, intermediate-term, and long-term financial goals.<\/li>\r\n \t<li style=\"text-align: left\">Use a budget to plan your future cash inflows and outflows and to assess your financial performance by comparing budgeted figures with actual amounts.<\/li>\r\n<\/ol>\r\n<div class=\"section\" id=\"frank-ch14_s03_s01\">\r\n<h2 class=\"title editable block\">Step 1: Evaluating Your Current Financial Situation<\/h2>\r\n<p id=\"frank-ch14_s03_s01_p01\" class=\"nonindent para editable block\">Just how are you doing, financially speaking? You should ask yourself this question every now and then, and it should certainly be your starting point when you decide to initiate a more or less formal financial plan. The first step in addressing this question is collecting and analyzing the records of what you <em class=\"emphasis\">own<\/em> and what you <em class=\"emphasis\">owe<\/em> and then applying a few accounting terms to the results:<\/p>\r\n\r\n<ul id=\"frank-ch14_s03_s01_l01\" class=\"itemizedlist editable block\">\r\n \t<li style=\"text-align: left\">Your personal <em class=\"emphasis\">assets<\/em> consist of what you <em class=\"emphasis\">own<\/em>.<\/li>\r\n \t<li style=\"text-align: left\">Your personal <em class=\"emphasis\">liabilities<\/em> are what you <em class=\"emphasis\">owe<\/em>\u2014your obligations to various creditors, big and small.<\/li>\r\n<\/ul>\r\n<div class=\"section\" id=\"frank-ch14_s03_s01_s01\">\r\n<h2 class=\"title editable block\" style=\"text-align: left\">Preparing Your Net-Worth Statement<\/h2>\r\n<p id=\"frank-ch14_s03_s01_s01_p01\" class=\"nonindent para editable block\">Your net worth (accounting term for your <em class=\"emphasis\">wealth<\/em>) is the difference between your assets and your liabilities. Thus the formula for determining net worth is:<\/p>\r\n<p class=\"indent\"><span class=\"informalequation block\">\r\n<span class=\"mathphrase\">Assets \u2212 Liabilities = Net worth<\/span>\r\n<\/span><\/p>\r\n<p id=\"frank-ch14_s03_s01_s01_p02\" class=\"indent para editable block no-indent\">If you own more than you owe, your net worth will be <em class=\"emphasis\">positive<\/em>; if you owe more than you own, it will be <em class=\"emphasis\">negative<\/em>. To find out whether your net worth is on the plus or minus side, you can prepare a personal net worth statement like the one in <a class=\"xref\" href=\"#frank-ch14_s03_s01_s01_f01\">Figure 12.6 \u201cNet Worth Statement\u201d<\/a>, which we\u2019ve drawn up for a fictional student named Joe College (Note that we\u2019ve included lines for items that may be relevant to some people\u2019s net worth statements but left them blank when they don\u2019t apply to Joe).<\/p>\r\n\r\n<h3><span class=\"title-prefix\">Figure 14.6<\/span> Net Worth Statement<\/h3>\r\n<div class=\"caption\" style=\"text-align: center;font-size: .8em\" id=\"frank-ch14_s03_s01_s01_f01\">\r\n<p class=\"indent\"><a><img src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/2fc489c5f8edc6119dca92c06999bd2f.jpg\" alt=\"Net Worth Statement of Joe College's Personal Net Worth Statement as of August 31, 2012\" style=\"max-width: 497px\" \/>\r\n<\/a><\/p>\r\n\r\n<\/div>\r\n<div class=\"section\" id=\"frank-ch14_s03_s01_s01_s01\">\r\n<h2 class=\"title editable block\">Assets<\/h2>\r\n<p id=\"frank-ch14_s03_s01_s01_s01_p01\" class=\"nonindent para editable block\">Joe has two types of assets:<\/p>\r\n\r\n<ul id=\"frank-ch14_s03_s01_s01_s01_l01\" class=\"itemizedlist editable block\">\r\n \t<li style=\"text-align: left\">First are his <em class=\"emphasis\">monetary<\/em> or <em class=\"emphasis\">liquid assets<\/em>\u2014his cash, the money in his checking accounts, and the value of any savings, CDs, and money market accounts. They\u2019re called <em class=\"emphasis\">liquid<\/em> because either they\u2019re cash or they can readily be turned into cash.<\/li>\r\n \t<li style=\"text-align: left\">Everything else is a <em class=\"emphasis\">tangible asset<\/em>\u2014something that Joe can use, as opposed to an investment. (We haven\u2019t given Joe any <em class=\"emphasis\">investments<\/em>\u2014such financial assets as stocks, bonds, or mutual funds\u2014because people usually purchase these instruments to meet such long-term goals as buying a house or sending a child to college.)<\/li>\r\n<\/ul>\r\n<p id=\"frank-ch14_s03_s01_s01_s01_p02\" class=\"indent para editable block no-indent\">Note that we\u2019ve been careful to calculate Joe\u2019s assets in terms of their fair market value\u2014the price he could get by selling them at present, not the price he paid for them or the price that he could get at some future time.<\/p>\r\n\r\n<\/div>\r\n<div class=\"section\" id=\"frank-ch14_s03_s01_s01_s02\">\r\n<h2 class=\"title editable block\">Liabilities<\/h2>\r\n<p id=\"frank-ch14_s03_s01_s01_s02_p01\" class=\"nonindent para editable block\">Joe\u2019s net worth statement also divides his liabilities into two categories:<\/p>\r\n\r\n<ul id=\"frank-ch14_s03_s01_s01_s02_l01\" class=\"itemizedlist editable block\">\r\n \t<li style=\"text-align: left\">Anything that Joe owes on such items as his furniture and computer are <em class=\"emphasis\">current liabilities<\/em>\u2014debts that must be paid within one year. Much of this indebtedness no doubt ends up on Joe\u2019s credit card balance, which is regarded as a current liability because he <em class=\"emphasis\">should<\/em> pay it off within a year.<\/li>\r\n \t<li style=\"text-align: left\">By contrast, his car payments and student-loan payments are <em class=\"emphasis\">noncurrent liabilities<\/em>\u2014debt payments that extend for a period of more than one year. Joe is in no position to buy a house, but for most people, their mortgage is their most significant noncurrent liability.<\/li>\r\n<\/ul>\r\n<p id=\"frank-ch14_s03_s01_s01_s02_p02\" class=\"indent para editable block no-indent\">Finally, note that Joe has positive net worth. At this point in the life of the average college student, positive net worth may be a little unusual. If you happen to have negative net worth right now, you\u2019re technically <em class=\"emphasis\">insolvent<\/em>, but remember that a major goal of getting a college degree is to enter the workforce with the best possible opportunity for generating enough wealth to reverse that situation.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<div class=\"section\" id=\"frank-ch14_s03_s01_s02\">\r\n<h2 class=\"title editable block\">Preparing Your Cash-Flow Statement<\/h2>\r\n<p id=\"frank-ch14_s03_s01_s02_p01\" class=\"nonindent para editable block\">Now that you know something about your financial status <em class=\"emphasis\">on a given date<\/em>, you need to know more about it <em class=\"emphasis\">over a period of time<\/em>. This is the function of a cash-flow or income statement, which shows where your money has come from and where it\u2019s slated to go.<\/p>\r\n<p id=\"frank-ch14_s03_s01_s02_p02\" class=\"indent para editable block no-indent\"><a class=\"xref\" href=\"#frank-ch14_s03_s01_s02_f01\">Figure 12.7 \u201cCash-Flow Statement\u201d<\/a> is Joe College\u2019s cash-flow statement. As you can see, Joe\u2019s <em class=\"emphasis\">income<\/em> (his cash <em class=\"emphasis\">inflows<\/em>\u2014money coming in) is derived from two sources: student loans and income from a part-time job. His expenditures (cash <em class=\"emphasis\">outflows<\/em>\u2014money going out) fall into several categories: housing, food, transportation, personal and health care, recreation\/entertainment, education, insurance, savings, and other expenses. To find out Joe\u2019s <em class=\"emphasis\">net cash flow<\/em>, we subtract his expenditures from his income:<\/p>\r\n<p class=\"indent no-indent\">$25,700\u00a0\u2013\u00a0$25,300\u00a0=\u00a0$400<\/p>\r\n\r\n<h3><span class=\"title-prefix\">Figure 12.7<\/span> Cash-Flow Statement<\/h3>\r\n<div class=\"caption\" style=\"text-align: center;font-size: .8em\" id=\"frank-ch14_s03_s01_s02_f01\">\r\n<p class=\"indent\"><a><img src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/32c992b959bd3d6e70cbfab261a0d9f2.jpg\" alt=\"Cash-Flow Statement of Joe College's Personal Cash-Flow Statement as of August 31, 2012\" style=\"max-width: 497px\" \/>\r\n<\/a><\/p>\r\n\r\n<\/div>\r\n<p id=\"frank-ch14_s03_s01_s02_p03\" class=\"indent para editable block no-indent\">Joe has been able to maintain a positive cash flow for the year ending August 31, 2012, but he\u2019s cutting it close. Moreover, he\u2019s in the black only because of the inflow from student loans\u2014income that, as you\u2019ll recall from his net worth statement, is also a noncurrent liability. We are, however, willing to give Joe the benefit of the doubt: Though he\u2019s incurring the high costs of an education, he\u2019s willing to commit himself to the debt (and, we\u2019ll assume, to careful spending) because he regards education as an investment that will pay off in the future.<\/p>\r\n<p id=\"frank-ch14_s03_s01_s02_p04\" class=\"indent para editable block no-indent\">Remember that when constructing a cash-flow statement, you must record only income and expenditures that pertain to a given period, whether it be a month, a semester, or (as in Joe\u2019s case) a year. Remember, too, that you must figure both inflows and outflows <em class=\"emphasis\">on a cash basis<\/em>: you record income only when you receive money, and you record expenditures only when you pay out money. When, for example, Joe used his credit card to purchase his computer, he didn\u2019t actually pay out any money. Each monthly payment on his credit card balance, however, is an outflow that must be recorded on his cash-flow statement (according to the type of expense\u2014say, recreation\/entertainment, food, transportation, and so on).<\/p>\r\n<p id=\"frank-ch14_s03_s01_s02_p05\" class=\"indent para editable block no-indent\">Your cash-flow statement, then, provides another perspective on your <em class=\"emphasis\">solvency<\/em>: if you\u2019re <em class=\"emphasis\">insolvent<\/em>, it\u2019s because you\u2019re spending more than you\u2019re earning. Ultimately, your net worth and cash-flow statements are most valuable when you use them together. While your net worth statement lets you know what you\u2019re worth\u2014how much wealth you have\u2014your cash-flow statement lets you know precisely what effect your spending and saving habits are having on your wealth.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<div class=\"section\" id=\"frank-ch14_s03_s02\">\r\n<h2 class=\"title editable block\">Step 2: Set Short-Term, Intermediate-Term, and Long-Term Financial Goals<\/h2>\r\n<p id=\"frank-ch14_s03_s02_p01\" class=\"nonindent para editable block\">We know from Joe\u2019s cash-flow statement that, despite his limited income, he feels that he can save $1,200 a year. He knows, of course, that it makes sense to have some cash in reserve in case of emergencies (car repairs, medical needs, and so forth), but he also knows that by putting away some of his money (probably each week), he\u2019s developing a habit that he\u2019ll need if he hopes to reach his long-term financial goals.<\/p>\r\n<p id=\"frank-ch14_s03_s02_p02\" class=\"indent para editable block no-indent\">Just what are Joe\u2019s goals? We\u2019ve summarized them in <a class=\"xref\" href=\"#frank-ch14_s03_s02_f01\">Figure 12.8 \u201cJoe\u2019s Goals\u201d<\/a>, where, as you can see, we\u2019ve divided them into three time frames: short-term (less than two years), intermediate-term (two to five years), and long-term (more than five years). Though Joe is still in an early stage of his financial life cycle, he has identified and structured his goals fairly effectively. In particular, they satisfy four criteria of well-conceived goals: they\u2019re <em class=\"emphasis\">realistic<\/em> and <em class=\"emphasis\">measurable<\/em>, and Joe has designated both <em class=\"emphasis\">definite time frames<\/em> and <em class=\"emphasis\">specific courses of action<\/em>.[footnote]Kapoor, J. R., Les R. Dlabay, and Robert J. Hughes, Personal Finance, 8th ed. (New York: McGraw-Hill, 2007), 81.[\/footnote]<\/p>\r\n\r\n<div class=\"caption\" style=\"text-align: center;font-size: .em;max-width: 500px\">\r\n<div class=\"figure full editable block\" id=\"frank-ch14_s03_s02_f01\">\r\n<h3 class=\"nonindent title\"><span class=\"title-prefix\">Figure 12.8<\/span> Joe\u2019s Goals<\/h3>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<th>Short-term goals\r\n(less than 2 years)<\/th>\r\n<th>Intermediate-term goals\r\n(2-5 years)<\/th>\r\n<th>Long-term goals\r\n(more than 5 years)<\/th>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<ul>\r\n \t<li>Pay off car loan<\/li>\r\n \t<li>Pay off credit card and charge account debt<\/li>\r\n<\/ul>\r\n<\/td>\r\n<td>\r\n<ul>\r\n \t<li>Complete college<\/li>\r\n \t<li>Take one-month vacation after completing college<\/li>\r\n<\/ul>\r\n<\/td>\r\n<td>\r\n<ul>\r\n \t<li>Pay off student loans<\/li>\r\n \t<li>Buy a home<\/li>\r\n \t<li>Save for retirement<\/li>\r\n<\/ul>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n<\/div>\r\n<p id=\"frank-ch14_s03_s02_p03\" class=\"indent para editable block no-indent\">They\u2019re also sensible. Joe sees no reason, for example, why he can\u2019t pay off his car loan, credit card, and charge account balances within two years. Remember that, with no income other than student-loan money and wages from a part-time job, Joe has decided (rightly or wrongly) to use his credit cards to pay for much of his personal consumption (furniture, electronics equipment, and so forth). It won\u2019t be an easy task to pay down these balances, so we\u2019ll give him some credit (so to speak) for regarding them as important enough to include paying them among his short-term goals. After finishing college, he\u2019ll splurge and take a month-long vacation. This might not be the best thing to do from a financial point of view, but he knows this could be his only opportunity to travel extensively. He is realistic in his classification of student loan repayment and the purchase of a home as long-term. But he might want to revisit his decision to classify saving for his retirement as a long-term goal. This is something we believe he should begin as soon as he starts working full-time.<\/p>\r\n\r\n<\/div>\r\n<div class=\"section\" id=\"frank-ch14_s03_s03\">\r\n<h2 class=\"title editable block\">Step 3: Develop a Budget and Use It to Evaluate Financial Performance<\/h2>\r\n<p id=\"frank-ch14_s03_s03_p01\" class=\"nonindent para editable block\">Once he has reviewed his cash-flow statement, Joe has a much better idea of what cash flowed in for the year that ended August 31, 2012, and a much better idea of where it went when it flowed out. Now he can ask himself whether he\u2019s satisfied with his annual inflow (income) and outflow (expenditures). If he\u2019s anything like most people, he\u2019ll want to make some changes\u2014perhaps to increase his income, to cut back on his expenditures, or, if possible, both. The first step in making these changes is drawing up a personal budget\u2014a document that itemizes the sources of his income and expenditures for the coming year, along with the relevant money amounts for each.<\/p>\r\n<p id=\"frank-ch14_s03_s03_p02\" class=\"indent para editable block no-indent\">Having reviewed the figures on his cash-flow statement, Joe did in fact make a few decisions:<\/p>\r\n\r\n<ul id=\"frank-ch14_s03_s03_l01\" class=\"itemizedlist editable block\">\r\n \t<li style=\"text-align: left\">Because he doesn\u2019t want to jeopardize his grades by increasing his work hours, he\u2019ll have to reconcile himself to just about the same wages for another year.<\/li>\r\n \t<li style=\"text-align: left\">He\u2019ll need to apply for another $7,000 student loan.<\/li>\r\n \t<li style=\"text-align: left\">If he\u2019s willing to cut his spending by $1,200, he can pay off his credit cards. Toward this end, he\u2019s targeted the following expenditures for reduction: rent (get a cheaper apartment), phone costs (switch plans), auto insurance (take advantage of a \u201cgood-student\u201d discount), and gasoline (pool rides or do a little more walking). Fortunately, his car loan will be paid off by midyear.<\/li>\r\n<\/ul>\r\n<p id=\"frank-ch14_s03_s03_p03\" class=\"indent para editable block no-indent\">Revising his figures accordingly, Joe developed the budget in <a class=\"xref\" href=\"#frank-ch14_s03_s03_f01\">Figure 12.9 \u201cJoe\u2019s Budget\u201d<\/a> for the year ending August 31, 2013. Look first at the column headed \u201cBudget.\u201d If things go as planned, Joe expects a cash surplus of $1,600 by the end of the year\u2014enough to pay off his credit card debt and leave him with an extra $400.<\/p>\r\nFigure 12.9 Joe\u2019s Budget\r\n<div class=\"caption\" style=\"text-align: center;font-size: .8em;max-width: 500px\">\r\n<div class=\"figure full editable block\" id=\"frank-ch14_s03_s03_f01\">\r\n<p class=\"indent\"><a><img src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/a7118fc4357b57ca87b54bb077763e44.jpg\" alt=\"Joe's College Budget\" style=\"max-width: 497px\" \/>\r\n<\/a><\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<div class=\"section\" id=\"frank-ch14_s03_s03_s01\">\r\n<h2 class=\"title editable block\">Figuring the Variance<\/h2>\r\n<p id=\"frank-ch14_s03_s03_s01_p01\" class=\"nonindent para editable block\">Now we can examine the two remaining columns in Joe\u2019s budget. Throughout the year, Joe will keep track of his actual income and actual expenditures and will enter the totals in the column labeled \u201cActual.\u201d Like most reasonable people, however, Joe doesn\u2019t really expect his actual figures to match with his budgeted figures. So whenever there\u2019s a difference between an amount in his \u201cBudget\u201d column and the corresponding amount in his \u201cActual\u201d column, Joe records the difference, whether plus or minus, as a variance. Two types of variances appear in Joe\u2019s budget:<\/p>\r\n\r\n<ul id=\"frank-ch14_s03_s03_s01_l01\" class=\"itemizedlist editable block\">\r\n \t<li>\r\n<p class=\"no-indent\"><em class=\"emphasis\">Income variance<\/em>. When actual <em class=\"emphasis\">income<\/em> turns out to be higher than expected or budgeted income, Joe records the variance as \u201cfavorable.\u201d (This makes sense, as you\u2019d find it favorable if you earned more income than expected.) When it\u2019s just the opposite, he records the variance as \u201cunfavorable.\u201d<\/p>\r\n<\/li>\r\n \t<li>\r\n<p class=\"no-indent\"><em class=\"emphasis\">Expense variance<\/em>. When the actual amount of an <em class=\"emphasis\">expenditure<\/em> is more than he had budgeted for, he records it as an \u201cunfavorable\u201d variance. (This also makes sense, as you\u2019d find it unfavorable if you spent more than the budgeted amount.) When the actual amount is less than budgeted, he records it as a \u201cfavorable\u201d variance.<\/p>\r\n<\/li>\r\n<\/ul>\r\n<\/div>\r\n<\/div>\r\n<div class=\"section\" id=\"frank-ch14_s03_s04\">\r\n<h2 class=\"title editable block\">Setting Mature Goals<\/h2>\r\n<p id=\"frank-ch14_s03_s04_p01\" class=\"nonindent para editable block\">Before we leave the subject of the financial-planning process, let\u2019s revisit the topic of Joe\u2019s goals. Another look at <a class=\"xref\" href=\"#frank-ch14_s03_s02_f01\">Figure 12.8 \u201cJoe\u2019s Goals\u201d<\/a> reminds us that, at the current stage of his financial life cycle, Joe has set fairly simple goals. We know, for example, that Joe wants to buy a home, but when does he want to take this major financial step? And of course, Joe wants to retire, but what kind of lifestyle does he want in retirement? Does he expect, like most people, a retirement lifestyle that\u2019s more or less comparable to that of his peak earning years? Will he be able to afford both the cost of a comfortable retirement and, say, the cost of sending his children to college? As Joe and his financial circumstances mature, he\u2019ll have to express these goals (and a few others) in more specific terms.<\/p>\r\n\r\n<div class=\"section\" id=\"frank-ch14_s03_s04_s01\">\r\n<h2 class=\"title editable block\">Levels of Mature Goals<\/h2>\r\n<p id=\"frank-ch14_s03_s04_s01_p01\" class=\"nonindent para editable block\">Let\u2019s fast-forward a decade or so, when Joe\u2019s picture of stages 2 and 3 of his financial life cycle have come into clearer focus. If he hasn\u2019t done so already, Joe is now ready to identify a primary goal to guide him in identifying and meeting all his other goals.[footnote]Winger, B. J., and Ralph R. Frasca, Personal Finance: An Integrated Planning Approach, 6th ed. (Upper Saddle River, NJ: Prentice Hall, 2003), 57\u201358.[\/footnote] Suppose that because Joe\u2019s investment in a college education has paid off the way he\u2019d planned ten years ago, he\u2019s in a position to target a primary goal of financial independence\u2014by which he means a certain financially secure life not only for himself but for his children, as well. Now that he\u2019s set this <em class=\"emphasis\">primary<\/em> goal, he can identify a more specific set of goals\u2014say, the following:<\/p>\r\n\r\n<ul id=\"frank-ch14_s03_s04_s01_l01\" class=\"itemizedlist editable block\">\r\n \t<li style=\"text-align: left\">A standard of living that reflects a certain level of comfort\u2014a level associated with the possession of certain assets, both tangible and intangible.<\/li>\r\n \t<li style=\"text-align: left\">The ability to provide his children with college educations.<\/li>\r\n \t<li style=\"text-align: left\">A retirement lifestyle comparable to that of his peak earning years.<\/li>\r\n<\/ul>\r\n<p id=\"frank-ch14_s03_s04_s01_p02\" class=\"indent para editable block no-indent\">Having set this <em class=\"emphasis\">secondary<\/em> level of goals, Joe\u2019s now ready to make specific plans for reaching them. As we\u2019ve already seen, Joe understands that plans are far more likely to work out when they\u2019re focused on specific goals. His next step, therefore, is to determine the goals on which he should focus this next level of plans.<\/p>\r\n<p id=\"frank-ch14_s03_s04_s01_p03\" class=\"indent para editable block no-indent\">As it turns out, Joe already knows what these goals are, because he\u2019s been setting the appropriate goals every year since he drew up the cash-flow statement in <a class=\"xref\" href=\"#frank-ch14_s03_s01_s02_f01\">Figure 12.7 \u201cCash-Flow Statement\u201d<\/a>. In drawing up that statement, Joe was careful to create several line items to identify his various expenditures: <em class=\"emphasis\">housing, food, transportation, personal and health care, recreation\/entertainment, education, insurance, savings<\/em>, and <em class=\"emphasis\">other expenses<\/em>. When we introduced these items, we pointed out that each one represents a cash outflow\u2014something for which Joe expected to pay. They are, in other words, things that Joe intends to <em class=\"emphasis\">buy<\/em> or, in the language of economics, <em class=\"emphasis\">consume<\/em>. As such, we can characterize them as <em class=\"emphasis\">consumption goals<\/em>. These \u201cpurchases\u201d\u2014what Joe wants in such areas as housing, insurance coverage, recreation\/entertainment, and so forth\u2014make specific his secondary goals and are therefore his <em class=\"emphasis\">third-level<\/em> goals.<\/p>\r\n<p id=\"frank-ch14_s03_s04_s01_p04\" class=\"indent para editable block\"><a class=\"xref\" href=\"#frank-ch14_s03_s04_s01_f01\">Figure 12.10 \u201cThree-Level Goals\/Plans\u201d<\/a> gives us a full picture of Joe\u2019s three-level hierarchy of goals.<\/p>\r\nFigure 12.10 Three-Level Goals\/Plans\r\n<div class=\"caption\" style=\"text-align: center;font-size: .8em\" id=\"frank-ch14_s03_s04_s01_f01\">\r\n<p class=\"indent\"><a><img src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/097c8617168a77a7704a4254bdee8b3a.jpg\" alt=\"Three-Level Goals\/Plans (Primary Goals, Secondary Goals, Third-Level Goals)\" style=\"max-width: 497px\" \/>\r\n<\/a><\/p>\r\n\r\n<\/div>\r\n<div class=\"section\" id=\"frank-ch14_s03_s04_s01_s01\">\r\n<h2 class=\"title editable block\">Present and Future Consumption Goals<\/h2>\r\n<p id=\"frank-ch14_s03_s04_s01_p05\" class=\"nonindent para editable block\">A closer look at the list of Joe\u2019s consumption goals reveals that they fall into two categories:<\/p>\r\n\r\n<\/div>\r\n<ol id=\"frank-ch14_s03_s04_s01_l02\" class=\"orderedlist editable block\">\r\n \t<li style=\"text-align: left\">We can call the first category <em class=\"emphasis\">present<\/em> goals because each item is intended to meet Joe\u2019s present needs and those (we\u2019ll now assume) of his family\u2014housing, health care coverage, and so forth. They must be paid for as Joe and his family take possession of them\u2014that is, when they use or consume them. All these things are also necessary to meet the first of Joe\u2019s secondary goals\u2014a certain standard of living.<\/li>\r\n \t<li style=\"text-align: left\">The items in the second category of Joe\u2019s consumption goals are aimed at meeting his other two secondary goals: sending his children to college and retiring with a comfortable lifestyle. He won\u2019t take possession of these purchases until sometime in the <em class=\"emphasis\">future<\/em>, but (as is so often the case) there\u2019s a catch: they must be paid for out of <em class=\"emphasis\">current<\/em> income.<\/li>\r\n<\/ol>\r\n<\/div>\r\n<\/div>\r\n<div class=\"section\" id=\"frank-ch14_s03_s05\">\r\n<h2 class=\"title editable block\">A Few Words about Saving<\/h2>\r\n<p id=\"frank-ch14_s03_s05_p01\" class=\"nonindent para editable block\">Joe\u2019s desire to meet this second category of consumption goals\u2014<em class=\"emphasis\">future<\/em> goals such as education for his kids and a comfortable retirement for himself and his wife\u2014accounts for the appearance on his list of the one item that, at first glance, may seem misclassified among all the others: namely, <em class=\"emphasis\">savings<\/em>.<\/p>\r\n\r\n<div class=\"section\" id=\"frank-ch14_s03_s05_s01\">\r\n<h2 class=\"title editable block\">Paying Yourself First<\/h2>\r\n<p id=\"frank-ch14_s03_s05_s01_p01\" class=\"nonindent para editable block\">It\u2019s tempting to glance at Joe\u2019s budget and cash-flow statement and assume that he shares with most of us a common attitude toward saving money: when you\u2019re done allotting money for various spending needs, you can decide what to do with what\u2019s left over\u2014save it or spend it. In reality, however, Joe\u2019s budgeting reflects an entirely different approach. When he made up the budget in <a class=\"xref\" href=\"#frank-ch14_s03_s03_f01\">Figure 12.9 \u201cJoe\u2019s Budget\u201d<\/a>, Joe <em class=\"emphasis\">started out<\/em> with the decision to save $1,600\u2014or at least to avoid spending it. Why? Because he had a goal: to be free of credit card debt. To meet this goal, he planned to use $1,200 of his <em class=\"emphasis\">current<\/em> income to pay off what would continue to hang over his head as a <em class=\"emphasis\">future<\/em> expense (his credit card debt). In addition, he <em class=\"emphasis\">planned<\/em> to have $400 left over after he\u2019d paid his credit card balance. Why? Because he had still longer-term goals, and he intended to get started on them early\u2014as soon as he finished college. Thus his intention from the outset was to put $400 into savings.<\/p>\r\n<p id=\"frank-ch14_s03_s05_s01_p02\" class=\"indent para editable block no-indent\">In other words, here\u2019s how Joe went about budgeting his money for the year ending August 31, 2013 (as shown in <a class=\"xref\" href=\"#frank-ch14_s03_s03_f01\">Figure 12.9 \u201cJoe\u2019s Budget\u201d<\/a>):<\/p>\r\n\r\n<ol id=\"frank-ch14_s03_s05_s01_l01\" class=\"orderedlist editable block\">\r\n \t<li style=\"text-align: left\">\r\n<p class=\"no-indent\">He calculated his income\u2014total cash inflows from his student loan and his part-time job ($25,700).<\/p>\r\n<\/li>\r\n \t<li style=\"text-align: left\">\r\n<p class=\"no-indent\">He subtracted from his total income two targeted consumption goals\u2014credit card payments ($1,200) and savings ($400).<\/p>\r\n<\/li>\r\n \t<li style=\"text-align: left\">\r\n<p class=\"no-indent\">He allocated what was left ($24,100) to his remaining consumption goals: housing ($6,600), food ($3,500), education ($6,500), and so forth.<\/p>\r\n<\/li>\r\n<\/ol>\r\n<p id=\"frank-ch14_s03_s05_s01_p03\" class=\"indent para editable block no-indent\">If you\u2019re concerned that Joe\u2019s sense of delayed gratification is considerably more mature than your own, think of it this way: <em class=\"emphasis\">Joe has chosen to pay himself first<\/em>. It\u2019s one of the key principles of personal-finances planning and an important strategy in doing something that we recommended earlier in this chapter\u2014starting early.[footnote]Keown, A. J., Personal Finance: Turning Money into Wealth, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007, 22 et passim.[\/footnote]<\/p>\r\n\r\n<div class=\"bcc-box bcc-success\" id=\"frank-ch14_s03_s05_s01_n01\">\r\n<h3 class=\"title\">Key Takeaways<\/h3>\r\n<ul id=\"frank-ch14_s03_s05_s01_l02\" class=\"itemizedlist\">\r\n \t<li>\r\n<p class=\"nonindent para\">The financial planning process consists of three steps:<\/p>\r\n\r\n<ol id=\"frank-ch14_s03_s05_s01_l03\" class=\"orderedlist\">\r\n \t<li>Evaluate your current financial status by creating a net worth statement and a cash flow analysis.<\/li>\r\n \t<li>Set short-term, intermediate-term, and long-term financial goals.<\/li>\r\n \t<li>Use a budget to plan your future cash inflows and outflows and to assess your financial performance by comparing budgeted figures with actual amounts.<\/li>\r\n<\/ol>\r\n<\/li>\r\n \t<li>\r\n<p class=\"nonindent para\">In step 1 of the financial planning process, you determine what you <em class=\"emphasis\">own<\/em> and what you <em class=\"emphasis\">owe<\/em>:<\/p>\r\n\r\n<ol id=\"frank-ch14_s03_s05_s01_l04\" class=\"orderedlist\">\r\n \t<li>Your personal <em class=\"emphasis\">assets<\/em> consist of what you own.<\/li>\r\n \t<li>Your personal <em class=\"emphasis\">liabilities<\/em> are what you owe\u2014your obligations to various creditors.<\/li>\r\n<\/ol>\r\n<\/li>\r\n \t<li>\r\n<p class=\"nonindent para\">Most people have two types of assets:<\/p>\r\n\r\n<ol id=\"frank-ch14_s03_s05_s01_l05\" class=\"orderedlist\">\r\n \t<li><em class=\"emphasis\">Monetary<\/em> or <em class=\"emphasis\">liquid assets<\/em> include cash, money in checking accounts, and the value of any savings, CDs, and money market accounts. They\u2019re called <em class=\"emphasis\">liquid<\/em> because either they\u2019re cash or they can readily be turned into cash.<\/li>\r\n \t<li>Everything else is a <em class=\"emphasis\">tangible asset<\/em>\u2014something that can be used, as opposed to an investment.<\/li>\r\n<\/ol>\r\n<\/li>\r\n \t<li>\r\n<p class=\"nonindent para\">Likewise, most people have two types of liabilities:<\/p>\r\n\r\n<ol id=\"frank-ch14_s03_s05_s01_l06\" class=\"orderedlist\">\r\n \t<li>Any debts that should be paid within one year are <em class=\"emphasis\">current liabilities<\/em>.<\/li>\r\n \t<li><em class=\"emphasis\">Noncurrent liabilities<\/em> consist of debt payments that extend for a period of more than one year.<\/li>\r\n<\/ol>\r\n<\/li>\r\n \t<li>Your <strong class=\"emphasis bold\">net worth<\/strong> is the difference between your assets and your liabilities. <strong class=\"emphasis bold\">Your net worth statement<\/strong> will show whether your net worth is on the plus or minus side on a given date.<\/li>\r\n \t<li>In step 2 of the financial planning process, you create a <strong class=\"emphasis bold\">cash-flow<\/strong> or <strong class=\"emphasis bold\">income statement<\/strong>, which shows where your money has come from and where it\u2019s slated to go. It reflects your financial status over a period of time. Your cash <em class=\"emphasis\">inflows<\/em>\u2014the money you have coming in\u2014are recorded as <em class=\"emphasis\">income<\/em>. Your cash <em class=\"emphasis\">outflows<\/em>\u2014money going out\u2014are itemized as <em class=\"emphasis\">expenditures<\/em> in such categories as housing, food, transportation, education, and savings.<\/li>\r\n \t<li>A good way to approach your financial goals is by dividing them into three time frames: short-term (less than two years), intermediate-term (two to five years), and long-term (more than five years). Goals should be realistic and measurable, and you should designate definite time frames and specific courses of action.<\/li>\r\n \t<li>Net worth and cash-flow statements are most valuable when used together: while your net worth statement lets you know what you\u2019re worth, your cash-flow statement lets you know precisely what effect your spending and saving habits are having on your net worth.<\/li>\r\n \t<li>If you\u2019re not satisfied with the effect of your spending and saving habits on your net worth, you may want to make changes in future inflows (income) and outflows (expenditures). You make these changes in step 3 of the financial planning process, when you draw up your personal <strong class=\"emphasis bold\">budget<\/strong>\u2014a document that itemizes the sources of your income and expenditures for a future period (often a year).<\/li>\r\n \t<li>\r\n<p class=\"nonindent para\">In addition to the itemized lists of inflows and outflows, there are three other columns in the budget:<\/p>\r\n\r\n<ol id=\"frank-ch14_s03_s05_s01_l07\" class=\"orderedlist\">\r\n \t<li>The \u201cBudget\u201d column tracks the amounts of money that you <em class=\"emphasis\">plan<\/em> to receive or to pay out over the budget period.<\/li>\r\n \t<li>The \u201cActual\u201d column records the amounts that did in fact come in or go out.<\/li>\r\n \t<li>The final column records the <strong class=\"emphasis bold\">variance<\/strong> for each item\u2014the difference between the amount in the \u201cBudget\u201d column and the corresponding amount in the \u201cActual\u201d column.<\/li>\r\n<\/ol>\r\n<\/li>\r\n \t<li>\r\n<p class=\"nonindent para\">There are two types of variance:<\/p>\r\n\r\n<ol id=\"frank-ch14_s03_s05_s01_l08\" class=\"orderedlist\">\r\n \t<li>An <em class=\"emphasis\">income variance<\/em> occurs when actual income is higher than budgeted income (or vice versa).<\/li>\r\n \t<li>An <em class=\"emphasis\">expense variance<\/em> occurs when the actual amount of an expenditure is higher than the budgeted amount (or vice versa).<\/li>\r\n<\/ol>\r\n<\/li>\r\n<\/ul>\r\n<\/div>\r\n<div class=\"bcc-box bcc-info\" id=\"frank-ch14_s03_s05_s01_n02\">\r\n<h3 class=\"title\">Exercise<\/h3>\r\n<p class=\"nonindent simpara\">(AACSB) Analysis<\/p>\r\n<p id=\"frank-ch14_s03_s05_s01_p04\" class=\"indent para\">Using your own information (or made-up information if you prefer), go through the three steps in the financial planning process:<\/p>\r\n\r\n<ol id=\"frank-ch14_s03_s05_s01_l09\" class=\"orderedlist\">\r\n \t<li>Evaluate your current financial status by creating a net worth statement and a cash flow analysis.<\/li>\r\n \t<li>Identify short-term, intermediate-term, and long-term financial goals.<\/li>\r\n \t<li>Create a budget (for a month or a year). Estimate future income and expenditures. Make up \u201cactual\u201d figures and calculate a variance by comparing budgeted figures with actual amounts.<\/li>\r\n<\/ol>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<div class=\"chapter standard\" id=\"slug-14-4-a-house-is-not-a-piggy-bank-a-few-lessons-from-the-subprime-crisis-2\">\r\n<div class=\"chapter-title-wrap\">\r\n<h1 class=\"chapter-title\" style=\"text-align: center\">A House Is Not a Piggy Bank: A Few Lessons from the Subprime Crisis<\/h1>\r\n<\/div>\r\n<div class=\"ugc chapter-ugc\">\r\n<div class=\"bcc-box bcc-highlight\" id=\"frank-ch14_s04_n01\">\r\n<h3 class=\"title\">Learning Objectives<\/h3>\r\n<ol id=\"frank-ch14_s04_l01\" class=\"orderedlist\">\r\n \t<li>Discuss the trend in the U.S. savings rate.<\/li>\r\n \t<li>Define a <em class=\"emphasis\">subprime loan<\/em> and explain the difference between a <em class=\"emphasis\">fixed-rate mortgage<\/em> and an <em class=\"emphasis\">adjustable-rate mortgage<\/em>.<\/li>\r\n \t<li>Discuss what can go wrong with a subprime loan at an adjustable rate. Discuss what can go wrong with hundreds of thousands of subprime loans at adjustable rates.<\/li>\r\n \t<li>Define <em class=\"emphasis\">risk<\/em> and explain some of the risks entailed by personal financial transactions.<\/li>\r\n<\/ol>\r\n<\/div>\r\n<p id=\"frank-ch14_s04_p01\" class=\"nonindent para editable block\">Joe isn\u2019t old enough to qualify, but if his grandfather had deposited $1,000 in an account paying 7 percent interest in 1945, it would now be worth $64,000. That\u2019s because money invested at 7 percent compounded will double every ten years. Now, $64,000 may or may not seem like a significant return over fifty years, but after all, the money did all the heavy lifting, and given the miracle of compound interest, it\u2019s surprising that Americans don\u2019t take greater advantage of the opportunity to multiply their wealth by saving more of it, even in modest, interest-bearing accounts. Ironically, with $790 billion in credit card debt, it\u2019s obvious that a lot of American families are experiencing the effects of compound interest\u2014but in reverse.[footnote]Frank, R. H., \u201cAmericans Save So Little, but What Can Be Done to Change That?\u201d New York Times, March 17, 2005, http:\/\/www.robert-h-frank.com\/PDFs\/ES.3.17.05.pdf (accessed November 11, 2011).[\/footnote]<\/p>\r\n<p id=\"frank-ch14_s04_p02\" class=\"indent para editable block no-indent\">As a matter of fact, though Joe College appears to be on the right track when it comes to saving, many people aren\u2019t. A lot of Americans, it seems, do indeed set savings goals, but in one recent survey, nearly 70 percent of the respondents reported that they fell short of their monthly goals because their money was needed elsewhere. About one-third of Americans say that they\u2019re putting away something but not enough, and another third aren\u2019t saving anything at all. Almost one-fifth of all Americans have net worth of zero\u2014or less.[footnote]Taylor, D., \u201cTwo-Thirds of Americans Don\u2019t Save Enough,\u201d Bankrate.com, October 2007, http:\/\/www.bankrate.com\/brm\/news\/retirement\/Oct_07_retirement_poll_results_a1.asp (accessed November 11, 2011).[\/footnote][footnote]Frank, R. H., \u201cAmericans Save So Little, but What Can Be Done to Change That?\u201d New York Times, March 17, 2005, http:\/\/www.robert-h-frank.com\/PDFs\/ES.3.17.05.pdf (accessed November 11, 2011).[\/footnote]<\/p>\r\n<p id=\"frank-ch14_s04_p03\" class=\"indent para editable block no-indent\">As we indicated in the opening section of this chapter, this shortage of savings goes hand in hand with a surplus in spending. \u201cMy parents,\u201d says one otherwise gainfully employed American knowledge worker, \u201care appalled at the way I justify my spending. I think, \u2018Why work and make money unless you\u2019re going to enjoy it?\u2019 That\u2019s a fine theory,\u201d she adds, \u201cuntil you\u2019re sixty, homeless, and with no money in the bank\u201d.[footnote]Gardner, M., \u201cWhy Can\u2019t Americans Save a Dime?\u201d Christian Science Monitor (2008), http:\/\/www.mrshultz.com\/webpages\/whycantamericanssave.htm (accessed November 11, 2011).[\/footnote] And indeed, if she doesn\u2019t intend to alter her personal-finances philosophy, she has good reason to worry about her \u201colder adult\u201d years. Sixty percent of Americans over the age of sixty-five have less than $100,000 in savings, and only 30 percent of this group have more than $25,000; 45 percent have less than $15,000. As for income, 75 percent of people over age sixty-five generate less than $35,000 annually, and 30 percent are in the \u201cpoverty to near-poverty\u201d range of $10,000 to $20,000 (as compared to 12 percent of the under-sixty-five population).[footnote]Rubin, R. M., Shelley I. White-Means, and Luojia Mao Daniel, \u201cIncome Distribution of Older Americans,\u201d Monthly Labor Review, November 2000, http:\/\/www.bls.gov\/opub\/mlr\/2000\/11\/art2full.pdf (accessed November 11, 2011).[\/footnote]<\/p>\r\n\r\n<div class=\"section\" id=\"frank-ch14_s04_s01\">\r\n<h2 class=\"title editable block\">Disposing of Savings<\/h2>\r\n<p id=\"frank-ch14_s04_s01_p01\" class=\"nonindent para editable block\"><a class=\"xref\" href=\"#frank-ch14_s04_s01_f01\">Figure 12.11 \u201cU.S. Savings Rate\u201d<\/a> shows the U.S. <em class=\"emphasis\">savings rate<\/em>\u2014which measures the percentage of disposable income devoted to savings for the period 1960 to 2010. As you can see, it suffered a steep decline from 1980 to 2005 and remained at this negligible savings rate until it started moving up in 2008. The recent increase in the savings rate, however, is still below the long-term average of 7 percent.[footnote]Economic Research, \u201cPersonal Savings Rate (PSAVERT),\u201d Economic Research, Federal Reserve Bank of St. Louis, August 28, 2008, http:\/\/research.stlouisfed.org\/fred2\/series\/PSAVERT (accessed November 10, 2011).[\/footnote][footnote]Dickson, A., \u201cU.S. Personal Savings Rate Close to Depression-Era Rates,\u201d Wisebread, February 2, 2007, http:\/\/www.wisebread.com\/u-s-personal-savings-rate-close-to-depression-era-rates (accessed November 11, 2011).[\/footnote]<\/p>\r\n<span class=\"title-prefix\">Figure 12.11<\/span> U.S. Savings Rate\r\n<div class=\"caption\" style=\"text-align: center;font-size: .8em\" id=\"frank-ch14_s04_s01_f01\">\r\n<p class=\"indent\"><a><img src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/66953a0bc474e4f226263c06e2cbee6d.jpg\" alt=\"U.S. Savings Rate\" style=\"max-width: 497px\" \/>\r\n<\/a><\/p>\r\n\r\n<\/div>\r\n<p id=\"frank-ch14_s04_s01_p03\" class=\"indent para editable block no-indent\">Now, a widespread tendency on the part of Americans to spend rather than save doesn\u2019t account entirely for the downward shift in the savings rate. In late 2005, the Federal Reserve cited at least two other (closely related) factors in the decline of savings:[footnote]Federal Reserve Bank of San Francisco, \u201cSpendthrift Nation,\u201d Economic Research and Data, November 10, 2005, http:\/\/www.frbsf.org\/publications\/economics\/letter\/2005\/el2005-30.html (accessed November 11, 2011).[\/footnote]<\/p>\r\n\r\n<ul id=\"frank-ch14_s04_s01_l01\" class=\"itemizedlist editable block\">\r\n \t<li style=\"text-align: left\">\r\n<p class=\"no-indent\">An increase in the ratio of stock-market wealth to disposable income<\/p>\r\n<\/li>\r\n \t<li style=\"text-align: left\">\r\n<p class=\"no-indent\">An increase in the ratio of residential-property wealth to disposable income<\/p>\r\n<\/li>\r\n<\/ul>\r\n<p id=\"frank-ch14_s04_s01_p04\" class=\"indent para editable block no-indent\">Assume, for example, that, in addition to your personal savings, you own some stock and have a mortgage on a home. Both your stock and your home are (supposedly) <em class=\"emphasis\">appreciable assets<\/em>\u2014their value used to go up over time. (In fact, if you had taken out your mortgage in 2000, by the end of 2005 your home would have appreciated at double the rate of your disposable personal income.) The decline in the personal savings rate during the mid-2000s, suggested the Fed, resulted in part from people\u2019s response to \u201clong-lived bull markets in stocks and housing\u201d; in other words, a lot of people had come to rely on the appreciation of such assets as stocks and residential property as \u201ca substitute for the practice of saving out of wage income.\u201d<\/p>\r\n\r\n<div class=\"section\" id=\"frank-ch14_s04_s01_s01\">\r\n<h2 class=\"title editable block\">Subprime Rates and Adjustable Rate Mortgages<\/h2>\r\n<p id=\"frank-ch14_s04_s01_s01_p01\" class=\"nonindent para editable block\">Let\u2019s assume that you weren\u2019t ready to take advantage of the boom in mortgage loans in 2000 but did set your sights on 2005. You may not have been ready to buy a house in 2005 either, but there\u2019s a good chance that you got a loan anyway. In particular, some lender might have offered you a so-called subprime mortgage loan. Subprime loans are made to borrowers who don\u2019t qualify for market-set interest rates because of one or more risk factors\u2014income level, employment status, credit history, ability to make only a very low down payment. As of March 2007, U.S. lenders had written $1.3 trillion in mortgages like yours.[footnote]Associated Press, \u201cHow Severe Is Subprime Mess?\u201d MSNBC.com, March 13, 2007, http:\/\/www.msnbc.msn.com\/id\/17584725\/ns\/business-real_estate\/t\/will-subprime-mess-ripple-through-economy\/#.Tr2hFvKul2I (accessed November 11, 2011).[\/footnote]<\/p>\r\n<p id=\"frank-ch14_s04_s01_s01_p02\" class=\"indent para editable block no-indent\">Granted, your terms might not have been very good. For one thing, interest rates on subprime loans may run from 8 percent to 10 percent and higher.[footnote]consumeraffairs.com, \u201cSubprime Mortgage Pricing Varies Greatly among U.S. Cities, consumeraffairs.com, September 13, 2005, http:\/\/www.consumeraffairs.com\/news04\/2005\/subprime_study.html (accessed November 11, 2011).[\/footnote] In addition, you probably had to settle for an adjustable-rate mortgage (ARM)\u2014one that\u2019s pegged to the increase or decrease of certain interest rates that your lender has to pay. When you signed your mortgage papers, you knew that if those rates went up, your mortgage rate\u2014and your monthly payments\u2014would go up, too. Fortunately, however, you had a plan B: with the value of your new asset appreciating even as you enjoyed living in it, it wouldn\u2019t be long before you could refinance it at a more manageable and more predictable rate.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<div class=\"section\" id=\"frank-ch14_s04_s02\">\r\n<h2 class=\"title editable block\">The Meltdown<\/h2>\r\n<p id=\"frank-ch14_s04_s02_p01\" class=\"nonindent para editable block\">Now imagine your dismay when housing prices started to go <em class=\"emphasis\">down<\/em> in 2006 and 2007. As a result, you weren\u2019t able to refinance, your ARM was set to adjust upward in 2008, and foreclosures were already happening all around you\u20141.3 million in 2007 alone.[footnote]Lahart, J., \u201cEgg Cracks Differ in Housing, Finance Shells,\u201d Wall Street Journal, July 13, 2008.[\/footnote] By April 2008, one in every 519 American households had received a foreclosure notice.[footnote]RealtyTrac Inc., \u201cForeclosure Activity Increases 4 Percent in April According to RealtyTrac(R) U.S. Foreclosure Market Report,\u201d PR Newswire, May 14, 2008, http:\/\/www.prnewswire.com\/news-releases\/foreclosure-activity-increases-4-percent-in-april-according-to-realtytracr-us-foreclosure -market-report-57244677.html (accessed November 11, 2011).[\/footnote] By August, 9.2 percent of the $12 trillion in U.S. mortgage loans was delinquent or in foreclosure.[footnote]Mortgage Bankers Association, \u201cDelinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey,\u201d Press Release, September 5, 2008, http:\/\/www.mbaa.org\/NewsandMedia\/PressCenter\/64769.htm (accessed November 11, 2011).[\/footnote][footnote]Duhigg, C., \u201cLoan-Agency Woes Swell from a Trickle to a Torrent,\u201d nytimes.com, July 11, 2008, http:\/\/www.nytimes.com\/2008\/07\/11\/business\/11ripple.html?ex=1373515200&amp;en=8ad220403fcfdf6e&amp;ei=5124&amp;partner=permalink &amp;exprod=permalink.[\/footnote] <span class=\"title-prefix\"><\/span><\/p>\r\n\r\n<h3 id=\"frank-ch14_s04_s02_p01\" class=\"nonindent para editable block\"><span class=\"title-prefix\">Figure 12.12 Foreclosure<\/span><\/h3>\r\n<div class=\"caption\" style=\"text-align: center;font-size: .8em;max-width: 500px\" id=\"frank-ch14_s04_s02_f01\">\r\n<p class=\"indent\"><a><img src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/14.4.0.jpg\" alt=\"A Foreclosure sign in front of a house\" class=\"aligncenter size-full wp-image-1479\" width=\"500\" \/><\/a><\/p>\r\n\r\n<\/div>\r\nIn 2008, nearly one out of five hundred households in the United States received a foreclosure notice.[footnote]Taber Andrew Bain \u2013 <a href=\"https:\/\/www.flickr.com\/photos\/andrewbain\/3899715321\">Foreclosure<\/a> \u2013 CC BY 2.0.[\/footnote]\r\n<p id=\"frank-ch14_s04_s02_p02\" class=\"indent para editable block no-indent\">The repercussions? Banks and other institutions that made mortgage loans were the first sector of the financial industry to be hit. Largely because of mortgage-loan defaults, profits at more than 8,500 U.S. banks dropped from $35 billion in the fourth quarter of 2006 to $650 million in the corresponding quarter of 2007 (a decrease of 89 percent). Bank earnings for the year 2007 declined 31 percent and dropped another 46 percent in the first quarter of 2008.[footnote]Federal Deposit Insurance Corporation, Quarterly Banking Profile (Fourth Quarter 2007), http:\/\/www.2.fdic.gov\/qbp\/2007dec\/qbp.pdf (accessed September 25, 2008).[\/footnote][footnote]FDIC, Quarterly Banking Profile (First Quarter 2008), http:\/\/www.2.fdic.gov\/qbp\/2008mar\/qbp.pdf (accessed September 25, 2008).[\/footnote]<\/p>\r\n<p id=\"frank-ch14_s04_s02_p03\" class=\"indent para editable block no-indent\">Losses in this sector were soon felt by two publicly traded government-sponsored organizations, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Both of these institutions are authorized to make loans and provide loan guarantees to banks, mortgage companies, and other mortgage lenders; their function is to make sure that these lenders have enough money to lend to prospective home buyers. Between them, Fannie Mae and Freddie Mac backed approximately half of that $12 trillion in outstanding mortgage loans, and when the mortgage crisis hit, the stock prices of the two corporations began to drop steadily. In September 2008, amid fears that both organizations would run out of capital, the U.S. government took over their management.<\/p>\r\n<p id=\"frank-ch14_s04_s02_p04\" class=\"indent para editable block no-indent\">Freddie Mac also had another function: to increase the supply of money available for mortgage loans and new home purchases, Freddie Mac bought mortgages already written by lenders, pooled them, and sold them as mortgage-backed securities to investors on the open market. Many major investment firms did much the same thing, buying individual subprime mortgages from original lenders (such as small banks), pooling the projected revenue\u2014payments made by the original individual home buyers\u2014and selling securities backed by the pooled revenue.<\/p>\r\n<p id=\"frank-ch14_s04_s02_p05\" class=\"indent para editable block no-indent\">But when their rates went too high and home buyers couldn\u2019t make these payments, these securities plummeted in value. Institutions that had invested in them\u2014including investment banks\u2014suffered significant losses.[footnote]Tully, S., \u201cWall Street\u2019s Money Machine Breaks Down,\u201d Fortune, CNNMoney.com, November 12, 2007, http:\/\/money.cnn.com\/magazines\/fortune\/fortune_archive\/2007\/11\/26\/101232838\/index.htm (accessed November 11, 2011).[\/footnote] In September 2008, one of these investment banks, Lehman Brothers, filed for bankruptcy protection; another, Merrill Lynch, agreed to sell itself for $50 billion. Next came American International Group (AIG), a giant insurance company that insured financial institutions against the risks they took in loaning and investing money. As its policyholders buckled under the weight of defaulted loans and failed investments, AIG, too, was on the brink of bankruptcy, and when private efforts to bail it out failed, the U.S. government stepped in with a loan of $85 billion.[footnote]Robb, G., et al., \u201cAIG Gets Fed Rescue in Form of $85 Billion Loan,\u201d MarketWatch, September 16, 2008, http:\/\/www.marketwatch.com\/News\/Story\/aig-gets-fed-rescue-form\/story.aspx?guid=%7BE84A4797%2D3EA6%2D40B1%2D9DB5%2DF07B5A7F5BC2%7D (accessed November 11, 2011).[\/footnote] The U.S. government also agreed to buy up risky mortgage-backed securities from teetering financial institutions at an estimated cost of \u201chundreds of billions\u201d.[footnote]Mortgage Bankers Association, \u201cDelinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey,\u201d Press Release, September 5, 2008, http:\/\/www.mbaa.org\/NewsandMedia\/PressCenter\/64769.htm (accessed November 11, 2011).[\/footnote]<\/p>\r\n\r\n<div class=\"section\" id=\"frank-ch14_s04_s02_s01\">\r\n<h2 class=\"title editable block\">Subprime Directives: A Few Lessons from the Subprime Crisis<\/h2>\r\n<p id=\"frank-ch14_s04_s02_s01_p01\" class=\"nonindent para editable block\">If you were one of the millions of Americans who took out subprime mortgages in the years between 2001 and 2005, you probably have some pressing financial problems. If you defaulted on your subprime ARM, you may have suffered foreclosure on your newly acquired asset, lost any equity that you\u2019d built up in it, and taken a hit in your credit rating. (We\u2019ll assume that you\u2019re not one of the people whose eagerness to get on the subprime bandwagon caused fraudulent mortgage applications to go up by 300 percent between 2002 and 2006.)[footnote]Financial Crimes Enforcement Network, Mortgage Loan Fraud: An Industry Assessment Based upon Suspicious Activity Report Analysis, November 2006, http:\/\/www.fincen.gov\/news_room\/rp\/reports\/pdf\/MortgageLoanFraud.pdf (accessed November 11, 2011).[\/footnote]<\/p>\r\n<p id=\"frank-ch14_s04_s02_s01_p02\" class=\"indent para editable block no-indent\">On the other hand, you\u2019ve probably learned a few lessons about financial planning and strategy. Let\u2019s conclude with a survey of three lessons that you should have learned from your hypothetical adventure in the world of subprime mortgages.<\/p>\r\n<p id=\"frank-ch14_s04_s02_s01_p03\" class=\"indent para editable block no-indent\"><em class=\"emphasis\">Lesson 1: All mortgages are not created equal<\/em>. Despite (or perhaps because of) the understandable enticement of home ownership, your judgment may have been faulty in this episode of your financial life cycle. Generally speaking, you\u2019re better off with a fixed-rate mortgage\u2014one on which the interest rate remains the same regardless of changes in market interest rates\u2014than with an ARM.[footnote]Keown, A. J., Personal Finance: Turning Money into Wealth, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007, 253\u201354.[\/footnote] As we\u2019ve explained at length in this chapter, planning is one of the cornerstones of personal-finances management, and ARMs don\u2019t lend themselves to planning. How well can you plan for your future mortgage payments if you can\u2019t be sure what they\u2019re going to be?<\/p>\r\n<p id=\"frank-ch14_s04_s02_s01_p04\" class=\"indent para editable block no-indent\">In addition, though interest rates may go up or down, planning for them to go <em class=\"emphasis\">down<\/em> and to take your mortgage payments with them doesn\u2019t make much sense. You can wait around to get lucky, and you can even try to get lucky (say, by buying a lottery ticket), but you certainly can\u2019t <em class=\"emphasis\">plan<\/em> to get lucky. Unfortunately, the only thing you can really <em class=\"emphasis\">plan<\/em> for is higher rates and higher payments. An ARM isn\u2019t a good idea if you don\u2019t know whether you can meet payments higher than your initial payment. In fact, if you have reason to believe that you can\u2019t meet the <em class=\"emphasis\">maximum<\/em> payment entailed by an ARM, you probably shouldn\u2019t take it on.<\/p>\r\n<p id=\"frank-ch14_s04_s02_s01_p05\" class=\"indent para editable block no-indent\"><em class=\"emphasis\">Lesson 2: It\u2019s risky out there<\/em>. You now know\u2014if you hadn\u2019t suspected it already\u2014that planning your personal finances would be a lot easier if you could do it in a predictable economic environment. But you can\u2019t, of course, and virtually constant instability in financial markets is simply one economic fact of life that you\u2019ll have to deal with as you make your way through the stages of your financial life cycle.<\/p>\r\n<p id=\"frank-ch14_s04_s02_s01_p06\" class=\"indent para editable block no-indent\">In other words, any foray into financial markets is risky. Basically, <em class=\"emphasis\">risk<\/em> is the possibility that cash flows will be variable.[footnote]Keown, A. J., et al., Foundations of Finance: The Logic and Practice of Financial Management, 6th ed. (Upper Saddle River, NJ: Pearson Education, 2008), 174.[\/footnote] Unfortunately, volatility in the overall economy is directly related to just one category of risks. There\u2019s a second category\u2014risks related to the activities of various organizations involved in your financial transactions. You\u2019ve already been introduced to the effects of these forms of financial risk, some of which have affected you directly, some of which have affected you indirectly, and some of which may affect you in the future:[footnote]Winger, B. J., and Ralph R. Frasca, Personal Finance: An Integrated Planning Approach, 6th ed. (Upper Saddle River, NJ: Prentice Hall, 2003), 250\u201351.[\/footnote]<\/p>\r\n\r\n<ul id=\"frank-ch14_s04_s02_s01_l01\" class=\"itemizedlist editable block\">\r\n \t<li style=\"text-align: left\">\r\n<p class=\"no-indent\"><em class=\"emphasis\">Management risk<\/em> is the risk that poor management of an organization with which you\u2019re dealing may adversely affect the outcome of your personal-finances planning. If you couldn\u2019t pay the higher rate on your ARM, managers at your lender probably failed to look deeply enough into your employment status and income.<\/p>\r\n<\/li>\r\n \t<li style=\"text-align: left\">\r\n<p class=\"no-indent\"><em class=\"emphasis\">Business risk<\/em> is the risk associated with a product that you\u2019ve chosen to buy. The fate of your mortgagor, who issued the original product\u2014your subprime ARM\u2014and that of everyone down the line who purchased it in some form (perhaps Freddy Mac and Merrill Lynch) bear witness to the pitfalls of business risk.<\/p>\r\n<\/li>\r\n \t<li style=\"text-align: left\">\r\n<p class=\"no-indent\"><em class=\"emphasis\">Financial risk<\/em> refers to the risk that comes from ill-considered indebtedness. Freddie Mac, Fannie Mae, and several investment banks have felt the repercussions of investing too much money in financial instruments that were backed with shaky assets (namely, subprime mortgages).<\/p>\r\n<\/li>\r\n<\/ul>\r\n<p id=\"frank-ch14_s04_s02_s01_p07\" class=\"indent para editable block no-indent\">In your own small way, of course, you, too, underestimated the pitfalls of all three of these forms of risk.<\/p>\r\n<p id=\"frank-ch14_s04_s02_s01_p08\" class=\"indent para editable block no-indent\"><em class=\"emphasis\">Lesson 3: Not all income is equally disposable<\/em>. <a class=\"xref\" href=\"#frank-ch14_s04_s02_s01_f01\">Figure 12.13 \u201cDebt-Income Ratio\u201d<\/a> shows the increase in the ratio of debt to disposable income among American households between 1985 and 2007. As you can see, the increase was dramatic\u2014from 80 percent in the early 1990s to about 130 percent in 2007.[footnote]Economist.com, \u201cGetting Worried Downtown,\u201d Economist.com, November 15, 2007, http:\/\/www.economist.com\/world\/unitedstates\/displaystory.cfm?story_id=10134077 (accessed November 11, 2011).[\/footnote] This rise was made possible by greater access to credit\u2014people borrow money in order to spend it, whether on consumption or on investments, and the more they can borrow, the more they can spend.<\/p>\r\n<p id=\"frank-ch14_s04_s02_s01_p09\" class=\"indent para editable block no-indent\">In the United States, greater access to credit in the late 1990s and early 2000s was made possible by rising housing prices: the more valuable your biggest asset, the more lenders are willing to lend you, even if what you\u2019re buying with your loan\u2014your house\u2014<em class=\"emphasis\">is<\/em> your biggest asset. As the borrower, your strategy is twofold: (1) Pay your mortgage out of your wage income, and (2) reap the financial benefits of an asset that appreciates in value. On top of everything else, you can count the increased value of your asset as <em class=\"emphasis\">savings<\/em>: when you sell the house at retirement, the difference between your mortgage and the current value of your house is yours to support you in your golden years.<\/p>\r\n\r\n<h3><span class=\"title-prefix\">Figure 12.13<\/span> Debt-Income Ratio<\/h3>\r\n<div class=\"caption\" style=\"text-align: center;font-size: .8em\" id=\"frank-ch14_s04_s02_s01_f01\">\r\n<p class=\"indent\"><a><img src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/4383b83c157d92581d7807f388555a27.jpg\" alt=\"Debt-Income Ratio\" style=\"max-width: 497px\" \/>\r\n<\/a><\/p>\r\n\r\n<\/div>\r\n<p id=\"frank-ch14_s04_s02_s01_p10\" class=\"indent para editable block no-indent\">As we know, however, housing prices had started to fall by the end of 2006. From a peak in mid-2006, they had fallen 8 percent by November 2007, and by April 2008 they were down from the 2006 peak by more than 19 percent\u2014the worst rate of decline since the Great Depression. And most experts expected it to get worse before it gets better, and unfortunately they were right. Housing prices have declined by 33 percent from the mid-2006 peak to the end of 2010.[footnote]Streitfeld, D., \u201cBottom May Be Near for Slide in Housing,\u201d The New York Times, May 31, 2011, http:\/\/www.nytimes.com\/2011\/06\/01\/business\/01housing.html (accessed November 10, 2011).[\/footnote][footnote]Walayat, N., \u201cU.S. House Prices Forecast 2008-2010,\u201d Market Oracle, June 29, 2008, http:\/\/www.marketoracle.co.uk\/Article5257.html (accessed November 11, 2011).[\/footnote]<\/p>\r\n<p id=\"frank-ch14_s04_s02_s01_p11\" class=\"indent para editable block no-indent\">So where do you stand? As you know, your house is worth no more than what you can get for it on the open market; thus the asset that you were counting on to help provide for your retirement has <em class=\"emphasis\">depreciated<\/em> substantially in little more than a decade. If you\u2019re one of the many Americans who tried to substitute equity in property for traditional forms of income savings, one financial specialist explains the unfortunate results pretty bluntly: your house \u201cis a place to live, not a brokerage account\u201d.[footnote]Doll, S. L., of Capital Performance Advisors, quoted by Amy Hoak, \u201cWhy a House Is Not a Piggy Bank to Tap Into for Your Retirement,\u201d Wall Street Journal, July 19, 2006, http:\/\/homes.wsj.com\/buysell\/markettrends\/20060719-hoak.html (accessed September 27, 2008).[\/footnote] If it\u2019s any consolation, you\u2019re not alone: a recent study by the Security Industries Association reports that, for many Americans, nearly half their net worth is based on the value of their home. Analysts fear that many of these people\u2014a significant proportion of the baby-boom generation\u2014won\u2019t be able to retire with the same standard of living that they\u2019ve been enjoying during their wage-earning years.[footnote]Hoak, A., \u201cWhy a House Is Not a Piggy Bank to Tap Into for Your Retirement,\u201d Wall Street Journal, July 19, 2006, http:\/\/homes.wsj.com\/buysell\/markettrends\/20060719-hoak.html (accessed September 27, 2008).[\/footnote]<\/p>\r\n\r\n<div class=\"bcc-box bcc-success\" id=\"frank-ch14_s04_s02_s01_n01\">\r\n<h3 class=\"title\">Key Takeaways<\/h3>\r\n<ul id=\"frank-ch14_s04_s02_s01_l02\" class=\"itemizedlist\">\r\n \t<li>Personal saving suffered a steep decline from 1980 to 2005 and remained at this negligible savings rate until it started moving up in 2008. The recent increase in the savings rate, however, is still below the long-term average of 7 percent.<\/li>\r\n \t<li>In addition to Americans\u2019 tendency to spend rather than save, the Federal Reserve observed that a lot of people had come to rely on the appreciation of such assets as stocks and residential property as a substitute for the practice of saving out of wage income.<\/li>\r\n \t<li><strong class=\"emphasis bold\">Subprime loans<\/strong> are made to would-be home buyers who don\u2019t qualify for market-set interest rates because of one or more risk factors\u2014income level, employment status, credit history, ability to make only a very low down payment. Interest rates may run from 8 percent to 10 percent and higher.<\/li>\r\n \t<li>An <strong class=\"emphasis bold\">adjustable-rate mortgage (ARM)<\/strong> is a home loan pegged to the increase or decrease of certain interest rates that the lender has to pay. If those rates go up, the mortgage rate and the home buyer\u2019s monthly payments go up, too. A <strong class=\"emphasis bold\">fixed-rate mortgage<\/strong> is a home loan on which the interest rate remains the same regardless of changes in market interest rates.<\/li>\r\n \t<li>In the years between 2001 and 2005, lenders made billions of dollars in subprime ARM loans to American home buyers. In 2006 and 2007, however, housing prices started to go down. Homeowners with subprime ARM loans weren\u2019t able to refinance, their mortgage rates began going up, and foreclosures became commonplace.<\/li>\r\n \t<li>In 2006 and 2007, largely because of mortgage-loan defaults, banks and other institutions that made mortgage loans began losing huge sums of money. These losses carried over to Fannie Mae and Freddie Mac, publicly traded government-sponsored organizations that make loans and provide loan guarantees to banks and other mortgage lenders.<\/li>\r\n \t<li>Next to be hit were major investment firms that had been buying subprime mortgages from banks and other original lenders, pooling the projected revenue\u2014payments made by the original individual home buyers\u2014and selling securities backed by the pooled revenue. When their rates went too high and home buyers couldn\u2019t make their house payments, these securities plummeted in value, and the investment banks and other institutions that had invested in them suffered significant losses.<\/li>\r\n \t<li>\r\n<p class=\"nonindent para\"><em class=\"emphasis\">Risk<\/em> is the possibility that cash flows will be variable. Three types of risk are related to the activities of various organizations that may be involved in your financial transactions:<\/p>\r\n\r\n<ol id=\"frank-ch14_s04_s02_s01_l03\" class=\"orderedlist\">\r\n \t<li><em class=\"emphasis\">Management risk<\/em> is the risk that poor management of an organization with which you\u2019re dealing may adversely affect the outcome of your personal-finances planning.<\/li>\r\n \t<li><em class=\"emphasis\">Business risk<\/em> is the risk associated with a product that you\u2019ve chosen to buy.<\/li>\r\n \t<li><em class=\"emphasis\">Financial risk<\/em> refers to the risk that comes from ill-considered indebtedness.<\/li>\r\n<\/ol>\r\n<\/li>\r\n<\/ul>\r\n<\/div>\r\n<div class=\"bcc-box bcc-info\" id=\"frank-ch14_s04_s02_s01_n02\">\r\n<h3 class=\"title\">Exercise<\/h3>\r\n<p class=\"nonindent simpara\">(AACSB) Analysis<\/p>\r\n<p id=\"frank-ch14_s04_s02_s01_p12\" class=\"indent para\">Write a report giving your opinion on how we got into the subprime mortgage crisis and how we\u2019ll get out of it<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<div class=\"chapter standard\" id=\"slug-14-5-cases-and-problems\">\r\n<div class=\"chapter-title-wrap\">\r\n<h1 class=\"chapter-title\" style=\"text-align: center\">Cases and Problems<\/h1>\r\n<\/div>\r\n<div class=\"ugc chapter-ugc\">\r\n<div class=\"bcc-box bcc-info\" id=\"frank-ch14_s05_n01\">\r\n<h3 class=\"title\"><strong class=\"emphasis bold\">Learning on the Web (AACSB)<\/strong><\/h3>\r\n<p id=\"frank-ch14_s05_p01\" class=\"nonindent para\">Go to <a class=\"link\" target=\"_blank\" href=\"https:\/\/www.quizzle.com\" rel=\"noopener noreferrer\">https:\/\/www.quizzle.com<\/a><a class=\"link\" href=\"http:\/\/www.annualcreditreport.com\"><\/a> and request a free copy of your credit report. Review the report. If you identify any errors, get them fixed. Write a brief report explaining the value of good credit.<\/p>\r\n\r\n<\/div>\r\n<div class=\"bcc-box bcc-info\" id=\"frank-ch14_s05_n02\">\r\n<h3 class=\"title\"><strong class=\"emphasis bold\">Ethics Angle (AACSB)<\/strong><\/h3>\r\n<p id=\"frank-ch14_s05_p02\" class=\"nonindent para\">Go online and read this article at Forbes.com: \u201cMost Common Resume Lies,\u201d by Kate DuBose Tomassi at <a class=\"link\" href=\"http:\/\/www.forbes.com\/workspecial\/2006\/05\/20\/resume-lies-work_cx_kdt_06work_0523lies.html\">http:\/\/www.forbes.com\/workspecial\/2006\/05\/20\/resume-lies-work_cx_kdt_06work_0523lies.html<\/a>. View the slide show of common r\u00e9sum\u00e9 lies. Answer these questions: What are the most common lies made in r\u00e9sum\u00e9s? Why is it a bad idea to lie on such a document? What are the potential consequences of misstating facts on your r\u00e9sum\u00e9?<\/p>\r\n\r\n<\/div>\r\n<div class=\"bcc-box bcc-info\" id=\"frank-ch14_s05_n03\">\r\n<h3 class=\"title\"><strong class=\"emphasis bold\">Team-Building Skills (AACSB)<\/strong><\/h3>\r\n<p id=\"frank-ch14_s05_p03\" class=\"nonindent para\">It\u2019s becoming more difficult for individuals to buy homes. This has meant that many people who would have bought a home have remained in apartments. In big cities, such as New York, sharing an apartment with roommates is a good way to save money. Yet it has some disadvantages. Get together as a team and identify the pros and cons of sharing housing. Pretend that each member of the group has agreed to share one apartment. Create a document that details each member\u2019s rights and responsibilities. Decide as a group whether the lease should be in one person\u2019s name or in all your names. Explain the pros and cons of both approaches.<\/p>\r\n\r\n<\/div>\r\n<div class=\"bcc-box bcc-info\" id=\"frank-ch14_s05_n04\">\r\n<h3 class=\"title\"><strong class=\"emphasis bold\">The Global View (AACSB)<\/strong><\/h3>\r\n<p id=\"frank-ch14_s05_p04\" class=\"nonindent para\">You\u2019re looking forward to taking a month-long vacation to Australia when you graduate from college in two years. Create a budget for this trip after researching likely costs. Determine how much you\u2019ll need for the trip and calculate how much you\u2019d have to save each month to afford the trip.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>","rendered":"<div class=\"part\" id=\"chapter-14-personal-finances\">\n<div class=\"part-title-wrap\">\n<p class=\"part-title\" style=\"text-align: left\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/14-collage-1024x1024.jpg\" class=\"aligncenter wp-image-1471\" alt=\"image\" style=\"font-weight: bold;text-align: center;font-size: 0.8em\" width=\"293\" height=\"293\" \/><\/p>\n<\/div>\n<div class=\"ugc part-ugc\">\n<div class=\"caption\" style=\"text-align: center;font-size: .8em;max-width: 500px\">\n<div class=\"informalfigure small block\" id=\"collins-ch14_s00_fx01\">Colin \u2013 DSC02066 \u2013 CC BY-SA 2.0; Pictures of Money \u2013 Piggy Bank \u2013 CC BY 2.0; Linus Bohman \u2013 Keys. \u2013 CC BY 2.0; Vicki \u2013 Sold it \u2013 CC BY-NC-ND 2.0.<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n<p id=\"collins-ch14_p01\" class=\"nonindent para editable block no-indent\">Do you wonder where your money goes? Do you have trouble controlling your spending? Have you run up the balances on your credit cards or gotten behind in your payments and hurt your credit rating? Do you worry about how you\u2019ll pay off your student loans? Would you like to buy a new car or even a home someday and you\u2019re not sure where the money will come from? If you do have extra money, do you know how to invest it? Do you know how to find the right job for you, land an offer, and evaluate the company\u2019s benefits? If these questions seem familiar to you, you could benefit from help in managing your personal finances. This chapter will provide that help.<\/p>\n<div class=\"section\" id=\"collins-ch14_s00\" xml:lang=\"en\">\n<h2 class=\"title editable block\">Where Does Your Money Go?<\/h2>\n<div class=\"bcc-box bcc-highlight\" id=\"collins-ch14_s00_n01\">\n<h3 class=\"title\">Learning Objectives<\/h3>\n<ol id=\"collins-ch14_s00_l01\" class=\"orderedlist\">\n<li>Offer advice to someone who is burdened with debt.<\/li>\n<li>Offer advice to someone whose monthly bills are too high.<\/li>\n<\/ol>\n<\/div>\n<p id=\"collins-ch14_s00_p01\" class=\"nonindent para editable block\">Let\u2019s say that you\u2019re single and twenty-eight. You have a good education and a good job\u2014you\u2019re pulling down $60K working with a local accounting firm. You have $6,000 in a retirement savings account, and you carry three credit cards. You plan to buy a house (maybe a condo) in two or three years, and you want to take your dream trip to the world\u2019s hottest surfing spots within five years (or, at the most, ten). Your only big worry is the fact that you\u2019re $70,000 in debt, mostly from student loans, your car loan, and credit card debt. In fact, even though you\u2019ve been gainfully employed for a total of six years now, you haven\u2019t been able to make a dent in that $70,000. You can afford the necessities of life and then some, but you\u2019ve occasionally wondered if you\u2019re ever going to have enough income to put something toward that debt.<a class=\"footnote\" title=\"Financial planner Elissa Buie helped to develop USA TODAY\u2019s Financial Diet. USA TODAY\u2019s Financial Diet, which ran in USA Today in 2005 (accessed November 10, 2011). Go to http:\/\/www.usatoday.com\/money\/perfi\/basics\/2005-04-14-financial-diet-excercise1_x.htm and use the embedded links to follow the entire series.\" id=\"return-footnote-292-1\" href=\"#footnote-292-1\" aria-label=\"Footnote 1\"><sup class=\"footnote\">[1]<\/sup><\/a><\/p>\n<p id=\"collins-ch14_s00_p02\" class=\"indent para editable block no-indent\">Now let\u2019s suppose that while browsing through a magazine in the doctor\u2019s office, you run across a short personal-finances self-help quiz. There are two sets of three statements each, and you\u2019re asked to check off each statement with which you <em class=\"emphasis\">agree<\/em>:<\/p>\n<ul id=\"collins-ch14_s00_l02\" class=\"itemizedlist editable block\">\n<li><strong class=\"emphasis bold\">Part 1<\/strong><\/li>\n<li>If I didn\u2019t have a credit card in my pocket, I\u2019d probably buy a lot less stuff.<\/li>\n<li>My credit card balance usually goes up at the holidays.<\/li>\n<li>If I really want something that I can\u2019t afford, I put it on my credit card or sign up for a payment plan.<\/li>\n<\/ul>\n<ul id=\"collins-ch14_s00_l03\" class=\"itemizedlist editable block\">\n<li><strong class=\"emphasis bold\">Part 2<\/strong><\/li>\n<li>I can barely afford my apartment.<\/li>\n<li>Whenever something goes wrong (car repairs, doctors\u2019 bills), I have to use my credit card.<\/li>\n<li>I almost never spend money on stuff I don\u2019t need, but I always seem to owe a balance on my credit card bill.<\/li>\n<\/ul>\n<p id=\"collins-ch14_s00_p03\" class=\"indent para editable block no-indent\">At the bottom of the page, you\u2019re asked whether you agreed with <em class=\"emphasis\">any<\/em> of the statements in Part 1 and <em class=\"emphasis\">any<\/em> of the statements in Part 2. It turns out that you answered yes in both cases and are thereby informed that you\u2019re probably jeopardizing your entire financial future.<\/p>\n<p id=\"collins-ch14_s00_p04\" class=\"indent para editable block no-indent\">Unfortunately, personal-finances experts tend to support the author of the quiz: if you agreed with any statement in Part 1, you have a problem with splurging; if you agreed with any statement in Part 2, your monthly bills are too high for your income.<\/p>\n<div class=\"section\" id=\"collins-ch14_s00_s01\">\n<h2>Building a Good Credit Rating<\/h2>\n<p id=\"collins-ch14_s00_s01_p01\" class=\"nonindent para editable block\">So, you have a financial problem: according to the quick test you took, you\u2019re a splurger and your bills are too high for your income. How does this put you at risk? If you get in over your head and can\u2019t make your loan or rent payments on time, you risk hurting your credit\u2014your ability to borrow in the future.<\/p>\n<p id=\"collins-ch14_s00_s01_p02\" class=\"indent para editable block no-indent\">Let\u2019s talk about your credit. How do potential lenders decide whether you\u2019re a good or bad credit risk? If you\u2019re a poor credit risk, how does this affect your ability to borrow, or the rate of interest you have to pay, or both? Here\u2019s the story. Whenever you use credit, those you borrow from (retailers, credit card companies, banks) provide information on your debt and payment habits to three national credit bureaus: Equifax, Experian, and TransUnion. The credit bureaus use the information to compile a numerical credit score, generally called a FICO score; it ranges from 300 to 900, with the majority of people falling in the 600\u2013700 range. (Here\u2019s a bit of trivia to bring up at a dull party: FICO stands for Fair Isaac Company\u2014the company that developed the score.) In compiling the score, the credit bureaus consider five criteria: payment history\u2014do you pay your bills on time? (the most important), total amount owed, length of your credit history, amount of new credit you have, and types of credit you use. The credit bureaus share their score and other information about your credit history with their subscribers.<\/p>\n<p id=\"collins-ch14_s00_s01_p03\" class=\"indent para editable block no-indent\">So what does this do for you? It depends. If you paid your bills on time, carried only a reasonable amount of debt, didn\u2019t max out your credit cards, had a history of borrowing, hadn\u2019t applied for a bunch of new loans, and borrowed from a mix of lenders, you\u2019d be in good shape. Your FICO score would be high and lenders would like you. Because of your high credit score, they\u2019d give you the loans you asked for at reasonable interest rates. But if your FICO score is low (perhaps you weren\u2019t so good at paying your bills on time), lenders won\u2019t like you and won\u2019t lend you money (or would lend it to you at high interest rates). A low FICO score can raise the amount you have to pay for auto insurance and cell phone plans and can even affect your chances of renting an apartment or landing a particular job. So it\u2019s very, very, very (the last \u201cvery\u201d is for emphasis) important that you do everything possible to earn a high credit score. If you don\u2019t know your score, here is what you should do: go to <a class=\"link\" target=\"_blank\" href=\"https:\/\/www.quizzle.com\" rel=\"noopener noreferrer\">https:\/\/www.quizzle.com\/<\/a> and request a free copy of your credit report.<\/p>\n<p id=\"collins-ch14_s00_s01_p04\" class=\"indent para editable block no-indent\">As a young person, though, how do you build a credit history that will give you a high FICO score? Your means for doing this changed in 2009 with the passage of the Credit CARD Act, federal legislation designed to stop credit card issuers from treating its customers unfairly.<a class=\"footnote\" title=\"Irby, L., \u201c10 Key Changes of the New Credit Card Rules,\u201d About.com, http:\/\/credit.about.com\/od\/consumercreditlaws\/tp\/new-credit-card-rules.htm (accessed November 10, 2011).\" id=\"return-footnote-292-2\" href=\"#footnote-292-2\" aria-label=\"Footnote 2\"><sup class=\"footnote\">[2]<\/sup><\/a> Based on feedback from several financial experts, Emily Starbuck Gerson and Jeremy Simon of CreditCards.com compiled the following list of ways students can build good credit.<a class=\"footnote\" title=\"Gerson, E. S., and Jeremy M. Simon, \u201c10 Ways Students Can Build Good Credit,\u201d CreditCards.com, http:\/\/www.creditcards.com\/credit-card-news\/help\/10-ways-students-get-good-credit-6000.php (accessed November 10, 2011).\" id=\"return-footnote-292-3\" href=\"#footnote-292-3\" aria-label=\"Footnote 3\"><sup class=\"footnote\">[3]<\/sup><\/a><\/p>\n<ol id=\"collins-5300-20111128-105646-487930\" class=\"orderedlist editable block\">\n<li><em class=\"emphasis\">Become an authorized user on your parents\u2019 account.<\/em> According to the rules set by the Credit CARD Act, if you are under age twenty-one and do not have independent income, you can get a credit card in your own name <strong class=\"emphasis bold\">only<\/strong> if you have a cosigner (who is over twenty-one and does have an income). This is a time when a parent can come in handy. Your parent could add you to his or her credit card account as an authorized user. Of course, this means your parent will know what you\u2019re spending your money on (which could make for some interesting conversations). But, on the plus side, by piggybacking on your parent\u2019s card you are building good credit (assuming, of course, that your parent pays the bill on time).<\/li>\n<li><em class=\"emphasis\">Obtain your own credit card.<\/em> If you can show the credit card company that you have sufficient income to pay your credit card bill, you might be able to get your own card. It isn\u2019t as easy to get a card as it was before the passage of the Credit CARD Act, and you won\u2019t get a lot of goodies for signing up (as was true before), but you stand a chance.<\/li>\n<li><em class=\"emphasis\">Get the right card for you.<\/em> If you meet the qualifications to get a credit card on your own, look for the best card for you. Although it sounds enticing to get a credit card that gives you frequent flyer miles for every dollar you spend, the added cost for this type of card, including higher interest charges and annual fees, might not be worth it. Look for a card with a low interest rate and no annual fee. As another option, you might consider applying for a retail credit card, such as a Target or Macy\u2019s card.<\/li>\n<li><em class=\"emphasis\">Use the credit card for occasional, small purchases.<\/em> If you do get a credit card or a retail card, limit your charges to things you can afford. But don\u2019t go in the other direction and put the card in a drawer and never use it. Your goal is to build a good credit history by showing the credit reporting agencies that you can handle credit and pay your bill on time. To accomplish this, you need to use the card.<\/li>\n<li><em class=\"emphasis\">Avoid big-ticket buys, except in case of emergency.<\/em> Don\u2019t run up the balance on your credit card by charging high-cost, discretionary items, such as a trip to Europe during summer break, which will take a long time to pay off. Leave some of your credit line accessible in case you run into an emergency, such as a major car repair.<\/li>\n<li><em class=\"emphasis\">Pay off your balance each month.<\/em> If you cannot pay off the balance on your credit card each month, this is likely a signal that you\u2019re living beyond your means. Quit using the card until you bring the balance down to zero. When you\u2019re first building credit, it\u2019s important to pay off the balance on your card at the end of each month. Not only will this improve your credit history, but it will save you a lot in interest charges.<\/li>\n<li><em class=\"emphasis\">Pay all your other bills on time.<\/em> Don\u2019t be fooled into thinking that the only information collected by the credit agencies is credit card related. They also collect information on other payments including phone plans, Internet service, rental payments, traffic fines, and even library overdue fees.<\/li>\n<li><em class=\"emphasis\">Don\u2019t cosign for your friends.<\/em> If you are twenty-one and have an income, a nonworking, under-age-twenty-one friend might beg you to cosign his credit card application. Don\u2019t do it! As a cosigner, the credit card company can make you pay your friend\u2019s balance (plus interest and fees) if he fails to meet his obligation. And this can blemish your own credit history and lower your credit rating.<\/li>\n<li><em class=\"emphasis\">Do not apply for several credit cards at one time.<\/em> Just because you can get several credit cards, this doesn\u2019t mean that you should. When you\u2019re establishing credit, applying for several cards over a short period of time can lower your credit rating. Stick with one card.<\/li>\n<li><em class=\"emphasis\">Use student loans for education expenses only, and pay on time.<\/em> For many, student loans are necessary. But avoid using student loans for noneducational purposes. All this does is run up your debt. When your loans become due, consolidate them if appropriate and don\u2019t miss a payment.<\/li>\n<\/ol>\n<p id=\"e916.collins-ch14_s01_s03_s01_p08\" class=\"indent para editable block no-indent\">What if you\u2019ve already damaged your credit score\u2014what can you do to raise it? Do what you should have done in the first place: pay your bills on time, pay more than the minimum balance due on your credit cards and charge cards, keep your card balances low, and pay your debts off as quickly as possible. Also, scan your credit report for any errors. If you find any, work with the credit bureau to get them corrected.<\/p>\n<\/div>\n<div class=\"section\" id=\"collins-ch14_s00_s02\">\n<h2 class=\"title editable block\">Understand the Cost of Borrowing<\/h2>\n<p id=\"collins-ch14_s00_s02_p01\" class=\"nonindent para editable block\">Because your financial problem was brought on, in part, because you have too much debt, you should stop borrowing. But, what if your car keeps breaking down and you\u2019re afraid of getting stuck on the road some night? So, you\u2019re thinking of replacing it with a used car that costs $10,000. Before you make a final decision to incur the debt, you should understand its costs. The rate of interest matters a lot. Let\u2019s compare three loans at varying interest rates: 6, 10, and 14 percent. We\u2019ll look at the monthly payment, as well as the total interest paid over the life of the loan.<\/p>\n<div class=\"informaltable block\">\n<table class=\"aligncenter\" style=\"border-spacing: 0px;height: 64px\" cellpadding=\"0\">\n<thead>\n<tr style=\"height: 16px\">\n<th style=\"height: 16px;width: 671.906px\" colspan=\"4\">$10,000 Loan for 4 Years at Various Interest Rates<\/th>\n<\/tr>\n<tr style=\"height: 16px\">\n<th style=\"height: 16px;width: 274.906px\">Interest Rate<\/th>\n<th style=\"height: 16px;width: 114.906px\">6%<\/th>\n<th style=\"height: 16px;width: 116.906px\">10%<\/th>\n<th style=\"height: 16px;width: 116.906px\">14%<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr style=\"height: 16px\">\n<td style=\"height: 16px;width: 274.906px\">Monthly Payment<\/td>\n<td style=\"height: 16px;width: 114.906px\">$235<\/td>\n<td style=\"height: 16px;width: 116.906px\">$254<\/td>\n<td style=\"height: 16px;width: 116.906px\">$273<\/td>\n<\/tr>\n<tr style=\"height: 16px\">\n<td style=\"height: 16px;width: 274.906px\">Total Interest Paid<\/td>\n<td style=\"height: 16px;width: 114.906px\">$1,272<\/td>\n<td style=\"height: 16px;width: 116.906px\">$2,172<\/td>\n<td style=\"height: 16px;width: 116.906px\">$3,114<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p id=\"collins-ch14_s00_s02_p02\" class=\"indent para editable block no-indent\">If your borrowing interest rate is 14 percent, rather than 6 percent, you\u2019ll end up paying an additional $1,842 in interest over the life of the loan. Your borrowing cost at 14 percent is more than twice as much as it is at 6 percent. The conclusion: search for the best interest rates and add the cost of interest to the cost of whatever you\u2019re buying before deciding whether you want it and can afford it. If you have to borrow the money for the car at the 14 percent interest rate, then the true cost of the car isn\u2019t $10,000, but rather $13,114.<\/p>\n<p id=\"collins-ch14_s00_s02_p03\" class=\"indent para editable block no-indent\">Now, let\u2019s explore the complex world of credit cards. First extremely important piece of information: not all credit cards are equal. Second extremely important piece of information: watch out for credit card fees! Credit cards are a way of life for most of us. But they can be very costly. Before picking a credit card, do your homework. A little research can save you a good deal of money. There are a number of costs you need to consider:<\/p>\n<ul id=\"collins-ch14_s00_s02_l01\" class=\"itemizedlist editable block\">\n<li><em class=\"emphasis\">Finance charge<\/em>. The interest rate charged to you often depends on your credit history; those with good credit get the best rates. Some cards offer low \u201cintroductory\u201d rates\u2014but watch out; these rates generally go up after six months.<\/li>\n<li><em class=\"emphasis\">Annual fee<\/em>. Many credit cards charge an annual fee: a yearly charge for using the card. You can avoid annual fees by shopping around (though there can be trade-offs: you might end up paying a higher interest rate to avoid an annual fee).<\/li>\n<li><em class=\"emphasis\">Over-limit fee<\/em>. This fee is charged whenever you exceed your credit line.<\/li>\n<li><em class=\"emphasis\">Late payment fee<\/em>. Pretty self-explanatory, but also annoying. Late payment fees are common for students; a study found students account for 6 percent of all overdraft fees.<a class=\"footnote\" title=\"Brackey, H. J., \u201cStudents Burdened by Overdraft Charges, Group Says,\u201d Wisdom of the Rich Dad, http:\/\/www.richdadwisdom.com\/2007\/12\/students-burdened-by-overdraft-charges\/ (accessed November 11, 2001).\" id=\"return-footnote-292-4\" href=\"#footnote-292-4\" aria-label=\"Footnote 4\"><sup class=\"footnote\">[4]<\/sup><\/a> One way to decrease the chance of paying late is to call the credit card company and ask them to set your payment due date for a time that works well for you. For example, if you get paid at the end of the month, ask for a payment date around the 10th of the month. Then you can pay your bill when you get paid and avoid a late fee.<\/li>\n<li><em class=\"emphasis\">Cash advance fee<\/em>. While it\u2019s tempting to get cash from your credit card, it\u2019s pretty expensive. You\u2019ll end up paying a fee (around 3 percent of the advance), and the interest rate charged on the amount borrowed can be fairly high.<\/li>\n<\/ul>\n<p id=\"collins-ch14_s00_s02_p04\" class=\"indent para editable block no-indent\">An alternative to a credit card is a debit card, which pulls money out of your checking account whenever you use the card to buy something or get cash from an ATM. These cards don\u2019t create a loan when used. So, are they better than credit cards? It depends\u2014each has its advantages and disadvantages. A big advantage of a credit card is that it helps you build credit. A disadvantage is that you can get in over your head in debt and possibly miss payments (thereby incurring a late payment fee). Debit cards help control spending. Theoretically, you can\u2019t spend more than you have in your checking account. But be careful\u2014if you don\u2019t keep track of your checking account balance, it\u2019s easy to overdraft your account when using your debit card. Prior to July 2010, most banks just accepted purchases or ATM withdrawals even if a customer didn\u2019t have enough money in his or her account to cover the transaction. The banks didn\u2019t do this to be nice, and they didn\u2019t ask customers if they wanted this done\u2014they just overdrafted the customer\u2019s account and charged the customer a hefty overdraft fee of around $35 through what they call an \u201coverdraft protection program\u201d.<a class=\"footnote\" title=\"Chu, K., \u201cDebit Card Overdraft Fees Hit Record Highs,\u201d USA Today, January 24, 2007, http:\/\/www.usatoday.com\/money\/perfi\/credit\/2007-01-24-debit-card-fees_x.htm (accessed November 11, 2011).\" id=\"return-footnote-292-5\" href=\"#footnote-292-5\" aria-label=\"Footnote 5\"><sup class=\"footnote\">[5]<\/sup><\/a> Overdraft fees can be quite expensive, particularly if you used the card to purchase a hamburger and soda at a fast-food restaurant.<\/p>\n<p id=\"e917.collins-5300-20111128-110359-894259\" class=\"indent para editable block no-indent\">The Federal Reserve changed the debit card rules in 2010, and now banks must get your permission before they enroll you in an overdraft protection program.<a class=\"footnote\" title=\"Board of Governors of the Federal Reserve System, \u201cWhat You Need to Know: Bank Account Overdraft Fees,\u201d Board of Governors of the Federal Reserve System, http:\/\/www.federalreserve.gov\/consumerinfo\/wyntk_overdraft.htm (accessed November 10, 2011).\" id=\"return-footnote-292-6\" href=\"#footnote-292-6\" aria-label=\"Footnote 6\"><sup class=\"footnote\">[6]<\/sup><\/a> If you opt in (agree), things work as before: You can spend or take out more money through an ATM machine than you have in your account, and the bank lets you do this. But it charges you a fee of about $30 plus additional fees of $5 per day if you don\u2019t cover the overdraft in five days. If you don\u2019t opt in, the bank will not let you overdraft your account. The downside is that you could get embarrassed at the cash register when your purchase is rejected or at a restaurant when trying to pay for a meal. Obviously, you want to avoid being charged an overdraft fee or being embarrassed when paying for a purchase. Here are some things you can do to decrease the likelihood that either would happen:<a class=\"footnote\" title=\"Prater, C., \u201cConsumers to Fed: Stop Debit Card Overdraft Opt-In \u2018Scare\u2019 Tactics: New Debit Card Overdraft Rules Slated to Start July 1, 2010,\u201d CreditCards.com, http:\/\/www.creditcards.com\/credit-card-news\/debit-card-overdraft-fee-opt-in-rules-1282.php (accessed November 10, 2011).\" id=\"return-footnote-292-7\" href=\"#footnote-292-7\" aria-label=\"Footnote 7\"><sup class=\"footnote\">[7]<\/sup><\/a><\/p>\n<ul id=\"collins-5300-20111128-110534-439149\" class=\"itemizedlist editable block\">\n<li>Ask your bank to e-mail or text you when your account balance is low.<\/li>\n<li>Have your bank link your debit card account to a savings account. If more money is needed to cover a purchase, the bank will transfer the needed funds from your savings to your checking account.<\/li>\n<li>Use the online banking feature offered by most banks to check your checking account activity.<\/li>\n<\/ul>\n<\/div>\n<div class=\"section\" id=\"collins-ch14_s00_s03\">\n<h2 class=\"title editable block\">A Few More Words about Debt<\/h2>\n<p id=\"collins-ch14_s00_s03_p01\" class=\"nonindent para editable block\">What should you do now to turn things around\u2014to start getting out of debt? According to many experts, you need to take two steps:<\/p>\n<ol id=\"collins-ch14_s00_s03_l01\" class=\"orderedlist editable block\">\n<li>Cut up your credit cards and start living on a cash-only basis.<\/li>\n<li>Do whatever you can to bring down your monthly bills.<\/li>\n<\/ol>\n<h3><span class=\"title-prefix\">Figure 12.1 Visa Credit Card<\/span><\/h3>\n<div class=\"caption\" style=\"text-align: center;font-size: .8em;max-width: 500px\">\n<div class=\"figure small editable block\" id=\"collins-ch14_s00_s03_f01\">\n<p class=\"indent\"><a><img decoding=\"async\" src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/14.0.4.jpg\" alt=\"A shredded credit card\" class=\"aligncenter size-full wp-image-1473\" width=\"500\" \/><\/a><\/p>\n<\/div>\n<\/div>\n<p>Living on a cash-only basis is the first step in getting debt under control.<a class=\"footnote\" title=\"Frankieleon \u2013 won\u2019t hurt you no more \u2013 CC BY 2.0\" id=\"return-footnote-292-8\" href=\"#footnote-292-8\" aria-label=\"Footnote 8\"><sup class=\"footnote\">[8]<\/sup><\/a><span style=\"font-size: 14pt\"><\/span><\/p>\n<p class=\"indent para editable block no-indent\">Step 1 in this abbreviated two-step personal-finances \u201cplan\u201d is probably the easier of the two, but taking even this step can be hard enough. In fact, a lot of people would find it painful to give up their credit cards, and there\u2019s a perfectly logical reason for their reluctance: the degree of pain that one would suffer from destroying one\u2019s credit cards probably stands in direct proportion to one\u2019s reliance on them.<\/p>\n<p id=\"collins-ch14_s00_s03_p03\" class=\"indent para editable block no-indent\">As of May 2011, total credit card debt in the United States is about $780 billion, out of $2.5 trillion in total consumer debt. Closer to home, one recent report puts <em class=\"emphasis\">average credit card debt per U.S. household<\/em> at $16,000 (up 100 percent since 2000). The 600 million credit cards held by U.S. consumers carry an average interest rate on these cards of 15 percent.<a class=\"footnote\" title=\"CreditCards.com, \u201cCredit Card Statistics, Industry Facts, Debt Statistics,\u201d CreditCards.com, http:\/\/www.creditcards.com\/credit-card-news\/credit-card-industry-facts-personal-debt-statistics-1276.php (accessed November 10, 2011).\" id=\"return-footnote-292-9\" href=\"#footnote-292-9\" aria-label=\"Footnote 9\"><sup class=\"footnote\">[9]<\/sup><\/a> Why are these numbers important? Primarily because, <em class=\"emphasis\">on average<\/em>, too many consumers have debt that they simply can\u2019t handle. \u201cCredit card debt,\u201d says one expert on the problem, \u201cis clobbering millions of Americans like a wrecking ball,\u201d<a class=\"footnote\" title=\"Wyden, R., quoted in \u201cAvoiding the Pitfalls of Credit Card Debt\u201d (Center for American Progress Action Fund, 2008), http:\/\/www.americanprogressaction.org\/issues\/2008\/avoiding_pitfalls.html (accessed September 13, 2008).\" id=\"return-footnote-292-10\" href=\"#footnote-292-10\" aria-label=\"Footnote 10\"><sup class=\"footnote\">[10]<\/sup><\/a> and if you\u2019re like most of us, you\u2019d probably like to know whether your personal-finances habits are setting you up to become one of the clobbered.<\/p>\n<p id=\"collins-ch14_s00_s03_p04\" class=\"indent para editable block no-indent\">If, for example, you\u2019re worried that your credit card debt may be overextended, the American Bankers Association suggests that you ask yourself a few questions:<a class=\"footnote\" title=\"Lipton, J., \u201cChoking On Credit Card Debt,\u201d Forbes.com, September 12, 2008, http:\/\/www.forbes.com\/finance\/2008\/09\/12\/credit-card-debt-pf-ii-in_jl_0911creditcards_inl.html (accessed November 11, 2011).\" id=\"return-footnote-292-11\" href=\"#footnote-292-11\" aria-label=\"Footnote 11\"><sup class=\"footnote\">[11]<\/sup><\/a><\/p>\n<ul>\n<li style=\"list-style-type: none\">\n<ul id=\"collins-ch14_s00_s03_l02\" class=\"itemizedlist editable block\">\n<li>\n<p class=\"no-indent\">Do I pay only the minimum month after month?<\/p>\n<\/li>\n<li>\n<p class=\"no-indent\">Do I run out of cash all the time?<\/p>\n<\/li>\n<li>\n<p class=\"no-indent\">Am I late on critical payments like my rent or my mortgage?<\/p>\n<\/li>\n<li>\n<p class=\"no-indent\">Am I taking longer and longer to pay off my balance(s)?<\/p>\n<\/li>\n<li>\n<p class=\"no-indent\">Do I borrow from one credit card to pay another?<\/p>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p id=\"collins-ch14_s00_s03_p05\" class=\"indent para editable block no-indent\">If such habits as these have helped you dig yourself into a hole that\u2019s steadily getting deeper and steeper, experts recommend that you take three steps as quickly as possible:<a class=\"footnote\" title=\"Lipton, J., \u201cChoking On Credit Card Debt,\u201d Forbes.com, September 12, 2008, http:\/\/www.forbes.com\/finance\/2008\/09\/12\/credit-card-debt-pf-ii-in_jl_0911creditcards_inl.html (accessed November 11, 2011).\" id=\"return-footnote-292-12\" href=\"#footnote-292-12\" aria-label=\"Footnote 12\"><sup class=\"footnote\">[12]<\/sup><\/a><\/p>\n<ol id=\"collins-ch14_s00_s03_l03\" class=\"orderedlist editable block\">\n<li><em class=\"emphasis\">Get to know the enemy<\/em>. You may not want to know, but you should collect all your financial statements and figure out exactly how much credit card debt you\u2019ve piled up.<\/li>\n<li><em class=\"emphasis\">Don\u2019t compound the problem with late fees<\/em>. List each card, along with interest rates, monthly minimums, and due dates. Bear in mind that paying late fees is the same thing as tossing what money you have left out the window.<\/li>\n<li><em class=\"emphasis\">Now cut up your credit cards (or at least stop using them)<\/em>. Pay cash for everyday expenses, and remember: swiping a piece of plastic is one thing (a little too easy), while giving up your hard-earned cash is another (a little harder).<\/li>\n<\/ol>\n<p id=\"collins-ch14_s00_s03_p06\" class=\"indent para editable block no-indent\">And, if you find you\u2019re unable to pay your debts, don\u2019t hide from the problem, as it will not go away. Call your lenders and explain the situation. They should be willing to work with you in setting up a payment plan. If you need additional help, contact a nonprofit credit assistance group such as the National Foundation for Credit Counseling (<a class=\"link\" href=\"http:\/\/www.nfcc.org\">http:\/\/www.nfcc.org<\/a>).<\/p>\n<\/div>\n<div class=\"section\" id=\"collins-ch14_s00_s04\">\n<h2 class=\"title editable block\">Why You Owe It to Yourself to Manage Your Debts<\/h2>\n<p id=\"collins-ch14_s00_s04_p01\" class=\"nonindent para editable block\">Now, it\u2019s time to tackle step 2 of our recommended personal-finances miniplan: do whatever you can to bring down your monthly bills. As we said, many people may find this step easier than step 1\u2014cutting up your credit cards and starting to live on a cash-only basis.<\/p>\n<p id=\"collins-ch14_s00_s04_p02\" class=\"indent para editable block no-indent\">If you want to take a gradual approach to step 2, one financial planner suggests that you perform the following \u201cexercises\u201d for one week:<a class=\"footnote\" title=\"Financial planner Elissa Buie helped to develop USA TODAY\u2019s Financial Diet.\" id=\"return-footnote-292-13\" href=\"#footnote-292-13\" aria-label=\"Footnote 13\"><sup class=\"footnote\">[13]<\/sup><\/a><\/em><\/p>\n<ul id=\"collins-ch14_s00_s04_l01\" class=\"itemizedlist editable block\">\n<li>Keep a written record of everything you spend and total it at week\u2019s end.<\/li>\n<li>Keep all your ATM receipts and count up the fees.<\/li>\n<li>Take $100 out of the bank and don\u2019t spend a penny more.<\/li>\n<li>Avoid gourmet coffee shops.<\/li>\n<\/ul>\n<p id=\"collins-ch14_s00_s04_p03\" class=\"indent para editable block no-indent\">Among other things, you\u2019ll probably be surprised at how much of your money can become somebody else\u2019s money on a week-by-week basis. If, for example, you spend $3 every day for one cup of coffee at a coffee shop, you\u2019re laying out nearly $1,100 a year. If you use your ATM card at a bank other than your own, you\u2019ll probably be charged a fee that can be as high as $3. The average person pays more than $60 a year in ATM fees, and if you withdraw cash from an ATM twice a week, you could be racking up $300 in annual fees. As for your ATM receipts, they\u2019ll tell you whether, on top of the fee that you\u2019re charged by that other bank\u2019s ATM, your <em class=\"emphasis\">own<\/em> bank is <em class=\"emphasis\">also<\/em> tacking on a surcharge.<a class=\"footnote\" title=\"Sun Trust Banks, \u201cMoney Management\u201d (2008), http:\/\/www.suntrusteducation.com\/toolbox\/moneymgt_spendless.asp (accessed September 16, 2008)\" id=\"return-footnote-292-14\" href=\"#footnote-292-14\" aria-label=\"Footnote 14\"><sup class=\"footnote\">[14]<\/sup><\/a><a class=\"footnote\" title=\"SavingAdvice.com, \u201cReduce ATM Fees\u2014Daily Financial Tip,\u201d SavingAdvice.com, April 5, 2006, http:\/\/www.savingadvice.com\/blog\/2006\/04\/05\/10533_reduce-atm-fees-daily-financial-tip.html\" id=\"return-footnote-292-15\" href=\"#footnote-292-15\" aria-label=\"Footnote 15\"><sup class=\"footnote\">[15]<\/sup><\/a><a class=\"footnote\" title=\"Loeb, M., \u201cFour Ways to Keep ATM Fees from Draining Your Bank Account,\u201d MarketWatch (June 14, 2007), http:\/\/www.marketwatch.com\/news\/story\/four-ways-keep-atm-fees\/story.aspx?guid=%7BEFB2C425-B7F8-40C4-8720-D684A838DBDA%7D (accessed November 11 2011)\" id=\"return-footnote-292-16\" href=\"#footnote-292-16\" aria-label=\"Footnote 16\"><sup class=\"footnote\">[16]<\/sup><\/a><a class=\"footnote\" title=\"Rosenberger, K., \u201cHow to Avoid ATM Fees,\u201d Helium (2008), http:\/\/www.helium.com\/items\/1100945-how-to-avoid-atm-fees (accessed November 11, 2011).\" id=\"return-footnote-292-17\" href=\"#footnote-292-17\" aria-label=\"Footnote 17\"><sup class=\"footnote\">[17]<\/sup><\/a><\/p>\n<p id=\"collins-ch14_s00_s04_p04\" class=\"indent para editable block no-indent\">If this little exercise proves enlightening\u2014or if, on the other hand, it apparently fails to highlight any potential pitfalls in your spending habits\u2014you might devote the next week to another exercise:<\/p>\n<ul id=\"collins-ch14_s00_s04_l02\" class=\"itemizedlist editable block\">\n<li>Put all your credit cards in a drawer and get by on cash.<\/li>\n<li>Take your lunch to work.<\/li>\n<li>Buy nothing but groceries and gasoline.<\/li>\n<li>Use coupons whenever you go to the grocery store (but don\u2019t buy anything just because you happen to have a coupon).<\/li>\n<\/ul>\n<p id=\"collins-ch14_s00_s04_p05\" class=\"indent para editable block no-indent\">The obvious question that you need to ask yourself at the end of week 2 is, \u201chow much did I save?\u201d An equally interesting question, however, is, \u201cwhat can I do without?\u201d One survey asked five thousand financial planners to name the two expenses that most consumers should find easiest to cut back on. <a class=\"xref\" href=\"#collins-ch14_s00_s04_f01\">Figure 12.2 \u201cReducible Expenses\u201d<\/a> shows the results.<\/p>\n<h3><span class=\"title-prefix\">Figure 12.2<\/span> Reducible Expenses<\/h3>\n<div class=\"caption\" style=\"text-align: center;font-size: .8em\" id=\"collins-ch14_s00_s04_f01\">\n<p class=\"indent\"><a><img decoding=\"async\" src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/f1d2c19e19ad24831792a3ee7ebfcb51.jpg\" alt=\"Reducible Expenses (from lowest to highest): health club dues, computer, software, movie rentals, buying CDs, books, other (including buying a less expensive car, taking a less extravagant vacation, eliminating impulse clothes purchases), gifts, cell phone use, cable TV costs, buying one less takeout dinner, and eating one less dinner out\" style=\"max-width: 497px\" \/><br \/>\n<\/a><\/p>\n<\/div>\n<p id=\"collins-ch14_s00_s04_p06\" class=\"indent para editable block no-indent\">You may or may not be among the American consumers who buy thirty-five million cans of Bud Light each and every day, or 150,000 pounds of Starbucks coffee, or 2.4 million Burger King hamburgers, or 628 Toyota Camrys. Yours may not be one of the 70 percent of U.S. households with an unopened consumer-electronics product lying around.<a class=\"footnote\" title=\"Arrington, M., \u201ceBay Survey Says Americans Buy Crap They Don\u2019t Want,\u201d TechCrunch, August 21, 2008, http:\/\/techcrunch.com\/2008\/08\/21\/ebay-survey-says-americans-buy-crap-they-dont-want\/ (accessed November 11, 2011).\" id=\"return-footnote-292-18\" href=\"#footnote-292-18\" aria-label=\"Footnote 18\"><sup class=\"footnote\">[18]<\/sup><\/a> And you may or may not be ready to make some major adjustments in your personal-spending habits, but if, at age twenty-eight, you have a good education and a good job, a $60,000 income, and a $70,000 debt\u2014by no means an implausible scenario\u2014there\u2019s a very good reason why you should think hard about controlling your modest share of that $2.5 trillion in U.S. consumer debt: your level of indebtedness will be a key factor in your ability\u2014or inability\u2014to reach your longer-term financial goals, such as home ownership, a dream trip, and, perhaps most important, a reasonably comfortable retirement.<\/p>\n<p id=\"collins-ch14_s00_s04_p07\" class=\"indent para editable block no-indent\">The great English writer Samuel Johnson once warned, \u201cDo not accustom yourself to consider debt only as an inconvenience; you will find it a calamity.\u201d In Johnson\u2019s day, you could be locked up for failing to pay your debts; there were even so-called debtors\u2019 prisons for the purpose, and we may suppose that the prospect of doing time for owing money was one of the things that Johnson had in mind when he spoke of debt as a potential \u201ccalamity.\u201d We don\u2019t expect that you\u2019ll ever go to prison on account of indebtedness, and we won\u2019t suggest that, say, having to retire to a condo in the city instead of a tropical island is a \u201ccalamity.\u201d We\u2019ll simply say that you\u2019re more likely to meet your lifetime financial goals\u2014whatever they are\u2014if you plan for them. What you need to know about planning for and reaching those goals is the subject of this chapter.<\/p>\n<div class=\"bcc-box bcc-success\" id=\"collins-ch14_s00_s04_n01\">\n<h3 class=\"title\">Key Takeaways<\/h3>\n<ul id=\"collins-ch14_s00_s04_l03\" class=\"itemizedlist\">\n<li>Before buying something on credit, ask yourself whether you really need the goods or services, can afford them, and are willing to pay interest on the purchase.<\/li>\n<li>Whenever you use credit, those you borrow from provide information on your debt and payment habits to three national credit bureaus.<\/li>\n<li>The credit bureaus use the information to compile a numerical credit score, called a FICO score, which they share with subscribers.<\/li>\n<li>The credit bureaus consider five criteria in compiling the score: payment history, total amount owed, length of your credit history, amount of new credit you have, and types of credit you use.<\/li>\n<li>\n<p class=\"nonindent para\">As a young person, you should do the following to build a good credit history that will give you a high FICO score.<\/p>\n<ul id=\"collins-ch14_s00_s04_l10\" class=\"itemizedlist\">\n<li>Become an authorized user on your parents\u2019 account.<\/li>\n<li>Obtain your own credit card<\/li>\n<li>Get the right card for you.<\/li>\n<li>Use the credit card for occasional, small purchases<\/li>\n<li>Avoid big-ticket buys, except in case of emergency.<\/li>\n<li>Pay off your balance each month.<\/li>\n<li>Pay all your other bills on time.<\/li>\n<li>Don\u2019t cosign for your friends.<\/li>\n<li>Do not apply for several credit cards at <em class=\"emphasis\">one time<\/em>.<\/li>\n<li>Use student loans for education expenses only, and pay on time.<\/li>\n<\/ul>\n<\/li>\n<li>To raise your credit score, you should pay your bills on time, pay more than the minimum balance due, keep your card balances low, and pay your debts off as quickly as possible. Also, scan your credit report for any errors and get any errors fixed.<\/li>\n<li>If you can\u2019t pay your debt, explain your situation to your lenders and see a credit assistance counselor.<\/li>\n<li>Before you incur a debt, you should understand its costs. The interest rate charged by the lender makes a big difference in the overall cost of the loan.<\/li>\n<li>The costs associated with credit cards include finance charges, annual fees, over-limit fees, late payment fees, and cash advance fees.<\/li>\n<li>The Federal Reserve changed the debit card rules in 2010 and now banks must get your permission before they enroll you in an overdraft protection program.<\/li>\n<li>If you have a problem with splurging, cut up your credit cards and start living on a cash-only basis.<\/li>\n<li>If your monthly bills are too high for your income, do whatever you can to bring down those bills.<\/li>\n<\/ul>\n<\/div>\n<div class=\"bcc-box bcc-info\" id=\"collins-ch14_s00_s04_n02\">\n<h3 class=\"title\">Exercise<\/h3>\n<p class=\"nonindent simpara\">(AACSB) Analysis<\/p>\n<p id=\"collins-ch14_s00_s04_p08\" class=\"indent para\">There are a number of costs associated with the use of a credit card, including finance charges, annual fee, over-limit fee, late payment fee, and cash advance fee. Identify these costs for a credit card you now hold. If you don\u2019t presently have a credit card, go online and find an offer for one. Check out these costs for the card being offered.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<div class=\"chapter standard\" id=\"slug-14-1-financial-planning\">\n<div class=\"chapter-title-wrap\">\n<h1 class=\"chapter-title\" style=\"text-align: center\">Financial Planning<\/h1>\n<\/div>\n<div class=\"ugc chapter-ugc\">\n<div class=\"bcc-box bcc-highlight\" id=\"frank-ch14_s01_n01\">\n<h3 class=\"title\">Learning Objectives<\/h3>\n<ol id=\"frank-ch14_s01_l01\" class=\"orderedlist\">\n<li>Define <em class=\"emphasis\">personal finances<\/em> and <em class=\"emphasis\">financial planning<\/em>.<\/li>\n<li>Explain the <em class=\"emphasis\">financial planning life cycle<\/em>.<\/li>\n<li>Discuss the advantages of a college education in meeting short- and long-term financial goals.<\/li>\n<li>Describe the steps you\u2019d take to get a job offer and evaluate alternative job offers, taking benefits into account.<\/li>\n<li>Understand the ways to finance a college education.<\/li>\n<\/ol>\n<\/div>\n<p id=\"frank-ch14_s01_p01\" class=\"nonindent para editable block\">Before we go any further, we need to nail down a couple of key concepts. First, just what, exactly, do we mean by personal finances? <em class=\"emphasis\">Finance<\/em> itself concerns the flow of money from one place to another, and your personal finances concern your money and what you plan to do with it as it flows in and out of your possession. Essentially, then, personal finance is the application of financial principles to the monetary decisions that you make either for your individual benefit or for that of your family.<\/p>\n<p id=\"frank-ch14_s01_p02\" class=\"indent para editable block no-indent\">Second, monetary decisions work out much more beneficially when they\u2019re planned rather than improvised. Thus our emphasis on financial planning\u2014the ongoing process of managing your personal finances in order to meet goals that you\u2019ve set for yourself or your family.<\/p>\n<p id=\"frank-ch14_s01_p03\" class=\"indent para editable block no-indent\">Financial planning requires you to address several questions, some of them relatively simple:<\/p>\n<ul id=\"frank-ch14_s01_l02\" class=\"itemizedlist editable block\">\n<li>What\u2019s my annual income?<\/li>\n<li>How much debt do I have, and what are my monthly payments on that debt?<\/li>\n<\/ul>\n<p id=\"frank-ch14_s01_p04\" class=\"indent para editable block no-indent\">Others will require some investigation and calculation:<\/p>\n<ul id=\"frank-ch14_s01_l03\" class=\"itemizedlist editable block\">\n<li>What\u2019s the value of my assets?<\/li>\n<li>How can I best budget my annual income?<\/li>\n<\/ul>\n<p id=\"frank-ch14_s01_p05\" class=\"indent para editable block no-indent\">Still others will require some forethought and forecasting:<\/p>\n<ul id=\"frank-ch14_s01_l04\" class=\"itemizedlist editable block\">\n<li>How much wealth can I expect to accumulate during my working lifetime?<\/li>\n<li>How much money will I need when I retire?<\/li>\n<\/ul>\n<div class=\"section\" id=\"frank-ch14_s01_s01\">\n<h2 class=\"title editable block\">The Financial Planning Life Cycle<\/h2>\n<p id=\"frank-ch14_s01_s01_p01\" class=\"nonindent para editable block\">Another question that you might ask yourself\u2014and certainly would do if you were a professional in financial planning\u2014is something like, \u201cHow will my financial plans change over the course of my life?\u201d <a class=\"xref\" href=\"#frank-ch14_s01_s01_f01\">Figure 12.3 \u201cFinancial Life Cycle\u201d<\/a> illustrates the financial life cycle of a typical individual\u2014one whose financial outlook and likely outcomes are probably a lot like yours.<a class=\"footnote\" title=\"Keown, A. J., Personal Finance: Turning Money into Wealth, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007), 8\u201311.\" id=\"return-footnote-292-19\" href=\"#footnote-292-19\" aria-label=\"Footnote 19\"><sup class=\"footnote\">[19]<\/sup><\/a> As you can see, our diagram divides this individual\u2019s life into three stages, each of which is characterized by different life events (such as beginning a family, buying a home, planning an estate, retiring). At each stage, too, there are recommended changes in the focus of the individual\u2019s financial planning:<\/p>\n<ul id=\"frank-ch14_s01_s01_l01\" class=\"itemizedlist editable block\">\n<li>In stage 1, the focus is on building wealth.<\/li>\n<li>In stage 2, the focus shifts to the process of preserving and increasing the wealth that one has accumulated and continues to accumulate.<\/li>\n<li>In stage 3, the focus turns to the process of living on (and, if possible, continuing to grow) one\u2019s saved wealth.<\/li>\n<\/ul>\n<h3><span class=\"title-prefix\">Figure 12.3<\/span> Financial Life Cycle<\/h3>\n<div class=\"caption\" style=\"text-align: center;font-size: .8em;max-width: 500px\">\n<div class=\"figure full large-height editable block\" id=\"frank-ch14_s01_s01_f01\">\n<p class=\"indent\"><a><img decoding=\"async\" src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/e0fde0ae7a3ebc8b2f427ba3989a80b9.jpg\" alt=\"Financial Life Cycle\" style=\"max-width: 497px\" \/><br \/>\n<\/a><\/p>\n<\/div>\n<\/div>\n<p id=\"frank-ch14_s01_s01_p02\" class=\"indent para editable block no-indent\">At each stage, of course, complications can set in\u2014say, changes in such conditions as marital or employment status or in the overall economic outlook. Finally, as you can also see, your financial needs will probably peak somewhere in stage 2, at approximately age fifty-five, or ten years before typical retirement age.<\/p>\n<div class=\"section\" id=\"frank-ch14_s01_s01_s01\">\n<h2 class=\"title editable block\">Choosing a Career<\/h2>\n<p id=\"frank-ch14_s01_s01_s01_p01\" class=\"nonindent para editable block\">Until you\u2019re eighteen or so, you probably won\u2019t generate much income; for the most part, you\u2019ll be living off your parents\u2019 wealth. In our hypothetical life cycle, however, financial planning begins in the individual\u2019s early twenties. If that seems like rushing things, consider a basic fact of life: this is the age at which you\u2019ll be choosing your career\u2014not only the sort of work you want to do during your prime income-generating years, but also the kind of lifestyle you want to live in the process.<a class=\"footnote\" title=\"Keown, A. J., Personal Finance: Turning Money into Wealth, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007), 8\u201311.\" id=\"return-footnote-292-20\" href=\"#footnote-292-20\" aria-label=\"Footnote 20\"><sup class=\"footnote\">[20]<\/sup><\/a><\/p>\n<p id=\"frank-ch14_s01_s01_s01_p02\" class=\"indent para editable block no-indent\">What about college? Most readers of this book, of course, have decided to go to college. If you haven\u2019t yet decided, you need to know that college is an extremely good investment of both money and time.<\/p>\n<p id=\"frank-ch14_s01_s01_s01_p03\" class=\"indent para editable block no-indent\"><a class=\"xref\" href=\"#frank-ch14_s01_s01_s01_t01\">Table 12.1 \u201cEducation and Average Income\u201d<\/a>, for example, summarizes the findings of a study conducted by the U.S. Census Bureau.<a class=\"footnote\" title=\"U.S. Census Bureau, \u201cOne-Third of Young Women Have Bachelor\u2019s Degrees\u201d (U.S. Department of Commerce, January 10, 2008), http:\/\/www.census.gov\/Press-Release\/www\/releases\/archives\/education\/011196.html (accessed September 18, 2008).\" id=\"return-footnote-292-21\" href=\"#footnote-292-21\" aria-label=\"Footnote 21\"><sup class=\"footnote\">[21]<\/sup><\/a> A quick review shows that people who graduate from high school can expect to increase their average annual earnings by about 49 percent over those of people who don\u2019t, and those who go on to finish college can expect to generate 82 percent more annual income than that. Over the course of the financial life cycle, families headed by those college graduates will earn about $1.6 million more than families headed by high school graduates who didn\u2019t attend college. (With better access to health care\u2014and, studies show, with better dietary and health practices\u2014college graduates will also live longer. And so will their children.)<a class=\"footnote\" title=\"U.S. Census Bureau, \u201cOne-Third of Young Women Have Bachelor\u2019s Degrees\u201d (U.S. Department of Commerce, January 10, 2008), http:\/\/www.census.gov\/Press-Release\/www\/releases\/archives\/education\/011196.html (accessed September 18, 2008).\" id=\"return-footnote-292-22\" href=\"#footnote-292-22\" aria-label=\"Footnote 22\"><sup class=\"footnote\">[22]<\/sup><\/a><\/p>\n<div class=\"wp-nocaption\">\n<div class=\"table block caption\" id=\"frank-ch14_s01_s01_s01_t01\">\n<h3 class=\"nonindent title\"><span class=\"title-prefix\">Table 12.1<\/span> Education and Average Income<\/h3>\n<table style=\"border-spacing: 0px\" cellpadding=\"0\">\n<thead>\n<tr>\n<th>Education<\/th>\n<th>Average income<\/th>\n<th>Percentage increase over next-highest level<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>High school dropout<\/td>\n<td>$20,873<\/td>\n<td>\u2014<\/td>\n<\/tr>\n<tr>\n<td>High school diploma<\/td>\n<td>$31,071<\/td>\n<td>48.9%<\/td>\n<\/tr>\n<tr>\n<td>College degree<\/td>\n<td>$56,788<\/td>\n<td>82.8%<\/td>\n<\/tr>\n<tr>\n<td>Advanced higher-education degree<\/td>\n<td>$82,320<\/td>\n<td>45.0%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p id=\"frank-ch14_s01_s01_s01_p04\" class=\"indent para editable block no-indent\">And what about the debt that so many people accumulate to finish college? For every $1 that you spend on your college education, you can expect to earn about $35 during the course of your financial life cycle.<a class=\"footnote\" title=\"Hansen, K., \u201cWhat Good Is a College Education Anyway?\u201d Quintessential Careers (2008), http:\/\/www.quintcareers.com\/college_education_value.html (accessed November 11, 2011).\" id=\"return-footnote-292-23\" href=\"#footnote-292-23\" aria-label=\"Footnote 23\"><sup class=\"footnote\">[23]<\/sup><\/a> At that rate of return, you should be able to pay off your student loans (unless, of course, you fail to practice reasonable financial planning).<\/p>\n<p id=\"frank-ch14_s01_s01_s01_p05\" class=\"indent para editable block no-indent\">Naturally, there are exceptions to these average outcomes. You\u2019ll find English-lit majors stocking shelves at 7-Eleven, and you\u2019ll find college dropouts running multibillion-dollar enterprises. Microsoft cofounder Bill Gates dropped out of college after two years, as did his founding partner, Paul Allen. Current Microsoft CEO Steve Ballmer finished his undergraduate degree but quit his MBA program to join Microsoft (where he apparently fit in among the other dropouts in top management). It\u2019s always good to remember, however, that though exceptions to rules (and average outcomes) occasionally modify the rules, they invariably fall far short of disproving them: in entrepreneurship as in most other walks of adult life, the better your education, the more promising your financial future. One expert in the field puts the case for the average person bluntly: educational credentials \u201care about being employable, becoming a legitimate candidate for a job with a future. They are about climbing out of the dead-end job market\u201d.<a class=\"footnote\" title=\"Ramsay, J. G., Perlman Center for Learning and Teaching, quoted by Katharine Hansen, \u201cWhat Good Is a College Education Anyway?\u201d Quintessential Careers (2008), http:\/\/www.quintcareers.com\/college_education_value.html (accessed November 11, 2011).\" id=\"return-footnote-292-24\" href=\"#footnote-292-24\" aria-label=\"Footnote 24\"><sup class=\"footnote\">[24]<\/sup><\/a><\/p>\n<p id=\"frank-ch14_s01_s01_s01_p06\" class=\"indent para editable block no-indent\">Finally, does it make any difference <em class=\"emphasis\">what<\/em> you study in college? To a perhaps surprising extent, not necessarily. Some career areas, such as engineering, architecture, teaching, and law, require targeted degrees, but the area of study designated on your degree often doesn\u2019t matter much when you\u2019re applying for a job. If, for instance, a job ad says, \u201cBusiness, communications, or other degree required,\u201d most applicants and hires will have those \u201cother\u201d degrees. When poring over r\u00e9sum\u00e9s for a lot of jobs, potential employers look for the degree and simply note that a candidate has one; they often don\u2019t need to focus on the particulars.<a class=\"footnote\" title=\"Roth, J. D., \u201cThe Value of a College Education,\u201d Get Rich Slowly, January 10, 2008, http:\/\/www.getrichslowly.org\/blog\/2008\/01\/10\/the-value-of-a-college-education\/ (accessed November 11, 2011).\" id=\"return-footnote-292-25\" href=\"#footnote-292-25\" aria-label=\"Footnote 25\"><sup class=\"footnote\">[25]<\/sup><\/a><\/p>\n<p id=\"frank-ch14_s01_s01_s01_p07\" class=\"indent para editable block no-indent\">This is not to say, however, that all degrees promise equal job prospects. <a class=\"xref\" href=\"#frank-ch14_s01_s01_s01_f01\">Figure 14.4 \u201cTop 25 Fastest-Growing Jobs, 2006\u20132016\u201d<\/a>, for example, summarizes a U.S. Bureau of Labor Statistics projection of the thirty fast-growing occupations for the years 2006\u20132016. Veterinary technicians and makeup artists will be in demand as never before, but as you can see, occupational prospects are fairly diverse.<a class=\"footnote\" title=\"http:\/\/data.bls.gov\/cgi-bin\/print.pl\/news.release\/ecopro.t06.htm (November 11, 2011).\" id=\"return-footnote-292-26\" href=\"#footnote-292-26\" aria-label=\"Footnote 26\"><sup class=\"footnote\">[26]<\/sup><\/a><\/p>\n<h3><span class=\"title-prefix\">Figure 12.4<\/span> Top 25 Fastest-Growing Jobs, 2006\u20132016<\/h3>\n<div class=\"caption\" style=\"text-align: center;font-size: .8em;max-width: 500px\">\n<div class=\"figure full full-height editable block\" id=\"frank-ch14_s01_s01_s01_f01\">\n<p class=\"indent\"><a><img decoding=\"async\" src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/2fa0a12f17526ba76c8a6367cb90b736.jpg\" alt=\"Top 25 Fastest-Growing Jobs, 2006-2016 (from lowest to highest): dental assistants, marriage and family therapists, mental health and substance abuse social workers, mental health counselors, dental hygienists, forensic science technicians, pharmacy technicians, physical therapist assistants, gaming surveillance officers and gaming investigators, social and human service assistants, financial analysts, skin care specialists, substance abuse and behavioral disorder counselors, veterinarians, medical assistants, makeup artists, theatrical and performance artists, personal financial advisors, veterinary technologists and technicians, computer software engineers, applications, home health aides, personal and home care aides, network systems and data communications analysts\" style=\"max-width: 497px\" \/><br \/>\n<\/a><\/p>\n<\/div>\n<\/div>\n<p id=\"frank-ch14_s01_s01_s01_p08\" class=\"indent para editable block no-indent\">Nor, of course, do all degrees pay off equally. In <a class=\"xref\" href=\"#frank-ch14_s01_s01_s01_t02\">Table 12.2 \u201cCollege Majors and Average Annual Earnings\u201d<\/a>, we\u2019ve extracted the findings of a study conducted by the National Science Foundation on the earnings of individuals with degrees in various undergraduate fields.<a class=\"footnote\" title=\"Penrice, D., \u201cMajor Moolah: Adding Up the Earnings Gaps in College Majors,\u201d N.U. Magazine, January 1999, http:\/\/www.northeastern.edu\/magazine\/9901\/labor.html (accessed November 11, 2011).\" id=\"return-footnote-292-27\" href=\"#footnote-292-27\" aria-label=\"Footnote 27\"><sup class=\"footnote\">[27]<\/sup><\/a><a class=\"footnote\" title=\"Harrington, P., and Andrew Sum, \u201cThe Post-College Earnings Experiences of Bachelor Degree Holders in the U.S.: Estimated Economic Returns to Major Fields of Study,\u201d in Learning and Work on Campus and on the Job: The Evolving Relationship between Higher Education and Employment, ed. S. Reder, B. A. Holland, and M. P. Latiolais (in preparation).\" id=\"return-footnote-292-28\" href=\"#footnote-292-28\" aria-label=\"Footnote 28\"><sup class=\"footnote\">[28]<\/sup><\/a> Clearly, some degrees\u2014notably in the engineering fields\u2014promise much higher average earnings than others. Chemical engineers, for instance, can earn nearly twice as much as elementary school teachers, but there\u2019s a catch: if you graduate with a degree in chemical engineering, your average annual salary will be about $67,000 <em class=\"emphasis\">if you can find a job related to that degree<\/em>; if you can\u2019t, you may have to settle for as much as 40 percent less.<a class=\"footnote\" title=\"Penrice, D., \u201cMajor Moolah: Adding Up the Earnings Gaps in College Majors,\u201d N.U. Magazine, January 1999, http:\/\/www.northeastern.edu\/magazine\/9901\/labor.html (accessed November 11, 2011).\" id=\"return-footnote-292-29\" href=\"#footnote-292-29\" aria-label=\"Footnote 29\"><sup class=\"footnote\">[29]<\/sup><\/a> (Supermodel Cindy Crawford cut short her studies in chemical engineering because there was more money to be made on the runway.)<\/p>\n<div class=\"wp-nocaption\">\n<div class=\"table block caption\" id=\"frank-ch14_s01_s01_s01_t02\">\n<h3 class=\"nonindent title\"><span class=\"title-prefix\">Table 12.2<\/span> College Majors and Average Annual Earnings<\/h3>\n<table style=\"border-spacing: 0px;width: 789px\" cellpadding=\"0\">\n<thead>\n<tr>\n<th style=\"width: 139.906px\">Major<\/th>\n<th style=\"width: 225.906px\">Average Earnings with Bachelor\u2019s Degree<\/th>\n<th style=\"width: 131.906px\">Major<\/th>\n<th style=\"width: 225.906px\">Average Earnings with Bachelor\u2019s Degree<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td style=\"width: 139.906px\">Chemical engineering<\/td>\n<td style=\"width: 225.906px\">$67,425<\/td>\n<td style=\"width: 131.906px\">History<\/td>\n<td style=\"width: 225.906px\">$45,926<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 139.906px\">Aerospace engineering<\/td>\n<td style=\"width: 225.906px\">$65,649<\/td>\n<td style=\"width: 131.906px\">Biology<\/td>\n<td style=\"width: 225.906px\">$45,532<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 139.906px\">Computer engineering<\/td>\n<td style=\"width: 225.906px\">$62,527<\/td>\n<td style=\"width: 131.906px\">Nursing<\/td>\n<td style=\"width: 225.906px\">$45,538<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 139.906px\">Physics<\/td>\n<td style=\"width: 225.906px\">$62,104<\/td>\n<td style=\"width: 131.906px\">Psychology<\/td>\n<td style=\"width: 225.906px\">$43,963<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 139.906px\">Electrical engineering<\/td>\n<td style=\"width: 225.906px\">$61,534<\/td>\n<td style=\"width: 131.906px\">English<\/td>\n<td style=\"width: 225.906px\">$43,614<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 139.906px\">Mechanical engineering<\/td>\n<td style=\"width: 225.906px\">$61,382<\/td>\n<td style=\"width: 131.906px\">Health technology<\/td>\n<td style=\"width: 225.906px\">$42,524<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 139.906px\">Industrial engineering<\/td>\n<td style=\"width: 225.906px\">$61,030<\/td>\n<td style=\"width: 131.906px\">Criminal justice<\/td>\n<td style=\"width: 225.906px\">$41,129<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 139.906px\">Civil engineering<\/td>\n<td style=\"width: 225.906px\">$58,993<\/td>\n<td style=\"width: 131.906px\">Physical education<\/td>\n<td style=\"width: 225.906px\">$40,207<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 139.906px\">Accounting<\/td>\n<td style=\"width: 225.906px\">$56,637<\/td>\n<td style=\"width: 131.906px\">Secondary education<\/td>\n<td style=\"width: 225.906px\">$39,976<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 139.906px\">Finance<\/td>\n<td style=\"width: 225.906px\">$55,104<\/td>\n<td style=\"width: 131.906px\">Fine arts<\/td>\n<td style=\"width: 225.906px\">$38,857<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 139.906px\">Computer science<\/td>\n<td style=\"width: 225.906px\">$52,615<\/td>\n<td style=\"width: 131.906px\">Philosophy<\/td>\n<td style=\"width: 225.906px\">$38,239<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 139.906px\">Business management<\/td>\n<td style=\"width: 225.906px\">$52,321<\/td>\n<td style=\"width: 131.906px\">Dramatic arts<\/td>\n<td style=\"width: 225.906px\">$37,091<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 139.906px\">Marketing<\/td>\n<td style=\"width: 225.906px\">$51,107<\/td>\n<td style=\"width: 131.906px\">Music<\/td>\n<td style=\"width: 225.906px\">$36,811<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 139.906px\">Journalism<\/td>\n<td style=\"width: 225.906px\">$46,835<\/td>\n<td style=\"width: 131.906px\">Elementary education<\/td>\n<td style=\"width: 225.906px\">$34,564<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 139.906px\">Information systems<\/td>\n<td style=\"width: 225.906px\">$46,519<\/td>\n<td style=\"width: 131.906px\">Special education<\/td>\n<td style=\"width: 225.906px\">$34,196<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p id=\"frank-ch14_s01_s01_s01_p09\" class=\"indent para editable block no-indent\">In short, when you\u2019re planning what to do with the rest of your life, it\u2019s a good idea to check into the fine points and realities, as well as the statistical data. If you talk to career counselors and people in the workforce, you might be surprised by what you learn about the relationship between certain college majors and various occupations. Onetime Hewlett-Packard CEO Carly Fiorina majored in medieval history and philosophy.<\/p>\n<\/div>\n<\/div>\n<div class=\"section\" id=\"frank-ch14_s01_s02\">\n<h2 class=\"title editable block\">Financing a College Education<\/h2>\n<p id=\"frank-ch14_s01_s02_p01\" class=\"nonindent para editable block\">Let\u2019s revisit one of the facts included in the earlier discussion: for every $1 that you spend on your college education, you can expect to earn about $35 during the course of your financial life cycle. And let\u2019s say you\u2019re convinced (as you should be) that getting a college degree is a wise financial choice. You still have to deal with the cost of getting your degree. We\u2019re sure this won\u2019t come as a surprise: attending college is expensive\u2014tuition and fees have gone up sharply, the cost of books has skyrocketed, and living expenses have climbed. Many students can attend college only if they receive some type of financial aid. Though the best way to learn what aid is available to you is to talk with a representative in the financial aid office at your school, this section provides an overview of the types of aid offered to students. Students finance their education through scholarships, grants, education loans, and work-study programs.<a class=\"footnote\" title=\"Witmer, D., \u201cThe Basics of Financial Aid for College,\u201d About.com, http:\/\/parentingteens.about.com\/od\/collegeinfo\/a\/financial_aid.htm (accessed November 11, 2011).\" id=\"return-footnote-292-30\" href=\"#footnote-292-30\" aria-label=\"Footnote 30\"><sup class=\"footnote\">[30]<\/sup><\/a> We\u2019ll explore each of these categories of aid:<\/p>\n<ul id=\"frank-ch14_s01_s02_l01\" class=\"itemizedlist editable block\">\n<li><em class=\"emphasis\">Scholarships<\/em>, which don\u2019t have to be repaid, are awarded based on a number of criteria, including academic achievement, athletic or artistic talent, special interest in a particular field of study, ethnic background, or religious affiliation. Scholarships are generally funded by private donors such as alums, religious institutions, companies, civic organizations, professional associations, and foundations.<\/li>\n<li><em class=\"emphasis\">Grants<\/em>, which also don\u2019t have to be repaid, are awarded based on financial need. They\u2019re funded by the federal government, the states, and academic institutions. An example of a common federal grant is the Pell Grant, which is awarded to undergraduate students based on financial need. The maximum Pell Grant award for the 2011\u201312 award year (July 1, 2011, to June 30, 2012) is $5,550.<a class=\"footnote\" title=\"Federal Student Aid, \u201cFederal Pell Grant,\u201d http:\/\/studentaid.ed.gov\/PORTALSWebApp\/students\/english\/PellGrants.jsp?tab=funding (accessed November 11, 2011).\" id=\"return-footnote-292-31\" href=\"#footnote-292-31\" aria-label=\"Footnote 31\"><sup class=\"footnote\">[31]<\/sup><\/a><\/li>\n<li><em class=\"emphasis\">Education loans<\/em>, which must be repaid, are available to students from various sources, including the federal government, states, and academic institutions. While recent problems in the credit markets have made college loans more difficult to obtain, most students are able to get the loans they need.<a class=\"footnote\" title=\"Snyder, S., \u201cCollege lending tight but available,\u201d The Philadelphia Inquirer, August 18, 2008, http:\/\/www.philly.com\/inquirer\/education\/20080818_College_lending_tight_but_available.html (accessed November 11, 2011).\" id=\"return-footnote-292-32\" href=\"#footnote-292-32\" aria-label=\"Footnote 32\"><sup class=\"footnote\">[32]<\/sup><\/a> The loans offered directly to undergraduate students by the federal government include the need-based, subsidized Federal Stafford, the non\u2013need-based unsubsidized Federal Stafford, and the need-based Federal Perkins loans. With the exception of the unsubsidized Federal Stafford, no interest accrues while the student is enrolled in college at least part time. There are also a number of loans available to parents of students, such as the Federal Parent PLUS program. Under this program, parents can borrow federally guaranteed low-interest loans to fund their child\u2019s education.<\/li>\n<li>Work-study is a federally sponsored program that provides students with paid, part-time jobs on campus. Because the student is paid based on work done, the funds received don\u2019t have to be repaid.<\/li>\n<\/ul>\n<\/div>\n<div class=\"section\" id=\"frank-ch14_s01_s03\">\n<h2 class=\"title editable block\">Find a Great Job<\/h2>\n<p id=\"frank-ch14_s01_s03_p01\" class=\"nonindent para editable block\">As was highlighted earlier, your financial life cycle begins at the point when you choose a career. Building your career takes considerable planning. It begins with the selection of a major in college and continues through graduation as you enter the workforce full time. You can expect to hold a number of jobs over your working life. If things go as they should, each job will provide valuable opportunities and help you advance your career. A big challenge is getting a job offer in your field of interest, evaluating the offer, and (if you have several options) selecting the job that\u2019s right for you.<a class=\"footnote\" title=\"This section is based in part on sections 13 and 14 of the Playbook for Life by The Hartford. The Playbook can be found on line at http:\/\/www.playbook.thehartford.com (accessed November 11, 2011).\" id=\"return-footnote-292-33\" href=\"#footnote-292-33\" aria-label=\"Footnote 33\"><sup class=\"footnote\">[33]<\/sup><\/a><\/p>\n<div class=\"section\" id=\"frank-ch14_s01_s03_s01\">\n<h2 class=\"title editable block\">Getting a Job Offer<\/h2>\n<p id=\"frank-ch14_s01_s03_s01_p01\" class=\"nonindent para editable block\">Most likely your college has a career center. The people working there can be a tremendous help to you as you begin your job search. But most of the work has to be done by you. Like other worthwhile projects, your job search project will be very time-consuming. As you get close to graduation, you\u2019ll need to block out time to work on this particularly important task.<\/p>\n<p id=\"frank-ch14_s01_s03_s01_p02\" class=\"indent para editable block no-indent\">The first step is to prepare a r\u00e9sum\u00e9, a document that provides a summary of educational achievements and relevant job experience. Its purpose is to get you an interview. A potential employer will likely spend less than a minute reviewing your r\u00e9sum\u00e9, so its content should be concise, clear, and applicable to the job for which you\u2019re applying. For some positions, the person in charge of hiring might read more than a hundred r\u00e9sum\u00e9s. If you don\u2019t want your r\u00e9sum\u00e9 kicked out right away, be sure it contains no typographical or grammatical errors. Once you\u2019ve completed your r\u00e9sum\u00e9, you can use it to create different versions tailored to specific companies you\u2019d like to work for. Your next step is to write a cover letter, a document accompanying your r\u00e9sum\u00e9 that explains why you\u2019re sending your r\u00e9sum\u00e9 and highlights your qualifications. You can find numerous tips on writing r\u00e9sum\u00e9s and cover letters (as well as samples of both) online. Be sure your r\u00e9sum\u00e9 is accurate: never lie or exaggerate in a r\u00e9sum\u00e9. You could get caught and not get the job (or\u2014even worse\u2014you could get the job, get caught, and then get fired). It\u2019s fairly common practice for companies to conduct background checks of possible employees, and these checks will point out any errors. In effect, says one expert, \u201cyou jeopardize your future when you lie about your past\u201d.<a class=\"footnote\" title=\"Isaacs, K., \u201cLying on Your Resume: What Are the Career Consequences?,\u201d Monster.com, http:\/\/insidetech.monster.com\/careers\/articles\/3574-lying-on-your-resume-what-are-the-career-consequences (accessed November 11, 2011).\" id=\"return-footnote-292-34\" href=\"#footnote-292-34\" aria-label=\"Footnote 34\"><sup class=\"footnote\">[34]<\/sup><\/a><\/p>\n<p id=\"frank-ch14_s01_s03_s01_p03\" class=\"indent para editable block no-indent\">After writing your r\u00e9sum\u00e9 and cover letter, your next task is to create a list of companies you\u2019d like to work for. Use a variety of sources, including your career services office and company Web sites, to decide which companies to put on your list. Visit the \u201ccareer or employment\u201d section of the company Web sites and search for specific openings.<\/p>\n<p id=\"frank-ch14_s01_s03_s01_p04\" class=\"indent para editable block no-indent\">You could also conduct a general search for positions that might be of interest to you, by doing the following:<\/p>\n<ul id=\"frank-ch14_s01_s03_s01_l01\" class=\"itemizedlist editable block\">\n<li>Visiting career Web sites, such as <a class=\"link\" href=\"http:\/\/www.monster.com\">Monster.com<\/a>, <a class=\"link\" href=\"http:\/\/www.wetfeet.com\">Wetfeet.com<\/a>, or <a class=\"link\" href=\"http:\/\/www.careerbuilder.com\">Careerbuilder.com<\/a> (which maintain large databases of openings for all geographical areas)<\/li>\n<li>Searching classified ads in online and print newspapers<\/li>\n<li>Attending career fairs at your college and in your community<\/li>\n<li>Signing up with career services to talk with recruiters when they visit your campus<\/li>\n<li>Contacting your friends, family, and college alumni and letting them know you\u2019re looking for a job and asking for their help<\/li>\n<\/ul>\n<p id=\"frank-ch14_s01_s03_s01_p05\" class=\"indent para editable block no-indent\">Once you spot a position you want, send your r\u00e9sum\u00e9 and cover letter (tailored to the specific company and job). Follow up in a few days to be sure your materials got to the right place, and offer to provide any additional information. Keep notes on all contacts.<\/p>\n<h3>Figure 12.5 Preparing for an Interview<\/h3>\n<div class=\"caption\" style=\"text-align: center;font-size: .8em;max-width: 500px\" id=\"frank-ch14_s01_s03_s01_f01\">\n<p class=\"indent\"><a><img decoding=\"async\" src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/14.1.0.jpg\" alt=\"A man trying looking in a mirror while trying on a suit before his interview\" class=\"aligncenter size-full wp-image-1475\" width=\"500\" \/><\/a><\/p>\n<\/div>\n<p>Preparing well for an interview can make it easier to relax and help the interviewer get to know you.<a class=\"footnote\" title=\"Yaniv Yaakubovich \u2013 Trying my suite before the interview \u2013 CC BY-ND 2.0\" id=\"return-footnote-292-35\" href=\"#footnote-292-35\" aria-label=\"Footnote 35\"><sup class=\"footnote\">[35]<\/sup><\/a><\/p>\n<p id=\"frank-ch14_s01_s03_s01_p06\" class=\"indent para editable block no-indent\">When you\u2019re invited for an interview, visit to the company\u2019s Web site and learn as much as you can about the company. Practice answering questions you might be asked during the interview, and think up a few pertinent questions to ask your interviewer. Dress conservatively\u2014males should wear a suit and tie and females should wear professional-looking clothes. Try to relax during the interview (though everyone knows this isn\u2019t always easy). Your goal is to get an offer, so let the interviewer learn who you are and how you can be an asset to the company. Send a thank-you note (or thank-you e-mail) to the interviewer after the interview.<\/p>\n<\/div>\n<div class=\"section\" id=\"frank-ch14_s01_s03_s02\">\n<h2 class=\"title editable block\">Evaluating Job Offers<\/h2>\n<p id=\"frank-ch14_s01_s03_s02_p01\" class=\"nonindent para editable block\">Let\u2019s be optimistic and say that you did quite well in your interviews, and you have two job offers. It\u2019s a great problem to have, but now you have to decide which one to accept. Salary is important, but it\u2019s clearly not the only factor. You should consider the opportunities the position offers: will you learn new things on the job, how much training will you get, could you move up in the organization (and if so, how quickly)? Also consider quality of life issues: how many hours a week will you have to work, is your schedule predictable (or will you be asked to work on a Friday night or Saturday at the last minute), how flexible is your schedule, how much time do you get off, how stressful will the job be, do you like the person who will be your manager, do you like your coworkers, how secure is the job, how much travel is involved, where\u2019s the company located, and what\u2019s the cost of living in that area? Finally, consider the financial benefits you\u2019ll receive. These could include health insurance, disability insurance, flexible spending accounts, and retirement plans. Let\u2019s talk more about the financial benefits, beginning with health insurance.<\/p>\n<ul id=\"frank-ch14_s01_s03_s02_l01\" class=\"itemizedlist editable block\">\n<li>Employer-sponsored health insurance plans vary greatly. Some cover the employee only, while others cover the employee, spouse, and children. Some include dental and eye coverage while others don\u2019t. Most plans require employees to share some of the cost of the medical plan (by paying a portion of the insurance premiums and a portion of the cost of medical care). But the amount that employees are responsible for varies greatly. Given the rising cost of health insurance, it\u2019s important to understand the specific costs associated with a health care plan and to take these costs into account when comparing job offers. More important, it\u2019s vital that you have medical insurance. Young people are often tempted to go without medical insurance, but this is a major mistake. An uncovered, costly medical emergency (say you\u2019re rushed to the hospital with appendicitis) can be a financial disaster. You could end up paying for your hospital and doctor care for years.<\/li>\n<li>Disability insurance isn\u2019t as well known as medical insurance, but it can be as important (if not more so). Disability insurance pays an income to an insured person when he or she is unable to work for an extended period. You would hope that you\u2019d never need disability insurance, but if you did it would be of tremendous value.<\/li>\n<li>A flexible spending account allows a specified amount of pretax dollars to be used to pay for qualified expenses, including health care and child care. By paying for these costs with pretax dollars, employees are able to reduce their tax bill.<\/li>\n<li>There are two main types of <em class=\"emphasis\">retirement plans<\/em>. One, called a defined benefit retirement plan, provides a set amount of money each month to retirees based on the number of years they worked and the income they earned. This form of retirement plan was once very popular, but it\u2019s less common today. The other, called a defined contribution retirement plan, is a form of savings plan. The employee contributes money each pay period to his or her retirement account, and the employer matches a portion of the contribution. Even when retirement is exceedingly far into the future, it\u2019s financially wise to set aside funds for retirement.<\/li>\n<\/ul>\n<div class=\"bcc-box bcc-success\" id=\"frank-ch14_s01_s03_s02_n01\">\n<h3 class=\"title\">Key Takeaways<\/h3>\n<ul id=\"frank-ch14_s01_s03_s02_l02\" class=\"itemizedlist\">\n<li><em class=\"emphasis\">Finance<\/em> concerns the flow of money from one place to another; your <em class=\"emphasis\">personal finances<\/em> concern your money and what you plan to do with it as it flows in and out of your possession. <strong class=\"emphasis bold\">Personal finance<\/strong> is thus the application of financial principles to the monetary decisions that you make, either for your individual benefit or for that of your family.<\/li>\n<li><strong class=\"emphasis bold\">Financial planning<\/strong> is the ongoing process of managing your personal finances to meet goals that you\u2019ve set for yourself or your family.<\/li>\n<li>\n<p class=\"nonindent para\">The <em class=\"emphasis\">financial life cycle<\/em> divides an individual\u2019s life into three stages, each of which is characterized by different life events. Each stage also entails recommended changes in the focus of the individual\u2019s financial planning:<\/p>\n<ol id=\"frank-ch14_s01_s03_s02_l03\" class=\"orderedlist\">\n<li>In stage 1, the focus is on <em class=\"emphasis\">building<\/em> wealth.<\/li>\n<li>In stage 2, the focus shifts to the process of <em class=\"emphasis\">preserving and increasing<\/em> the wealth that one has accumulated and continues to accumulate.<\/li>\n<li>In stage 3, the focus turns to the process of <em class=\"emphasis\">living on<\/em> (and, if possible, continuing to grow) one\u2019s saved wealth.<\/li>\n<\/ol>\n<\/li>\n<li>According to the model of the financial life cycle, financial planning begins in the individual\u2019s early twenties, the age at which most people choose a <em class=\"emphasis\">career<\/em>\u2014both the sort of <em class=\"emphasis\">work<\/em> they want to do during their income-generating years and the kind of <em class=\"emphasis\">lifestyle<\/em> they want to live in the process.<\/li>\n<li>College is a good investment of both money and time. People who graduate from high school can expect to improve their average annual earnings by about 49 percent over those of people who don\u2019t, and those who go on to finish college can expect to generate 82 percent more annual income than that. The area of study designated on your degree often doesn\u2019t matter when you\u2019re applying for a job: when poring over r\u00e9sum\u00e9s, employers often look for the degree and simply note that a candidate has one.<\/li>\n<li>The first step in your job search is to prepare a <strong class=\"emphasis bold\">r\u00e9sum\u00e9<\/strong>, a document that provides a summary of educational achievements and relevant job experience. Your r\u00e9sum\u00e9 should be concise, clear, applicable to the job for which you are applying, and free of errors and inaccuracies.<\/li>\n<li>A <strong class=\"emphasis bold\">cover letter<\/strong> is a document that accompanies your r\u00e9sum\u00e9 and explains why you\u2019re sending your r\u00e9sum\u00e9 and highlights your qualifications.<\/li>\n<li>\n<p class=\"nonindent para\">To conduct a general search for positions that might be of interest to you, you could:<\/p>\n<ol id=\"frank-ch14_s01_s03_s02_l04\" class=\"orderedlist\">\n<li>Visit career Web sites, such as Monster.com, Wetfeet.com, or Careerbuilder.com.<\/li>\n<li>Search classified ads in online and print newspapers.<\/li>\n<li>Attend career fairs at your college and in your community.<\/li>\n<li>Talk with recruiters when they visit your campus.<\/li>\n<li>Contact people you know, tell them you\u2019re looking for a job, and ask for their help.<\/li>\n<\/ol>\n<\/li>\n<li>When you\u2019re invited for an interview, you should research the company, practice answering questions you might be asked in the interview, and think up pertinent questions to ask the interviewer.<\/li>\n<li>\n<p class=\"nonindent para\">When comparing job offers, consider more than salary. Also of importance are quality of life issues and benefits. Common financial benefits include health insurance, disability insurance, flexible spending accounts, and retirement plans.<\/p>\n<ol id=\"frank-ch14_s01_s03_s02_l05\" class=\"orderedlist\">\n<li><em class=\"emphasis\">Employer-sponsored health insurance<\/em> plans vary greatly in coverage and cost to the employee.<\/li>\n<li>Disability insurance pays an income to an insured person when he or she is unable to work for an extended period of time.<\/li>\n<li>A <em class=\"emphasis\">flexible spending account<\/em> allows a specified amount of pretax dollars to be used to pay for qualified expenses, including health care and child care. By paying for these costs with pretax dollars, employees are able to reduce their tax bill.<\/li>\n<\/ol>\n<\/li>\n<li>There are two main types of <em class=\"emphasis\">retirement plans<\/em>: a defined benefit plan, which provides a set amount of money each month to retirees based on the number of years they worked and the income they earned, and a defined contribution plan, which is a form of savings plan into which both the employee and employer contribute. A well-known defined contribution plan is a 401(k).<\/li>\n<\/ul>\n<\/div>\n<div class=\"bcc-box bcc-info\" id=\"frank-ch14_s01_s03_s02_n02\">\n<h3 class=\"title\">Exercise<\/h3>\n<p class=\"nonindent simpara\">(AACSB) Analysis<\/p>\n<p id=\"frank-ch14_s01_s03_s02_p02\" class=\"indent para\">Think of the type of job you\u2019d like to have. Describe the job and indicate how you\u2019d go about getting a job offer for this type of job. How would you evaluate competing offers from two companies? What criteria would you use in selecting the right job for you?<\/p>\n<\/div>\n<\/div>\n<\/div>\n<div class=\"chapter standard\" id=\"slug-14-2-time-is-money\">\n<div class=\"chapter-title-wrap\">\n<h1 class=\"chapter-title\" style=\"text-align: center\">Time Is Money<\/h1>\n<\/div>\n<div class=\"ugc chapter-ugc\">\n<div class=\"bcc-box bcc-highlight\" id=\"frank-ch14_s02_n01\">\n<h3 class=\"title\">Learning Objectives<\/h3>\n<ol id=\"frank-ch14_s02_l01\" class=\"orderedlist\">\n<li>Explain <em class=\"emphasis\">compound interest<\/em> and <em class=\"emphasis\">the time value of money<\/em>.<\/li>\n<li>Discuss the value of getting an early start on your plans for saving.<\/li>\n<\/ol>\n<\/div>\n<p id=\"frank-ch14_s02_p01\" class=\"nonindent para editable block\">The fact that you have to choose a career at an early stage in your financial life cycle isn\u2019t the only reason that you need to start early on your financial planning. Let\u2019s assume, for instance, that it\u2019s your eighteenth birthday and that on this day you take possession of $10,000 that your grandparents put in trust for you. You could, of course, spend it; in particular, it would probably cover the cost of flight training for a private pilot\u2019s license\u2014something you\u2019ve always wanted but were convinced that you couldn\u2019t afford for another ten or fifteen years. Your grandfather, of course, suggests that you put it into some kind of savings account. If you just wait until you finish college, he says, and if you can find a savings plan that pays 5 percent interest, you\u2019ll have the $10,000 plus another $2,209 to buy a pretty good used car.<\/p>\n<p id=\"frank-ch14_s02_p02\" class=\"indent para editable block no-indent\">The total amount you\u2019ll have\u2014 $12,209\u2014piques your interest. If that $10,000 could turn itself into $12,209 after sitting around for four years, what would it be worth if you actually held on to it until you did retire\u2014say, at age sixty-five? A quick trip to the Internet to find a compound-interest calculator informs you that, forty-seven years later, your $10,000 will have grown to $104,345 (assuming a 5 percent interest rate). That\u2019s not really enough to retire on, but after all, you\u2019d at least have some cash, even if you hadn\u2019t saved another dime for nearly half a century. On the other hand, what if that four years in college had paid off the way you planned, so that (once you get a good job) you\u2019re able to add, say, another $10,000 to your retirement savings account every year until age sixty-five? At that rate, you\u2019ll have amassed a nice little nest egg of slightly more than $1.6 million.<\/p>\n<div class=\"section\" id=\"frank-ch14_s02_s01\">\n<h2 class=\"title editable block\">Compound Interest<\/h2>\n<p id=\"frank-ch14_s02_s01_p01\" class=\"nonindent para editable block\">In your efforts to appreciate the potential of your $10,000 to multiply itself, you have acquainted yourself with two of the most important concepts in finance. As we\u2019ve already indicated, one is the principle of compound interest, which refers to the effect of earning interest on your interest.<\/p>\n<p id=\"frank-ch14_s02_s01_p02\" class=\"indent para editable block no-indent\">Let\u2019s say, for example, that you take your grandfather\u2019s advice and invest your $10,000 (your <em class=\"emphasis\">principal<\/em>) in a savings account at an annual interest rate of 5 percent. Over the course of the first year, your investment will earn $512 in interest and grow to $10,512. If you now reinvest the entire $10,512 at the same 5 percent annual rate, you\u2019ll earn another $537 in interest, giving you a total investment at the end of year 2 of $11,049. And so forth. And that\u2019s how you can end up with $104,345 at age sixty-five.<\/p>\n<\/div>\n<div class=\"section\" id=\"frank-ch14_s02_s02\">\n<h2 class=\"title editable block\">Time Value of Money<\/h2>\n<p id=\"frank-ch14_s02_s02_p01\" class=\"nonindent para editable block\">You\u2019ve also encountered the principle of the time value of money\u2014the principle whereby a dollar received in the present is worth more than a dollar received in the future. If there\u2019s one thing that we\u2019ve stressed throughout this chapter so far, it\u2019s the fact that, for better or for worse, most people prefer to consume now rather than in the future. This is true for both borrowers and lenders. If you borrow money from me, it\u2019s because you can\u2019t otherwise buy something that you want at the present time. If I lend it to you, it\u2019s because I\u2019m willing to postpone the opportunity to purchase something I want at the present time\u2014perhaps a risk-free, ten-year U.S. Treasury bond with a present yield rate of 3 percent.<\/p>\n<p id=\"frank-ch14_s02_s02_p02\" class=\"indent para editable block no-indent\">I\u2019m willing to forego my opportunity, however, only if I can get some compensation for its loss, and that\u2019s why I\u2019m going to charge you interest. And you\u2019re going to pay the interest because you need the money to buy what you want to buy. How much interest should we agree on? In theory, it could be just enough to cover the cost of my lost opportunity, but there are, of course, other factors. Inflation, for example, will have eroded the value of my money by the time I get it back from you. In addition, while I would be taking no risk in loaning money to the U.S. government (as I would be doing if I bought that Treasury bond), I am taking a risk in loaning it to you. Our agreed-on rate will reflect such factors.<a class=\"footnote\" title=\"Gallager, T. J., and Joseph D. Andrews Jr., Financial Management: Principles and Practice, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2003), 34, 196.\" id=\"return-footnote-292-36\" href=\"#footnote-292-36\" aria-label=\"Footnote 36\"><sup class=\"footnote\">[36]<\/sup><\/a><\/p>\n<p id=\"frank-ch14_s02_s02_p03\" class=\"indent para editable block no-indent\">Finally, the time value of money principle also states that a dollar received today starts earning interest sooner than one received tomorrow. Let\u2019s say, for example, that you receive $2,000 in cash gifts when you graduate from college. At age twenty-three, with your college degree in hand, you get a decent job and don\u2019t have an immediate need for that $2,000. So you put it into an account that pays 10 percent compounded <em class=\"emphasis\">and<\/em> you add another $2,000 ($167 per month) to your account every year for the next eleven years<sup>1<\/sup>. The left panel of <a class=\"xref\" href=\"#frank-ch14_s02_s02_t01\">Table 12.3 \u201cWhy to Start Saving Early (I)\u201d<\/a> shows how much your account will earn each year and how much money you\u2019ll have at certain ages between twenty-three and sixty-seven. As you can see, you\u2019d have nearly $52,000 at age thirty-six and a little more than $196,000 at age fifty; at age sixty-seven, you\u2019d be just a bit short of $1 million. The right panel of the same table shows what you\u2019d have if you hadn\u2019t started saving $2,000 a year until you were age thirty-six. As you can also see, you\u2019d have a respectable sum at age sixty-seven\u2014but less than half of what you would have accumulated by starting at age twenty-three. More important, even to accumulate that much, <em class=\"emphasis\">you\u2019d have to add $2,000 per year for a total of thirty-two years, not just twelve<\/em>.<\/p>\n<div class=\"wp-nocaption\">\n<div class=\"table block caption\" id=\"frank-ch14_s02_s02_t01\">\n<h3 class=\"nonindent title\"><span class=\"title-prefix\">Table 12.3<\/span> Why to Start Saving Early (I)<a class=\"footnote\" title=\"Source: Data from Consumer Credit Counseling Service of Maryland and Delaware Inc., \u201cPower of Saving Early\u201d (2008), http:\/\/www.cccs-inc.org\/tools\/tools_saving_early.php (accessed November 15, 2008).\" id=\"return-footnote-292-37\" href=\"#footnote-292-37\" aria-label=\"Footnote 37\"><sup class=\"footnote\">[37]<\/sup><\/a><\/h3>\n<table style=\"border-spacing: 0px\" cellpadding=\"0\">\n<thead>\n<tr>\n<th><\/th>\n<th colspan=\"3\">Savings accumulated from age 23, with deposits of $2,000 annually until age 67<\/th>\n<th colspan=\"3\">Savings accumulated from age 36, with deposits of $2,000 annually until age 67<\/th>\n<\/tr>\n<tr>\n<th>Age<\/th>\n<th>Annual deposit<\/th>\n<th>Annual interest earned<\/th>\n<th>Total saved at the end of the year<\/th>\n<th>Annual deposit<\/th>\n<th>Annual interest earned<\/th>\n<th>Total saved at the end of the year<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>23<\/td>\n<td>$0.00<\/td>\n<td>$0.00<\/td>\n<td>$0.00<\/td>\n<td>$0.00<\/td>\n<td>$0.00<\/td>\n<td>$0.00<\/td>\n<\/tr>\n<tr>\n<td>24<\/td>\n<td>$2,000<\/td>\n<td>$200.00<\/td>\n<td>$2,200<\/td>\n<td>$0.00<\/td>\n<td>$0.00<\/td>\n<td>$0.00<\/td>\n<\/tr>\n<tr>\n<td>25<\/td>\n<td>$2,000<\/td>\n<td>$420.00<\/td>\n<td>$4,620<\/td>\n<td>$0.00<\/td>\n<td>$0.00<\/td>\n<td>$0.00<\/td>\n<\/tr>\n<tr>\n<td>30<\/td>\n<td>$2,000<\/td>\n<td>$1,897.43<\/td>\n<td>$20,871.78<\/td>\n<td>$0.00<\/td>\n<td>$0.00<\/td>\n<td>$0.00<\/td>\n<\/tr>\n<tr>\n<td>35<\/td>\n<td>$2,000<\/td>\n<td>$4,276.86<\/td>\n<td>$47,045.42<\/td>\n<td>$0.00<\/td>\n<td>$0.00<\/td>\n<td>$0.00<\/td>\n<\/tr>\n<tr>\n<td>36<\/td>\n<td>$0.00<\/td>\n<td>$4,704.54<\/td>\n<td>$51,749.97<\/td>\n<td>$2,000<\/td>\n<td>$200.00<\/td>\n<td>$2,200.00<\/td>\n<\/tr>\n<tr>\n<td>40<\/td>\n<td>$0.00<\/td>\n<td>$6,887.92<\/td>\n<td>$75,767.13<\/td>\n<td>$2,000<\/td>\n<td>$1,221.02<\/td>\n<td>$13,431.22<\/td>\n<\/tr>\n<tr>\n<td>45<\/td>\n<td>$0.00<\/td>\n<td>$11,093.06<\/td>\n<td>$122,023.71<\/td>\n<td>$2,000<\/td>\n<td>$3,187.48<\/td>\n<td>$35,062.33<\/td>\n<\/tr>\n<tr>\n<td>50<\/td>\n<td>$0.00<\/td>\n<td>$17,865.49<\/td>\n<td>$196,520.41<\/td>\n<td>$2,000<\/td>\n<td>$6,354.50<\/td>\n<td>$69,899.46<\/td>\n<\/tr>\n<tr>\n<td>55<\/td>\n<td>$0.00<\/td>\n<td>$28,772.55<\/td>\n<td>$316,498.09<\/td>\n<td>$2,000<\/td>\n<td>$11,455.00<\/td>\n<td>$126,005.00<\/td>\n<\/tr>\n<tr>\n<td>60<\/td>\n<td>$0.00<\/td>\n<td>$46,338.49<\/td>\n<td>$509,723.34<\/td>\n<td>$2,000<\/td>\n<td>$19,669.41<\/td>\n<td>$216,363.53<\/td>\n<\/tr>\n<tr>\n<td>65<\/td>\n<td>$0.00<\/td>\n<td>$74,628.59<\/td>\n<td>$820,914.53<\/td>\n<td>$2,000<\/td>\n<td>$32,898.80<\/td>\n<td>$361,886.65<\/td>\n<\/tr>\n<tr>\n<td>67<\/td>\n<td>$0.00<\/td>\n<td>$90,300.60<\/td>\n<td>$993,306.53<\/td>\n<td>$2,000<\/td>\n<td>$40,277.55<\/td>\n<td>$442,503.09<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p id=\"frank-ch14_s02_s02_p04\" class=\"indent para editable block no-indent\">Here\u2019s another way of looking at the same principle. Suppose that you\u2019re twenty years old, don\u2019t have $2,000, and don\u2019t want to attend college full-time. You are, however, a hard worker and a conscientious saver, and one of your (very general) financial goals is to accumulate a $1 million retirement nest egg. As a matter of fact, if you can put $33 a month into an account that pays 12 percent interest compounded<a class=\"footnote\" title=\"This 12 percent interest rate is not realistic for today\u2019s economic environment. It\u2019s used for illustrative purposes only.\" id=\"return-footnote-292-38\" href=\"#footnote-292-38\" aria-label=\"Footnote 38\"><sup class=\"footnote\">[38]<\/sup><\/a>, you can have your $1 million by age sixty-seven. That is, <em class=\"emphasis\">if you start at age twenty<\/em>. As you can see from <a class=\"xref\" href=\"#frank-ch14_s02_s02_t02\">Table 12.4 \u201cWhy to Start Saving Early (II)\u201d<\/a>, if you wait until you\u2019re twenty-one to start saving, you\u2019ll need $37 a month. If you wait until you\u2019re thirty, you\u2019ll have to save $109 a month, and if you procrastinate until you\u2019re forty, the ante goes up to $366 a month.<a class=\"footnote\" title=\"Keown, A. J., Personal Finance: Turning Money into Wealth, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007), 23.\" id=\"return-footnote-292-39\" href=\"#footnote-292-39\" aria-label=\"Footnote 39\"><sup class=\"footnote\">[39]<\/sup><\/a><\/p>\n<div class=\"wp-nocaption\">\n<div class=\"table block caption\" id=\"frank-ch14_s02_s02_t02\">\n<h3 class=\"nonindent title\"><span class=\"title-prefix\">Table 12.4<\/span> Why to Start Saving Early (II)<a class=\"footnote\" title=\"Source: Arthur J. Keown, Personal Finance: Turning Money into Wealth, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007), 23.\" id=\"return-footnote-292-40\" href=\"#footnote-292-40\" aria-label=\"Footnote 40\"><sup class=\"footnote\">[40]<\/sup><\/a><\/h3>\n<table style=\"border-spacing: 0px\" cellpadding=\"0\">\n<thead>\n<tr>\n<th>First Payment When You Turn<\/th>\n<th>Required Monthly Payment<\/th>\n<th>First Payment When You Turn<\/th>\n<th>Required Monthly Payment<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20<\/td>\n<td>$33<\/td>\n<td>30<\/td>\n<td>$109<\/td>\n<\/tr>\n<tr>\n<td>21<\/td>\n<td>$37<\/td>\n<td>31<\/td>\n<td>$123<\/td>\n<\/tr>\n<tr>\n<td>22<\/td>\n<td>$42<\/td>\n<td>32<\/td>\n<td>$138<\/td>\n<\/tr>\n<tr>\n<td>23<\/td>\n<td>$47<\/td>\n<td>33<\/td>\n<td>$156<\/td>\n<\/tr>\n<tr>\n<td>24<\/td>\n<td>$53<\/td>\n<td>34<\/td>\n<td>$176<\/td>\n<\/tr>\n<tr>\n<td>25<\/td>\n<td>$60<\/td>\n<td>35<\/td>\n<td>$199<\/td>\n<\/tr>\n<tr>\n<td>26<\/td>\n<td>$67<\/td>\n<td>40<\/td>\n<td>$366<\/td>\n<\/tr>\n<tr>\n<td>27<\/td>\n<td>$76<\/td>\n<td>50<\/td>\n<td>$1,319<\/td>\n<\/tr>\n<tr>\n<td>28<\/td>\n<td>$85<\/td>\n<td>60<\/td>\n<td>$6,253<\/td>\n<\/tr>\n<tr>\n<td>29<\/td>\n<td>$96<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p id=\"frank-ch14_s02_s02_p05\" class=\"indent para editable block no-indent\">The moral here should be fairly obvious: a dollar saved today not only starts earning interest sooner than one saved tomorrow (or ten years from now) but also can ultimately earn a lot more money in the long run. Starting early means in your twenties\u2014early in stage 1 of your financial life cycle. As one well-known financial advisor puts it, \u201cIf you\u2019re in your 20s and you haven\u2019t yet learned how to delay gratification, your life is likely to be a constant financial struggle\u201d.<a class=\"footnote\" title=\"Clements, J., quoted in \u201cAn Interview with Jonathan Clements\u2014Part 2,\u201d All Financial Matters, February 10, 2006, http:\/\/allfinancialmatters.com\/2006\/02\/10\/an-interview-with-jonathan-clements-part-2\/ (accessed November 11, 2011).\" id=\"return-footnote-292-41\" href=\"#footnote-292-41\" aria-label=\"Footnote 41\"><sup class=\"footnote\">[41]<\/sup><\/a><\/p>\n<div class=\"bcc-box bcc-success\" id=\"frank-ch14_s02_s02_n01\">\n<h3 class=\"title\">Key Takeaways<\/h3>\n<ul id=\"frank-ch14_s02_s02_l01\" class=\"itemizedlist\">\n<li>The principle of <strong class=\"emphasis bold\">compound interest<\/strong> refers to the effect of earning interest on your interest.<\/li>\n<li>The principle of the <strong class=\"emphasis bold\">time value of money<\/strong> is the principle whereby a dollar received in the present is worth more than a dollar received in the future.<\/li>\n<li>The principle of the time value of money also states that a dollar received today starts earning interest sooner than one received tomorrow.<\/li>\n<li>Together, these two principles give a significant financial advantage to individuals who begin saving early during the financial-planning life cycle.<\/li>\n<\/ul>\n<\/div>\n<div class=\"bcc-box bcc-info\" id=\"frank-ch14_s02_s02_n02\">\n<h3 class=\"title\">Exercise<\/h3>\n<p class=\"nonindent simpara\">(AACSB) Analysis<\/p>\n<p id=\"frank-ch14_s02_s02_p06\" class=\"indent para\">Everyone wants to be a millionaire (except those who are already billionaires). To find out how old you\u2019ll be when you become a millionaire, go to <a class=\"link\" href=\"http:\/\/www.youngmoney.com\/calculators\/savings_calculators\/millionaire_calculator\">http:\/\/www.youngmoney.com\/calculators\/savings_calculators\/millionaire_calculator<\/a> and input these assumptions:<\/p>\n<p id=\"frank-ch14_s02_s02_p07\" class=\"indent para\">Age: your actual age<\/p>\n<p id=\"frank-ch14_s02_s02_p08\" class=\"indent para\">Amount currently invested: $10,000<\/p>\n<p id=\"frank-ch14_s02_s02_p09\" class=\"indent para\">Expected rate of return (interest rate): 5 percent<\/p>\n<p id=\"frank-ch14_s02_s02_p10\" class=\"indent para\">Millionaire target age: 65<\/p>\n<p id=\"frank-ch14_s02_s02_p11\" class=\"indent para\">Savings per month: $500<\/p>\n<p id=\"frank-ch14_s02_s02_p12\" class=\"indent para\">Expected inflation rate: 3 percent<\/p>\n<p id=\"frank-ch14_s02_s02_p13\" class=\"indent para\">Click \u201ccalculate\u201d and you\u2019ll learn when you\u2019ll become a millionaire (given the previous assumptions).<\/p>\n<p id=\"frank-ch14_s02_s02_p14\" class=\"indent para\">Now, let\u2019s change things. We\u2019ll go through this process three times. Change only the items described. Keep all other assumptions the same as those listed previously.<\/p>\n<ol id=\"frank-ch14_s02_s02_l02\" class=\"orderedlist\">\n<li>Change the interest rate to 3 percent and then to 6 percent.<\/li>\n<li>Change the savings amount to $200 and then to $800.<\/li>\n<li>Change your age from \u201cyour age\u201d to \u201cyour age plus 5\u201d and then to \u201cyour age minus 5.\u201d<\/li>\n<\/ol>\n<p id=\"frank-ch14_s02_s02_p15\" class=\"indent para\">Write a brief report describing the sensitivity of becoming a millionaire, based on changing interest rates, monthly savings amount, and age at which you begin to invest.<\/p>\n<\/div>\n<\/div>\n<div class=\"chapter standard\" id=\"slug-14-3-the-financial-planning-process\">\n<div class=\"chapter-title-wrap\">\n<h1 class=\"chapter-number\" style=\"text-align: center\">The Financial Planning Process<\/h1>\n<\/div>\n<div class=\"ugc chapter-ugc\">\n<div class=\"bcc-box bcc-highlight\" id=\"frank-ch14_s03_n01\">\n<h3 class=\"title\">Learning Objectives<\/h3>\n<ol id=\"frank-ch14_s03_l01\" class=\"orderedlist\">\n<li>Identify the three stages of the <em class=\"emphasis\">personal-finances planning process<\/em>.<\/li>\n<li>Explain how to draw up a personal <em class=\"emphasis\">net-worth statement<\/em>, a personal <em class=\"emphasis\">cash-flow statement<\/em>, and a personal <em class=\"emphasis\">budget<\/em>.<\/li>\n<\/ol>\n<\/div>\n<p id=\"frank-ch14_s03_p01\" class=\"nonindent para editable block\">We\u2019ve divided the financial planning process into three steps:<\/p>\n<ol id=\"frank-ch14_s03_l02\" class=\"orderedlist editable block\">\n<li style=\"text-align: left\">Evaluate your current financial status by creating a net worth statement and a cash flow analysis.<\/li>\n<li style=\"text-align: left\">Set short-term, intermediate-term, and long-term financial goals.<\/li>\n<li style=\"text-align: left\">Use a budget to plan your future cash inflows and outflows and to assess your financial performance by comparing budgeted figures with actual amounts.<\/li>\n<\/ol>\n<div class=\"section\" id=\"frank-ch14_s03_s01\">\n<h2 class=\"title editable block\">Step 1: Evaluating Your Current Financial Situation<\/h2>\n<p id=\"frank-ch14_s03_s01_p01\" class=\"nonindent para editable block\">Just how are you doing, financially speaking? You should ask yourself this question every now and then, and it should certainly be your starting point when you decide to initiate a more or less formal financial plan. The first step in addressing this question is collecting and analyzing the records of what you <em class=\"emphasis\">own<\/em> and what you <em class=\"emphasis\">owe<\/em> and then applying a few accounting terms to the results:<\/p>\n<ul id=\"frank-ch14_s03_s01_l01\" class=\"itemizedlist editable block\">\n<li style=\"text-align: left\">Your personal <em class=\"emphasis\">assets<\/em> consist of what you <em class=\"emphasis\">own<\/em>.<\/li>\n<li style=\"text-align: left\">Your personal <em class=\"emphasis\">liabilities<\/em> are what you <em class=\"emphasis\">owe<\/em>\u2014your obligations to various creditors, big and small.<\/li>\n<\/ul>\n<div class=\"section\" id=\"frank-ch14_s03_s01_s01\">\n<h2 class=\"title editable block\" style=\"text-align: left\">Preparing Your Net-Worth Statement<\/h2>\n<p id=\"frank-ch14_s03_s01_s01_p01\" class=\"nonindent para editable block\">Your net worth (accounting term for your <em class=\"emphasis\">wealth<\/em>) is the difference between your assets and your liabilities. Thus the formula for determining net worth is:<\/p>\n<p class=\"indent\"><span class=\"informalequation block\"><br \/>\n<span class=\"mathphrase\">Assets \u2212 Liabilities = Net worth<\/span><br \/>\n<\/span><\/p>\n<p id=\"frank-ch14_s03_s01_s01_p02\" class=\"indent para editable block no-indent\">If you own more than you owe, your net worth will be <em class=\"emphasis\">positive<\/em>; if you owe more than you own, it will be <em class=\"emphasis\">negative<\/em>. To find out whether your net worth is on the plus or minus side, you can prepare a personal net worth statement like the one in <a class=\"xref\" href=\"#frank-ch14_s03_s01_s01_f01\">Figure 12.6 \u201cNet Worth Statement\u201d<\/a>, which we\u2019ve drawn up for a fictional student named Joe College (Note that we\u2019ve included lines for items that may be relevant to some people\u2019s net worth statements but left them blank when they don\u2019t apply to Joe).<\/p>\n<h3><span class=\"title-prefix\">Figure 14.6<\/span> Net Worth Statement<\/h3>\n<div class=\"caption\" style=\"text-align: center;font-size: .8em\" id=\"frank-ch14_s03_s01_s01_f01\">\n<p class=\"indent\"><a><img decoding=\"async\" src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/2fc489c5f8edc6119dca92c06999bd2f.jpg\" alt=\"Net Worth Statement of Joe College's Personal Net Worth Statement as of August 31, 2012\" style=\"max-width: 497px\" \/><br \/>\n<\/a><\/p>\n<\/div>\n<div class=\"section\" id=\"frank-ch14_s03_s01_s01_s01\">\n<h2 class=\"title editable block\">Assets<\/h2>\n<p id=\"frank-ch14_s03_s01_s01_s01_p01\" class=\"nonindent para editable block\">Joe has two types of assets:<\/p>\n<ul id=\"frank-ch14_s03_s01_s01_s01_l01\" class=\"itemizedlist editable block\">\n<li style=\"text-align: left\">First are his <em class=\"emphasis\">monetary<\/em> or <em class=\"emphasis\">liquid assets<\/em>\u2014his cash, the money in his checking accounts, and the value of any savings, CDs, and money market accounts. They\u2019re called <em class=\"emphasis\">liquid<\/em> because either they\u2019re cash or they can readily be turned into cash.<\/li>\n<li style=\"text-align: left\">Everything else is a <em class=\"emphasis\">tangible asset<\/em>\u2014something that Joe can use, as opposed to an investment. (We haven\u2019t given Joe any <em class=\"emphasis\">investments<\/em>\u2014such financial assets as stocks, bonds, or mutual funds\u2014because people usually purchase these instruments to meet such long-term goals as buying a house or sending a child to college.)<\/li>\n<\/ul>\n<p id=\"frank-ch14_s03_s01_s01_s01_p02\" class=\"indent para editable block no-indent\">Note that we\u2019ve been careful to calculate Joe\u2019s assets in terms of their fair market value\u2014the price he could get by selling them at present, not the price he paid for them or the price that he could get at some future time.<\/p>\n<\/div>\n<div class=\"section\" id=\"frank-ch14_s03_s01_s01_s02\">\n<h2 class=\"title editable block\">Liabilities<\/h2>\n<p id=\"frank-ch14_s03_s01_s01_s02_p01\" class=\"nonindent para editable block\">Joe\u2019s net worth statement also divides his liabilities into two categories:<\/p>\n<ul id=\"frank-ch14_s03_s01_s01_s02_l01\" class=\"itemizedlist editable block\">\n<li style=\"text-align: left\">Anything that Joe owes on such items as his furniture and computer are <em class=\"emphasis\">current liabilities<\/em>\u2014debts that must be paid within one year. Much of this indebtedness no doubt ends up on Joe\u2019s credit card balance, which is regarded as a current liability because he <em class=\"emphasis\">should<\/em> pay it off within a year.<\/li>\n<li style=\"text-align: left\">By contrast, his car payments and student-loan payments are <em class=\"emphasis\">noncurrent liabilities<\/em>\u2014debt payments that extend for a period of more than one year. Joe is in no position to buy a house, but for most people, their mortgage is their most significant noncurrent liability.<\/li>\n<\/ul>\n<p id=\"frank-ch14_s03_s01_s01_s02_p02\" class=\"indent para editable block no-indent\">Finally, note that Joe has positive net worth. At this point in the life of the average college student, positive net worth may be a little unusual. If you happen to have negative net worth right now, you\u2019re technically <em class=\"emphasis\">insolvent<\/em>, but remember that a major goal of getting a college degree is to enter the workforce with the best possible opportunity for generating enough wealth to reverse that situation.<\/p>\n<\/div>\n<\/div>\n<div class=\"section\" id=\"frank-ch14_s03_s01_s02\">\n<h2 class=\"title editable block\">Preparing Your Cash-Flow Statement<\/h2>\n<p id=\"frank-ch14_s03_s01_s02_p01\" class=\"nonindent para editable block\">Now that you know something about your financial status <em class=\"emphasis\">on a given date<\/em>, you need to know more about it <em class=\"emphasis\">over a period of time<\/em>. This is the function of a cash-flow or income statement, which shows where your money has come from and where it\u2019s slated to go.<\/p>\n<p id=\"frank-ch14_s03_s01_s02_p02\" class=\"indent para editable block no-indent\"><a class=\"xref\" href=\"#frank-ch14_s03_s01_s02_f01\">Figure 12.7 \u201cCash-Flow Statement\u201d<\/a> is Joe College\u2019s cash-flow statement. As you can see, Joe\u2019s <em class=\"emphasis\">income<\/em> (his cash <em class=\"emphasis\">inflows<\/em>\u2014money coming in) is derived from two sources: student loans and income from a part-time job. His expenditures (cash <em class=\"emphasis\">outflows<\/em>\u2014money going out) fall into several categories: housing, food, transportation, personal and health care, recreation\/entertainment, education, insurance, savings, and other expenses. To find out Joe\u2019s <em class=\"emphasis\">net cash flow<\/em>, we subtract his expenditures from his income:<\/p>\n<p class=\"indent no-indent\">$25,700\u00a0\u2013\u00a0$25,300\u00a0=\u00a0$400<\/p>\n<h3><span class=\"title-prefix\">Figure 12.7<\/span> Cash-Flow Statement<\/h3>\n<div class=\"caption\" style=\"text-align: center;font-size: .8em\" id=\"frank-ch14_s03_s01_s02_f01\">\n<p class=\"indent\"><a><img decoding=\"async\" src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/32c992b959bd3d6e70cbfab261a0d9f2.jpg\" alt=\"Cash-Flow Statement of Joe College's Personal Cash-Flow Statement as of August 31, 2012\" style=\"max-width: 497px\" \/><br \/>\n<\/a><\/p>\n<\/div>\n<p id=\"frank-ch14_s03_s01_s02_p03\" class=\"indent para editable block no-indent\">Joe has been able to maintain a positive cash flow for the year ending August 31, 2012, but he\u2019s cutting it close. Moreover, he\u2019s in the black only because of the inflow from student loans\u2014income that, as you\u2019ll recall from his net worth statement, is also a noncurrent liability. We are, however, willing to give Joe the benefit of the doubt: Though he\u2019s incurring the high costs of an education, he\u2019s willing to commit himself to the debt (and, we\u2019ll assume, to careful spending) because he regards education as an investment that will pay off in the future.<\/p>\n<p id=\"frank-ch14_s03_s01_s02_p04\" class=\"indent para editable block no-indent\">Remember that when constructing a cash-flow statement, you must record only income and expenditures that pertain to a given period, whether it be a month, a semester, or (as in Joe\u2019s case) a year. Remember, too, that you must figure both inflows and outflows <em class=\"emphasis\">on a cash basis<\/em>: you record income only when you receive money, and you record expenditures only when you pay out money. When, for example, Joe used his credit card to purchase his computer, he didn\u2019t actually pay out any money. Each monthly payment on his credit card balance, however, is an outflow that must be recorded on his cash-flow statement (according to the type of expense\u2014say, recreation\/entertainment, food, transportation, and so on).<\/p>\n<p id=\"frank-ch14_s03_s01_s02_p05\" class=\"indent para editable block no-indent\">Your cash-flow statement, then, provides another perspective on your <em class=\"emphasis\">solvency<\/em>: if you\u2019re <em class=\"emphasis\">insolvent<\/em>, it\u2019s because you\u2019re spending more than you\u2019re earning. Ultimately, your net worth and cash-flow statements are most valuable when you use them together. While your net worth statement lets you know what you\u2019re worth\u2014how much wealth you have\u2014your cash-flow statement lets you know precisely what effect your spending and saving habits are having on your wealth.<\/p>\n<\/div>\n<\/div>\n<div class=\"section\" id=\"frank-ch14_s03_s02\">\n<h2 class=\"title editable block\">Step 2: Set Short-Term, Intermediate-Term, and Long-Term Financial Goals<\/h2>\n<p id=\"frank-ch14_s03_s02_p01\" class=\"nonindent para editable block\">We know from Joe\u2019s cash-flow statement that, despite his limited income, he feels that he can save $1,200 a year. He knows, of course, that it makes sense to have some cash in reserve in case of emergencies (car repairs, medical needs, and so forth), but he also knows that by putting away some of his money (probably each week), he\u2019s developing a habit that he\u2019ll need if he hopes to reach his long-term financial goals.<\/p>\n<p id=\"frank-ch14_s03_s02_p02\" class=\"indent para editable block no-indent\">Just what are Joe\u2019s goals? We\u2019ve summarized them in <a class=\"xref\" href=\"#frank-ch14_s03_s02_f01\">Figure 12.8 \u201cJoe\u2019s Goals\u201d<\/a>, where, as you can see, we\u2019ve divided them into three time frames: short-term (less than two years), intermediate-term (two to five years), and long-term (more than five years). Though Joe is still in an early stage of his financial life cycle, he has identified and structured his goals fairly effectively. In particular, they satisfy four criteria of well-conceived goals: they\u2019re <em class=\"emphasis\">realistic<\/em> and <em class=\"emphasis\">measurable<\/em>, and Joe has designated both <em class=\"emphasis\">definite time frames<\/em> and <em class=\"emphasis\">specific courses of action<\/em>.<a class=\"footnote\" title=\"Kapoor, J. R., Les R. Dlabay, and Robert J. Hughes, Personal Finance, 8th ed. (New York: McGraw-Hill, 2007), 81.\" id=\"return-footnote-292-42\" href=\"#footnote-292-42\" aria-label=\"Footnote 42\"><sup class=\"footnote\">[42]<\/sup><\/a><\/p>\n<div class=\"caption\" style=\"text-align: center;font-size: .em;max-width: 500px\">\n<div class=\"figure full editable block\" id=\"frank-ch14_s03_s02_f01\">\n<h3 class=\"nonindent title\"><span class=\"title-prefix\">Figure 12.8<\/span> Joe\u2019s Goals<\/h3>\n<table>\n<tbody>\n<tr>\n<th>Short-term goals<br \/>\n(less than 2 years)<\/th>\n<th>Intermediate-term goals<br \/>\n(2-5 years)<\/th>\n<th>Long-term goals<br \/>\n(more than 5 years)<\/th>\n<\/tr>\n<tr>\n<td>\n<ul>\n<li>Pay off car loan<\/li>\n<li>Pay off credit card and charge account debt<\/li>\n<\/ul>\n<\/td>\n<td>\n<ul>\n<li>Complete college<\/li>\n<li>Take one-month vacation after completing college<\/li>\n<\/ul>\n<\/td>\n<td>\n<ul>\n<li>Pay off student loans<\/li>\n<li>Buy a home<\/li>\n<li>Save for retirement<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<\/div>\n<p id=\"frank-ch14_s03_s02_p03\" class=\"indent para editable block no-indent\">They\u2019re also sensible. Joe sees no reason, for example, why he can\u2019t pay off his car loan, credit card, and charge account balances within two years. Remember that, with no income other than student-loan money and wages from a part-time job, Joe has decided (rightly or wrongly) to use his credit cards to pay for much of his personal consumption (furniture, electronics equipment, and so forth). It won\u2019t be an easy task to pay down these balances, so we\u2019ll give him some credit (so to speak) for regarding them as important enough to include paying them among his short-term goals. After finishing college, he\u2019ll splurge and take a month-long vacation. This might not be the best thing to do from a financial point of view, but he knows this could be his only opportunity to travel extensively. He is realistic in his classification of student loan repayment and the purchase of a home as long-term. But he might want to revisit his decision to classify saving for his retirement as a long-term goal. This is something we believe he should begin as soon as he starts working full-time.<\/p>\n<\/div>\n<div class=\"section\" id=\"frank-ch14_s03_s03\">\n<h2 class=\"title editable block\">Step 3: Develop a Budget and Use It to Evaluate Financial Performance<\/h2>\n<p id=\"frank-ch14_s03_s03_p01\" class=\"nonindent para editable block\">Once he has reviewed his cash-flow statement, Joe has a much better idea of what cash flowed in for the year that ended August 31, 2012, and a much better idea of where it went when it flowed out. Now he can ask himself whether he\u2019s satisfied with his annual inflow (income) and outflow (expenditures). If he\u2019s anything like most people, he\u2019ll want to make some changes\u2014perhaps to increase his income, to cut back on his expenditures, or, if possible, both. The first step in making these changes is drawing up a personal budget\u2014a document that itemizes the sources of his income and expenditures for the coming year, along with the relevant money amounts for each.<\/p>\n<p id=\"frank-ch14_s03_s03_p02\" class=\"indent para editable block no-indent\">Having reviewed the figures on his cash-flow statement, Joe did in fact make a few decisions:<\/p>\n<ul id=\"frank-ch14_s03_s03_l01\" class=\"itemizedlist editable block\">\n<li style=\"text-align: left\">Because he doesn\u2019t want to jeopardize his grades by increasing his work hours, he\u2019ll have to reconcile himself to just about the same wages for another year.<\/li>\n<li style=\"text-align: left\">He\u2019ll need to apply for another $7,000 student loan.<\/li>\n<li style=\"text-align: left\">If he\u2019s willing to cut his spending by $1,200, he can pay off his credit cards. Toward this end, he\u2019s targeted the following expenditures for reduction: rent (get a cheaper apartment), phone costs (switch plans), auto insurance (take advantage of a \u201cgood-student\u201d discount), and gasoline (pool rides or do a little more walking). Fortunately, his car loan will be paid off by midyear.<\/li>\n<\/ul>\n<p id=\"frank-ch14_s03_s03_p03\" class=\"indent para editable block no-indent\">Revising his figures accordingly, Joe developed the budget in <a class=\"xref\" href=\"#frank-ch14_s03_s03_f01\">Figure 12.9 \u201cJoe\u2019s Budget\u201d<\/a> for the year ending August 31, 2013. Look first at the column headed \u201cBudget.\u201d If things go as planned, Joe expects a cash surplus of $1,600 by the end of the year\u2014enough to pay off his credit card debt and leave him with an extra $400.<\/p>\n<p>Figure 12.9 Joe\u2019s Budget<\/p>\n<div class=\"caption\" style=\"text-align: center;font-size: .8em;max-width: 500px\">\n<div class=\"figure full editable block\" id=\"frank-ch14_s03_s03_f01\">\n<p class=\"indent\"><a><img decoding=\"async\" src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/a7118fc4357b57ca87b54bb077763e44.jpg\" alt=\"Joe's College Budget\" style=\"max-width: 497px\" \/><br \/>\n<\/a><\/p>\n<\/div>\n<\/div>\n<div class=\"section\" id=\"frank-ch14_s03_s03_s01\">\n<h2 class=\"title editable block\">Figuring the Variance<\/h2>\n<p id=\"frank-ch14_s03_s03_s01_p01\" class=\"nonindent para editable block\">Now we can examine the two remaining columns in Joe\u2019s budget. Throughout the year, Joe will keep track of his actual income and actual expenditures and will enter the totals in the column labeled \u201cActual.\u201d Like most reasonable people, however, Joe doesn\u2019t really expect his actual figures to match with his budgeted figures. So whenever there\u2019s a difference between an amount in his \u201cBudget\u201d column and the corresponding amount in his \u201cActual\u201d column, Joe records the difference, whether plus or minus, as a variance. Two types of variances appear in Joe\u2019s budget:<\/p>\n<ul id=\"frank-ch14_s03_s03_s01_l01\" class=\"itemizedlist editable block\">\n<li>\n<p class=\"no-indent\"><em class=\"emphasis\">Income variance<\/em>. When actual <em class=\"emphasis\">income<\/em> turns out to be higher than expected or budgeted income, Joe records the variance as \u201cfavorable.\u201d (This makes sense, as you\u2019d find it favorable if you earned more income than expected.) When it\u2019s just the opposite, he records the variance as \u201cunfavorable.\u201d<\/p>\n<\/li>\n<li>\n<p class=\"no-indent\"><em class=\"emphasis\">Expense variance<\/em>. When the actual amount of an <em class=\"emphasis\">expenditure<\/em> is more than he had budgeted for, he records it as an \u201cunfavorable\u201d variance. (This also makes sense, as you\u2019d find it unfavorable if you spent more than the budgeted amount.) When the actual amount is less than budgeted, he records it as a \u201cfavorable\u201d variance.<\/p>\n<\/li>\n<\/ul>\n<\/div>\n<\/div>\n<div class=\"section\" id=\"frank-ch14_s03_s04\">\n<h2 class=\"title editable block\">Setting Mature Goals<\/h2>\n<p id=\"frank-ch14_s03_s04_p01\" class=\"nonindent para editable block\">Before we leave the subject of the financial-planning process, let\u2019s revisit the topic of Joe\u2019s goals. Another look at <a class=\"xref\" href=\"#frank-ch14_s03_s02_f01\">Figure 12.8 \u201cJoe\u2019s Goals\u201d<\/a> reminds us that, at the current stage of his financial life cycle, Joe has set fairly simple goals. We know, for example, that Joe wants to buy a home, but when does he want to take this major financial step? And of course, Joe wants to retire, but what kind of lifestyle does he want in retirement? Does he expect, like most people, a retirement lifestyle that\u2019s more or less comparable to that of his peak earning years? Will he be able to afford both the cost of a comfortable retirement and, say, the cost of sending his children to college? As Joe and his financial circumstances mature, he\u2019ll have to express these goals (and a few others) in more specific terms.<\/p>\n<div class=\"section\" id=\"frank-ch14_s03_s04_s01\">\n<h2 class=\"title editable block\">Levels of Mature Goals<\/h2>\n<p id=\"frank-ch14_s03_s04_s01_p01\" class=\"nonindent para editable block\">Let\u2019s fast-forward a decade or so, when Joe\u2019s picture of stages 2 and 3 of his financial life cycle have come into clearer focus. If he hasn\u2019t done so already, Joe is now ready to identify a primary goal to guide him in identifying and meeting all his other goals.<a class=\"footnote\" title=\"Winger, B. J., and Ralph R. Frasca, Personal Finance: An Integrated Planning Approach, 6th ed. (Upper Saddle River, NJ: Prentice Hall, 2003), 57\u201358.\" id=\"return-footnote-292-43\" href=\"#footnote-292-43\" aria-label=\"Footnote 43\"><sup class=\"footnote\">[43]<\/sup><\/a> Suppose that because Joe\u2019s investment in a college education has paid off the way he\u2019d planned ten years ago, he\u2019s in a position to target a primary goal of financial independence\u2014by which he means a certain financially secure life not only for himself but for his children, as well. Now that he\u2019s set this <em class=\"emphasis\">primary<\/em> goal, he can identify a more specific set of goals\u2014say, the following:<\/p>\n<ul id=\"frank-ch14_s03_s04_s01_l01\" class=\"itemizedlist editable block\">\n<li style=\"text-align: left\">A standard of living that reflects a certain level of comfort\u2014a level associated with the possession of certain assets, both tangible and intangible.<\/li>\n<li style=\"text-align: left\">The ability to provide his children with college educations.<\/li>\n<li style=\"text-align: left\">A retirement lifestyle comparable to that of his peak earning years.<\/li>\n<\/ul>\n<p id=\"frank-ch14_s03_s04_s01_p02\" class=\"indent para editable block no-indent\">Having set this <em class=\"emphasis\">secondary<\/em> level of goals, Joe\u2019s now ready to make specific plans for reaching them. As we\u2019ve already seen, Joe understands that plans are far more likely to work out when they\u2019re focused on specific goals. His next step, therefore, is to determine the goals on which he should focus this next level of plans.<\/p>\n<p id=\"frank-ch14_s03_s04_s01_p03\" class=\"indent para editable block no-indent\">As it turns out, Joe already knows what these goals are, because he\u2019s been setting the appropriate goals every year since he drew up the cash-flow statement in <a class=\"xref\" href=\"#frank-ch14_s03_s01_s02_f01\">Figure 12.7 \u201cCash-Flow Statement\u201d<\/a>. In drawing up that statement, Joe was careful to create several line items to identify his various expenditures: <em class=\"emphasis\">housing, food, transportation, personal and health care, recreation\/entertainment, education, insurance, savings<\/em>, and <em class=\"emphasis\">other expenses<\/em>. When we introduced these items, we pointed out that each one represents a cash outflow\u2014something for which Joe expected to pay. They are, in other words, things that Joe intends to <em class=\"emphasis\">buy<\/em> or, in the language of economics, <em class=\"emphasis\">consume<\/em>. As such, we can characterize them as <em class=\"emphasis\">consumption goals<\/em>. These \u201cpurchases\u201d\u2014what Joe wants in such areas as housing, insurance coverage, recreation\/entertainment, and so forth\u2014make specific his secondary goals and are therefore his <em class=\"emphasis\">third-level<\/em> goals.<\/p>\n<p id=\"frank-ch14_s03_s04_s01_p04\" class=\"indent para editable block\"><a class=\"xref\" href=\"#frank-ch14_s03_s04_s01_f01\">Figure 12.10 \u201cThree-Level Goals\/Plans\u201d<\/a> gives us a full picture of Joe\u2019s three-level hierarchy of goals.<\/p>\n<p>Figure 12.10 Three-Level Goals\/Plans<\/p>\n<div class=\"caption\" style=\"text-align: center;font-size: .8em\" id=\"frank-ch14_s03_s04_s01_f01\">\n<p class=\"indent\"><a><img decoding=\"async\" src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/097c8617168a77a7704a4254bdee8b3a.jpg\" alt=\"Three-Level Goals\/Plans (Primary Goals, Secondary Goals, Third-Level Goals)\" style=\"max-width: 497px\" \/><br \/>\n<\/a><\/p>\n<\/div>\n<div class=\"section\" id=\"frank-ch14_s03_s04_s01_s01\">\n<h2 class=\"title editable block\">Present and Future Consumption Goals<\/h2>\n<p id=\"frank-ch14_s03_s04_s01_p05\" class=\"nonindent para editable block\">A closer look at the list of Joe\u2019s consumption goals reveals that they fall into two categories:<\/p>\n<\/div>\n<ol id=\"frank-ch14_s03_s04_s01_l02\" class=\"orderedlist editable block\">\n<li style=\"text-align: left\">We can call the first category <em class=\"emphasis\">present<\/em> goals because each item is intended to meet Joe\u2019s present needs and those (we\u2019ll now assume) of his family\u2014housing, health care coverage, and so forth. They must be paid for as Joe and his family take possession of them\u2014that is, when they use or consume them. All these things are also necessary to meet the first of Joe\u2019s secondary goals\u2014a certain standard of living.<\/li>\n<li style=\"text-align: left\">The items in the second category of Joe\u2019s consumption goals are aimed at meeting his other two secondary goals: sending his children to college and retiring with a comfortable lifestyle. He won\u2019t take possession of these purchases until sometime in the <em class=\"emphasis\">future<\/em>, but (as is so often the case) there\u2019s a catch: they must be paid for out of <em class=\"emphasis\">current<\/em> income.<\/li>\n<\/ol>\n<\/div>\n<\/div>\n<div class=\"section\" id=\"frank-ch14_s03_s05\">\n<h2 class=\"title editable block\">A Few Words about Saving<\/h2>\n<p id=\"frank-ch14_s03_s05_p01\" class=\"nonindent para editable block\">Joe\u2019s desire to meet this second category of consumption goals\u2014<em class=\"emphasis\">future<\/em> goals such as education for his kids and a comfortable retirement for himself and his wife\u2014accounts for the appearance on his list of the one item that, at first glance, may seem misclassified among all the others: namely, <em class=\"emphasis\">savings<\/em>.<\/p>\n<div class=\"section\" id=\"frank-ch14_s03_s05_s01\">\n<h2 class=\"title editable block\">Paying Yourself First<\/h2>\n<p id=\"frank-ch14_s03_s05_s01_p01\" class=\"nonindent para editable block\">It\u2019s tempting to glance at Joe\u2019s budget and cash-flow statement and assume that he shares with most of us a common attitude toward saving money: when you\u2019re done allotting money for various spending needs, you can decide what to do with what\u2019s left over\u2014save it or spend it. In reality, however, Joe\u2019s budgeting reflects an entirely different approach. When he made up the budget in <a class=\"xref\" href=\"#frank-ch14_s03_s03_f01\">Figure 12.9 \u201cJoe\u2019s Budget\u201d<\/a>, Joe <em class=\"emphasis\">started out<\/em> with the decision to save $1,600\u2014or at least to avoid spending it. Why? Because he had a goal: to be free of credit card debt. To meet this goal, he planned to use $1,200 of his <em class=\"emphasis\">current<\/em> income to pay off what would continue to hang over his head as a <em class=\"emphasis\">future<\/em> expense (his credit card debt). In addition, he <em class=\"emphasis\">planned<\/em> to have $400 left over after he\u2019d paid his credit card balance. Why? Because he had still longer-term goals, and he intended to get started on them early\u2014as soon as he finished college. Thus his intention from the outset was to put $400 into savings.<\/p>\n<p id=\"frank-ch14_s03_s05_s01_p02\" class=\"indent para editable block no-indent\">In other words, here\u2019s how Joe went about budgeting his money for the year ending August 31, 2013 (as shown in <a class=\"xref\" href=\"#frank-ch14_s03_s03_f01\">Figure 12.9 \u201cJoe\u2019s Budget\u201d<\/a>):<\/p>\n<ol id=\"frank-ch14_s03_s05_s01_l01\" class=\"orderedlist editable block\">\n<li style=\"text-align: left\">\n<p class=\"no-indent\">He calculated his income\u2014total cash inflows from his student loan and his part-time job ($25,700).<\/p>\n<\/li>\n<li style=\"text-align: left\">\n<p class=\"no-indent\">He subtracted from his total income two targeted consumption goals\u2014credit card payments ($1,200) and savings ($400).<\/p>\n<\/li>\n<li style=\"text-align: left\">\n<p class=\"no-indent\">He allocated what was left ($24,100) to his remaining consumption goals: housing ($6,600), food ($3,500), education ($6,500), and so forth.<\/p>\n<\/li>\n<\/ol>\n<p id=\"frank-ch14_s03_s05_s01_p03\" class=\"indent para editable block no-indent\">If you\u2019re concerned that Joe\u2019s sense of delayed gratification is considerably more mature than your own, think of it this way: <em class=\"emphasis\">Joe has chosen to pay himself first<\/em>. It\u2019s one of the key principles of personal-finances planning and an important strategy in doing something that we recommended earlier in this chapter\u2014starting early.<a class=\"footnote\" title=\"Keown, A. J., Personal Finance: Turning Money into Wealth, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007, 22 et passim.\" id=\"return-footnote-292-44\" href=\"#footnote-292-44\" aria-label=\"Footnote 44\"><sup class=\"footnote\">[44]<\/sup><\/a><\/p>\n<div class=\"bcc-box bcc-success\" id=\"frank-ch14_s03_s05_s01_n01\">\n<h3 class=\"title\">Key Takeaways<\/h3>\n<ul id=\"frank-ch14_s03_s05_s01_l02\" class=\"itemizedlist\">\n<li>\n<p class=\"nonindent para\">The financial planning process consists of three steps:<\/p>\n<ol id=\"frank-ch14_s03_s05_s01_l03\" class=\"orderedlist\">\n<li>Evaluate your current financial status by creating a net worth statement and a cash flow analysis.<\/li>\n<li>Set short-term, intermediate-term, and long-term financial goals.<\/li>\n<li>Use a budget to plan your future cash inflows and outflows and to assess your financial performance by comparing budgeted figures with actual amounts.<\/li>\n<\/ol>\n<\/li>\n<li>\n<p class=\"nonindent para\">In step 1 of the financial planning process, you determine what you <em class=\"emphasis\">own<\/em> and what you <em class=\"emphasis\">owe<\/em>:<\/p>\n<ol id=\"frank-ch14_s03_s05_s01_l04\" class=\"orderedlist\">\n<li>Your personal <em class=\"emphasis\">assets<\/em> consist of what you own.<\/li>\n<li>Your personal <em class=\"emphasis\">liabilities<\/em> are what you owe\u2014your obligations to various creditors.<\/li>\n<\/ol>\n<\/li>\n<li>\n<p class=\"nonindent para\">Most people have two types of assets:<\/p>\n<ol id=\"frank-ch14_s03_s05_s01_l05\" class=\"orderedlist\">\n<li><em class=\"emphasis\">Monetary<\/em> or <em class=\"emphasis\">liquid assets<\/em> include cash, money in checking accounts, and the value of any savings, CDs, and money market accounts. They\u2019re called <em class=\"emphasis\">liquid<\/em> because either they\u2019re cash or they can readily be turned into cash.<\/li>\n<li>Everything else is a <em class=\"emphasis\">tangible asset<\/em>\u2014something that can be used, as opposed to an investment.<\/li>\n<\/ol>\n<\/li>\n<li>\n<p class=\"nonindent para\">Likewise, most people have two types of liabilities:<\/p>\n<ol id=\"frank-ch14_s03_s05_s01_l06\" class=\"orderedlist\">\n<li>Any debts that should be paid within one year are <em class=\"emphasis\">current liabilities<\/em>.<\/li>\n<li><em class=\"emphasis\">Noncurrent liabilities<\/em> consist of debt payments that extend for a period of more than one year.<\/li>\n<\/ol>\n<\/li>\n<li>Your <strong class=\"emphasis bold\">net worth<\/strong> is the difference between your assets and your liabilities. <strong class=\"emphasis bold\">Your net worth statement<\/strong> will show whether your net worth is on the plus or minus side on a given date.<\/li>\n<li>In step 2 of the financial planning process, you create a <strong class=\"emphasis bold\">cash-flow<\/strong> or <strong class=\"emphasis bold\">income statement<\/strong>, which shows where your money has come from and where it\u2019s slated to go. It reflects your financial status over a period of time. Your cash <em class=\"emphasis\">inflows<\/em>\u2014the money you have coming in\u2014are recorded as <em class=\"emphasis\">income<\/em>. Your cash <em class=\"emphasis\">outflows<\/em>\u2014money going out\u2014are itemized as <em class=\"emphasis\">expenditures<\/em> in such categories as housing, food, transportation, education, and savings.<\/li>\n<li>A good way to approach your financial goals is by dividing them into three time frames: short-term (less than two years), intermediate-term (two to five years), and long-term (more than five years). Goals should be realistic and measurable, and you should designate definite time frames and specific courses of action.<\/li>\n<li>Net worth and cash-flow statements are most valuable when used together: while your net worth statement lets you know what you\u2019re worth, your cash-flow statement lets you know precisely what effect your spending and saving habits are having on your net worth.<\/li>\n<li>If you\u2019re not satisfied with the effect of your spending and saving habits on your net worth, you may want to make changes in future inflows (income) and outflows (expenditures). You make these changes in step 3 of the financial planning process, when you draw up your personal <strong class=\"emphasis bold\">budget<\/strong>\u2014a document that itemizes the sources of your income and expenditures for a future period (often a year).<\/li>\n<li>\n<p class=\"nonindent para\">In addition to the itemized lists of inflows and outflows, there are three other columns in the budget:<\/p>\n<ol id=\"frank-ch14_s03_s05_s01_l07\" class=\"orderedlist\">\n<li>The \u201cBudget\u201d column tracks the amounts of money that you <em class=\"emphasis\">plan<\/em> to receive or to pay out over the budget period.<\/li>\n<li>The \u201cActual\u201d column records the amounts that did in fact come in or go out.<\/li>\n<li>The final column records the <strong class=\"emphasis bold\">variance<\/strong> for each item\u2014the difference between the amount in the \u201cBudget\u201d column and the corresponding amount in the \u201cActual\u201d column.<\/li>\n<\/ol>\n<\/li>\n<li>\n<p class=\"nonindent para\">There are two types of variance:<\/p>\n<ol id=\"frank-ch14_s03_s05_s01_l08\" class=\"orderedlist\">\n<li>An <em class=\"emphasis\">income variance<\/em> occurs when actual income is higher than budgeted income (or vice versa).<\/li>\n<li>An <em class=\"emphasis\">expense variance<\/em> occurs when the actual amount of an expenditure is higher than the budgeted amount (or vice versa).<\/li>\n<\/ol>\n<\/li>\n<\/ul>\n<\/div>\n<div class=\"bcc-box bcc-info\" id=\"frank-ch14_s03_s05_s01_n02\">\n<h3 class=\"title\">Exercise<\/h3>\n<p class=\"nonindent simpara\">(AACSB) Analysis<\/p>\n<p id=\"frank-ch14_s03_s05_s01_p04\" class=\"indent para\">Using your own information (or made-up information if you prefer), go through the three steps in the financial planning process:<\/p>\n<ol id=\"frank-ch14_s03_s05_s01_l09\" class=\"orderedlist\">\n<li>Evaluate your current financial status by creating a net worth statement and a cash flow analysis.<\/li>\n<li>Identify short-term, intermediate-term, and long-term financial goals.<\/li>\n<li>Create a budget (for a month or a year). Estimate future income and expenditures. Make up \u201cactual\u201d figures and calculate a variance by comparing budgeted figures with actual amounts.<\/li>\n<\/ol>\n<\/div>\n<\/div>\n<\/div>\n<div class=\"chapter standard\" id=\"slug-14-4-a-house-is-not-a-piggy-bank-a-few-lessons-from-the-subprime-crisis-2\">\n<div class=\"chapter-title-wrap\">\n<h1 class=\"chapter-title\" style=\"text-align: center\">A House Is Not a Piggy Bank: A Few Lessons from the Subprime Crisis<\/h1>\n<\/div>\n<div class=\"ugc chapter-ugc\">\n<div class=\"bcc-box bcc-highlight\" id=\"frank-ch14_s04_n01\">\n<h3 class=\"title\">Learning Objectives<\/h3>\n<ol id=\"frank-ch14_s04_l01\" class=\"orderedlist\">\n<li>Discuss the trend in the U.S. savings rate.<\/li>\n<li>Define a <em class=\"emphasis\">subprime loan<\/em> and explain the difference between a <em class=\"emphasis\">fixed-rate mortgage<\/em> and an <em class=\"emphasis\">adjustable-rate mortgage<\/em>.<\/li>\n<li>Discuss what can go wrong with a subprime loan at an adjustable rate. Discuss what can go wrong with hundreds of thousands of subprime loans at adjustable rates.<\/li>\n<li>Define <em class=\"emphasis\">risk<\/em> and explain some of the risks entailed by personal financial transactions.<\/li>\n<\/ol>\n<\/div>\n<p id=\"frank-ch14_s04_p01\" class=\"nonindent para editable block\">Joe isn\u2019t old enough to qualify, but if his grandfather had deposited $1,000 in an account paying 7 percent interest in 1945, it would now be worth $64,000. That\u2019s because money invested at 7 percent compounded will double every ten years. Now, $64,000 may or may not seem like a significant return over fifty years, but after all, the money did all the heavy lifting, and given the miracle of compound interest, it\u2019s surprising that Americans don\u2019t take greater advantage of the opportunity to multiply their wealth by saving more of it, even in modest, interest-bearing accounts. Ironically, with $790 billion in credit card debt, it\u2019s obvious that a lot of American families are experiencing the effects of compound interest\u2014but in reverse.<a class=\"footnote\" title=\"Frank, R. H., \u201cAmericans Save So Little, but What Can Be Done to Change That?\u201d New York Times, March 17, 2005, http:\/\/www.robert-h-frank.com\/PDFs\/ES.3.17.05.pdf (accessed November 11, 2011).\" id=\"return-footnote-292-45\" href=\"#footnote-292-45\" aria-label=\"Footnote 45\"><sup class=\"footnote\">[45]<\/sup><\/a><\/p>\n<p id=\"frank-ch14_s04_p02\" class=\"indent para editable block no-indent\">As a matter of fact, though Joe College appears to be on the right track when it comes to saving, many people aren\u2019t. A lot of Americans, it seems, do indeed set savings goals, but in one recent survey, nearly 70 percent of the respondents reported that they fell short of their monthly goals because their money was needed elsewhere. About one-third of Americans say that they\u2019re putting away something but not enough, and another third aren\u2019t saving anything at all. Almost one-fifth of all Americans have net worth of zero\u2014or less.<a class=\"footnote\" title=\"Taylor, D., \u201cTwo-Thirds of Americans Don\u2019t Save Enough,\u201d Bankrate.com, October 2007, http:\/\/www.bankrate.com\/brm\/news\/retirement\/Oct_07_retirement_poll_results_a1.asp (accessed November 11, 2011).\" id=\"return-footnote-292-46\" href=\"#footnote-292-46\" aria-label=\"Footnote 46\"><sup class=\"footnote\">[46]<\/sup><\/a><a class=\"footnote\" title=\"Frank, R. H., \u201cAmericans Save So Little, but What Can Be Done to Change That?\u201d New York Times, March 17, 2005, http:\/\/www.robert-h-frank.com\/PDFs\/ES.3.17.05.pdf (accessed November 11, 2011).\" id=\"return-footnote-292-47\" href=\"#footnote-292-47\" aria-label=\"Footnote 47\"><sup class=\"footnote\">[47]<\/sup><\/a><\/p>\n<p id=\"frank-ch14_s04_p03\" class=\"indent para editable block no-indent\">As we indicated in the opening section of this chapter, this shortage of savings goes hand in hand with a surplus in spending. \u201cMy parents,\u201d says one otherwise gainfully employed American knowledge worker, \u201care appalled at the way I justify my spending. I think, \u2018Why work and make money unless you\u2019re going to enjoy it?\u2019 That\u2019s a fine theory,\u201d she adds, \u201cuntil you\u2019re sixty, homeless, and with no money in the bank\u201d.<a class=\"footnote\" title=\"Gardner, M., \u201cWhy Can\u2019t Americans Save a Dime?\u201d Christian Science Monitor (2008), http:\/\/www.mrshultz.com\/webpages\/whycantamericanssave.htm (accessed November 11, 2011).\" id=\"return-footnote-292-48\" href=\"#footnote-292-48\" aria-label=\"Footnote 48\"><sup class=\"footnote\">[48]<\/sup><\/a> And indeed, if she doesn\u2019t intend to alter her personal-finances philosophy, she has good reason to worry about her \u201colder adult\u201d years. Sixty percent of Americans over the age of sixty-five have less than $100,000 in savings, and only 30 percent of this group have more than $25,000; 45 percent have less than $15,000. As for income, 75 percent of people over age sixty-five generate less than $35,000 annually, and 30 percent are in the \u201cpoverty to near-poverty\u201d range of $10,000 to $20,000 (as compared to 12 percent of the under-sixty-five population).<a class=\"footnote\" title=\"Rubin, R. M., Shelley I. White-Means, and Luojia Mao Daniel, \u201cIncome Distribution of Older Americans,\u201d Monthly Labor Review, November 2000, http:\/\/www.bls.gov\/opub\/mlr\/2000\/11\/art2full.pdf (accessed November 11, 2011).\" id=\"return-footnote-292-49\" href=\"#footnote-292-49\" aria-label=\"Footnote 49\"><sup class=\"footnote\">[49]<\/sup><\/a><\/p>\n<div class=\"section\" id=\"frank-ch14_s04_s01\">\n<h2 class=\"title editable block\">Disposing of Savings<\/h2>\n<p id=\"frank-ch14_s04_s01_p01\" class=\"nonindent para editable block\"><a class=\"xref\" href=\"#frank-ch14_s04_s01_f01\">Figure 12.11 \u201cU.S. Savings Rate\u201d<\/a> shows the U.S. <em class=\"emphasis\">savings rate<\/em>\u2014which measures the percentage of disposable income devoted to savings for the period 1960 to 2010. As you can see, it suffered a steep decline from 1980 to 2005 and remained at this negligible savings rate until it started moving up in 2008. The recent increase in the savings rate, however, is still below the long-term average of 7 percent.<a class=\"footnote\" title=\"Economic Research, \u201cPersonal Savings Rate (PSAVERT),\u201d Economic Research, Federal Reserve Bank of St. Louis, August 28, 2008, http:\/\/research.stlouisfed.org\/fred2\/series\/PSAVERT (accessed November 10, 2011).\" id=\"return-footnote-292-50\" href=\"#footnote-292-50\" aria-label=\"Footnote 50\"><sup class=\"footnote\">[50]<\/sup><\/a><a class=\"footnote\" title=\"Dickson, A., \u201cU.S. Personal Savings Rate Close to Depression-Era Rates,\u201d Wisebread, February 2, 2007, http:\/\/www.wisebread.com\/u-s-personal-savings-rate-close-to-depression-era-rates (accessed November 11, 2011).\" id=\"return-footnote-292-51\" href=\"#footnote-292-51\" aria-label=\"Footnote 51\"><sup class=\"footnote\">[51]<\/sup><\/a><\/p>\n<p><span class=\"title-prefix\">Figure 12.11<\/span> U.S. Savings Rate<\/p>\n<div class=\"caption\" style=\"text-align: center;font-size: .8em\" id=\"frank-ch14_s04_s01_f01\">\n<p class=\"indent\"><a><img decoding=\"async\" src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/66953a0bc474e4f226263c06e2cbee6d.jpg\" alt=\"U.S. Savings Rate\" style=\"max-width: 497px\" \/><br \/>\n<\/a><\/p>\n<\/div>\n<p id=\"frank-ch14_s04_s01_p03\" class=\"indent para editable block no-indent\">Now, a widespread tendency on the part of Americans to spend rather than save doesn\u2019t account entirely for the downward shift in the savings rate. In late 2005, the Federal Reserve cited at least two other (closely related) factors in the decline of savings:<a class=\"footnote\" title=\"Federal Reserve Bank of San Francisco, \u201cSpendthrift Nation,\u201d Economic Research and Data, November 10, 2005, http:\/\/www.frbsf.org\/publications\/economics\/letter\/2005\/el2005-30.html (accessed November 11, 2011).\" id=\"return-footnote-292-52\" href=\"#footnote-292-52\" aria-label=\"Footnote 52\"><sup class=\"footnote\">[52]<\/sup><\/a><\/p>\n<ul id=\"frank-ch14_s04_s01_l01\" class=\"itemizedlist editable block\">\n<li style=\"text-align: left\">\n<p class=\"no-indent\">An increase in the ratio of stock-market wealth to disposable income<\/p>\n<\/li>\n<li style=\"text-align: left\">\n<p class=\"no-indent\">An increase in the ratio of residential-property wealth to disposable income<\/p>\n<\/li>\n<\/ul>\n<p id=\"frank-ch14_s04_s01_p04\" class=\"indent para editable block no-indent\">Assume, for example, that, in addition to your personal savings, you own some stock and have a mortgage on a home. Both your stock and your home are (supposedly) <em class=\"emphasis\">appreciable assets<\/em>\u2014their value used to go up over time. (In fact, if you had taken out your mortgage in 2000, by the end of 2005 your home would have appreciated at double the rate of your disposable personal income.) The decline in the personal savings rate during the mid-2000s, suggested the Fed, resulted in part from people\u2019s response to \u201clong-lived bull markets in stocks and housing\u201d; in other words, a lot of people had come to rely on the appreciation of such assets as stocks and residential property as \u201ca substitute for the practice of saving out of wage income.\u201d<\/p>\n<div class=\"section\" id=\"frank-ch14_s04_s01_s01\">\n<h2 class=\"title editable block\">Subprime Rates and Adjustable Rate Mortgages<\/h2>\n<p id=\"frank-ch14_s04_s01_s01_p01\" class=\"nonindent para editable block\">Let\u2019s assume that you weren\u2019t ready to take advantage of the boom in mortgage loans in 2000 but did set your sights on 2005. You may not have been ready to buy a house in 2005 either, but there\u2019s a good chance that you got a loan anyway. In particular, some lender might have offered you a so-called subprime mortgage loan. Subprime loans are made to borrowers who don\u2019t qualify for market-set interest rates because of one or more risk factors\u2014income level, employment status, credit history, ability to make only a very low down payment. As of March 2007, U.S. lenders had written $1.3 trillion in mortgages like yours.<a class=\"footnote\" title=\"Associated Press, \u201cHow Severe Is Subprime Mess?\u201d MSNBC.com, March 13, 2007, http:\/\/www.msnbc.msn.com\/id\/17584725\/ns\/business-real_estate\/t\/will-subprime-mess-ripple-through-economy\/#.Tr2hFvKul2I (accessed November 11, 2011).\" id=\"return-footnote-292-53\" href=\"#footnote-292-53\" aria-label=\"Footnote 53\"><sup class=\"footnote\">[53]<\/sup><\/a><\/p>\n<p id=\"frank-ch14_s04_s01_s01_p02\" class=\"indent para editable block no-indent\">Granted, your terms might not have been very good. For one thing, interest rates on subprime loans may run from 8 percent to 10 percent and higher.<a class=\"footnote\" title=\"consumeraffairs.com, \u201cSubprime Mortgage Pricing Varies Greatly among U.S. Cities, consumeraffairs.com, September 13, 2005, http:\/\/www.consumeraffairs.com\/news04\/2005\/subprime_study.html (accessed November 11, 2011).\" id=\"return-footnote-292-54\" href=\"#footnote-292-54\" aria-label=\"Footnote 54\"><sup class=\"footnote\">[54]<\/sup><\/a> In addition, you probably had to settle for an adjustable-rate mortgage (ARM)\u2014one that\u2019s pegged to the increase or decrease of certain interest rates that your lender has to pay. When you signed your mortgage papers, you knew that if those rates went up, your mortgage rate\u2014and your monthly payments\u2014would go up, too. Fortunately, however, you had a plan B: with the value of your new asset appreciating even as you enjoyed living in it, it wouldn\u2019t be long before you could refinance it at a more manageable and more predictable rate.<\/p>\n<\/div>\n<\/div>\n<div class=\"section\" id=\"frank-ch14_s04_s02\">\n<h2 class=\"title editable block\">The Meltdown<\/h2>\n<p id=\"frank-ch14_s04_s02_p01\" class=\"nonindent para editable block\">Now imagine your dismay when housing prices started to go <em class=\"emphasis\">down<\/em> in 2006 and 2007. As a result, you weren\u2019t able to refinance, your ARM was set to adjust upward in 2008, and foreclosures were already happening all around you\u20141.3 million in 2007 alone.<a class=\"footnote\" title=\"Lahart, J., \u201cEgg Cracks Differ in Housing, Finance Shells,\u201d Wall Street Journal, July 13, 2008.\" id=\"return-footnote-292-55\" href=\"#footnote-292-55\" aria-label=\"Footnote 55\"><sup class=\"footnote\">[55]<\/sup><\/a> By April 2008, one in every 519 American households had received a foreclosure notice.<a class=\"footnote\" title=\"RealtyTrac Inc., \u201cForeclosure Activity Increases 4 Percent in April According to RealtyTrac(R) U.S. Foreclosure Market Report,\u201d PR Newswire, May 14, 2008, http:\/\/www.prnewswire.com\/news-releases\/foreclosure-activity-increases-4-percent-in-april-according-to-realtytracr-us-foreclosure -market-report-57244677.html (accessed November 11, 2011).\" id=\"return-footnote-292-56\" href=\"#footnote-292-56\" aria-label=\"Footnote 56\"><sup class=\"footnote\">[56]<\/sup><\/a> By August, 9.2 percent of the $12 trillion in U.S. mortgage loans was delinquent or in foreclosure.<a class=\"footnote\" title=\"Mortgage Bankers Association, \u201cDelinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey,\u201d Press Release, September 5, 2008, http:\/\/www.mbaa.org\/NewsandMedia\/PressCenter\/64769.htm (accessed November 11, 2011).\" id=\"return-footnote-292-57\" href=\"#footnote-292-57\" aria-label=\"Footnote 57\"><sup class=\"footnote\">[57]<\/sup><\/a><a class=\"footnote\" title=\"Duhigg, C., \u201cLoan-Agency Woes Swell from a Trickle to a Torrent,\u201d nytimes.com, July 11, 2008, http:\/\/www.nytimes.com\/2008\/07\/11\/business\/11ripple.html?ex=1373515200&amp;en=8ad220403fcfdf6e&amp;ei=5124&amp;partner=permalink &amp;exprod=permalink.\" id=\"return-footnote-292-58\" href=\"#footnote-292-58\" aria-label=\"Footnote 58\"><sup class=\"footnote\">[58]<\/sup><\/a> <span class=\"title-prefix\"><\/span><\/p>\n<h3 class=\"nonindent para editable block\"><span class=\"title-prefix\">Figure 12.12 Foreclosure<\/span><\/h3>\n<div class=\"caption\" style=\"text-align: center;font-size: .8em;max-width: 500px\" id=\"frank-ch14_s04_s02_f01\">\n<p class=\"indent\"><a><img decoding=\"async\" src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/14.4.0.jpg\" alt=\"A Foreclosure sign in front of a house\" class=\"aligncenter size-full wp-image-1479\" width=\"500\" \/><\/a><\/p>\n<\/div>\n<p>In 2008, nearly one out of five hundred households in the United States received a foreclosure notice.<a class=\"footnote\" title=\"Taber Andrew Bain \u2013 Foreclosure \u2013 CC BY 2.0.\" id=\"return-footnote-292-59\" href=\"#footnote-292-59\" aria-label=\"Footnote 59\"><sup class=\"footnote\">[59]<\/sup><\/a><\/p>\n<p id=\"frank-ch14_s04_s02_p02\" class=\"indent para editable block no-indent\">The repercussions? Banks and other institutions that made mortgage loans were the first sector of the financial industry to be hit. Largely because of mortgage-loan defaults, profits at more than 8,500 U.S. banks dropped from $35 billion in the fourth quarter of 2006 to $650 million in the corresponding quarter of 2007 (a decrease of 89 percent). Bank earnings for the year 2007 declined 31 percent and dropped another 46 percent in the first quarter of 2008.<a class=\"footnote\" title=\"Federal Deposit Insurance Corporation, Quarterly Banking Profile (Fourth Quarter 2007), http:\/\/www.2.fdic.gov\/qbp\/2007dec\/qbp.pdf (accessed September 25, 2008).\" id=\"return-footnote-292-60\" href=\"#footnote-292-60\" aria-label=\"Footnote 60\"><sup class=\"footnote\">[60]<\/sup><\/a><a class=\"footnote\" title=\"FDIC, Quarterly Banking Profile (First Quarter 2008), http:\/\/www.2.fdic.gov\/qbp\/2008mar\/qbp.pdf (accessed September 25, 2008).\" id=\"return-footnote-292-61\" href=\"#footnote-292-61\" aria-label=\"Footnote 61\"><sup class=\"footnote\">[61]<\/sup><\/a><\/p>\n<p id=\"frank-ch14_s04_s02_p03\" class=\"indent para editable block no-indent\">Losses in this sector were soon felt by two publicly traded government-sponsored organizations, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Both of these institutions are authorized to make loans and provide loan guarantees to banks, mortgage companies, and other mortgage lenders; their function is to make sure that these lenders have enough money to lend to prospective home buyers. Between them, Fannie Mae and Freddie Mac backed approximately half of that $12 trillion in outstanding mortgage loans, and when the mortgage crisis hit, the stock prices of the two corporations began to drop steadily. In September 2008, amid fears that both organizations would run out of capital, the U.S. government took over their management.<\/p>\n<p id=\"frank-ch14_s04_s02_p04\" class=\"indent para editable block no-indent\">Freddie Mac also had another function: to increase the supply of money available for mortgage loans and new home purchases, Freddie Mac bought mortgages already written by lenders, pooled them, and sold them as mortgage-backed securities to investors on the open market. Many major investment firms did much the same thing, buying individual subprime mortgages from original lenders (such as small banks), pooling the projected revenue\u2014payments made by the original individual home buyers\u2014and selling securities backed by the pooled revenue.<\/p>\n<p id=\"frank-ch14_s04_s02_p05\" class=\"indent para editable block no-indent\">But when their rates went too high and home buyers couldn\u2019t make these payments, these securities plummeted in value. Institutions that had invested in them\u2014including investment banks\u2014suffered significant losses.<a class=\"footnote\" title=\"Tully, S., \u201cWall Street\u2019s Money Machine Breaks Down,\u201d Fortune, CNNMoney.com, November 12, 2007, http:\/\/money.cnn.com\/magazines\/fortune\/fortune_archive\/2007\/11\/26\/101232838\/index.htm (accessed November 11, 2011).\" id=\"return-footnote-292-62\" href=\"#footnote-292-62\" aria-label=\"Footnote 62\"><sup class=\"footnote\">[62]<\/sup><\/a> In September 2008, one of these investment banks, Lehman Brothers, filed for bankruptcy protection; another, Merrill Lynch, agreed to sell itself for $50 billion. Next came American International Group (AIG), a giant insurance company that insured financial institutions against the risks they took in loaning and investing money. As its policyholders buckled under the weight of defaulted loans and failed investments, AIG, too, was on the brink of bankruptcy, and when private efforts to bail it out failed, the U.S. government stepped in with a loan of $85 billion.<a class=\"footnote\" title=\"Robb, G., et al., \u201cAIG Gets Fed Rescue in Form of $85 Billion Loan,\u201d MarketWatch, September 16, 2008, http:\/\/www.marketwatch.com\/News\/Story\/aig-gets-fed-rescue-form\/story.aspx?guid=%7BE84A4797%2D3EA6%2D40B1%2D9DB5%2DF07B5A7F5BC2%7D (accessed November 11, 2011).\" id=\"return-footnote-292-63\" href=\"#footnote-292-63\" aria-label=\"Footnote 63\"><sup class=\"footnote\">[63]<\/sup><\/a> The U.S. government also agreed to buy up risky mortgage-backed securities from teetering financial institutions at an estimated cost of \u201chundreds of billions\u201d.<a class=\"footnote\" title=\"Mortgage Bankers Association, \u201cDelinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey,\u201d Press Release, September 5, 2008, http:\/\/www.mbaa.org\/NewsandMedia\/PressCenter\/64769.htm (accessed November 11, 2011).\" id=\"return-footnote-292-64\" href=\"#footnote-292-64\" aria-label=\"Footnote 64\"><sup class=\"footnote\">[64]<\/sup><\/a><\/p>\n<div class=\"section\" id=\"frank-ch14_s04_s02_s01\">\n<h2 class=\"title editable block\">Subprime Directives: A Few Lessons from the Subprime Crisis<\/h2>\n<p id=\"frank-ch14_s04_s02_s01_p01\" class=\"nonindent para editable block\">If you were one of the millions of Americans who took out subprime mortgages in the years between 2001 and 2005, you probably have some pressing financial problems. If you defaulted on your subprime ARM, you may have suffered foreclosure on your newly acquired asset, lost any equity that you\u2019d built up in it, and taken a hit in your credit rating. (We\u2019ll assume that you\u2019re not one of the people whose eagerness to get on the subprime bandwagon caused fraudulent mortgage applications to go up by 300 percent between 2002 and 2006.)<a class=\"footnote\" title=\"Financial Crimes Enforcement Network, Mortgage Loan Fraud: An Industry Assessment Based upon Suspicious Activity Report Analysis, November 2006, http:\/\/www.fincen.gov\/news_room\/rp\/reports\/pdf\/MortgageLoanFraud.pdf (accessed November 11, 2011).\" id=\"return-footnote-292-65\" href=\"#footnote-292-65\" aria-label=\"Footnote 65\"><sup class=\"footnote\">[65]<\/sup><\/a><\/p>\n<p id=\"frank-ch14_s04_s02_s01_p02\" class=\"indent para editable block no-indent\">On the other hand, you\u2019ve probably learned a few lessons about financial planning and strategy. Let\u2019s conclude with a survey of three lessons that you should have learned from your hypothetical adventure in the world of subprime mortgages.<\/p>\n<p id=\"frank-ch14_s04_s02_s01_p03\" class=\"indent para editable block no-indent\"><em class=\"emphasis\">Lesson 1: All mortgages are not created equal<\/em>. Despite (or perhaps because of) the understandable enticement of home ownership, your judgment may have been faulty in this episode of your financial life cycle. Generally speaking, you\u2019re better off with a fixed-rate mortgage\u2014one on which the interest rate remains the same regardless of changes in market interest rates\u2014than with an ARM.<a class=\"footnote\" title=\"Keown, A. J., Personal Finance: Turning Money into Wealth, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007, 253\u201354.\" id=\"return-footnote-292-66\" href=\"#footnote-292-66\" aria-label=\"Footnote 66\"><sup class=\"footnote\">[66]<\/sup><\/a> As we\u2019ve explained at length in this chapter, planning is one of the cornerstones of personal-finances management, and ARMs don\u2019t lend themselves to planning. How well can you plan for your future mortgage payments if you can\u2019t be sure what they\u2019re going to be?<\/p>\n<p id=\"frank-ch14_s04_s02_s01_p04\" class=\"indent para editable block no-indent\">In addition, though interest rates may go up or down, planning for them to go <em class=\"emphasis\">down<\/em> and to take your mortgage payments with them doesn\u2019t make much sense. You can wait around to get lucky, and you can even try to get lucky (say, by buying a lottery ticket), but you certainly can\u2019t <em class=\"emphasis\">plan<\/em> to get lucky. Unfortunately, the only thing you can really <em class=\"emphasis\">plan<\/em> for is higher rates and higher payments. An ARM isn\u2019t a good idea if you don\u2019t know whether you can meet payments higher than your initial payment. In fact, if you have reason to believe that you can\u2019t meet the <em class=\"emphasis\">maximum<\/em> payment entailed by an ARM, you probably shouldn\u2019t take it on.<\/p>\n<p id=\"frank-ch14_s04_s02_s01_p05\" class=\"indent para editable block no-indent\"><em class=\"emphasis\">Lesson 2: It\u2019s risky out there<\/em>. You now know\u2014if you hadn\u2019t suspected it already\u2014that planning your personal finances would be a lot easier if you could do it in a predictable economic environment. But you can\u2019t, of course, and virtually constant instability in financial markets is simply one economic fact of life that you\u2019ll have to deal with as you make your way through the stages of your financial life cycle.<\/p>\n<p id=\"frank-ch14_s04_s02_s01_p06\" class=\"indent para editable block no-indent\">In other words, any foray into financial markets is risky. Basically, <em class=\"emphasis\">risk<\/em> is the possibility that cash flows will be variable.<a class=\"footnote\" title=\"Keown, A. J., et al., Foundations of Finance: The Logic and Practice of Financial Management, 6th ed. (Upper Saddle River, NJ: Pearson Education, 2008), 174.\" id=\"return-footnote-292-67\" href=\"#footnote-292-67\" aria-label=\"Footnote 67\"><sup class=\"footnote\">[67]<\/sup><\/a> Unfortunately, volatility in the overall economy is directly related to just one category of risks. There\u2019s a second category\u2014risks related to the activities of various organizations involved in your financial transactions. You\u2019ve already been introduced to the effects of these forms of financial risk, some of which have affected you directly, some of which have affected you indirectly, and some of which may affect you in the future:<a class=\"footnote\" title=\"Winger, B. J., and Ralph R. Frasca, Personal Finance: An Integrated Planning Approach, 6th ed. (Upper Saddle River, NJ: Prentice Hall, 2003), 250\u201351.\" id=\"return-footnote-292-68\" href=\"#footnote-292-68\" aria-label=\"Footnote 68\"><sup class=\"footnote\">[68]<\/sup><\/a><\/p>\n<ul id=\"frank-ch14_s04_s02_s01_l01\" class=\"itemizedlist editable block\">\n<li style=\"text-align: left\">\n<p class=\"no-indent\"><em class=\"emphasis\">Management risk<\/em> is the risk that poor management of an organization with which you\u2019re dealing may adversely affect the outcome of your personal-finances planning. If you couldn\u2019t pay the higher rate on your ARM, managers at your lender probably failed to look deeply enough into your employment status and income.<\/p>\n<\/li>\n<li style=\"text-align: left\">\n<p class=\"no-indent\"><em class=\"emphasis\">Business risk<\/em> is the risk associated with a product that you\u2019ve chosen to buy. The fate of your mortgagor, who issued the original product\u2014your subprime ARM\u2014and that of everyone down the line who purchased it in some form (perhaps Freddy Mac and Merrill Lynch) bear witness to the pitfalls of business risk.<\/p>\n<\/li>\n<li style=\"text-align: left\">\n<p class=\"no-indent\"><em class=\"emphasis\">Financial risk<\/em> refers to the risk that comes from ill-considered indebtedness. Freddie Mac, Fannie Mae, and several investment banks have felt the repercussions of investing too much money in financial instruments that were backed with shaky assets (namely, subprime mortgages).<\/p>\n<\/li>\n<\/ul>\n<p id=\"frank-ch14_s04_s02_s01_p07\" class=\"indent para editable block no-indent\">In your own small way, of course, you, too, underestimated the pitfalls of all three of these forms of risk.<\/p>\n<p id=\"frank-ch14_s04_s02_s01_p08\" class=\"indent para editable block no-indent\"><em class=\"emphasis\">Lesson 3: Not all income is equally disposable<\/em>. <a class=\"xref\" href=\"#frank-ch14_s04_s02_s01_f01\">Figure 12.13 \u201cDebt-Income Ratio\u201d<\/a> shows the increase in the ratio of debt to disposable income among American households between 1985 and 2007. As you can see, the increase was dramatic\u2014from 80 percent in the early 1990s to about 130 percent in 2007.<a class=\"footnote\" title=\"Economist.com, \u201cGetting Worried Downtown,\u201d Economist.com, November 15, 2007, http:\/\/www.economist.com\/world\/unitedstates\/displaystory.cfm?story_id=10134077 (accessed November 11, 2011).\" id=\"return-footnote-292-69\" href=\"#footnote-292-69\" aria-label=\"Footnote 69\"><sup class=\"footnote\">[69]<\/sup><\/a> This rise was made possible by greater access to credit\u2014people borrow money in order to spend it, whether on consumption or on investments, and the more they can borrow, the more they can spend.<\/p>\n<p id=\"frank-ch14_s04_s02_s01_p09\" class=\"indent para editable block no-indent\">In the United States, greater access to credit in the late 1990s and early 2000s was made possible by rising housing prices: the more valuable your biggest asset, the more lenders are willing to lend you, even if what you\u2019re buying with your loan\u2014your house\u2014<em class=\"emphasis\">is<\/em> your biggest asset. As the borrower, your strategy is twofold: (1) Pay your mortgage out of your wage income, and (2) reap the financial benefits of an asset that appreciates in value. On top of everything else, you can count the increased value of your asset as <em class=\"emphasis\">savings<\/em>: when you sell the house at retirement, the difference between your mortgage and the current value of your house is yours to support you in your golden years.<\/p>\n<h3><span class=\"title-prefix\">Figure 12.13<\/span> Debt-Income Ratio<\/h3>\n<div class=\"caption\" style=\"text-align: center;font-size: .8em\" id=\"frank-ch14_s04_s02_s01_f01\">\n<p class=\"indent\"><a><img decoding=\"async\" src=\"http:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-content\/uploads\/sites\/23\/2018\/12\/4383b83c157d92581d7807f388555a27.jpg\" alt=\"Debt-Income Ratio\" style=\"max-width: 497px\" \/><br \/>\n<\/a><\/p>\n<\/div>\n<p id=\"frank-ch14_s04_s02_s01_p10\" class=\"indent para editable block no-indent\">As we know, however, housing prices had started to fall by the end of 2006. From a peak in mid-2006, they had fallen 8 percent by November 2007, and by April 2008 they were down from the 2006 peak by more than 19 percent\u2014the worst rate of decline since the Great Depression. And most experts expected it to get worse before it gets better, and unfortunately they were right. Housing prices have declined by 33 percent from the mid-2006 peak to the end of 2010.<a class=\"footnote\" title=\"Streitfeld, D., \u201cBottom May Be Near for Slide in Housing,\u201d The New York Times, May 31, 2011, http:\/\/www.nytimes.com\/2011\/06\/01\/business\/01housing.html (accessed November 10, 2011).\" id=\"return-footnote-292-70\" href=\"#footnote-292-70\" aria-label=\"Footnote 70\"><sup class=\"footnote\">[70]<\/sup><\/a><a class=\"footnote\" title=\"Walayat, N., \u201cU.S. House Prices Forecast 2008-2010,\u201d Market Oracle, June 29, 2008, http:\/\/www.marketoracle.co.uk\/Article5257.html (accessed November 11, 2011).\" id=\"return-footnote-292-71\" href=\"#footnote-292-71\" aria-label=\"Footnote 71\"><sup class=\"footnote\">[71]<\/sup><\/a><\/p>\n<p id=\"frank-ch14_s04_s02_s01_p11\" class=\"indent para editable block no-indent\">So where do you stand? As you know, your house is worth no more than what you can get for it on the open market; thus the asset that you were counting on to help provide for your retirement has <em class=\"emphasis\">depreciated<\/em> substantially in little more than a decade. If you\u2019re one of the many Americans who tried to substitute equity in property for traditional forms of income savings, one financial specialist explains the unfortunate results pretty bluntly: your house \u201cis a place to live, not a brokerage account\u201d.<a class=\"footnote\" title=\"Doll, S. L., of Capital Performance Advisors, quoted by Amy Hoak, \u201cWhy a House Is Not a Piggy Bank to Tap Into for Your Retirement,\u201d Wall Street Journal, July 19, 2006, http:\/\/homes.wsj.com\/buysell\/markettrends\/20060719-hoak.html (accessed September 27, 2008).\" id=\"return-footnote-292-72\" href=\"#footnote-292-72\" aria-label=\"Footnote 72\"><sup class=\"footnote\">[72]<\/sup><\/a> If it\u2019s any consolation, you\u2019re not alone: a recent study by the Security Industries Association reports that, for many Americans, nearly half their net worth is based on the value of their home. Analysts fear that many of these people\u2014a significant proportion of the baby-boom generation\u2014won\u2019t be able to retire with the same standard of living that they\u2019ve been enjoying during their wage-earning years.<a class=\"footnote\" title=\"Hoak, A., \u201cWhy a House Is Not a Piggy Bank to Tap Into for Your Retirement,\u201d Wall Street Journal, July 19, 2006, http:\/\/homes.wsj.com\/buysell\/markettrends\/20060719-hoak.html (accessed September 27, 2008).\" id=\"return-footnote-292-73\" href=\"#footnote-292-73\" aria-label=\"Footnote 73\"><sup class=\"footnote\">[73]<\/sup><\/a><\/p>\n<div class=\"bcc-box bcc-success\" id=\"frank-ch14_s04_s02_s01_n01\">\n<h3 class=\"title\">Key Takeaways<\/h3>\n<ul id=\"frank-ch14_s04_s02_s01_l02\" class=\"itemizedlist\">\n<li>Personal saving suffered a steep decline from 1980 to 2005 and remained at this negligible savings rate until it started moving up in 2008. The recent increase in the savings rate, however, is still below the long-term average of 7 percent.<\/li>\n<li>In addition to Americans\u2019 tendency to spend rather than save, the Federal Reserve observed that a lot of people had come to rely on the appreciation of such assets as stocks and residential property as a substitute for the practice of saving out of wage income.<\/li>\n<li><strong class=\"emphasis bold\">Subprime loans<\/strong> are made to would-be home buyers who don\u2019t qualify for market-set interest rates because of one or more risk factors\u2014income level, employment status, credit history, ability to make only a very low down payment. Interest rates may run from 8 percent to 10 percent and higher.<\/li>\n<li>An <strong class=\"emphasis bold\">adjustable-rate mortgage (ARM)<\/strong> is a home loan pegged to the increase or decrease of certain interest rates that the lender has to pay. If those rates go up, the mortgage rate and the home buyer\u2019s monthly payments go up, too. A <strong class=\"emphasis bold\">fixed-rate mortgage<\/strong> is a home loan on which the interest rate remains the same regardless of changes in market interest rates.<\/li>\n<li>In the years between 2001 and 2005, lenders made billions of dollars in subprime ARM loans to American home buyers. In 2006 and 2007, however, housing prices started to go down. Homeowners with subprime ARM loans weren\u2019t able to refinance, their mortgage rates began going up, and foreclosures became commonplace.<\/li>\n<li>In 2006 and 2007, largely because of mortgage-loan defaults, banks and other institutions that made mortgage loans began losing huge sums of money. These losses carried over to Fannie Mae and Freddie Mac, publicly traded government-sponsored organizations that make loans and provide loan guarantees to banks and other mortgage lenders.<\/li>\n<li>Next to be hit were major investment firms that had been buying subprime mortgages from banks and other original lenders, pooling the projected revenue\u2014payments made by the original individual home buyers\u2014and selling securities backed by the pooled revenue. When their rates went too high and home buyers couldn\u2019t make their house payments, these securities plummeted in value, and the investment banks and other institutions that had invested in them suffered significant losses.<\/li>\n<li>\n<p class=\"nonindent para\"><em class=\"emphasis\">Risk<\/em> is the possibility that cash flows will be variable. Three types of risk are related to the activities of various organizations that may be involved in your financial transactions:<\/p>\n<ol id=\"frank-ch14_s04_s02_s01_l03\" class=\"orderedlist\">\n<li><em class=\"emphasis\">Management risk<\/em> is the risk that poor management of an organization with which you\u2019re dealing may adversely affect the outcome of your personal-finances planning.<\/li>\n<li><em class=\"emphasis\">Business risk<\/em> is the risk associated with a product that you\u2019ve chosen to buy.<\/li>\n<li><em class=\"emphasis\">Financial risk<\/em> refers to the risk that comes from ill-considered indebtedness.<\/li>\n<\/ol>\n<\/li>\n<\/ul>\n<\/div>\n<div class=\"bcc-box bcc-info\" id=\"frank-ch14_s04_s02_s01_n02\">\n<h3 class=\"title\">Exercise<\/h3>\n<p class=\"nonindent simpara\">(AACSB) Analysis<\/p>\n<p id=\"frank-ch14_s04_s02_s01_p12\" class=\"indent para\">Write a report giving your opinion on how we got into the subprime mortgage crisis and how we\u2019ll get out of it<\/p>\n<\/div>\n<\/div>\n<\/div>\n<div class=\"chapter standard\" id=\"slug-14-5-cases-and-problems\">\n<div class=\"chapter-title-wrap\">\n<h1 class=\"chapter-title\" style=\"text-align: center\">Cases and Problems<\/h1>\n<\/div>\n<div class=\"ugc chapter-ugc\">\n<div class=\"bcc-box bcc-info\" id=\"frank-ch14_s05_n01\">\n<h3 class=\"title\"><strong class=\"emphasis bold\">Learning on the Web (AACSB)<\/strong><\/h3>\n<p id=\"frank-ch14_s05_p01\" class=\"nonindent para\">Go to <a class=\"link\" target=\"_blank\" href=\"https:\/\/www.quizzle.com\" rel=\"noopener noreferrer\">https:\/\/www.quizzle.com<\/a><a class=\"link\" href=\"http:\/\/www.annualcreditreport.com\"><\/a> and request a free copy of your credit report. Review the report. If you identify any errors, get them fixed. Write a brief report explaining the value of good credit.<\/p>\n<\/div>\n<div class=\"bcc-box bcc-info\" id=\"frank-ch14_s05_n02\">\n<h3 class=\"title\"><strong class=\"emphasis bold\">Ethics Angle (AACSB)<\/strong><\/h3>\n<p id=\"frank-ch14_s05_p02\" class=\"nonindent para\">Go online and read this article at Forbes.com: \u201cMost Common Resume Lies,\u201d by Kate DuBose Tomassi at <a class=\"link\" href=\"http:\/\/www.forbes.com\/workspecial\/2006\/05\/20\/resume-lies-work_cx_kdt_06work_0523lies.html\">http:\/\/www.forbes.com\/workspecial\/2006\/05\/20\/resume-lies-work_cx_kdt_06work_0523lies.html<\/a>. View the slide show of common r\u00e9sum\u00e9 lies. Answer these questions: What are the most common lies made in r\u00e9sum\u00e9s? Why is it a bad idea to lie on such a document? What are the potential consequences of misstating facts on your r\u00e9sum\u00e9?<\/p>\n<\/div>\n<div class=\"bcc-box bcc-info\" id=\"frank-ch14_s05_n03\">\n<h3 class=\"title\"><strong class=\"emphasis bold\">Team-Building Skills (AACSB)<\/strong><\/h3>\n<p id=\"frank-ch14_s05_p03\" class=\"nonindent para\">It\u2019s becoming more difficult for individuals to buy homes. This has meant that many people who would have bought a home have remained in apartments. In big cities, such as New York, sharing an apartment with roommates is a good way to save money. Yet it has some disadvantages. Get together as a team and identify the pros and cons of sharing housing. Pretend that each member of the group has agreed to share one apartment. Create a document that details each member\u2019s rights and responsibilities. Decide as a group whether the lease should be in one person\u2019s name or in all your names. Explain the pros and cons of both approaches.<\/p>\n<\/div>\n<div class=\"bcc-box bcc-info\" id=\"frank-ch14_s05_n04\">\n<h3 class=\"title\"><strong class=\"emphasis bold\">The Global View (AACSB)<\/strong><\/h3>\n<p id=\"frank-ch14_s05_p04\" class=\"nonindent para\">You\u2019re looking forward to taking a month-long vacation to Australia when you graduate from college in two years. Create a budget for this trip after researching likely costs. Determine how much you\u2019ll need for the trip and calculate how much you\u2019d have to save each month to afford the trip.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<hr class=\"before-footnotes clear\" \/><div class=\"footnotes\"><ol><li id=\"footnote-292-1\">Financial planner Elissa Buie helped to develop <em class=\"emphasis\">USA TODAY\u2019s Financial Diet<\/em>. USA TODAY\u2019s Financial Diet, which ran in USA Today in 2005 (accessed November 10, 2011). Go to http:\/\/www.usatoday.com\/money\/perfi\/basics\/2005-04-14-financial-diet-excercise1_x.htm and use the embedded links to follow the entire series.  <a href=\"#return-footnote-292-1\" class=\"return-footnote\" aria-label=\"Return to footnote 1\">&crarr;<\/a><\/li><li id=\"footnote-292-2\">Irby, L., \u201c10 Key Changes of the New Credit Card Rules,\u201d About.com, http:\/\/credit.about.com\/od\/consumercreditlaws\/tp\/new-credit-card-rules.htm (accessed November 10, 2011). <a href=\"#return-footnote-292-2\" class=\"return-footnote\" aria-label=\"Return to footnote 2\">&crarr;<\/a><\/li><li id=\"footnote-292-3\">Gerson, E. S., and Jeremy M. Simon, \u201c10 Ways Students Can Build Good Credit,\u201d CreditCards.com, http:\/\/www.creditcards.com\/credit-card-news\/help\/10-ways-students-get-good-credit-6000.php (accessed November 10, 2011). <a href=\"#return-footnote-292-3\" class=\"return-footnote\" aria-label=\"Return to footnote 3\">&crarr;<\/a><\/li><li id=\"footnote-292-4\">Brackey, H. J., \u201cStudents Burdened by Overdraft Charges, Group Says,\u201d Wisdom of the Rich Dad, http:\/\/www.richdadwisdom.com\/2007\/12\/students-burdened-by-overdraft-charges\/ (accessed November 11, 2001). <a href=\"#return-footnote-292-4\" class=\"return-footnote\" aria-label=\"Return to footnote 4\">&crarr;<\/a><\/li><li id=\"footnote-292-5\">Chu, K., \u201cDebit Card Overdraft Fees Hit Record Highs,\u201d USA Today, January 24, 2007, http:\/\/www.usatoday.com\/money\/perfi\/credit\/2007-01-24-debit-card-fees_x.htm (accessed November 11, 2011). <a href=\"#return-footnote-292-5\" class=\"return-footnote\" aria-label=\"Return to footnote 5\">&crarr;<\/a><\/li><li id=\"footnote-292-6\">Board of Governors of the Federal Reserve System, \u201cWhat You Need to Know: Bank Account Overdraft Fees,\u201d Board of Governors of the Federal Reserve System, http:\/\/www.federalreserve.gov\/consumerinfo\/wyntk_overdraft.htm (accessed November 10, 2011). <a href=\"#return-footnote-292-6\" class=\"return-footnote\" aria-label=\"Return to footnote 6\">&crarr;<\/a><\/li><li id=\"footnote-292-7\">Prater, C., \u201cConsumers to Fed: Stop Debit Card Overdraft Opt-In \u2018Scare\u2019 Tactics: New Debit Card Overdraft Rules Slated to Start July 1, 2010,\u201d CreditCards.com, http:\/\/www.creditcards.com\/credit-card-news\/debit-card-overdraft-fee-opt-in-rules-1282.php (accessed November 10, 2011). <a href=\"#return-footnote-292-7\" class=\"return-footnote\" aria-label=\"Return to footnote 7\">&crarr;<\/a><\/li><li id=\"footnote-292-8\">F<span style=\"font-size: 14pt\">rankieleon \u2013 <\/span><a href=\"https:\/\/www.flickr.com\/photos\/armydre2008\/16286816560\" style=\"font-size: 14pt\">won\u2019t hurt you no more<\/a><span style=\"font-size: 14pt\"> \u2013 CC BY 2.0<\/span> <a href=\"#return-footnote-292-8\" class=\"return-footnote\" aria-label=\"Return to footnote 8\">&crarr;<\/a><\/li><li id=\"footnote-292-9\">CreditCards.com, \u201cCredit Card Statistics, Industry Facts, Debt Statistics,\u201d CreditCards.com, http:\/\/www.creditcards.com\/credit-card-news\/credit-card-industry-facts-personal-debt-statistics-1276.php (accessed November 10, 2011). <a href=\"#return-footnote-292-9\" class=\"return-footnote\" aria-label=\"Return to footnote 9\">&crarr;<\/a><\/li><li id=\"footnote-292-10\">Wyden, R., quoted in \u201cAvoiding the Pitfalls of Credit Card Debt\u201d (Center for American Progress Action Fund, 2008), http:\/\/www.americanprogressaction.org\/issues\/2008\/avoiding_pitfalls.html (accessed September 13, 2008). <a href=\"#return-footnote-292-10\" class=\"return-footnote\" aria-label=\"Return to footnote 10\">&crarr;<\/a><\/li><li id=\"footnote-292-11\">Lipton, J., \u201cChoking On Credit Card Debt,\u201d Forbes.com, September 12, 2008, http:\/\/www.forbes.com\/finance\/2008\/09\/12\/credit-card-debt-pf-ii-in_jl_0911creditcards_inl.html (accessed November 11, 2011). <a href=\"#return-footnote-292-11\" class=\"return-footnote\" aria-label=\"Return to footnote 11\">&crarr;<\/a><\/li><li id=\"footnote-292-12\">Lipton, J., \u201cChoking On Credit Card Debt,\u201d Forbes.com, September 12, 2008, http:\/\/www.forbes.com\/finance\/2008\/09\/12\/credit-card-debt-pf-ii-in_jl_0911creditcards_inl.html (accessed November 11, 2011). <a href=\"#return-footnote-292-12\" class=\"return-footnote\" aria-label=\"Return to footnote 12\">&crarr;<\/a><\/li><li id=\"footnote-292-13\">Financial planner Elissa Buie helped to develop <em class=\"emphasis\">USA TODAY\u2019s Financial Diet. <a href=\"#return-footnote-292-13\" class=\"return-footnote\" aria-label=\"Return to footnote 13\">&crarr;<\/a><\/li><li id=\"footnote-292-14\">Sun Trust Banks, \u201cMoney Management\u201d (2008), http:\/\/www.suntrusteducation.com\/toolbox\/moneymgt_spendless.asp (accessed September 16, 2008) <a href=\"#return-footnote-292-14\" class=\"return-footnote\" aria-label=\"Return to footnote 14\">&crarr;<\/a><\/li><li id=\"footnote-292-15\">SavingAdvice.com, \u201cReduce ATM Fees\u2014Daily Financial Tip,\u201d SavingAdvice.com, April 5, 2006, http:\/\/www.savingadvice.com\/blog\/2006\/04\/05\/10533_reduce-atm-fees-daily-financial-tip.html <a href=\"#return-footnote-292-15\" class=\"return-footnote\" aria-label=\"Return to footnote 15\">&crarr;<\/a><\/li><li id=\"footnote-292-16\">Loeb, M., \u201cFour Ways to Keep ATM Fees from Draining Your Bank Account,\u201d MarketWatch (June 14, 2007), http:\/\/www.marketwatch.com\/news\/story\/four-ways-keep-atm-fees\/story.aspx?guid=%7BEFB2C425-B7F8-40C4-8720-D684A838DBDA%7D (accessed November 11 2011) <a href=\"#return-footnote-292-16\" class=\"return-footnote\" aria-label=\"Return to footnote 16\">&crarr;<\/a><\/li><li id=\"footnote-292-17\">Rosenberger, K., \u201cHow to Avoid ATM Fees,\u201d Helium (2008), http:\/\/www.helium.com\/items\/1100945-how-to-avoid-atm-fees (accessed November 11, 2011). <a href=\"#return-footnote-292-17\" class=\"return-footnote\" aria-label=\"Return to footnote 17\">&crarr;<\/a><\/li><li id=\"footnote-292-18\">Arrington, M., \u201ceBay Survey Says Americans Buy Crap They Don\u2019t Want,\u201d TechCrunch, August 21, 2008, http:\/\/techcrunch.com\/2008\/08\/21\/ebay-survey-says-americans-buy-crap-they-dont-want\/ (accessed November 11, 2011). <a href=\"#return-footnote-292-18\" class=\"return-footnote\" aria-label=\"Return to footnote 18\">&crarr;<\/a><\/li><li id=\"footnote-292-19\">Keown, A. J., Personal Finance: Turning Money into Wealth, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007), 8\u201311. <a href=\"#return-footnote-292-19\" class=\"return-footnote\" aria-label=\"Return to footnote 19\">&crarr;<\/a><\/li><li id=\"footnote-292-20\">Keown, A. J., Personal Finance: Turning Money into Wealth, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007), 8\u201311. <a href=\"#return-footnote-292-20\" class=\"return-footnote\" aria-label=\"Return to footnote 20\">&crarr;<\/a><\/li><li id=\"footnote-292-21\">U.S. Census Bureau, \u201cOne-Third of Young Women Have Bachelor\u2019s Degrees\u201d (U.S. Department of Commerce, January 10, 2008), http:\/\/www.census.gov\/Press-Release\/www\/releases\/archives\/education\/011196.html (accessed September 18, 2008). <a href=\"#return-footnote-292-21\" class=\"return-footnote\" aria-label=\"Return to footnote 21\">&crarr;<\/a><\/li><li id=\"footnote-292-22\">U.S. Census Bureau, \u201cOne-Third of Young Women Have Bachelor\u2019s Degrees\u201d (U.S. Department of Commerce, January 10, 2008), http:\/\/www.census.gov\/Press-Release\/www\/releases\/archives\/education\/011196.html (accessed September 18, 2008). <a href=\"#return-footnote-292-22\" class=\"return-footnote\" aria-label=\"Return to footnote 22\">&crarr;<\/a><\/li><li id=\"footnote-292-23\">Hansen, K., \u201cWhat Good Is a College Education Anyway?\u201d Quintessential Careers (2008), http:\/\/www.quintcareers.com\/college_education_value.html (accessed November 11, 2011). <a href=\"#return-footnote-292-23\" class=\"return-footnote\" aria-label=\"Return to footnote 23\">&crarr;<\/a><\/li><li id=\"footnote-292-24\">Ramsay, J. G., Perlman Center for Learning and Teaching, quoted by Katharine Hansen, \u201cWhat Good Is a College Education Anyway?\u201d Quintessential Careers (2008), http:\/\/www.quintcareers.com\/college_education_value.html (accessed November 11, 2011). <a href=\"#return-footnote-292-24\" class=\"return-footnote\" aria-label=\"Return to footnote 24\">&crarr;<\/a><\/li><li id=\"footnote-292-25\">Roth, J. D., \u201cThe Value of a College Education,\u201d Get Rich Slowly, January 10, 2008, http:\/\/www.getrichslowly.org\/blog\/2008\/01\/10\/the-value-of-a-college-education\/ (accessed November 11, 2011). <a href=\"#return-footnote-292-25\" class=\"return-footnote\" aria-label=\"Return to footnote 25\">&crarr;<\/a><\/li><li id=\"footnote-292-26\">http:\/\/data.bls.gov\/cgi-bin\/print.pl\/news.release\/ecopro.t06.htm (November 11, 2011). <a href=\"#return-footnote-292-26\" class=\"return-footnote\" aria-label=\"Return to footnote 26\">&crarr;<\/a><\/li><li id=\"footnote-292-27\">Penrice, D., \u201cMajor Moolah: Adding Up the Earnings Gaps in College Majors,\u201d N.U. Magazine, January 1999, http:\/\/www.northeastern.edu\/magazine\/9901\/labor.html (accessed November 11, 2011). <a href=\"#return-footnote-292-27\" class=\"return-footnote\" aria-label=\"Return to footnote 27\">&crarr;<\/a><\/li><li id=\"footnote-292-28\">Harrington, P., and Andrew Sum, \u201cThe Post-College Earnings Experiences of Bachelor Degree Holders in the U.S.: Estimated Economic Returns to Major Fields of Study,\u201d in Learning and Work on Campus and on the Job: The Evolving Relationship between Higher Education and Employment, ed. S. Reder, B. A. Holland, and M. P. Latiolais (in preparation). <a href=\"#return-footnote-292-28\" class=\"return-footnote\" aria-label=\"Return to footnote 28\">&crarr;<\/a><\/li><li id=\"footnote-292-29\">Penrice, D., \u201cMajor Moolah: Adding Up the Earnings Gaps in College Majors,\u201d N.U. Magazine, January 1999, http:\/\/www.northeastern.edu\/magazine\/9901\/labor.html (accessed November 11, 2011). <a href=\"#return-footnote-292-29\" class=\"return-footnote\" aria-label=\"Return to footnote 29\">&crarr;<\/a><\/li><li id=\"footnote-292-30\">Witmer, D., \u201cThe Basics of Financial Aid for College,\u201d About.com, http:\/\/parentingteens.about.com\/od\/collegeinfo\/a\/financial_aid.htm (accessed November 11, 2011). <a href=\"#return-footnote-292-30\" class=\"return-footnote\" aria-label=\"Return to footnote 30\">&crarr;<\/a><\/li><li id=\"footnote-292-31\">Federal Student Aid, \u201cFederal Pell Grant,\u201d http:\/\/studentaid.ed.gov\/PORTALSWebApp\/students\/english\/PellGrants.jsp?tab=funding (accessed November 11, 2011). <a href=\"#return-footnote-292-31\" class=\"return-footnote\" aria-label=\"Return to footnote 31\">&crarr;<\/a><\/li><li id=\"footnote-292-32\">Snyder, S., \u201cCollege lending tight but available,\u201d The Philadelphia Inquirer, August 18, 2008, http:\/\/www.philly.com\/inquirer\/education\/20080818_College_lending_tight_but_available.html (accessed November 11, 2011). <a href=\"#return-footnote-292-32\" class=\"return-footnote\" aria-label=\"Return to footnote 32\">&crarr;<\/a><\/li><li id=\"footnote-292-33\">This section is based in part on sections 13 and 14 of the Playbook for Life by The Hartford. The Playbook can be found on line at http:\/\/www.playbook.thehartford.com (accessed November 11, 2011). <a href=\"#return-footnote-292-33\" class=\"return-footnote\" aria-label=\"Return to footnote 33\">&crarr;<\/a><\/li><li id=\"footnote-292-34\">Isaacs, K., \u201cLying on Your Resume: What Are the Career Consequences?,\u201d Monster.com, http:\/\/insidetech.monster.com\/careers\/articles\/3574-lying-on-your-resume-what-are-the-career-consequences (accessed November 11, 2011). <a href=\"#return-footnote-292-34\" class=\"return-footnote\" aria-label=\"Return to footnote 34\">&crarr;<\/a><\/li><li id=\"footnote-292-35\">Yaniv Yaakubovich \u2013 <a href=\"https:\/\/www.flickr.com\/photos\/armydre2008\/16286816560\">Trying my suite before the interview<\/a> \u2013 CC BY-ND 2.0 <a href=\"#return-footnote-292-35\" class=\"return-footnote\" aria-label=\"Return to footnote 35\">&crarr;<\/a><\/li><li id=\"footnote-292-36\">Gallager, T. J., and Joseph D. Andrews Jr., Financial Management: Principles and Practice, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2003), 34, 196. <a href=\"#return-footnote-292-36\" class=\"return-footnote\" aria-label=\"Return to footnote 36\">&crarr;<\/a><\/li><li id=\"footnote-292-37\"><em class=\"emphasis\">Source<\/em>: Data from Consumer Credit Counseling Service of Maryland and Delaware Inc., \u201cPower of Saving Early\u201d (2008), <a class=\"link\" href=\"http:\/\/www.cccs-inc.org\/tools\/tools_saving_early.php\">http:\/\/www.cccs-inc.org\/tools\/tools_saving_early.php<\/a> (accessed November 15, 2008). <a href=\"#return-footnote-292-37\" class=\"return-footnote\" aria-label=\"Return to footnote 37\">&crarr;<\/a><\/li><li id=\"footnote-292-38\">This 12 percent interest rate is not realistic for today\u2019s economic environment. It\u2019s used for illustrative purposes only. <a href=\"#return-footnote-292-38\" class=\"return-footnote\" aria-label=\"Return to footnote 38\">&crarr;<\/a><\/li><li id=\"footnote-292-39\">Keown, A. J., Personal Finance: Turning Money into Wealth, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007), 23. <a href=\"#return-footnote-292-39\" class=\"return-footnote\" aria-label=\"Return to footnote 39\">&crarr;<\/a><\/li><li id=\"footnote-292-40\"><em class=\"emphasis\">Source<\/em>: Arthur J. Keown, <em class=\"emphasis\">Personal Finance: Turning Money into Wealth<\/em>, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007), 23. <a href=\"#return-footnote-292-40\" class=\"return-footnote\" aria-label=\"Return to footnote 40\">&crarr;<\/a><\/li><li id=\"footnote-292-41\">Clements, J., quoted in \u201cAn Interview with Jonathan Clements\u2014Part 2,\u201d All Financial Matters, February 10, 2006, http:\/\/allfinancialmatters.com\/2006\/02\/10\/an-interview-with-jonathan-clements-part-2\/ (accessed November 11, 2011). <a href=\"#return-footnote-292-41\" class=\"return-footnote\" aria-label=\"Return to footnote 41\">&crarr;<\/a><\/li><li id=\"footnote-292-42\">Kapoor, J. R., Les R. Dlabay, and Robert J. Hughes, Personal Finance, 8th ed. (New York: McGraw-Hill, 2007), 81. <a href=\"#return-footnote-292-42\" class=\"return-footnote\" aria-label=\"Return to footnote 42\">&crarr;<\/a><\/li><li id=\"footnote-292-43\">Winger, B. J., and Ralph R. Frasca, Personal Finance: An Integrated Planning Approach, 6th ed. (Upper Saddle River, NJ: Prentice Hall, 2003), 57\u201358. <a href=\"#return-footnote-292-43\" class=\"return-footnote\" aria-label=\"Return to footnote 43\">&crarr;<\/a><\/li><li id=\"footnote-292-44\">Keown, A. J., Personal Finance: Turning Money into Wealth, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007, 22 et passim. <a href=\"#return-footnote-292-44\" class=\"return-footnote\" aria-label=\"Return to footnote 44\">&crarr;<\/a><\/li><li id=\"footnote-292-45\">Frank, R. H., \u201cAmericans Save So Little, but What Can Be Done to Change That?\u201d New York Times, March 17, 2005, http:\/\/www.robert-h-frank.com\/PDFs\/ES.3.17.05.pdf (accessed November 11, 2011). <a href=\"#return-footnote-292-45\" class=\"return-footnote\" aria-label=\"Return to footnote 45\">&crarr;<\/a><\/li><li id=\"footnote-292-46\">Taylor, D., \u201cTwo-Thirds of Americans Don\u2019t Save Enough,\u201d Bankrate.com, October 2007, http:\/\/www.bankrate.com\/brm\/news\/retirement\/Oct_07_retirement_poll_results_a1.asp (accessed November 11, 2011). <a href=\"#return-footnote-292-46\" class=\"return-footnote\" aria-label=\"Return to footnote 46\">&crarr;<\/a><\/li><li id=\"footnote-292-47\">Frank, R. H., \u201cAmericans Save So Little, but What Can Be Done to Change That?\u201d New York Times, March 17, 2005, http:\/\/www.robert-h-frank.com\/PDFs\/ES.3.17.05.pdf (accessed November 11, 2011). <a href=\"#return-footnote-292-47\" class=\"return-footnote\" aria-label=\"Return to footnote 47\">&crarr;<\/a><\/li><li id=\"footnote-292-48\">Gardner, M., \u201cWhy Can\u2019t Americans Save a Dime?\u201d Christian Science Monitor (2008), http:\/\/www.mrshultz.com\/webpages\/whycantamericanssave.htm (accessed November 11, 2011). <a href=\"#return-footnote-292-48\" class=\"return-footnote\" aria-label=\"Return to footnote 48\">&crarr;<\/a><\/li><li id=\"footnote-292-49\">Rubin, R. M., Shelley I. White-Means, and Luojia Mao Daniel, \u201cIncome Distribution of Older Americans,\u201d Monthly Labor Review, November 2000, http:\/\/www.bls.gov\/opub\/mlr\/2000\/11\/art2full.pdf (accessed November 11, 2011). <a href=\"#return-footnote-292-49\" class=\"return-footnote\" aria-label=\"Return to footnote 49\">&crarr;<\/a><\/li><li id=\"footnote-292-50\">Economic Research, \u201cPersonal Savings Rate (PSAVERT),\u201d Economic Research, Federal Reserve Bank of St. Louis, August 28, 2008, http:\/\/research.stlouisfed.org\/fred2\/series\/PSAVERT (accessed November 10, 2011). <a href=\"#return-footnote-292-50\" class=\"return-footnote\" aria-label=\"Return to footnote 50\">&crarr;<\/a><\/li><li id=\"footnote-292-51\">Dickson, A., \u201cU.S. Personal Savings Rate Close to Depression-Era Rates,\u201d Wisebread, February 2, 2007, http:\/\/www.wisebread.com\/u-s-personal-savings-rate-close-to-depression-era-rates (accessed November 11, 2011). <a href=\"#return-footnote-292-51\" class=\"return-footnote\" aria-label=\"Return to footnote 51\">&crarr;<\/a><\/li><li id=\"footnote-292-52\">Federal Reserve Bank of San Francisco, \u201cSpendthrift Nation,\u201d Economic Research and Data, November 10, 2005, http:\/\/www.frbsf.org\/publications\/economics\/letter\/2005\/el2005-30.html (accessed November 11, 2011). <a href=\"#return-footnote-292-52\" class=\"return-footnote\" aria-label=\"Return to footnote 52\">&crarr;<\/a><\/li><li id=\"footnote-292-53\">Associated Press, \u201cHow Severe Is Subprime Mess?\u201d MSNBC.com, March 13, 2007, http:\/\/www.msnbc.msn.com\/id\/17584725\/ns\/business-real_estate\/t\/will-subprime-mess-ripple-through-economy\/#.Tr2hFvKul2I (accessed November 11, 2011). <a href=\"#return-footnote-292-53\" class=\"return-footnote\" aria-label=\"Return to footnote 53\">&crarr;<\/a><\/li><li id=\"footnote-292-54\">consumeraffairs.com, \u201cSubprime Mortgage Pricing Varies Greatly among U.S. Cities, consumeraffairs.com, September 13, 2005, http:\/\/www.consumeraffairs.com\/news04\/2005\/subprime_study.html (accessed November 11, 2011). <a href=\"#return-footnote-292-54\" class=\"return-footnote\" aria-label=\"Return to footnote 54\">&crarr;<\/a><\/li><li id=\"footnote-292-55\">Lahart, J., \u201cEgg Cracks Differ in Housing, Finance Shells,\u201d Wall Street Journal, July 13, 2008. <a href=\"#return-footnote-292-55\" class=\"return-footnote\" aria-label=\"Return to footnote 55\">&crarr;<\/a><\/li><li id=\"footnote-292-56\">RealtyTrac Inc., \u201cForeclosure Activity Increases 4 Percent in April According to RealtyTrac(R) U.S. Foreclosure Market Report,\u201d PR Newswire, May 14, 2008, http:\/\/www.prnewswire.com\/news-releases\/foreclosure-activity-increases-4-percent-in-april-according-to-realtytracr-us-foreclosure -market-report-57244677.html (accessed November 11, 2011). <a href=\"#return-footnote-292-56\" class=\"return-footnote\" aria-label=\"Return to footnote 56\">&crarr;<\/a><\/li><li id=\"footnote-292-57\">Mortgage Bankers Association, \u201cDelinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey,\u201d Press Release, September 5, 2008, http:\/\/www.mbaa.org\/NewsandMedia\/PressCenter\/64769.htm (accessed November 11, 2011). <a href=\"#return-footnote-292-57\" class=\"return-footnote\" aria-label=\"Return to footnote 57\">&crarr;<\/a><\/li><li id=\"footnote-292-58\">Duhigg, C., \u201cLoan-Agency Woes Swell from a Trickle to a Torrent,\u201d nytimes.com, July 11, 2008, http:\/\/www.nytimes.com\/2008\/07\/11\/business\/11ripple.html?ex=1373515200&amp;en=8ad220403fcfdf6e&amp;ei=5124&amp;partner=permalink &amp;exprod=permalink. <a href=\"#return-footnote-292-58\" class=\"return-footnote\" aria-label=\"Return to footnote 58\">&crarr;<\/a><\/li><li id=\"footnote-292-59\">Taber Andrew Bain \u2013 <a href=\"https:\/\/www.flickr.com\/photos\/andrewbain\/3899715321\">Foreclosure<\/a> \u2013 CC BY 2.0. <a href=\"#return-footnote-292-59\" class=\"return-footnote\" aria-label=\"Return to footnote 59\">&crarr;<\/a><\/li><li id=\"footnote-292-60\">Federal Deposit Insurance Corporation, Quarterly Banking Profile (Fourth Quarter 2007), http:\/\/www.2.fdic.gov\/qbp\/2007dec\/qbp.pdf (accessed September 25, 2008). <a href=\"#return-footnote-292-60\" class=\"return-footnote\" aria-label=\"Return to footnote 60\">&crarr;<\/a><\/li><li id=\"footnote-292-61\">FDIC, Quarterly Banking Profile (First Quarter 2008), http:\/\/www.2.fdic.gov\/qbp\/2008mar\/qbp.pdf (accessed September 25, 2008). <a href=\"#return-footnote-292-61\" class=\"return-footnote\" aria-label=\"Return to footnote 61\">&crarr;<\/a><\/li><li id=\"footnote-292-62\">Tully, S., \u201cWall Street\u2019s Money Machine Breaks Down,\u201d Fortune, CNNMoney.com, November 12, 2007, http:\/\/money.cnn.com\/magazines\/fortune\/fortune_archive\/2007\/11\/26\/101232838\/index.htm (accessed November 11, 2011). <a href=\"#return-footnote-292-62\" class=\"return-footnote\" aria-label=\"Return to footnote 62\">&crarr;<\/a><\/li><li id=\"footnote-292-63\">Robb, G., et al., \u201cAIG Gets Fed Rescue in Form of $85 Billion Loan,\u201d MarketWatch, September 16, 2008, http:\/\/www.marketwatch.com\/News\/Story\/aig-gets-fed-rescue-form\/story.aspx?guid=%7BE84A4797%2D3EA6%2D40B1%2D9DB5%2DF07B5A7F5BC2%7D (accessed November 11, 2011). <a href=\"#return-footnote-292-63\" class=\"return-footnote\" aria-label=\"Return to footnote 63\">&crarr;<\/a><\/li><li id=\"footnote-292-64\">Mortgage Bankers Association, \u201cDelinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey,\u201d Press Release, September 5, 2008, http:\/\/www.mbaa.org\/NewsandMedia\/PressCenter\/64769.htm (accessed November 11, 2011). <a href=\"#return-footnote-292-64\" class=\"return-footnote\" aria-label=\"Return to footnote 64\">&crarr;<\/a><\/li><li id=\"footnote-292-65\">Financial Crimes Enforcement Network, Mortgage Loan Fraud: An Industry Assessment Based upon Suspicious Activity Report Analysis, November 2006, http:\/\/www.fincen.gov\/news_room\/rp\/reports\/pdf\/MortgageLoanFraud.pdf (accessed November 11, 2011). <a href=\"#return-footnote-292-65\" class=\"return-footnote\" aria-label=\"Return to footnote 65\">&crarr;<\/a><\/li><li id=\"footnote-292-66\">Keown, A. J., Personal Finance: Turning Money into Wealth, 4th ed. (Upper Saddle River, NJ: Pearson Education, 2007, 253\u201354. <a href=\"#return-footnote-292-66\" class=\"return-footnote\" aria-label=\"Return to footnote 66\">&crarr;<\/a><\/li><li id=\"footnote-292-67\">Keown, A. J., et al., Foundations of Finance: The Logic and Practice of Financial Management, 6th ed. (Upper Saddle River, NJ: Pearson Education, 2008), 174. <a href=\"#return-footnote-292-67\" class=\"return-footnote\" aria-label=\"Return to footnote 67\">&crarr;<\/a><\/li><li id=\"footnote-292-68\">Winger, B. J., and Ralph R. Frasca, Personal Finance: An Integrated Planning Approach, 6th ed. (Upper Saddle River, NJ: Prentice Hall, 2003), 250\u201351. <a href=\"#return-footnote-292-68\" class=\"return-footnote\" aria-label=\"Return to footnote 68\">&crarr;<\/a><\/li><li id=\"footnote-292-69\">Economist.com, \u201cGetting Worried Downtown,\u201d Economist.com, November 15, 2007, http:\/\/www.economist.com\/world\/unitedstates\/displaystory.cfm?story_id=10134077 (accessed November 11, 2011). <a href=\"#return-footnote-292-69\" class=\"return-footnote\" aria-label=\"Return to footnote 69\">&crarr;<\/a><\/li><li id=\"footnote-292-70\">Streitfeld, D., \u201cBottom May Be Near for Slide in Housing,\u201d The New York Times, May 31, 2011, http:\/\/www.nytimes.com\/2011\/06\/01\/business\/01housing.html (accessed November 10, 2011). <a href=\"#return-footnote-292-70\" class=\"return-footnote\" aria-label=\"Return to footnote 70\">&crarr;<\/a><\/li><li id=\"footnote-292-71\">Walayat, N., \u201cU.S. House Prices Forecast 2008-2010,\u201d Market Oracle, June 29, 2008, http:\/\/www.marketoracle.co.uk\/Article5257.html (accessed November 11, 2011). <a href=\"#return-footnote-292-71\" class=\"return-footnote\" aria-label=\"Return to footnote 71\">&crarr;<\/a><\/li><li id=\"footnote-292-72\">Doll, S. L., of Capital Performance Advisors, quoted by Amy Hoak, \u201cWhy a House Is Not a Piggy Bank to Tap Into for Your Retirement,\u201d Wall Street Journal, July 19, 2006, http:\/\/homes.wsj.com\/buysell\/markettrends\/20060719-hoak.html (accessed September 27, 2008). <a href=\"#return-footnote-292-72\" class=\"return-footnote\" aria-label=\"Return to footnote 72\">&crarr;<\/a><\/li><li id=\"footnote-292-73\">Hoak, A., \u201cWhy a House Is Not a Piggy Bank to Tap Into for Your Retirement,\u201d Wall Street Journal, July 19, 2006, http:\/\/homes.wsj.com\/buysell\/markettrends\/20060719-hoak.html (accessed September 27, 2008). <a href=\"#return-footnote-292-73\" class=\"return-footnote\" aria-label=\"Return to footnote 73\">&crarr;<\/a><\/li><\/ol><\/div>","protected":false},"author":30,"menu_order":7,"template":"","meta":{"pb_show_title":"on","pb_short_title":"Personal Finances","pb_subtitle":"Personal Finances","pb_authors":[],"pb_section_license":"cc-by-nc-sa"},"chapter-type":[],"contributor":[58],"license":[54],"class_list":["post-292","chapter","type-chapter","status-publish","hentry","contributor-mpauley","license-cc-by-nc-sa"],"part":418,"_links":{"self":[{"href":"https:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-json\/pressbooks\/v2\/chapters\/292","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-json\/wp\/v2\/users\/30"}],"version-history":[{"count":17,"href":"https:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-json\/pressbooks\/v2\/chapters\/292\/revisions"}],"predecessor-version":[{"id":1439,"href":"https:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-json\/pressbooks\/v2\/chapters\/292\/revisions\/1439"}],"part":[{"href":"https:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-json\/pressbooks\/v2\/parts\/418"}],"metadata":[{"href":"https:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-json\/pressbooks\/v2\/chapters\/292\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-json\/wp\/v2\/media?parent=292"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-json\/pressbooks\/v2\/chapter-type?post=292"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-json\/wp\/v2\/contributor?post=292"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/pressbooks.library.upei.ca\/smallbusinessmanagement\/wp-json\/wp\/v2\/license?post=292"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}