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Liquid Assets
Assets held in the form of cash or "near cash"
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Investments
Assets that earn a return rather than provide a service
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Real Property
Immovable property; long lives and high costs; mostly appreciate in value
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Personal Property
Moveable; mostly depreciate in value
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Fair Market Value
Price at which we can reasonably expected to sell asset
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Types of Liquid Assets
- Checking Account
- Savings Account
- NOW Account
- MMDA
- MMMF
- CD if <1 year
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Types of Investments
- Stocks and Bonds
- Closed-end Funds
- Mutual Funds
- Retirement Funds
- IRA
- 401K
- CD if >1 year
- Real Estate
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Types of Real Property
- Single family houses, condominiums, cooperatives
- Vacation homes
- Land and buildings on property
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Types of Personal Property
- automobiles
- recreation equipment
- household items
- jewelryartwork
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Number of Live Births
Number of births that occur in a population
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Crude Birth Rate
Number of births per 1000 population
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General Fertility Rate
- Number of births per 1000 women aged 18-44
- Best statistic to use
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Replacement Level
- Level of fertility at which women in the same cohort have exactly enough daughters (on average) to “replace” themselves in the population
- § A total fertility rate of 2.1 is considered replacement level
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Cause of Long-Term Trend
- Decrease in the economic benefits of having children
- Increase in the costs of having and raising children
- Decrease in the costs of avoiding having children
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Increases in costs of having children
- Direct costs have risen
- o Inflation
- o Rising standard of child quality
- Opportunity costs of parents (especially mothers) have risen
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Decrease in the Economic Benefits of having children
- Decrease in children’s productive efforts
- Substitution of government for children’s role as providers of old age assistance
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Decrease in the cost of avoiding children
- Widespread availability of cheap, effective, birth control
- Legalization of abortion
- Secularization of society and weakening impact of religious views
- Social acceptance of couples being “childless”---“voluntarily childfree”
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Recent Fertility Rate
- Preliminary data for 2008
- o General Fertility Rate= 68.7
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Objective Benefits of having children
- Productive work of children (farm work and household production)
- Children as social insurance during parent’s old age
- Now augmented by social security, Medicare, pensions, insurances, etc.
- Tax exemption
- Tax credit
- Tax benefits of children (for families who pay income taxes)
- Transfer income from government (for eligible low-income families)
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Tax Exemption
Reduces taxes by taxpayer’s tax bracket
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Tax Credit
Reduces taxes dollar for dollar
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Cash Subsidies
TANF= Welfare
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In-Kind Subsidies
- Food stamps, housing subsidies, Medicaid, head start, etc.
- Added benefit with children
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Objective Costs of having children
- Direct cost of raising children until 18
- o Food at home, clothing, medical care, insurance, transportation
- Costs of children’s college education (past 18)
- Opportunity costs of children
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Opportunity Costs of Having Children
- o Foregone earnings of mother and/or father
- o Foregone rate of return on savings/investment
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Subjective Benefits of having children
- Adult status and social identity
- “Immortality”
- Morality, subordination of self-interest
- Emotional security, affiliation
- Feelings of accomplishment and competence
- Stimulation and novelty
- Feelings of power and influence
- Social comparison and competition (“keeping up with the Joneses”)
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Subjective Costs of having children
- Worry, worry, worry
- Physiological/psychological demands of child care
- Foregone consumption and leisure of parents
- o Life-style changes
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Factors that could increase cost to parents
- Out-of-state tuition for public university
- Private college or university
- The 5-year plan
- Graduate school or advanced training
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Factors that could decrease cost to parents
- Assume child will pay part
- Assume child will live at home
- Assume child will go to two-year college or technical institute
- Assume scholarship will be attainable
- o Pell grants; employer programs, religions, civic, community programs, military
- Assume educational/student loans
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Current (Short-Term) Liabilities
- Owned and due within 1 year
- § Bills outstanding (power bill, water bill…)
- Revolving credit (credit cards)
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Long-Term Liabilities
- Debt due 1 year or more from the date of the balance sheet
- § Installment debt
- § Mortgage (only principal portion)
- § Other debt
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Net Worth
- Measure of your financial worth
- Equity in owned assets
- What remains after selling all your owned assets and paying off all your liabilities
- Assets-Liabilities
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Balance Sheet Formation and Preperation
- List your assets at their fair market value as of the date you are preparing the balance sheet
- List all current and long-term liabilities
- Calculate net worth
- Calculate solvency ratio and liquidity ratio
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Income
- Cash In
- Earned income
- Non-earned income
- § Money from investments and savings
- § Sell a car
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Expenditures
- Cash Out
- Fixed vs. flexible
- Certain vs. uncertain
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Fixed, Certain
- A necessity, amount known
- House
- Car
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Fixed, Uncertain
- A necessity, amount unknown
- Power Bill
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Flexible, Certain
- Not a necessity, amount known
- Cable bill
- Haircut
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Flexible, Uncertain
- Not a necessity, amount unknown
- Going to movies
- Out to eat
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Preparing the Income and Expenditure Sheet
- Record your income from all sources for the chosen period
- Establish meaningful expense categories
- Subtract total expenses from total income to get cash surplus (a positive number) or deficit (a negative number)
- Calculate the Savings Ratio and Debt Service Ratio
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Solvency Ratio
- Shows how much of a decline in the market value of their assets a family can have before becoming insolvent
- Insolvent= when ratio is less than zero
- Net worth/total assets
- The higher, the better
- Desirable solvency ratio= >.50
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Liquidity Ratio
- Shows how much of their one-year liabilities they could pay with their liquid assets
- Debt= unpaid bills, all of your revolving credit card bills
- Car loans= how much you paid in one year
- Liquid assets/total current debt
- The higher, the better
- Desirable liquidity ratio= >.50
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Saving Ratio
- Shows the family’s level of preparation for the future
- Savings ratio= cash surplus or deficit (plus amount saved)/annual net income
- Total net income= income after taxes
- Social Security
- The higher, the better
- Desirable savings ratio= >.05
- Negative ratio is possible
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Debt Service Ratio
- Shows the burden that the family’s debt is relative to their income (their ability to repay that debt)
- Debt service ratio= monthly loan payments/monthly gross income or loan payments/gross income
- Car loans, credit card obligations paid in the past year
- The lower, the better
- Desirable debt service ratio= <.35
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Budget
- Estimate income
- Estimate expenditures
- See if budget balances
- o If not, make adjustments
- Finalize budget
- Implement budget and keep records
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Chapter 7 Bankruptcy
- Straight Bankruptcy
- A person’s assets are given to a trustee to be sold- distributed to creditors
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Chapter 13 Bankruptcy
- Wage Earner Plan
- Develop plan to pay off (over 3-5 years)
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Bankruptcy
- Chapter 7
- Chapter 13
- 10 years you’ll have bankruptcy on your report
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Types of Credit
- Consumer Debt
- Mortgage Debt
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Consumer Debt
- Charge Accounts
- Installment loans (fixed terms)
- Singly payment loans (30-day, 90-day note)
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Mortgage Debt
- First mortgage
- § What you use for house
- Second mortgage
- § The loan on the residence
- § Equity installment loan
- Equity credit line
- § Based on amount of equity in house
- § Use as you need
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Objective Benefits of Credit
- During high inflation periods, it may be cheaper to buy now
- (Sometimes) tax advantages of buying on credit
- Example: equity loan or mortgage
- (Sometimes) price discounts when using credit
- o Example: credit cards
- When travelling abroad, better exchange rate
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Subjective Benefits of Credit
- Obtaining expensive goods now while spreading out payments for them over time (immediate gratification)
- Convenience of purchasing and record-keeping, particularly with credit card
- Safety and security of not carrying large amounts of cash
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Types of Financial Goals
- Long-Term
- Intermediate
- Short-Term
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Long-Term Goals
- 6+ years
- Future Value Estimates
- Time Horizon
- Send kids to college
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Intermediate Goals
- 2-5 years
- Time Horizon
- Prioritize
- Pay off apartment
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Short-Term Goals
- 1 year
- Time Horizon
- Prioritize
- Pay off a small debt within 8 months
- Increase your retirement contribution by $100
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Ideas when setting goals
- Prioritize
- Attach time horizon or target date
- Attach dollar value (future value)
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