Financial Management and Understanding Your Money How to Build Home Equity and Retirement.

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Financial Management and Understanding Your
Money?How to Build Home Equity and Retirement.
Mr. Jacobi Advisory Explore Workshop
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• The Power of Compounding

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EXAMPLEInvestments
Your Grandma put 100 under her mattress 60 years
ago. If she invested in a bank account paying
4.5 interest compounded yearly, how much would
it be now?
APx(1APR)Y 100 x (1.045)60
100 x (1.045)60
1402.74
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Compound Interest Formula Paid n Times Per
Year...
APR
)
(NY)
AP(1
n
n Number of Compounding periods per
year YNumber of years (may be a
fraction) AAccumulated balance after Y years.
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EXAMPLE Monthly Compounding
You deposit 4000 in a bank account that pays an
APR of 8 and compound interest monthly. How
much money will you have after 5 years?
(nY)
(12 x 5)
APR
APx(1
)
.08
4000 x (1
)
n
12
4000 x (1.0066666)60
5959.38
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• Savings Plans and Investments

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Savings Plan Formula (Regular Payments)
( 1 ) - 1
(n y)
APR
n
A PMT X
(
)
APR
n
A accumulated savings plan balance PMT regular
payment (deposit) amount APR annual percentage
rate(as a decimal n number of payment periods
per year Y number of years
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Retirement Example

• You are planning on retiring in 40 years and you
  put 250.00 a month into an IRA that has an
  average annual return of 9.7. How much money
  will you have invested over the 40 years? How
  much money will you have in your IRA when you
  retire?

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Money Invested over 40 years
250.00 X 12 X 40
120,000.00
(12 X 40)
( 1
)

.097
- 1
12
A 250 X
)
(
.097
12

5774.198374
1,443,549.59
250 X
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Example(College Savings Plan at 6)
You want to build a 100,000 college fund in 18
years bymaking regular, end-of-month deposits.
Assuming an APRof 6, calculate how much you
should deposit monthly.How much of the final
value comes from actual deposits and how much
from interest.
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0.06
100,000 X
12
( 1
)

0.06
(12 X 18)
12
- 1
500.00

258.16
216
( 1.005)
- 1
258.16 X 12 X 18 55,762.56
100,000 - 55,762.56 44,237.44
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• Loan Payments, Credit Cards, and Mortgages

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Introduction

• Soon after you graduate high school, you will
  have many new loans and payments that we will be
  responsible for. Such as credit card debts, and
  student loans.
• With these types of loans and credit you will
  have to pay back the initial amount and interest
  added to this amount.

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Principal
The principal is the amount of money owed at any
particular time.
Installment Loans
Many people prefer to payout their loans with a
regular monthly payment simply because it makes
it easier to budget plan.
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Installment Loan Formula
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Example

• Suppose that you wanted to pay off a loan of
  1,400, with an interest of 14, with 6 equal
  monthly payments.
• What would be your monthly payment amount?

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Principal and Interest for Installment Loans

• At the beginning of your monthly payments, much
  of the payment goes toward the interest and not
  much to the principal. But because you are
  paying off the principal as well as the interest,
  you interest payment goes down, and you end up
  paying more to the principal of the loan as time
  goes on.

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Example

• Suppose you have student loans totaling 8,500
  when you graduate from college. The interest
  rate if APR8 and the loan term is 9 years.
• What are your monthly payments? How much will
  you pay over the lifetime of the loan? What is
  the total interest you will pay on the loan?

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(No Transcript)
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More on the Example

• Your monthly payments are 110.66. Over a
  9-year-term, your total payments will be

Of this amount, 8,500 pays off the principal.
The rest, of 11,951.28- 8,500
3,451.28 Represents interest payments.
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Choices of Rate and Term

• Because business worry mainly about the bottom
  line, to cater to their customers, they might
  offer different term and rate plans.
• For example you could get a 3-year loan with at
  8, or a 4-year loan at 9 and so.
• The thing you have to consider is that with a
  shorter loan the monthly payment will be higher.
  You need to find out what you can afford.

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Example

• You need a 5,000 loan to buy a used car. You
  bank offers a 3-year loan at 8 and a 4-year loan
  at 9.
• Calculate your monthly payments and total
  interest over the loan term with each option.

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3-year Term
36 x 156.685,640.48. 5,000 of this is
your Principal so, 640.48 is interest.
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4-year Term
48 x 124.43 5,972.64, so after the
principal 5,000 is paid off, you paid 972.64 in
interest.
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Credit Cards

• Credit cards are different from installment loans
  because you do not have to pay off your balance
  in any set period of time.
• Instead, they credit card company required you to
  pay only a minimum monthly payment, that pays off
  little of the principal however.

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More on Credit Cards

• With such minimum monthly payments it would take
  you very long to pay off a credit card debt.
• If you wanted to pay off the debt in a set period
  of time you would have to use the loan payment
  formula.

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Credit Card Caution

• Because every business bottom line is to make
  money, a credit card companies interest rates are
  very high, so it is easy to get into debt. If
  you dont pay your monthly payment on time, you
  could wind up in a never ending hole of credit
  card debt!
• Pay your monthly payments on time so that you
  dont have to pay more interest on a higher
  balance because you didnt pay you monthly
  payment on time.

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Example

• You have a credit card debt of 3,300 with an
  annual interest rate of 23. You decide to pay
  off your balance over 1 year.
• How much will you need to pay each month? Assume
  you make no further credit card purchases.

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You must pay 310.45 per month to pay off the
balance in one year.
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Example

• Vesta Jean has gotten into credit card trouble.
  She has a balance of 10,500 and just lost her
  job. Her credit card company charges interest
  APR 22, compounded daily. Suppose the credit
  card company allows her to suspend her payments
  until she finds a new job-but continues to charge
  interest.
• If it takes her a year to find a new job, how
  much will she owe when she starts her new job?

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13,082.94
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Mortgages

• Today one of the most popular installment loans
  are mortgages, these loans help you buy a house.
• The lender will ask for a down payment, usually
  10 to 20 of the purchase price.
• Then the lender will loan you the rest of the
  money to buy the house.

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More on Mortgages.

• Lenders often have closing costs.
• There are two types of closing cost(1) Direct
  fees, such as fees for getting the home appraised
  and checking you credit history, for which the
  lender charges a fixed dollar amount.(2) Fees
  charged as points where each point is 1 of the
  loan amount. Many lenders divide points into two
  categories an origination fee that is charged
  on all loans and discount points that vary for
  loans with different rates.

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Mortgage Basics

• When you are seeking a home mortgage, be sure to
  keep the following considerations in mind as you
  compare lenders(1) What interest rate and down
  payment are required for the loan?(2) What
  closing costs will be charged? Be sure you
  identify all closing costs, including origination
  fees and discount points, since different lenders
  may quote their fees differently.(3) Watch out
  for fine print, such as prepayment penalties,
  that may make the loan more expensive than it
  seems on the surface.

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Fixed Rate Mortgage

• The simplest type of home loan is a fixed rate
  mortgage, in which you are guaranteed that the
  interest rate will not change over the life of
  the loan.
• Most fixed rate loans have a term of either 15,
  20 or 30 years, with lower interest rates on the
  shorter-term loans.

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Example

• You need a loan of 150,000 to buy your new home.
  The bank offers a choice of a 30-year loan at an
  APR of 8 or a 15-year loan at 7.5.
• Compare your monthly payments and total loan
  costs under the two options. Assume that the
  closing costs are the same in both cases and
  therefore do not affect the choice.

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30-year Term
396,234.00
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15-year Term
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Wow, look how much I saved?

• Although it looks as though from first glance
  that the 30-year term saves you more money.
  Looking at the big picture will show that the
  15-year term saves you 145,940.40.

396,234.00 250,293.60 145,940.40
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Example

• Great Bank offers a 25 year loan of 150,000 at
  7.5 with closing costs of 700 plus 1 point.
• Big Bank offers a lower rate of 6 for the 25
  year loan at 150,000, but with closing costs of
  1,200 plus 1 point.
• Evaluate the two options.

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Great Bank?
1108.49
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Big Bank?
966.45
Big Banks rates are lower and monthly payments
come out to 966.45, so you save 142.04 a
month with Big Bank, but you must consider
closing cost.
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Now lets see how much a Byron Center house costs?

• And how much it will be worth in 30 years?

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Example

• Your loan of 250,000 to buy your new home. The
  bank offers a choice of a 30-year loan at an APR
  of 8 or a 15-year loan at 7.5.
• Compare your monthly payments and total loan
  costs under the two options. And determine how
  much money you will gain in equity over 30 years.

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30-year Term
660,387.60
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15-year Term
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Your home was worth 250,000.00 in 2005. What
will it be worth in 2020? (Assuming a growth
average of 4.5 over the 15 years)
APx(1APR)Y 250,000 x (1.045)15
250,000 x (1.045)15
483,820.61
Your home was worth 250,000.00 in 2005. What
will it be worth in 2035? (Assuming a growth
average of 4.5 over the 30 years)
APx(1APR)Y 250,000 x (1.045)30
250,000 x (1.045)30
936,329.54
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What is the better option for equity? Well, that
is a trick question?
30-year Term
936,329.54 660,387.60 275,941.94
15-year Term
483,820.61 417,155.40 66,665.21
The answer is that they both options will
give The same equity over the same time period