Flashcards in Exam 2 Deck (74):
history of credit (debt) in the US
while the practice of offering credit is ancient, widespread use of credit is relatively new in the US
-in the past, if someone didn't have enough money to pay for something in cash, they didn't buy it!
-advice: when you first start work you will likely have to buy some things on credit (i.e. car), but strive to use less and less debt over time
you are borrowing money, and will make yearly, monthly, weekly payments on something to pay for it in the future
where is credit used
houses, cars, education, furniture, electronics, vacations, appliances, etc.
they become less valuable over time as they age, are used more frequently, etc.
examples of depreciating assets
cars, boats, motorcycles, airplanes, furniture, consumer appliances, etcs. (pay a lot of money for things, but later, they're not really worth anything after a while)
-Americans spend way too much money on these!
credit cards: pros and cons
if you are like many college students you have them - and you may have outstanding balances that you can't pay off at the end of the month
pros: establish a credit history, easy to track purchases, protection against fraudulent activity
cons: high interest rates, spend more money when you use credit than cash, some people cannot control themselves with credit cards
credit card advice
-pay tem off if you have a balance - even before you start tackling student loans
-once you go over your credit limits, the fees get pretty massive in a hurry
-don't use them more than necessary
credit card legislation
recent legislation has actually let credit card companies increase the rates on your outstanding balances as high as 29.99%
credit card vs. debit cards
credit card - purchased on credit (you don't have the money), must pay back with interest on the credit card company terms
debit card - looks and feels like a credit card (often has visa or mastercard logo), but the money comes directly and immediately from your money in a savings/checking account
downfall of credit cards
easy to rack up outstanding balances, fees can be very high, yearly membership fees for some cards often not worth it
advantage of credit cards
you do have protection from unauthorized purchases (identity theft)
Establish an emergency fund
fund a savings account with a minimum of $1,000 (ideally, it would be much higher)
-this will be the fund you use for unexpected expenses (i.e. car problems, medical bills, etc.)
-this fund is NOT to buy Flyers, Reds, or Cavaliers sport ticks or for the new pair of shoes you have to have
-use this fund instead of credit cards to pay for emergency expenses --> unexpected expenses occur regularly!!
student loans concerns
-average UD student graduates with $37,500 in student loan debt
-student loans are unforgivable (ie you still have to pay tthem even if you declare bankruptcy)
-normally have a six month grace period after graduation before you have to start repaying loans
-default repayment period often 10 years
-divided into subsidized and unsubsidized loans
interest paid b the government while you're in school. you then start paying for that interest after graduation.
these are loans you get through for-profit banks and lenders
-accrue interest immediately upon disbursement, meaning you pay all of the interest as soon as you get the loan (so even while you're in school)
average payment of student loans
$22k loan paid off over 10 years at current student loan interest rate of 6.8% results in a monthly payment of $253.10 and $8,381.04 in total interest paid during the life of the loan for a total cost of $30,381.04 (see ppt)
advice for paying off student loans
-pay off any unsubsidized loans first: these have been accruing interest your entire time in college
-think twice about immediately consolidatin gyour student loans: yoften times you lose your six month grace period and have to start payin gback loans immediate
-see ppt for more!
buying a new/different car?
for many college graduates, getting a new car is like a rite of passage - companies offer you recent graduate rebates, favorable financing, and marketing propaganda that says you need a new car but do you really
pros of buying a new car car vs used
warranty, no one else's problems to dea lwith, you know the history of how the car was maintained, etc.
cons of buying a new car vs used
cost, resale value - cars are a depreciating asset
pros of buying a used vs new car
lower cost, much of the depreciation has already occurred, most cars last longer these days
cons of buying a used vs new car
what are the expectations of your industry/employer/yourself in terms of cars
-cars are sometimes seen as a signal of what kind of person you are
-as a new college graduate, this is one of the few times in your life you have a valid excuse to drive a clunker for a few years
-if you are going to be doing sales/transactions where you chauffer around well to do professionsals, a decent car may be necessary
see ppt for new car payments
see ppt for used car payments
Meek is not a fan but they can make sense
pros of leasing
-lower monthly payment vs buying for a nicer car
-get to drive a new car every 3-4 years
-minimizes short term costs
-if a business owner, you can deduct all or most of your vehicle leasing expenses each year
cons of leasing
-essentially renting a car
-always have a car payment
-restriction on # miles you can drive per year, pay penalties if you go over
-higher insurance costs
-potential for extra "wear and tear" fees
General advice on cars
-buy a 2-5 year old, one-owner cars (with high depreciation)
-pay cash if possible
-okayy to buy car new but keep it for 8-10 years
-once you pay off your car loan, continue saving each month so that your down payment on your next vehicle is bigger when it comes time to replace current car
-only lease if it makes business sense
Rank of highest income for business majors out of college
General rules about money
-amount of money you need to save for retirement is brutal: save now!
-put at least 10% (preferably 20-25% over time) of your earnings in savings
As you get older and earn more money, the level of lifestyle you expect escalates along with your expenses.
college dorm --> apartment --> first home --> mansion
***Right now as college students, we want to minimize lifestyle inflation, maximize earnings, and saving/investing like mad
The concept of enough
For some people, no amount of money they earn will ever be enough. At some level of income, your basic happiness is met. After a certain amount of spending, those things don't actually bring you happiness.
***defined by each individual person
buying a house and renting out rooms/expenses to roommates. You essentially live there rent free.
pay now so you can play later
-always consider the bias you may get from securities salespeople or financial publication (eg they get paid by selling you certain financial instruments and by being optimistic)
-Meek likes mutual funds and broad index funds (ETF) that have low costs
Grandfather of index funds and author of The Clash of the Cultures: Investment vs Speculation
Advice from John Bogle
ST speculation has crowded out LT investment. Though this has been great for the financial sector, it has come at the expense of the public - very few investors outperform the market long term
1. reversion to the mean
2. time is your friend, impulse is your enemy
3. buy right and hold tight
4. have realistic expectations
Reversion to the mean
what's hot today isn't likely to be hot tomorrow. The stock market reverts to fundamental returns over the long run. Don't follow the herd.
Time is your friend, impulse is your enemy
take advantage of compound interest and don't be captivated by the siren song of the market. That only seduces you into buying after stocks have soared an selling after they plunge
-losing hurts worse than the joy brought on by gains (people often let their emotions dictate their actions and they sell when they have losses)
forget the needle, buy the haystack
buy the whole market and you can eliminate stock risk, style risk, and manager risk. Your odds of finding the next apple are low. (ie. hard to know who the next apple is)
miniize the croupier's take
beating the stock market and the consino are both zero-sum games, before costs. you get what you don't pay for
there's no escaping risk
I've long searched for high returns without risk; despite the many claims that such investments exist, however, I haven't found it. And a money market may be the ultimate risk because it will likely lag inflation.
beware fighting the last war
What worked in the recent past is not likely to work going forward. Investments that worked well in the first market plunge of the century failed miserably in the second plunge.
Hedgehog beats the fox
Foxes represent the financial institutions that charge far too much for their artful, complicated advice. The hedgehog, which when threatened simply curls up into an impregnable spiny ball, represents the index fund with its "price-less" concept
Stay the course
The secret to investing is there is no secret. When you own the entire stock market through a broad stock index fund with an appropriate allocation to an all bond-market index fund, you have the optimal investment strategy. Discipline is best summed up by staying the course.
buy right and hold tight
Once you set your asset allocation, stick to it no matter how greedy or scared you become.
have realistic expectations
You are unlikely to get rich quickly. Bogle thinks a 7.5 percent annual return for stocks and a 3.5 percent annual return for bonds is reasonable in the long-run.
IRA - traditional
no taxes upfront, but are taxes at individual rates in retirement (i.e. 401-k)
IRA - Roth
pay with after tax $ now, not taxes at withdrawal
Definitely consider putting part of your retirement savings into a roth IRA in addition to your 401-k plan
Benefit is that the money has already been taxed (you contribute with after-tax money) and you are able to withdraw it tax free after age 59.5
The younger you are, the more sense it makes to do this since you're likely in a smaller tax bracket.
Don’t count on the federal government being financially viable to take care of your retirement needs 50 years from now
*Social Security is going broke in its current form
A few ways to fix it
-Lower people’s monthly benefits
-Raise the minimum retirement age (already happening, but will be even greater in the future
Enroll immediately in 401-k – contribute at least as much as your employer’s match
Employer Sponsored 401-k retirement plan
most common form
Usually offered by your employer as part of your benefits package
Most often managed by another investing firm (e.g., Fidelity, Charles-Scwab, Lincoln Financial) that offers several financial investment products (e.g., mutual funds, annuities, etc.)
Right now maximum annual contribution is $18,000 (for 2017)
At least put in enough to maximize your employer match amount, if they offer one
E.G. – Employer matches dollar for dollar up to 3% - you put in 3%, they match 3% = 6% of income going to retirement income
Ideally, put in much more than this if you can afford it
Renting vs. buying a house/apt
Generally better to rent if you are going to stay less than 3-5 years (transaction costs of buying/selling a house too high)
Houses are easy to buy and hard to sell…early on in your career, renting may be better for you not only because of lower costs, but because of job mobilility.
While it has always been assumed that Real Estate is a “Can’t lose” proposition, recent history tells us otherwise
potential downside of LT Renting
National average rent is $1350/month (zillow)
Rent Increases because of gentrification/economic growth/popularity. 10 years ago, these cities were very affordable:
-Austin, TX, (UP 7% in 2015 from 2014)
-Denver, CO – Median rent is $1827/month (Up 10% in 2015)
-Nashville, TN (Up 6% in 2015 from 2014)
-Portland, OR (Up 7% in 2015 from 2014)
Landlord sells the house/condo/apt. out from underneath you forcing you to move
Dealing with overbearing landlords (being required to maintain landscaping of property)
Potentially having to move when rents raise to much
Not being able to decorate/landscape/customize the way you want in most cases
Potential upsides of LT Renting
Extreme Mobility – Don’t like where you live this year, don’t like your job – move next year
Fixed expense ratios – no large expenses to replace Heater/A/C, new roof, etc.
Can weather out the home price increases until they fall to reasonable levels (maybe
When you are better off renting than buying
In very expensive markets (NYC, San Francisco, Silicon Valley, Seattle, SanFran)
In markets where making mortgage payments on home, plus paying property taxes, association fees, maintenance, etc. are much more than renting a similar unit
What do you need to buy a house?
Stable Income - Generally a mortgage payment should be no more than 30% of your gross pay
Down Payment/Collateral – 20% or more is best (because you avoid paying PMI (private mortgage insurance) – The days of little to no down payment are gone
-private mortgage insurance: you have to pay if you default because higher statistics of default if less than 20% down payment
Healthy Debt/Income ratio – Want mortgage payment to be no more than about 30-35% of take home (net) pay (Banks will lend you more, but it may cripple other financial plans)
-ex: Doctors have high income BUT tons of student loan debt
Savings - for maintenance, furniture, appliances, etc.
($500 - $5,000) applied to closing costs of mortgage balance
-whenever you submit an offer on a property you submit a check with it that says "I'm serious about making this offer". If you back out of offer, seller gets to keep money.
can range from as little as $500 to as much as 2-4% of the purchase price depending on the lender
if there are any prior claims on the house, that insurance will take care of those claims for you
Mortgage application fees
some banks make you pay these
home inspection cost
usually between $250-$500
always a good idea
potential unexpected expenses with a new house after you purchase
excess house = _______
-don't buy more house than you need. Utilities,property, taxes, maintenance are all higher and cost you more money
-don't take out a 30 year mortgage - get a 15 year (your mortgage payments will only be 30% greater and you will save a tremendous amount of interest over the long run)
What would Professor Meek do at our age
Househack - I would save up enough money to do an fha loan (generally 3.5%-5%) and buy a duplex, triplex, four-plex in a decent area of town.
-If Things were really expensive in the area I was moving to, I might consider buying a tiny house (on wheels) or an RV!
buy a house (duplex, triplex, 4plex) and rent out other rooms to roommates which in turn subsidizes (lowers) your cost
-Even If I didn’t buy, and was going to rent,I would use the Househacking concept and rent a place with multiple other roomates to keep my expenses lower.
MBA, you might get more out of it by working for a few years first. If your company pays for part or all of it – even more incentive to go.
PhD – If you have any inclination of` being a researcher and a professor, you should seriously consider this – 40% of all business professors are age 55+ and there is expected to be a shortage of professors in some areas. However, although you teach, the PhD is a degree catered towards research.
Health Insurance - HMO
health maintenance organization
must choose a primary care physician
-must always see PCP first before seeing any other specialists. The PCP typically recommends a specialist to ou
-most plans these days are not HMOs
Health insurance - PPO
Preferred Provider Organization (most common)
Unlike HMO, you are not required to have any specific doctor (can go to specialists without seeing primary care physician)
Pay a co-pay to see a doctor ($10, 25, 50) that is less than the actual cost of the visit. Insurance company pays that excess over your copay