Boroski,Talcott 1

Alanna Boroski, Ashlyn Talcott

Mr. Kammerman

Finance 1050

19 December 2017

Finance 1050 Final Project

Ken and Barbie

● Both are 40 years old

● Combined yearly income is $170,000
● Zero dollars saved for retirement
● They own a tanning bed worth $5000
● Mortgage $1,400 per month and the Barbie Dream House will be paid off in 15 years
● Two cars, both worth $30,000 and they pay a total of $800 in car payments per month
● One kid who is 12 years old. Chess prodigy and loves math more than he loves Trumpy
Bear
● The family just inherited $2,000,000 and are looking to invest it or use it wisely

Taxes:

1. How do we determine how much we pay in income taxes (Think of the 6 steps)?
1. Determining gross or total income. 2. Calculating adjusted gross income (AGI).
3. Subtracting deductions. 4. Claiming your exemptions. 5. Calculating your taxable
income & from that calculating your base income tax. 6. Subtract your credits &
determine your taxes due. According to an H&R Block website and helping calculator,
Ken and Barbie should pay about $27,765 a year in income taxes.
2. What forms do we fill out and what is progressive tax structure?​ Some of the forms
filled out are W-2, 1040, W-9, W-4, etc.​ ​Progressive tax structure is where increased
income is taxed at increasing rates. A progressive tax system might, for example, tax
low-income taxpayers at 10 percent, middle-income taxpayers at 15 percent and
high-income taxpayers at 30 percent.
3. What is a tax bracket? ​A tax bracket is a range of incomes taxed at a given rate. It
usually ranges from 10-35% depending upon income. According to the current tax
bracket qualifications, Ken and Barbie would be in the 28% tax bracket.
4. Should we itemize or use the standard deduction? ​I think that they would pay less
overall in taxes if they itemized because they have mortgage interest, child care expenses,
etc.
5. We keep hearing about tax deductions, what are those? ​They are expenses that reduce
taxable income.​ Are they the same as exemptions? ​No. Tax exemptions refer to the
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removal from taxation of a particular item rather than a deduction.​ Can you give us some
examples?​ Some examples of deductions are: home mortgage interest, property, state,
and local income taxes, investment interest expense, medical expenses, charitable
contributions, miscellaneous deductions, etc.

Investment Basics:

1. Will you help us make two investment goals for each of the three categories of time?
Short-Term Goals: 1. Barbie and Ken should discuss with their employers about any
retirement availabilities such as a 401k in order to start saving for retirement as soon as
possible. 2. Immediately stick the majority of the $2,000,000 inherited into investments.
This could include stocks, bonds, MMFs, CDs, etc. Important to diversify the inherited
money. Investing will help the money grow which will eventually be a great option for
their retirement. Intermediate-Term Goals: 1. Set up a college fund for their 12 year old
child. 2. Pay off outstanding automobile payments for each of their cars. Long-Term
Goals: 1. Achieved a retirement fund large enough to supplement their pension so that
they can remain living at their current standard. 2. Ken and Barbie by this time should
definitely create a will/trust in order to distribute their assets when both of them pass.
2. We have a hard time saving, can you explain what PYF is and why it is important?
PYF means “pay yourself first”. This means to treat your personal savings account as an
important payment and put money in it first before paying any other other bills. By doing
this, it will help prepare for emergencies, provide comfortability, and develop beneficial
saving habits.
3. What are some of our investment options? ​For Ken and Barbie and their extensive
amount of inherited money, there are numerous investing options: annuities, art and
collectibles, bonds (convertible, corporate, municipal)​, ​closed-end investment funds,
stocks (preferred, common), money market, mortgage-backed securities, mutual funds,
exchange-traded funds, real estate and property, real estate investment trusts (REITs),
U.S. treasury securities, etc. ​What ones are most popular? (Lending and Ownership?)
As for lending options, which are debt instruments issued by corporations and
government, the most popular investment options are savings accounts and bonds.
Ownership, which is considered partial ownership in a corporation have two main
examples which are preferred and common stocks. Typically, lending investments pose a
lower risk and provide a lower return than ownership investments. For Ken and Barbie, I
would suggest investing in both lending and ownership options. They should diversify
their money into safe government-issues bonds as well as riskier index-funds. 
4. Should we just buy a whole bunch of Apple stock? Or buy a bunch of Barbie Dream
Cars? ​Between these two options, I would definitely suggest NOT buying a bunch of
Barbie Dream Cars and instead using that money to invest in Apple stock. I say this
because investing in stocks produces a probability of return on the investment whereas
the Barbie Dream Cars would overtime lose their initial value, losing Ken and Barbie
money.
5. What asset allocation would you recommend for us?​ For Ken and Barbie, I would
suggest the dynamic strategy of asset allocation. This means that would regularly adjust
the mix of assets as the market rises and falls. They would sell assets that are declining
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and purchase assets that are increasing. For example, if the stock market falls, they sell
stocks in anticipation of further decreases. If the market is rising, they purchase stocks in
anticipation of continued market gains. This may seem slightly risky, however, if Ken
and Barbie continually investment in potentially-rising investments, this could really
benefit them for retirement.

Mutual Funds:

1. What the smurf is a mutual fund? How does it work? Can you give us some
advantages and disadvantages? ​A mutual fund is an investment fund that raises funds
from investors, pools the money, and invests it in stocks, bonds, and other investments.
Advantages: diversification, professional management, minimal transaction cost,
liquidity, flexibility, service. Disadvantages: lower than market performance, costs, risks,
can’t diversify a market crash, taxes.
2. Are mutual funds free? What types of fees do they charge?​ It depends on if the
mutual fund is load free or not. Mutual funds typically charge 12b-1 fee, management
fees. shareholder transaction costs, investment advisory fees, and marketing and
distribution expenses.
3. Should we do an ETF instead of a mutual fund? Why? Or why not? ​There are many
deciding factors when it comes to investing in either an ETF or a mutual fund. For Ken
and Barbie, I would suggest an ETF.​ ​This is because ETFs typically have lower expenses
then a mutual fund since there are no loads and the operating expenses are usually lower.
Another difference is that an ETF doesn’t trade at the end of the day like a mutual fund so
the price is determined by investor demand at any given time during the trading day.
Also, ETFs are considered more tax effective than mutual funds.

Retirement Planning:

1. We are just planning social security for retirement. This is a good plan right? ​NO!
Social Security will most likely be no longer available to them when they retire. This is
because the system of social security is failing. Overtime, there are less and less
individuals pooling money into the system which basically means that the money is
running out. Social security is definitely not dependable. Even if they did receive social
security benefits, they would not be able to survive off of just that small amount of
income.
2. What is a pension? My husband has one, we just assume it’s a fancy pen. ​A pension
is a regular payment made during a person's retirement from an investment fund to which
that person or their employer has contributed during their working life.​ ​It is guaranteed
money for life. One must work the full 30 years to get the entire pension. A typical
pension is when a person receives 75% of their three highest paid working years.
3. Can you explain to use what a 401k, Roth IRA, IRA, and which one is best for us?
Or should we do more. ​401k: Offered by employer, it is post taxed, the company will
match the money you put into at a certain amount. Roth IRA: It is pre taxed, the
maximum you can put into it is $5,500 annually. IRA: Post taxed, and the most you can
put in is $5,500 annually. The best option for Ken and Barbie would be to start a 401k
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with their employer and contribute the maximum amount possible while having your
employer match the amount, however, about every 10 years they should do a backdoor
roth to roll their money over to a Roth IRA in order to avoid paying massive taxes on
their money.
4. What should we do to start saving for our kids college? Is there something we can
do? ​Ken and Barbie should definitely start a 529 plan. A 529 plan is a tax-advantaged
savings plan designed to save for future college costs. They are sponsored by states, state
agencies, or educational institutions. In compliance with the 529 plan, their kid would
only be able to use this money for college, nothing else.

Estate Planning:

1. Do we need a will? Explain. What is the big advantage of having a will? ​Yes, Ken
and Barbie will need a will because their child could potentially be screwed over if both
parents suddenly died without a will in place. The main advantages of having a will
includes: avoids probate, specifies a guardian for the child so the courts don’t choose,
chooses who you would like to benefit from your estate, protects the interests of minor,
nominate an executor or trustees of your choice, etc.
2. Who would you recommend to be our executor? ​An executor is someone named in a
will who is given the legal responsibility to take care of a dead person's remaining
financial obligations such as paying their bills and taxes. When of age, Ken and Barbie’s
executor should be their son. He is the only family mentioned that is important to them
and it is also states that he is very good at math. This would prove to be very beneficial
when having to deal with paying bills, taxes, etc.
3. We’ve heard a lot about probate, can you explain it to us? How do we avoid
probate? ​It is extremely wise to create a trust/will in order to avoid any type of probate
situation. One should make sure that their trust/will is 100% valid and is not challenging
or potentially questionable. Probate is when a person dies without a will or trust in place
then, because of this disguidance, the courts are designated to distribute and debate on
who will get the individual's assets. Typically in court, the assets are only given to people
who are able prove that they actually knew the individual who passed and proof that they
would want them to have it. This can be extremely tricky and sometimes unfair. That is
why it is overall better to avoid probate and have a very specific will/trust in place.
4. Will you give me an example or explain how a trust works? ​A trust is a fiduciary
relationship in which one party, known as a trustor, gives another party, the trustee, the
right to hold title to property or assets for the benefit of a third party, the beneficiary.
Unlike a will, a trust can help an individual manage his assets during his lifetime, while
specifying how those assets are to be managed or distributed upon their death. Examples
of trusts: living, family, revocable, irrevocable, charitable, special needs, totten, etc.

Paco and Corbin (Married two weeks ago)

● Both are 20 years old

● College students with $50,000 in student debt loan
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○ All loans are unsubsidized as of this moment

● No kids
● Paco drives a 1992 Toyota Camry and Corbin drives a 2017 Jeep Cherokee (loan of
$45,000)
● They live in an apartment at the University of Utah
● They both have part time jobs making a combined $50,000 per year
● Corbin is studying finance and Paco is studying rhythm gymnastics
● Have $25,000 in savings earning 4% per year
● $10,000 in their combined checking account
● $5,000 of credit card debt
● Paco is planning on going to grad school at Harvard in two years and Corbin is
going to grad school at Boston University

Time value of money:

1. How long till our savings account doubles? ​According to The Rule of 72, in order to
double the savings account amount of $25,000 at a 4% interest rate, it would take 18
years.
2. Will you explain what compound interest is and why it’s important in our situation?
Compound interest is interest built upon previous interest. It is important in Paco and
Corbin’s situation because it would play a huge negative impact on their debt. With their
large car debt of $45,000, it will just keep on increasing due to compound interest. In
many situations compound interest can be good but in their situation, it is not good.
3. Compare present value and future value and why it should matter to us. ​Present
value is how much money something is worth currently and future value is how much it
will be worth in the future. In Paco and Corbin’s sake, this important to take into
consideration with their cars. Corbin’s car, a 2017 Jeep Cherokee, has a present value of
$45,000. However overtime, the overall value of this car will definitely decrease with just
means that it has a lower future value compare to its present value.
4. My dad bought me something called an annuity that is also a perpetuity, what is it?
Do I get money from this? ​An annuity is simply an investment that makes regular
payments throughout the year. If an annuity is also a perpetuity, that means that the
payments are life-long (will never end). If your dad bought you this perpetuity annuity,
that means that you-the investor-will keep receiving payments. When you die, the
perpetuity will pass on to your heirs and keep making payments as normal. Yes, you as
well as whomever the annuity passes onto will receive money from this.

Student and consumer loans:

1. We have an option to get a variable rate or a fixed rate on our new car loan, which
one should we take and why? ​Deciphering between a variable rate or a fixed rate can be
extremely tricky. Both options have many advantages and disadvantages to them. For
example, having a fixed rate would prove very beneficial if the market was doing very
poorly. This would mean that you would already have a locked in low interest rate.
However, this could also be a bad thing. Corbin and Paco may lock in a fixed rate
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primarily then after awhile the market does very well and the variable rate would now be
lower. In Corbin and Paco’s sake, I would advise them to choose a fixed rate on their car
loan. Since they are both young, do not make too much money yet, obtain quite a bit of
debt, and pay rent for their apartment, choosing the less-risk option is the better way to
go. With a fixed rate there would be no questioning on the amount that they pay each
month and I think that this would be beneficial to their financing strategies.
2. Will you categorize our debts and tell me which are secured and which are
unsecured? ​Corbin and Paco currently obtain three forms of debt. 1. $50,000 in student
loans. 2. $45,000 2017 Jeep Cherokee loan. 3. $5,000 of credit card debt. I think that the
order of priority for paying of these debts should go credit card, student debt, then the
automobile loan. In Corbin and Paco’s case, their credit card debt as well as student loan
debt is considered unsecured, (not backed up by a physical asset), whereas their
automobile is secured because it is backed up by the actual car.
3. Our neighbor came and asked to borrow money. She said if she doesn’t get it from
us that she is going to get it from a Payday Loan center. Should we help her out?
Why? ​Yes, I definitely suggest that Corbin and Paco try to help out their neighbor, even
if it is only a little amount. Their neighbor should avoid Payday Loan Centers at all costs.
Payday Loan Centers are designed to front the user with a quick cash-advance which may
at first seem helpful but truly screws over the borrower in the end. Immediately after
taking out the loan, the consumer already owes on average 391% interest on the loan.
This is ridiculous! Payday Loan centers are a absolute trap and not a good solution to
money problems.
4. What about bankruptcy? Can we just file that to get rid of our student loans? What
are the two types of bankruptcy? ​No, filing bankruptcy is an extremely last resort to
money problems and actually will not get rid of student loans. The two types of
bankruptcy are Chapter 7 and Chapter 13. Chapter 7 bankruptcy is the more extreme of
the two and it means that they will get rid of almost all of the debt, besides student loans,
in exchange for selling the house, cars, and any other assets. This type of bankruptcy also
makes the filer have bad credit for 7-10 years. Chapter 7 is also very hard to file and
qualify for. Chapter 13 is a little bit simpler. This type of bankruptcy enables individuals
with regular income to develop a financial plan in order to repay all or part of their debts.
This type is easier to qualify for compared to Chapter 7.
5. We just found out that Paco’s dad has a 529 plan for us. What is the purpose of this
money? What should we use it for? ​A 529 plan is absolutely awesome! It is already a
tax-advantaged investment which purpose is to encourage saving for furthering one’s
education level onto higher education. Paco and Corbin should definitely use it for
college, especially since Corbin is planning to study finance which may be slightly
expensive. College is the main point of the entire 529 plan.
6. What type of student loans are best for us to take out, subsidized or unsubsidized?
Will you explain it to us? ​Subsidized loans will always be the better loan option. This is
because on subsidized loans, the borrower will not need to pay the interest on the student
loans during the time that they are attending college as well as sometimes a certain
specified amount after they graduate. The student does not need to pay this interest
because it is covered by the government. This will save them a lot more money and is a
way better option than unsubsidized loans. Unsubsidized loan are pretty much opposite.
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These types of loans obtain interest that is not covered by the government and the borrow
is responsible. Obviously these loans are more expensive and the worse option compared
to subsidized loans.

Buying a Car and House:

1. Word on the street is that there is a four step process to buying a house and car.
Will you walk us through this? ​The four step process to buying a house and car is as
followed: 1. Differentiate Want from Need-this doesn’t mean never buying anything you
want but just recognizing a purchase as it is and making sure you can afford it. “Want”
purchases typically carry a tradeoff. 2. Do Your Homework-after you determine what
your budget will allow, take the time to research the details. Ex: differences in quality,
features of each brand, etc. Do some comparison shopping. 3. Make Your
Purchase-consider the various financing alternatives, determining not only which is the
best deal, but which alternative best fits your monthly budget. 4. Maintain Your
Purchase-smart buying means getting the best product or service at the best price with
financing that’s right for you. Smart buying also includes physically maintaining what
you’ve bought as well as resolving any complaints or issues about the purchase or
product.
2. We are contemplating buying a house, what do you think we should do? If we
should buy a house should we take out a 15 or 30 year loan? Please explain why. ​In
my opinion, I don’t think it would be the best choice for Corbin and Paco to buy a house
right now. They should rent instead. Corbin and Paco are young, obtain great amounts of
debt, only work part-time, and are still furthering their educations into finance and
rhythm gymnastics. Building equity is good, for their current situation it would be better
for them to just rent. However, eventually when they decide to buy a house I would
suggest taking out a 15 year loan rather than a 30 year loan if possible. This is because
they will be able to pay the house off quicker and end up paying less interest on the
overall cost of the house.
3. Paco needs a new car. Will you recommend a lease or buying a new car and telling
us why? ​Deciding on whether to lease or buy a car can be tricky and depends primarily
on the current financial situation of the individual. Since Paco is a young college student
who only works part-time, I would suggest leasing a car rather than buying one. Leasing
cars have many advantages including: lower monthly payments with a low/no down
payment, better car for less money, lower repair costs with warranties, easy transitions to
a new cars, less sales tax, etc.
4. PITI? Can you tell us the four parts that go into PITI? ​The acronym “PITI” is in
relation to a mortgage payment. It means the overall sum amount of the monthly
P​rincipal, ​I​nterest, ​T​axes, and ​I​nsurance. By adding up all four parts of PITI, this will
give an individual a fairly accurate estimate of the amount for the overall cost of a
mortgage.
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Life and Health Insurance:

1. Do we need life insurance? How do we calculate how much we need? ​Yes, I would
suggest that Paco and Corbin get life insurance. Doing so will support the individual with
bills, expenses, grief, etc., if their partner passes away. Life insurance provides great
support. There are two ways to calculate how much someone will need for life insurance:
earnings multiple approach and needs approach. For Paco and Corbin, I would suggest
needs approach since they are both young and do not yet accumulate a significant amount
of income. Needs approach just means a method which determines how much life
insurance needed based on funds your family would require to maintain their lifestyle
after the death. This approach is more customized.
2. My dad is an anti-term insurance and loves cash value. Is that the right way to go?
Which one is the best for us? ​Term insurance is a type that pays your beneficiary a
specific amount of money if the individual dies while covered by the policy. You pay a
set premium that is based on the probability of death. Term insurance covers only a
specific period, not whole life. Cash value insurance is a type that has life insurance and a
savings plan. Some of the premiums go to the insurance and some go towards the
savings. I have to disagree with the father, I believe that term insurance is the way to go.
For Paco and Corbin, the cheaper option of term insurance would be better in their case.
It allows for affordable coverage during the years in which they need the life insurance
the most.
3. Using the numbers above, tell us how much life insurance we will need. ​Using the
numbers above, with $100,000 in debt, $50,000 income, $25,000 savings, 10 years of
income provided, if the spouse continues to work for 45 more years finding a job at
$50,000 in the 25% tax marginal rate, with an estimated inflation rate of 3%, and a 6%
after-tax net investment yield, the needed life insurance would be $185,224.15. Many
factors could play into this estimate and change certain amounts, but this a good average
amount that Paco and Corbin should get in life insurance.
4. We are so confused about how health insurance works. Can you explain how it
works? (If it were me I would use words that rhyme with medium, mo-pay, and
sheductible) ​Basic health insurance includes a combination of hospital, surgical, and
physician expense insurance. Health insurance, like many other insurance options, is
basically risk-pooling. Many people will pay into an insurance “pool” and from there,
some people receive the pooled money for their health needs. Three factors that play into
health insurance are premiums, copays, and deductibles. A premium is the amount the
policyholder pays to the health plan each month to purchase health coverage. A
deductible is the amount that the insured must pay ​out-of-pocket​ before the health insurer
pays its share. A co-payment is the amount that the insured person must pay out of pocket
before the health insurer pays for a particular visit or service.
5. What is the difference between Medicare, Medicaid, disability, and long term
insurance? ​Medicare is a government insurance program that provides medical benefits
to the disabled and those over 65 years old. Medicaid is a medical assistance program
aimed at the needy or the “poor”. Disability is health insurance that provides payments to
the insured in the event that income is interrupted by illness, sickness, or accident. Long
term care insurance is insurance aimed at covering the costs associated with long-term
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nursing home care, commonly for victims of chronic illness, diseases, strokes, or just
people who can no longer manage to live on their own.

Property and Life Insurance:

1. What can we do to prevent major financial loss in case someone breaks into our
apartments and steals all of our stuff? ​Corbin and Paco can decrease the major
financial loss risk if someone broke into their apartment by getting Renters Insurance.
Renters Insurance is a combination of coverages designed to help protect your belongings
and save money. A typical renters policy that the couple should get includes liability
coverage- the protection of belongings and coverage for additional living expenses.
Renters Insurance will really help minimize the impact.
2. Will you give us some advice on how to save money on homeowners insurance?
There are many ways to try and save money when it comes to purchasing homeowners
insurance. A few ways include: shopping around, making the home more disaster
resistant, improving home security, seeking out other discounts, maintaining a good
credit score, staying with the same insurer, considering the location of the home, etc.
3. Recommend the types of auto insurance that we should have on our cars. ​For Paco, I
would suggest having liability insurance as well as collision coverage. I think that she
would only need these two basic forms of auto insurance considering her car is a 1992
Toyota Camry and she is probably going to need a new one soon anyway. For Corbin and
his new $45,000 2017 Jeep Cherokee, I would suggest liability insurance, collision
coverage, comprehensive coverage, and uninsured/underinsured coverage. I think that he
should have more insurance on his car compared to Paco’s because his is brand new and
has a very good current value and it is important to keep good care of this car.
4. What are some common ways to keep our car insurance costs down? ​Consider the
color/model of the automobile, maintain good grades if a student, avoid getting into
accidents/collisions as well as receiving tickets, get more than one rate quote before you
commit, go high on deductibles, maintain a great credit score, ask about low-mileage
discounts or any other discounts, shop around, buy homeowners and auto coverage from
the same insurer, etc.

Elmo
● 18 years old
● Just graduated high school
● Checking account with $4,000
● Savings account with $10,000
● CDs with $25,000
● Bonds-$10,000
● Beanie Babies-$15,000 (Gold Plated)
● He owns a car worth $10,000
● Golf clubs worth $1,000
● Car loan worth $20,000
● Gambling debt $15,000
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● Credit Score of 650

The Financial Planning Process:

1. Explain the five steps in the financial planning process and tell me which one is the
most important? ​1. Evaluate your financial health 2. Define your financial goals 3.
Develop a plan of action 4. Implement your plan 5. Review your progress, reevaluate,
and revise your plan. In my opinion, the most important would be #5 because it is
absolutely essential to keep checking back on your progress to make sure your goals are
being accomplished and to constantly keep revising your plan. Doing so will further
improve your goals and how you reach them for the better.
2. Help me set a short term, intermediate, and long term goal. How long is each term?
Short-Term Goal-within 1 year: Within one year, Elmo should definitely stop his
gambling problems in order to stop increasing his overall gambling debts.
Intermediate-Term Goal-1-10 years: In one to ten years, now that Elmo has stopped his
gambling problem, he should focus on paying off all of his gambling debt to benefit his
overall financial situation. Long-Term-more than 10 years: In more than ten years, Elmo
will be at least almost 30’s and by this point his main focus should really be on saving
money for his retirement. This could be done with a 401k, Roth IRA, IRA, etc.
3. What advice would you give me about the three factors that influence future
income? ​There are numerous factors that can possibly influence the future income of an
individual however I think that the three most substantial factors are: experience,
education, and opportunity. Experience is highly necessary because it is important for
one’s employer to know that they can rely on their employee due to their prior knowledge
and abilities in various scenarios. Education is also very important. Countless research
studies have proven that a high level of education correlates with a higher level of pay.
Employers frequently look for higher levels of schooling. The last one, opportunity, is
very important when determining future income. It is essential to place yourself in a
position/company that provides opportunity for growth and improvement. Nobody wants
to be stuck in a job that offers no personal upgrading.

Measuring your Financial Health and Making a Plan:

1. Explain to me what is included on a balance sheet and why it’s important. Calculate
my own net worth. ​A balance sheet is a statement of the assets, liabilities, and capital of
a person, business, or other organization at a particular point in time. It outlines the
balance of income and spending over the preceding period. A balance sheet is sometimes
referred to as a “snapshot” of an individual's financial situation. It is important because
having a balance sheet will help to recognize one own’s worth. Elmo’s current net worth
is his assets which add up to $95,000 minus his debts which add up to $15,000 which
equals $80,000. This is his net worth.
2. List my assets and liabilities. Dorothy does not count as an asset. ​Assets: $4,000
checking account money, $10,000 savings account money, $25,000 in CDs, $10,000 in
bonds, $15,000 beanie babies, $10,000 car, $1,000 golf clubs, and $20,000 car loan.
Liabilities: $15,000 gambling debt.
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3. Pick two ratios and explain to me what they measure and why they are important.
The first ratio is called current ratio. This ratio is a liquidity ratio that measures the ability
to pay short-term and long-term obligations. The current ratio considers the current total
assets and the current total liabilities. The formula for calculating current ratio is: current
assets/current liabilities This is important because it is good to know that you will be
financially okay if an emergency comes up and you need fast money. Another good one
is the debt ratio. This determines if you have the ability to meet your debt obligations.
This would be very important if you are in debt and need to decide if you will be able to
get yourself out of it or if you will just continue to get yourself into more debt.
4. What are some key points that I can tell to Ernie on why a budget it important?
Budgeting is important in many ways. It allows you to create a plan deciding where all
your money will go. This will ensure that you will have enough money for the things you
need and the things that are important to you. Using a budget will also keep you out of
debt or if you are currently in debt, help you work your way out of debt.
5. I am thinking about hiring a financial planner. Either talk me into it or talk me out
of it. What would you say? Which type of planner should I pick? ​I think that you
should definitely hire a financial planner. There are many benefits to hiring a financial
advisor. They often have a deeper knowledge about money management than the client
does such as investments and taxes. They help figure out savings strategies and
retirement options/plans while helping the client set retirement goals or really any other
finance-associated goals. Finally probably the most beneficial aspect to hiring a financial
planner would be that they can save you a lot of time. I would advise Elmo to hire a
fee-only advisor because they are registered advisors with responsibility to act in their
clients' best interest. They don’t accept compensation based on product sales.

Cash or Liquid Asset Management:

1. I have a bunch of CD’s. Cookie Monster told me they are stupid. Why would
someone tell me that CD’s suck? ​Some may say that CD’s suck because: they have
limited liquidity meaning that the holder cannot access their money in need of an
emergency, there is a risk of inflation meaning that the money will lose its value over
time as the interest gains are getting taken by inflation, and lastly they have an early
withdrawal penalty meaning that if you take it out before set date than you have to pay a
fee.
2. Why is liquidity important?​ Liquidity is important because it is how fast something can
be turned into cash. Liquid assets are assets that can be turned to cash or purchasing
power immediately. In case of an emergency, liquidity would help an affected individual
be able to stay afloat for awhile. Liquidity is basically just a safety net for you or your
family.
3. Oscar made me get a tattoo of PYF on my wrist. I am not sure what it means. Can
you explain it to me? ​PYF means “pay yourself first”. This means to treat your personal
savings account as an important payment and put money in it first before paying any
other other bills. By doing this, it will help prepare for emergencies, provide
comfortability, and develop beneficial saving habits.
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4. What are the advantages and disadvantages of the types of accounts that I have
listed above? ​Savings account: Advantages-pays interest on deposits, easy to open and
access, secure. Disadvantages-pay relatively lower interest rates, subject to transaction
limits, may charge fees. CDs: Advantages-safe, better returns than savings deposits, wide
selection, fixed and predictable return. Disadvantages-limited liquidity, inflation risk,
early withdrawal penalties. Bonds: Advantages-investment returns are fixed, less risky
compared to stocks, less volatile, clear ratings. Disadvantages-investment returns are
fixed, larger sum of investment needed, less liquid compared to stocks, direct exposure to
interest rate risk. Speculation: Advantages-could prove very beneficial when supply is
low and demand is high. Disadvantages-could prove very bad when supply is high and
demand is low.

Using Credit:

1. I am trying to get the Sesame Street Platinum Credit Card. Give me some
arguments that I can take home and use to convince my parents that it is okay. Or,
are my parents right and I need to not get one. Tell me why. ​I believe that your
parents are correct in advising you to not get a Sesame Street Platinum Credit Card. You
should listen to them and not get one. Since you currently are only 18 years old, you
should be putting your money into more important things than a platinum credit card.
That card may just put you into debt that you should not be accumulating. This isn’t to
say that you should never get the platinum card, you should just hold off longer on the
purchase.
2. Analyze the types of credit users and tell me which one I should get if I am allowed
to get a credit card.​Types of credit users: Credit user-generally carries an unpaid
balance from month to month. Convenience user-someone who pays off the credit
balance each month, the interest rate is irrelevant. Convenience and Credit user-someone
who generally, but not always, pays off all the balance. Elmo should without-a-doubt be a
convenience user. This way, he can look for a credit card with low annual fees and an
interest-free grace period. Being a convenience user will help to stay out of debt or
paying more money due to accumulated interest.
3. Will you explain to me how a credit card works? How is a grace period involved? ​A
credit card is basically receiving cash, goods, or services with an obligation to pay later.
When buying on credit, you can charge whatever you want as long as you stay under the
credit limit. One will pay back either the minimum or the entire amount of the
outstanding balance each month. A grace period is the length of time given to make a
payment before interest is charges against the outstanding balance on the credit card.
4. I am trying to rent an apartment but they say my payment is tied to my credit score.
If it’s about 700 it’s $2500 per month. How good is my credit score? ​A credit score
primarily ranges from 300 to 850. A 700 credit score is considered good however not
excellent. ​What are some ways I can improve it? ​Some ways to improve a credit score
are: impressive payment history-being on time, credit utilization, credit age, different
types of credit, and number of inquiries. ​How does credit score impact me financially?
Credit history/score tends to predict your future creditworthiness, (the likelihood that you
will repay a loan and make your payments on time). Credit scores affect borrowing
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money to purchase something. Whether you are applying for a car loan, a home
mortgage, or a credit card, the lender will always check your credit score rating. Poor
credit = higher car insurance premiums and, on the mortgage side, an interest rate three or
four times higher.
5. What is the difference between a credit score and credit report?​ A credit score is the
numerical value, typically ranging from 300-850, calculated from information in your
credit file. Credit scores are used by lenders and landlords to determine your “credit risk.
A credit report is a summary of your financial reliability. For the most part, your history
of paying debts and other bills.

Investing in Stocks:

1. My pal, Big Bird, just gave me $1,000,000 and said I have to invest it. Should I
invest it in stocks or bonds? ​I would strongly suggest that Elmo invest the money into
stocks compared to bonds. Even though stocks are much riskier, they also have a higher
rate of return. In stocks, Elmo’s initial million dollar investment has the potential to grow
exponentially larger. Whereas if he had invested in into bonds, he would not get such a
high rate of return.
2. Would I be better to invest in blue chip, growth, or defensive stocks? ​Elmo should
definitely invest in growth stocks. I suggest he do this because he is still very young and
growth stocks are a great choice for young people. Although growth stocks are relatively
small, they still outgrow every other option due to their large stock price appreciation.
3. The count told me I should look at index funds, I feel stupid for not knowing what
they are. Can you explain an index fund to me. ​An index fund is basically a list of
investments. It does not pick and choose its investments but holds all of the bonds and
stocks on an index. It has a portfolio constructed to match the components of a market
index. An example of an index fund is Standard & Poor's 500 Index (S&P 500).
4. Name the three types of stock investment strategies and tell me which one is best for
me. ​1. Dollar Cost Averaging: purchasing a fixed dollar amount of stock at specified
intervals. Logic is that by investing the same dollar amount each period instead of buying
in one lump sum, you’ll be averaging out price fluctuations by buying more shares of
common stock when the price is lowest, and fewer shares when the price is at the highest.
2. Buy-and-Hold Strategy: involves buying stock and holding it for a period of years.
Aims at avoiding the market, minimized brokerage fees/transaction costs, postpones
capital gain taxes, and gains will be taxed as long-term capital gains. 3. Dividend
Reinvestment Plans (DRIPs): Allows the investor to automatically reinvest stock
dividends in the same company’s stock without paying any brokerage fees. Great way to
let savings grow.

Bonds:

1. There is a rumor that the state wants to do some updates on Sesame Street and issue
bonds in order to do so. Explain why bonds are a worthwhile investment. ​Bonds are
an extremely worthwhile investment and I would definitely advise Elmo to invest in
some of them-especially since they are being offered by the state. Bonds are so great
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because they also produce predictable returns, they are extremely safe, not super risky,
and bond owners are always guaranteed to be the first ones to get their money back in the
state of a crash.
2. My good ole pal Snuffy is considering investing in real estate. I told him he should
invest in REITs instead. Why should I tell him that’s the case? ​He should invest in
REITs rather than investing in real estate because REITs are actually index funds for
houses. This allows for diversification and for sharing in value appreciation and rental
income without having to deal with the actual buying, managing and selling of the
property. In summary, REITs are much simpler and easier compared to other real estate
options.
3. My good friends, Bert and Ernie, invest in a company called Hamazon. They deliver
meat products. The company went out of business and they didn't get any money
back, but my friend Zoe did. Can you think of a possible explanation? ​A possible
explanation for Zoe receiving money back when the company went out of business and
not Bert or Ernie could be that Zoe had bonds with Hamazon. Since bonds are much
more safer compared to stocks, she would have been one of the first people in line to get
paid. Bert and Ernie probably didn’t get any money back because they invested in
something more risky such as stocks and the money ran out before they were able to
receive any of it. Another way that Zoe would have received money when Hamazon went
out of business and not the two other friends would be that Zoe could have possibly
short-selled the company-hoping and betting that it would crash and, when it did, she
earned money off of it.
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Budget:
● Elmo makes $2500 per month
● Miss Piggy makes $1500 per month
● Dividend of $12 per month
● Elmo also gets a royalty check of $4000 per month

● Elmo and Piggy are in the 25% tax bracket (assume it’s a flat tax and not
progressive).

● Monthly mortgage is $3,100

● Water, sewage, and heat are a combined $300
● They don’t have to pay property tax
● Spend an average of $300 on fast food per week
● Groceries are $50 per week
● Neither of them ever buy new clothes but Elmo spends $50 a week on gel for his fur
● Each of them have a car payment of $350 per month
● Gas is paid for by the company
● Elmo loves to golf and spends about $600 per month golfing
● Piggy loves to scrapbook and spends about $400 per month
● They have a Netflix subscription of $12 per month
● Zero medical expenses
● Car insurance is $100 per month
● Life insurance is $100 per year
● No kids
● What is the final # in the letter M box? Is this a good or bad number?
● What recommendations would you make?
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●
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Goal Sheet:
Use the attached goal sheets and make three financial goals for Elmo and Piggy for each
section of the sheet.
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Balance Sheet:
Big Bird

● $50,000 in cash sitting under a mattress

● $100,000 invested in index funds
● $3,000 invested local bonds
● No life insurance
● $2.5 million saved in 401k
● Owns a nest worth $250,000 and owes $11,000 on it
● Big Bird owns a car, even though he can fly. It’s wroth $25,000 and he owes $10,000
● Vintage Tickle Me Elmo worth $10,000
● Bert owes him a $50,000 gambling debt
● Big Bird owes $4,000 on his credit card
● Has college loan debt of $120,000
● What is his net worth?
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