Personal Finance at Your Fingertips

430 Pages·2007·2.256 MB·English

by  Ken Little

PERSONAL
FINANCE
AT Y O U R F I N G E R T I P S
Ken Little
A member of Penguin Group (USA) Inc.

PERSONAL
FINANCE
AT Y O U R F I N G E R T I P S
Ken Little
A member of Penguin Group (USA) Inc.
This book is dedicated to my wife, Cyndy, and our cabin in the woods.
ALPHA BOOKS
Published by the Penguin Group
Penguin Group (USA) Inc., 375 Hudson Street, New York, New York 10014, USA
Penguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario M4P 2Y3, Canada (a division of
Pearson Penguin Canada Inc.)
Penguin Books Ltd., 80 Strand, London WC2R 0RL, England
Penguin Ireland, 25 St. Stephen’s Green, Dublin 2, Ireland (a division of Penguin Books Ltd.)
Penguin Group (Australia), 250 Camberwell Road, Camberwell, Victoria 3124, Australia (a division of Pearson
Australia Group Pty. Ltd.)
Penguin Books India Pvt. Ltd., 11 Community Centre, Panchsheel Park, New Delhi—110 017, India
Penguin Group (NZ), 67 Apollo Drive, Rosedale, North Shore, Auckland 1311, New Zealand (a division of Pearson
New Zealand Ltd.)
Penguin Books (South Africa) (Pty.) Ltd., 24 Sturdee Avenue, Rosebank, Johannesburg 2196, South Africa
Penguin Books Ltd., Registered Offices: 80 Strand, London WC2R 0RL, England
Copyright © 2007 by Ken Little
All rights reserved. No part of this book shall be reproduced, stored in a retrieval system, or transmitted by any means,
electronic, mechanical, photocopying, recording, or otherwise, without written permission from the publisher. No
patent liability is assumed with respect to the use of the information contained herein. Although every precaution has
been taken in the preparation of this book, the publisher and author assume no responsibility for errors or omissions.
Neither is any liability assumed for damages resulting from the use of information contained herein. For information,
address Alpha Books, 800 East 96th Street, Indianapolis, IN 46240.
ISBN: 1-4295-5012-0
Library of Congress Catalog Card Number: 2006920578
Note:This publication contains the opinions and ideas of its author. It is intended to provide helpful and informative
material on the subject matter covered. It is sold with the understanding that the author and publisher are not
engaged in rendering professional services in the book. If the reader requires personal assistance or advice, a competent
professional should be consulted.
The author and publisher specifically disclaim any responsibility for any liability, loss, or risk, personal or otherwise,
which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this book.
Publisher:Marie Butler-Knight
Editorial Director/Acquisitions Editor: Mike Sanders
Managing Editor: Billy Fields
Senior Development Editor: Phil Kitchel
Senior Production Editor: Janette Lynn
Indexer:Brad Herriman
Layout:Brian Massey
Proofreader:Aaron Black
ii
CONTENTS
CONTENTS
Chapter 1 Personal Finance Planning..........................1
1.1 Personal Financial Planning.............................2
1.2 Financial Goals.......................................5
1.3 Personal Financial Plan.................................9
1.4 Using a Financial Planner..............................17
Chapter 2 Budgeting .....................................21
2.1 Creating a Budget....................................22
2.2 Tracking Expenses....................................28
2.3 Spending Plan.......................................30
2.4 Saving Plan.........................................32
2.5 Personal Financial Software ............................34
2.6 Emergency Funds ....................................39
Chapter 3 Banking.......................................43
3.1 Choosing a Bank.....................................44
3.2 Checking Accounts ..................................48
3.3 Savings Accounts ....................................51
3.4 Other Banking Services ...............................59
3.5 Banking Fees........................................62
3.6 Banking Regulations..................................64
3.7 Time Value of Money .................................66
3.8 Identity Theft .......................................69
Chapter 4 Credit and Debt ................................71
4.1 Debt Management ...................................72
4.2 Credit Cards ........................................77
4.3 Debit Cards.........................................82
4.4 Personal Loans ......................................84
4.5 Credit Rating .......................................86
4.6 Repairing Your Credit.................................89
4.7 Bankruptcy .........................................91
Chapter 5 Housing.......................................95
5.1 Buying vs. Renting ...................................96
5.2 Property Types.......................................99
5.3 Buying a Home .....................................102
iii
PERSONAL FINANCE AT YOURFINGERTIPS
5.4 Financing and Refinancing............................106
5.5 Building a Home....................................115
5.6 Selling Your House ..................................117
5.7 Renting and Leasing.................................124
Chapter 6 Automobiles ..................................127
6.1 Buying a Car .......................................128
6.2 Buying vs. Leasing...................................132
6.3 What To Do with Your Old Car........................133
6.4 The Auto Loan.....................................135
6.5 The Auto Lease.....................................137
Chapter 7 Insurance.....................................139
7.1 Life Insurance ......................................140
7.2 Auto Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .145
7.3 Homeowners Insurance...............................149
7.4 Renter’s Insurance...................................153
7.5 Health Insurance ...................................154
7.6 Disability Insurance .................................161
7.7 Long-Term Care Insurance............................165
Chapter 8 Taxes........................................169
8.1 Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .170
8.2 Taxable Income.....................................173
8.3 Tax Professionals....................................176
8.4 Doing Your Own Taxes...............................178
8.5 Tax Savings Strategies................................182
8.6 Alternative Minimum Tax ............................184
8.7 Audits ............................................186
Chapter 9 College Financing...............................189
9.1 Costs .............................................190
9.2 College Financial Aid................................194
9.3 Prepaid Tuition Plans ................................203
9.4 Tax-Free College Savings Plans ........................206
9.5 Commercial Loans ..................................209
9.6 Employer-Sponsored Plans ............................212
9.7 Alternatives to Traditional College .....................213
iv
CONTENTS
Chapter 10 Investment Planning and Management ...............215
10.1 Defining Investment Options..........................216
10.2 Investment Objectives ...............................226
10.3 Risk and Reward Relationship .........................228
10.4 Asset Allocation....................................233
10.5 Trading Through a Broker ............................236
10.6 Online Trading .....................................238
Chapter 11 Investing in Mutual Funds and Exchange Traded Funds...239
11.1 Mutual Fund Basics..................................240
11.2 Types of Mutual Funds ...............................246
11.3 Mutual Fund Expenses ...............................254
11.4 Finding Good Mutual Funds...........................258
11.5 Exchange Traded Funds (ETFs) Basics...................267
11.6 Types of ETFs ......................................270
11.7 Finding Good ETFs..................................271
11.8 Other Kinds of Funds ................................273
Chapter 12 Investing in Stocks..............................275
12.1 Basics of Stock Investing .............................276
12.2 The Stock Markets and Indexes........................279
12.3 Types of Stocks .....................................283
12.4 Finding Good Stocks ................................287
12.5 Dividends .........................................289
12.6 Buying and Selling Stocks ............................291
12.7 Employee Stock Options..............................294
12.8 Return on Investment................................298
Chapter 13 Investing in Bonds..............................301
13.1 Basics of Bond Investing..............................302
13.2 Types of Bonds......................................305
13.3 Bond Mutual Funds..................................312
13.4 Understanding Yields ................................314
13.5 Credit Ratings......................................315
13.6 Buying and Selling Bonds.............................318
Chapter 14 Retirement Planning ............................323
14.1 Setting Retirement Goals.............................324
14.2 Determining Financial Needs..........................327
v
14.3 Creating a Retirement Plan ...........................331
14.4 Social Security and Medicare..........................335
14.5 Pension Plans ......................................339
14.6 Personal Contributions...............................342
14.7 Your Home Equity...................................345
14.8 Getting Help.......................................347
Chapter 15 Retirement Accounts............................349
15.1 Types of Accounts...................................350
15.2 IRAs .............................................352
15.3 401(k) and 403(b) Plans..............................357
15.4 Small Business Retirement Plans .......................363
15.5 Getting Help.......................................365
Chapter 16 Estate Planning ................................367
16.1 Estate Types........................................368
16.2 Probate ...........................................370
16.3 Wills .............................................373
16.4 Trusts.............................................376
16.5 Estate Planners and Attorneys .........................378
Appendix A Words to Go Glossary ...........................379
Appendix B Resources ....................................395
Index........................................401
INTRODUCTION
Personal Finance At Your Fingertips is a reference book of a different type. We
have organized and formatted this book to bring you the important information
you need about personal fi nance topics, but not every single detail and tiny bit of
information.
The chapters focus on the most important things you need to know about per-
sonal fi nance without bogging you down in needless detail. You’ll fi nd the infor-
mation you want on a personal fi nance topic quickly without reading the book
cover-to-cover.
The topics all fi t together because personal fi nance is a comprehensive subject,
but you can fi nd the piece of information you are looking for by going directly to
that subject. The goal is to get you to your information by the most direct route
possible. If the information you need is in Chapter 4 and concerns credit card
debt, you can go directly there and get your question answered. Handy “SEE
ALSO” arrows tell you exactly where to go:
SEE ALSO 4.6, “Repairing Your Credit”
In addition to the SEE ALSO pointers, you’ll also fi nd a sidebar titled, “Words to
Go.” This sidebar defi nes terms you’ll fi nd in the surrounding text.
WORDS TO GO . . .WORDS TO GO . . .WORDS TO GO . . .
Words to Go are quick defi nitions of fi nancial terms discussed within the
chapter. These defi nitions are provided to enhance your understanding of the
material covered.
Each chapter contains these pointers, which direct you to other areas in the book
for additional information on a topic mentioned in the preceding paragraph.
The topics are presented in a logical order, progressing from the general to the
more specifi c. The broad overview of fi nancial planning moves through budget-
ing and money management to more complicated areas such as insurance, taxes,
investing, estates, and so on.
Many people have a personal fi nancial issue right in front of them that occupies
most of their attention. It might be fi nancing a college education for their chil-
dren, planning a comfortable retirement, or an investment question. These major
vii
PERSONAL FINANCE AT YOURFINGERTIPS
topics are compartmentalized for rapid access and focused attention. Jumping
around in this book is no problem—that’s the way we designed it, to be respon-
sive to those questions and concerns that you need to know about right now.
Here is a general overview of the book’s structure:
Chapter 1, “Personal Financial Planning”: This chapter defines financial plan-
ning and covers goal setting and working with a professional planner.
Chapter 2, “Budgeting”: The budgeting process is defined and you are shown
how to create a spending and savings plans that addresses your financial goals.
The use of personal financial software is reviewed along with how to set up an
emergency cash reserve.
Chapter 3, “Banking”: Financial institutions, bank products, services, fees, and
regulations are covered in this chapter, along with the time value of money and
identity theft.
Chapter 4, “Credit and Debt”: What is good debt and bad debt? How much is
too much debt? Managing your credit and debt is covered in this chapter, which
includes credit cards, credit rating, repairing your credit, and bankruptcy.
Chapter 5, “Housing”: This chapter looks at the benefits and drawbacks of
owning versus renting your house, how to buy and sell your home, working with
a real estate agent, selling your home yourself, building a home, and the details
of renting and leasing.
Chapter 6, “Automobiles”: Should you buy a new or used car? What is the true
cost of leasing? This chapter discusses the details of buying, leasing, and financ-
ing an automobile.
Chapter 7, “Insurance”: This chapter covers the important aspects of life, auto,
renters, health, disability, and long-term care insurance.
Chapter 8, “Taxes”: Federal income taxes are discussed and explained along
with tax saving strategies, the alternative minimum tax, and audits.
Chapter 9, “College Financing”: The costs of college, including the various
forms of financial aid, tuition plans, and other sources of financing are discussed
in this chapter.
Chapter 10, “Investment Planning and Management”: This chapter defines
investment objectives and options, along with examining the risk/reward relation-
ship. Return on investments and using asset allocation are examined. Trading
through a broker and online are compared.
viii