BA 96 – Personal Finance

1/26/09
Elements of personal finance
• understanding income and expenditures
• managing taxes
• Effective use of consumer credit
• Making major purchases (transport, home, education)
• Managing risk with insurances
• Investments and planning for retirement

Life cycle planning

• Income and expenditure don’t match over time
• Most people’s major expenditures are predictable at certain points in time
• Save ahead or borrow and pay back to cover gaps btwn income and
expenditure
• Don’t necessarily save constantly throughout life; sometimes save more,
sometimes borrow more
o Leasing makes sense sometimes, for example

Recent societal changes

• Parents support children then children support parents
o Now parents support children until adulthood and children don’t care
for parents
• Pensions were tied to lifetime work at a firm
o Now pensions move with employees – 401ks and such
• Much more risk for individuals!

Subsistence
• Half the world lives at subsistence level (enough to live but no discretionary
income)
• 1 billion live on <$1/day
• Few super-rich, but most of us are middle class (some discretionary income)
• How many jeans do I own? Yikes.

Life choices - we make a lot of discretionary expenditures

• What’s a ‘good’ income for me? Now, with a 20% raise, what would I spend it
on?
• “no matter how much you make, you can always make yourself miserable by
wanting something more”
• Choices
o Cousin’s CC tuition or lease a Lexus for me?
o Retire at 40 or keep working for a 2nd home?
o Pay for kids’ grad school or give grandparents $1000 a month?
o Remodel kitchen or backpack thru Patagonia?
• Choices come from values – what are mine?
o Education
 o Fame and prestige
o Financial security
o Luxury
o Personal growth
o Charity
o Family
o Leaving money to family
o Travel/adventure
o Building a collection

Typical income pattern

• S-shaped curve
• Rational people want equal income over lifetime
o Modest living in 40s to avoid poverty in 80s
o Some lean years to make it up later

Income and expenditure

• Income (more is better)  expenditure (spend on things that feel good);
repeat
o Sometimes save some (deferred expenditure)
o Sometimes investments (not always deferred expenditure, can create
wealth)
 Grow over time, unlike savings
• Net worth = non-financial assets + savings + investments

Income vs. net worth

• 3 cars and no retirement savings (income all to expenditure)
• ‘janitor millionaires’ (over-saving but never spending)

Savings vs. investment

• Saving: keep up with inflation, use current income for later expenditure
• Investment: earn returns greater than inflation, grow net worth
o ‘net’ = assets – liabilities (own – owe)

What can net worth do for me?

• Keep growing it (janitor millionaire)
• Leave money to others (dynastic wealth)
o Values issue – why might I do that?
• Enjoy it (nicer cars)
• Use it for income (retire early, do good things)
• Old people are scared of outliving their money
o Anyone who is currently retired is screwed

Major expenses are predictable

• Early 20s – pay for school
• Mid 20s – household formation, wedding expenses
• Late 20s – graduate education
 • Early 30s – home purchase, childcare
• Late 30s – kids’ expenses
• 40s – kids’ college, plan for retirement
• 50s – retirement funding, ‘reward’ expenditures
• 60s – cutting back on work, prepping for retirement
• 70s+ – manage wealth for income and bequests

Summary:
• Financial well-being comes from good planning
• Consumers have choices to make based on personal values
o Realize what’s important to you in young adulthood
• Income and net worth are predictable over lifetime
• Most people face similar life events that need careful planning

Compounding
• Compound interest is nice
• $100 at 5% for 30yrs = $432; at 6% is $574  long time periods are good
• Saving a little while young is way better than saving a lot when you’re old

Why taxes are important

• If investments aren’t tax-protected, you’re earning more like 4.27% if your
r=7%
o IRA, roth-IRA, etc

Financial planning industry

• Not regulated
• How to pick? How are those planners being paid?
o If they don’t charge you, then they’re getting a commission – maybe
not the best fit for you
o Consider an independent ‘fee only’ planner if needed
• When do you need one? Exceptional life events
o How to spend inheritance money
o Grandparent moves into a nursing home, needs to use their income +
assets to pay
o Marrying someone with 2 kids and no college fund
• When you don’t need one
o When to buy first home?
o Lease a car?
o Pay off student loans before buying things?
o Making a down payment before bonus comes through?
• What can a planner do?
o Risks and payoffs from certain investments
o Balance portfolio
o Recommend alternative investments
o Calculate probability of achieving financial goal (outliving savings)
o Providing objective assessment of your plans
• Rational steps
 o Understand current situation
 Assets and liabilities
 Income
o Be clear about goals (identify personal values)
 Short, medium, and long term
o ID and evaluate alternate strategies
 Using credit
 LR view
 Good return on investment
o Implement plan
o Re-evaluate plan
 Regularly and if things change

2/2/09 lecture 2: budgeting and tax advantaged financial behavior

Tax evasion is illegal but tax avoidance is a good thing

Spending styles and values

• Spender types
o Unconscious: doesn’t want to worry
 Will be slammed with surprises
o Emotional: feels good to buy, even for others
 Will max out credit cards
o Bargain hunter: loves thrill of chase
 Tradeoff for time  may miss big picture (LR saving)
o Hoarder: hates to spend
 Will miss investment opps
o The gambler: runs on edge, something will come up
 Luck runs out
• Type to be
o Depends on values, but best is balanced
 Financial plan in place – balance future plans with current fun
 Reasonable controls on spending – resist impulse buys, but
reward self anyway
 Can enjoy $ appropriately – don’t worry constantly about bills
Budgeting
• Recurring (rent, food)– paid for by income
• Non-recurring (accidents, vacations)– paid for by savings
• Step 1: gather data
o Best future predictor of future is the past (use online records)
o In future, use Quicken or Msft Money (key is to categorize spending)
 What to learn: Bach’s “latte effect” – what’s that daily sbux
really cost?
• Step2: develop budget
o ID recurring and non-recurring expenditures
o Remove exceptional events (sister’s wedding, new car engine)
o Set baseline budget with minimum-to-survive (rent, utilities, food)
 o Add in “nice to have” discretionary expenses (gym, haircut, manicure)
 Tells you what you can cut off in a crisis
• Beware of ‘averages’ and conventional wisdom, esp in CA
o Housing and commute costs here are WAY higher
o Perhaps clothes too, or some category
• What if the numbers don’t add up?
o Is this a timing difference? (seasonal issues like finals)
o Are necessary expenses really necessary?
 If so, borrow now, pay off later
o If not, cut back
 Move home, sell Lexus, drop gym membership
o Or add more income (like it’s so easy)

Budgeting and the college student

• How much is UCB tuition and fees in-state? $8576 annually
o + health insurance = 1698
o Total for CA residents = ~$31,000
• Most of us know the yearly rhythm for income and spending
• What do your parents expect you to pay for?
• A monthly/semester-ly allowance beats begging and fights
o Monthly is better (starting HS) because they can get used to it early;
out in the real world money comes monthly
Budgeting and the wage earner (26 paychecks trick)
• If you get 2 checks/month, budget 2 checks/month
o Two months out of the year, you’ll get 3 paychecks = extra cash!
o How to spend it? Vacations, gifts, whatever
Once you have a budget, how to manage with it
• Record what you spend
• Track variances (pg85-6)
o If over-budget, why?
 Budget creep: too many lattes
• Cut back
• Readjust budget and cut back elsewhere
• Plan for bankruptcy (no thanks)
 Exceptional expenditure
• “repay” yourself from savings, assuming you had
budgeted for savings
• Cut back on discretionary expenditure until you catch up
• Increase part-time hours
• “justify” it to yourself to see how ridiculous that sounds
• Stick to your budget
• Build in rewards
o What’s the payoff for sticking to budget? If you hate your life, maybe
change something
o Not: “I go to work so I can pay the mortgage so I can live somewhere in
order to go to work” – how depressing
• Too many dreams?
 o Use technique of paired comparisons to pick one at a time
 Is it worth giving up an annual vacation to buy a 2nd car?
Budgeting for people that hate to live on a budget
• Immediately divide your paycheck into tons of pieces: cash, savings,
checking, checking #2
• Pay essentials up front
• Monitor bank account online and stop spending when you run out of $
• Eventually admit what you can’t afford
Budgeting and roommates
• Negotiate deal up front
• Clarify who pays for what and how shit’s split – esp whose name is on bills
• Anticipate hassles like long-term guests or one roomie who’s always away
Budgeting and romance
• Even if you’re super poor, need 3 checking accounts: yours, mine, ours
• Fund “ours” equally or according to income
• Decide what joint expenses are and which are personal
• Income disparities:
o Even if someone makes nothing, everyone should have some
discretionary money
o If income is barely enough, pay out a tiny bit of joint money for ‘fun’

The Paper
- Read the book
- Outline it
- Cite any outside sources
- Be direct, not artsy
- EDIT.
- Check syllabus for format

Types of taxes: deliberately enacted to change your behavior

This is not tax advice

• Federal taxes are 30% of GDP

Kinds of taxes:
• Payroll:
o Income: federal and state
o FICA – federal insurance contribution act (social security)
o Medicare
• Variable
o Sales
o Real estate (city, county)
o Estate and gift
o Capital gains
o Personal property (cars)
• Why so many different kinds? Different kinds encourage different behavior;
• Regressive/progressive taxes
 o Regressive: hurt the poor more
 Clothing, cigarettes, lotteries
o Progressive: ‘soak’ the rich
 Income tax
 Discourage initiative and dampen economy overall
Tax avoidance is a good thing
• The rules encourage you to do this!
• 4 ways:
o Exempt – report it, but treat it like it isn’t there (municipal bond
interest)
o Adjustment to income – take away from gross income
 Alimony
o Deduction – pay taxes on less than gross income
 Schedule A: mortgage interest
 Schedule C: small business expenses
o Tax credit – ‘earned income,’ hybrid cars
 First-time home buyers?
 Knocks some $ off your tax bill, if EIC then govt may pay you
back
 EIC??
• Avoid taxes on investments that grow net worth
o Tax preference'd savings
 401(k) [better for old people] and IRA
• Deduct from income, no taxes on capital gains or
interest/dividends, BUT you pay taxes on withdrawls like
they’re ‘income’
o No-tax on growth and withdrawl but not a deduction
 Roth IRAs (better for younger people)
 Coverdell Savings Accts (education)
• No income tax deduction, but can withdraw and not count
that as income
• No tax on the interest earned or capital gains
Other-than-payroll taxes
• Personal property
• Real estate property taxes – SO HIGH in CA
o $5-600 a month on an SF condo
o Tax-deductible on Schedule A
 For 2nd home too, but not 3rd or more
• Hard to avoid, but >55yrs old you can ‘transfer your tax basis’ within county
under prop 13
o Need attorney
o Should only pay taxes on the value they bought house at originally
o If they move, don’t pay taxes on the profit from selling house???
• Capital gains
o If you buy and sell any asset (except in 401(k) or IRA), you owe tax on
profit
o Usually low rates (15%)
 o Real estate capital gains home-owner exemption
 $250k or $500k married
 2/5 yrs rule of residency
 You can do this over and over. It’s confusing.
• Sales tax
o Generally not tax-deductible
o Avoid by…not spending money…great
o What about states with no sales tax? Higher property taxes, lower
quality public services (which are normally paid for by sales tax)
• Estate and gift taxes
o Important exemptions
 Spouses can give unlimited amts to each other
 Anyone can pay any amt of tuition or medical care for anyone
else
• But they have to pay the institution, not the beneficiary
 Anyone can give anyone else $12,000/yr
o Estate tax ‘exemption’ and some weird rules
 $1million  2  3.5million in 2009
 Gifts > annual exemption count towards ‘estate’ total
• Grandma gives me $100,000 for a condo down payment
• Estate tax is coming back because CA needs money 
 Tax is owed not by recipient but by ‘the Estate’ / or donor
• That’s why it takes a year for estates to settle
• Gifts can be given in any amt, but count against estate
later
o Moral
 Complicated shit, needs an estate planner
• Putting house ‘in trust’
• Beware of ‘living trust’ merchants – see a real attorney!
 Estate taxes can be super high; 45-55%
• Payroll taxes
o FICA (social security)
 Very regressive
 Provides 4 things:
• Pension (small variable component) (can be fixed by not
having variable component)
• Very small payment if injured/unable to work
[supplemental disability]
• Survivors’ insurance (minor kids, window)
• Death benefit - $255 to pay for funeral (stupid; time to
drop this or fix it)
 Social security trust fund
• Doesn’t really exist?
• Program is ‘pay as you go’
• Other programs in the world have lower benefit (close to
poverty) and no variable component
 o No one relies on this as a ‘pension plan’ and we
won’t either
 FICA taxes are high (OASDI – old age survivors and disability
insurance)
• Employer pays same amt as you do
• FICA is paid even on 401(k) contributions
• 6.2% on up to $97.5k/yr (drops if you make more)
• This rate will likely go up to fund boomers’ retirement
o Medicare tax
 1.45% of gross income with no limit
 System funds itself right now, but it’s closer to crisis than social
security
 Public policy issues
• Limit benefits (hip replacements for 90 yr olds)
• Great increase in tax
o These can’t be avoided unless you earn less 
• Income taxes
o Progressive
 >$100k, some deductions go away
 Watch out for ‘alternative minimum tax’ – you’ll need a tax
accountant
o CA follows the feds on deductions and exemptions, but doesn’t copy all
o Federal
 See chart
o CA
 See chart
o If you earn $60k, 25% to feds and 9.3% to CA = 34.3% total
 Difference btwn marginal and average rate
 Good news: govt will ‘pay’ 34 cents on every $1 into 401(k)
• Mortgage of $1800 costs %1188 because 34% taken out
• Tax-exempt gifts adjusted down too
o How to calculate
 Earnings + other income like interest + schedule D (investment)
= gross income
 Subtract exemptions (alimony, scholarship, 401k, student load
interest)
 ?
o Standard or itemized deduction
 ‘personal’ exemption is $3400
 Standard deduction is 5350 (2x if married)
• Add up schedule A and take that or standard ???
 Schedule A:
• medical expenses, casualty loss (if up to 3% of income)
• State income taxes paid
• Real estate and other property taxes
• Mortgage interest (not principal paid)
 • Charity
• We will meet this really fast
 Summary: tax code motivates charitable donations, whether to
rent or buy
• Can always use turbotax or an accountant
 Schedule C for small business (p107)
• If you get income on the side, you can offset that with
expenses
• Must have profit motive
• De minimus personal use can be quite attractive
o No one cares if you use it for personal use as well
as business
• Summary of taxes on income:
o Cannot avoid some taxes
o To motivate middle class behavior
o Either give govt a lot of money to spend for you, or learn tax codes and
keep up and make $$$
• Key to build good net worth: “sounds lovely but I simply can’t afford it”
• Other ways to keep to your budget
o What would I do differently tomorrow if I had (it)?
o What I have wanted (it) if I hadn’t seen the ad?
• Federal budget facts:
o 2008-9 was $3 trillion
 Per person: that’s $10,000 each
 Did not include $350billion on TARP-I or $134billion on AIG or
$900billion on the bill in congress now
o First passed $2trillion in 2002
o Where does money come from?
 Corporate income tax, individual income tax, FICA, excise (booze
and cigs), other (estate)
o Where does money go?
 Defense (more than next 5 countries together), social security,
medicare/aid, education, tons of other little things

2/9/09 lecture 3: consumer credit

Types of credit
• Credit: amount you can borrow
• Debt: amount you owe
o Secured: lower interest rate because bank can repossess your assets
(mortgage, car loan)
o Unsecured: higher rates; credit card, bank line-of-credit, ‘personal
loan,’ student loans
• Types of cards
o ATM – cash withdrawal at your bank only
o Debit – draws instantly from your account, use instead of a check
o Charge – like basic AMEX; must pay full balance monthly
 o Credit – charge up to limit and pay off over time
 Why store cards suck: too easy to buy unnecessary things
 not comparison shopping
 high interest rates
 count as ‘open accounts’ against credit score as low quality
credit
o credit vs. debit
 credit cards are protected if stolen (limit $50 loss) – debit cards
are not, so your entire account can be drained
o corporate travel card
 may be required for work, regardless of your credit score
 give up SSN and may bill to your house
 if company is slow to reimburse you, could be reported as “paid
late”
o charge and credit limits
 ‘cash advance’ limit is < total credit
• If you take a cash advance, interest from that day on is
huge until you pay bank for full amount
 Card may have separate ‘charge’ (pay it this month) and ‘credit’
limits
 ‘over-limit’ fees may be enormous
o Why you want a credit card
 Advantages
• Smoothes timing differences btwn expense and income
• Convenience of not carrying cash, buying online
• Building credit score
• Frequent flier rewards
 Disadvantages:
• Buying unnecessary things
• High high interest rates, fees
• Carrying a balance robs your income means you’re always
paying interest
Establishing credit
• Credit rating agencies
o Demonstrate ‘credit-worthiness’ – can you take on and repay debt?
o 3 bureaux: Experian, Equifax, trans union
 They get monthly reports, but each may get different reports
about you from diff sources
o Each creditor calculates a FICO score including soft factors (where you
have accounts, for how long)
• Checking your credit score
o Annualcreditreport.com – scary cuz you give up a lot of info but it is
legit
o Freecreditreport and freetriplecredit are NOT LEGIT
• Credit will be necessary, so
o Good hygiene (form of name, address should be consistent)
o Start with utilities (phone, PG&E)
 o Gas charge cards are easy to get (just for gas)
o Store credit cards (Macy’s)
o Credit card from bank, maybe with savings deposit
o Authorized user on parents’ account, then ask that company for your
own account
o Manufacturer-financing (like buying a vehicle)
o Beware of lots of rejected applications
Managing credit
• Keeping records neat
o Never co-sign a card for anyone else
 Too risky, counts against your credit even if you don’t ever have
to pay
o Do not load your credit card
 Dangers of making the ‘minimum payment’
o Check your credit report regularly – once a year is allowed free
o Formally file disputes and get them resolved
 May have to do this with each bureau
• Identity theft
o 2 types: Account misuse, application fraud
o Mostly still paper-based
o Protect yourself
 Shred stuff
 Do not give SSN, only confirm last 4 digits
 Check credit regularly
 Be a good customer – call credit card company when you travel
 Open the bill! Immediately follow up anything you don’t
recognize
 Don’t respond to phony emails
• Do not charge more than you can immediately pay off
o Unless you know the money is coming really soon
• Never carry a balance
o If you need a loan, get one
o US avg balance is ~$6000; but 40% of people pay off in full monthly
 People filing for bankruptcy typically have $24k in debt - $5400
in interest annually!
• Beware of multiple credit cards and offers for new ones with ‘teaser’ rates

o Having more accounts and inactive accounts BOTH lower credit score
• How many cards should you have? Two – mastercard and visa
o Degree of freedom if one doesn’t work
o Allows switching if annual fees go up
o Two credit limits = modern version of “have 6mos living expenses in
the bank”
• How to pick a card:
o Annual fees
o Underlying rates (after initial period)
o Other fees – late, over limit
 o Reward cards – might charge $65/yr
 Using credit wisely could get ½ a trip per year if your job
requires travel
o Beware ‘cash back’ – how much would you have to spend to get
anything back?
 Where does that cash come from?
 Fees and interest are so high
 Amount you get back usually is meager and insufficient
• If you’re way in debt
o Face it – how bad is it really?
 How many accounts do you have, what are the rates and fees
o Make a plan
 Reduce monthly expenses, increase monthly CC payment
 Get a part-time job just for paying off debt
 Consolidate CC debt into a bank loan (or ideally a secured loan)
and stop charging!
 Sell assets and use proceeds to pay off debt
o Carefully manage termination of inactive accounts
 Store cards are easy to get rid of
o If you could never pay it off, prepare for bankruptcy
 Beware of ‘consumer counseling agencies’ that are just trying to
get you to take out a high-interest loan

Improving your FICO score

• Fair Isaac Corporation (San Rafael)
• Stats based on universe of borrowers – given your behavior, how likely are
you to default?
• By contract, FICO calculates score from credit bureau
• Why it matters
o Range is 300-850; 675 is avg, 723 is median
 >705 is good
 >780 is very good, above >800 excellent
 <620 is ‘subprime’ (we finance anyone!)
o Special financing sometimes, if you’ve got a good rating (‘qualified
customers only’)
o Lower FICO = higher interest rate
o Can be denied credit if your score is low
• How it’s calculated
o 35% payment history
 # accounts ‘paid as agreed’
 # of late payments
 Amt of late payments
 Judgments, bankruptcy, and other ugly stuff
o 30% amounts owed
 # accounts with balances
 How far along you are on installment debt
  Ratio of how much of your available credit you’ve used (so make
sure your limit is bigger than you need)
o 15% length of credit history
 How many yrs your credit file has been open
 How long accounts have been open
 How long since last activity (danger of unused cards)
 Length of credit history – no bonus for having bank accounts
open forever
o 10% new credit
 Number of new accounts
 Number of inquiries for new credit
• That’s why you don’t fill out loan apps everywhere
• A cluster of car dealerships asking at the same time is
looked at more favorably
• Checking your credit doesn’t count, whether it’s you or
someone else
o 10% types of credit used
 Mortgage is a good sign
 Installment payment (car loans)
 Credit cards
 Store cards
 Consumer finance company loans [bad]
o Not in FICO – age, nationality, race, salary, savings, checking,
workplace
• How to improve
o Always pay all bills on time
o Keep balance-relative-to-limit low (moment-in-time snapshot)
 Calm down credit spending for a wihle when you’re looking for a
mortgage
o Don’t move debt around from one account to another
o Don’t attempt to raise score by closing too many unused accounts at
once
 ‘account history’ remains long after account closes
 Use the unused card!
o Request increase in credit line
o LR-view:
 Don’t open too many accounts
 Don’t get a car loan and 2 new CCs in the same month
 Limit ‘inquiries’
• FICO simulator – myfico.com can tell you what to do to improve score
o Recently revised “authorized user” rule to not improve FICO, but does
help your standing with the bank in question

FAQs
• How to close an account? Takes incredible amounts of effort
• Never carry a balance but use accounts you have (just make sure it’s paid off
in full)
Summary
• Credit is good for smoothing timing differences
• No good reason to carry balances
• FICO is important

Exam:
Questions and examples – what other people ask and examples Robinson gives
Readings – do them.

2/17/09 Liquidity for a lifetime

Cash reserves planning for emergencies
• If spending everything you make, eventually will have problems
• How much to reserve?
o 6 months of expenses (typical time to find a job if you lose one)
 However: if you have no income, you have no taxes
 Won’t be funding retirement
 Cut back on discretionary expenditures
o Calculations:
 In Bay Area, ~$2000/month (rent, car, food, etc)
 If you’re in a 2-income household, can you live like one?
• Types
o Cash: savings, money market
 Don’t want too much cash because it isn’t earning interest and
you may be tempted to spend it stupidly
o Line of credit
o Credit cards
 Last resort because of high interest, effect on credit score
Banking types
• Commercial banks
• Credit unions
o Affinity groups (like employees of a company)
o Low interest rates – if you don’t pay, it comes from your paycheck
o More likely to grant loans
o No sophisticated stuff like wire transfers
• Checking accounts at brokerage firm
• Money market accounts
• Online savings accounts (Orange, HSBC)
o Higher rates
o Harder to access
• Govt savings bonds
o Nobody uses these, esp with a shitty economy
o Crappy interest rates, lowest of all
o Used be sold to people who didn’t know better… 
• How to choose a bank
 o Convenience: how easy to deposit paycheck? Transfer money? Deal
with stolen stuff?
o Price: fees, interest tradeoffs
o Services: wire transfers
o People: develop relationships with real people, with at least 2 banks
 If anything goes wrong or you need rules stretched
 Computer systems actually do go down, so have a backup
 If you’re saving money for something, it’s better to keep that
stash away from yourself haha
Checking accounts
• Types
o Demand deposits – money when you want it
 No interest, NOW (negotiable order of withdrawal)
o Time deposits
 Savings accounts
• Suck right now because rates are so low
 Certificates of deposit
• Early withdrawal penalty
• Hidden rollover provisions – make sure you get it out on
time so it doesn’t go back in
• When are CDs useful? Storing certain amount of money
for an exactly set period of time
Online banking
• Most of us don’t use checks; pay online
o This is fine because there’s a record, but keep copies for verification or
disputes
• Big advantage – scheduling payments for most convenient time

Basic loan terminology

• Get a loan if savings aren’t enough or you need a short-term fix you can
easily take care of
• Nearly all are “simple interest” / declining balance loans
• Promissory note (perhaps in addition to mortgage, car loan)
o One that says ‘bank can take my car if I don’t pay’ and another that
says ‘I promise to pay $x back’
• Collateral: credit union will have a ‘lien’ on your car’s title and will be the ‘loss
payee’ for your insurance payout if it gets totaled
• Down payment (vs. amt financed)
• Term – how long loan is for
• Monthly payment
• Interest rate, periodic rate (if annual rate is 6% then periodic is 0.5%; need
this to calc monthly amt)
o APR (annula percentage rate): interest + fees, prorated over life of loan
 Never for car loans, often for others
• Recourse and non-recourse loans (for business only, and non-recourse never
happens)
o Paying it back vs. not paying it back personally
 • Credit insurance: too expensive, protects lender more than you
o “if you die, we’ll finish paying the loan for you”
o Don’t need it, and keep paying monthly rate even when principal goes
down
• ‘payoff penalty’ and ‘pre-payment’ penalty
• Balloon payment (bad), ‘single pay loan’ (maybe useful)
o Balloon: pay low rates on your mortgage or whatever for a little while,
then the rate balloons up
o Single payment: short-term when you know you can pay it back soon
but can’t cover it now
• Fully amortizing loans
o Balance  zero on last payment (that last payment causes death of
loan)
o For stuff like cars
o Once done, no debt, good credit record, own the asset free and clear
 If you have a lien on it, need to get that released
o If you make too low a down payment on a car, it will depreciate too
quickly and you’ll get buried in the loan – owe more than the object is
worth
Types of consumer credit
• Secured
o Mortgages
 First mortgage: up to 80% of home value
 Second mortgage: gets paid if aynthing’s left, so higher rates
 Jumbo mortgage: over $625k (for NY and CA)
 Points: percents that you pay upfront
• Usually 1-point loan origination fee to get loan set up
• Anything beyond 1 point, like upfront interest, is
inadvisable unless you have a limited income because
most people cannot afford it
 Pre-payment penalties – charge to pay off loan early (5%!)
• May count as double-tax-deductible interest, tho
 Due-on-sale clause: mortgage can’t be transferred to someone
who buys property
• Very common
• Bank should set up new mortgage for them
 Owner-occupier: take seriously
• Banks make you promise that it’s your primary residence
(so you’re more likely to pay them back, less likely to
trash it)
 PMI (private mortgage insurance)
• If you get a mortgage >80%, probably have to pay higher
interest for ‘insurance’ against you defaulting
o Alternatives: first and second mortgage
 Types:
• Graduated payment: payments go up later, assuming
you’ll earn more later
 o Works for surgical residents, not hairdressers
• Fixed or adjustable rate: usually adjust once a year
o Adjustable means bank chooses when to adjust
o When’s this good? If rates are currently high (and
you expect it to go down)
• Hybrid: 5 yrs fixed /1, 7 yrs adjustable/1
o Good for buying first property if you won’t be there
too long
• Option ARMs
o Negative amortization because principal isn’t really
going down
o Don’t use unless you’re about to finish med school
and will definitely have money
• Interest only
o No amortization – never pay it back
o All payments are tax deductible, since it’s only
interest
o Like a lease
o Popular in CA because principals are too damn high
o Bad: never build up equity, never pay off mortgage
o Good: all payments deductible, about as cheap as
rent, joys of ownership,
o Home equity line of credit (kind of second mortgage)
 Almost gone now; this is what got people in trouble
 Flexible amounts up to a limit
 They are mortgages, so it’s tax deductable
 Now hard to get because homes are devalued
 Not used wisely
 Can have high interest rates and dangerous if you use them for
expenses or toys
• Good for building an extra room or paying for college
because those have ROI
 2 types:
• Take out fixed amount, to buy a 2nd home
• Stand-by line of credit (don’t pay anything unless you use
it)
o How does it affect credit score?
 Why not rent? Mortgage is tax-deductible, and you have home
equity, and it’s yours!
 Refinancing
• When? When rates go down a lot, or you want to take out
money from equity
o ‘time payment’ loans (appliances, furniture)
 Don’t take on more than you can afford
 Usually high rates but offer low promo rates to start out
o Car loans – most people have this unless they lease
  No harm in this; why bother owning your car outright when you
can be doing something else with the money and you can make
the monthly payments?
 Don’t use dealer loans, rates are high; manufacturer rates may
be better
 Low rates because secured; also proves credit history
• No collateral
• Bank loans
• Student loans
• Personal loan