FIN2106 Lecture Notes - Lecture 5: Negative Gearing, Opportunity Cost, Balloon Payment Mortgage
FIN2106 – Module 5
-Budgeting
oHelps with the achievement of financial goals by monitoring and controlling finances,
reducing needless spending and allowing savings
oUsually prepared monthly on a cash basis
oInvolves estimating:
Disposable income
Expenditures – grouped into categories
Savings
oVariances – comparison of actual against budget
-Use of credit
oCredit makes it easy to purchase items, pay bills and take advantage of investment
opportunities
oOffers convenience but can also cause distress if not used appropriately
oDebt management is an essential component of personal financial planning
-Types of borrowing
oBorrowing to fund lifestyle
potentially “disastrous” debt
oBorrowing to purchase depreciating assets
generally “bad” debt
oBorrowing to secure shelter
oBorrowing to invest
potentially “good” debt
oThe first three types of borrowing are served through consumer credit
-Consumer credit
oUnlike borrowing to purchase investments, consumer credit is purchasing power
extended on trust so that goods and services needed for consumption can be bought.
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oAdvantages:
Being able to purchase when timing is right
Being recognised as financially sound
Efficient and modern system of payment
oDisadvantages lie with people who are unable to act with self-discipline.
-Types of consumer credit
oHome loans
Fixed or variable rate loans
Line of credit accounts
Reverse mortgages
oCredit cards
Branded, advance, store or line of credit cards
Appropriate and inappropriate uses of credit cards
oPersonal loans
Secured or unsecured
Interest rate between home loans and credit cards
oMotor vehicle loans
oLeasing finance
Commonly used for personal items such as cars
Lender retains title on lease item
Payments made up of interest and partial payment of principal with a balloon
payment at the end
-Credit danger signals
oIncreasing proportion of income is used to make credit repayments
oCredit is being used to purchase food and other necessities
oIndividual is borrowing money to tide them over until payday
oMoney is being borrowed to pay off other debt
oBalances on credit cards or debt facilities are not reducing
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Budgeting: helps with the achievement of financial goals by monitoring and controlling finances, reducing needless spending and allowing savings, usually prepared monthly on a cash basis, involves estimating: Savings: variances comparison of actual against budget. Consumer credit: unlike borrowing to purchase investments, consumer credit is purchasing power extended on trust so that goods and services needed for consumption can be bought, advantages: Being able to purchase when timing is right. Efficient and modern system of payment: disadvantages lie with people who are unable to act with self-discipline. Branded, advance, store or line of credit cards. Appropriate and inappropriate uses of credit cards: personal loans. Interest rate between home loans and credit cards: motor vehicle loans, leasing finance. Commonly used for personal items such as cars. Payments made up of interest and partial payment of principal with a balloon payment at the end. Positive gearing income from investment is higher than the interest payments for the borrowed money.
