Personal Finance &The Cost of Consumer Credit John M. Beckem II, PhD Ralph A. Armenta, MBA, MS Finance SUNY/ESC CDL Conference April 30, 2011
Where should your money gofirst? Company Savings Plans Pay off non-deductible debt 6-8 months emergency savings Education Savings Pay down home mortgage
#1 Contribute to Company Retirement Planup to the Maximum MatchSome employers offer to match a percentage of your contributions to a401(k) or similar plan.Why go for the match?You re getting paid to save
• #2 Pay off nondeductible, high-interest rate debt Paying off your debt will make it much easier to reach your savings goals. Solvency is the road to financial freedom How to pay down your debt - Create a budget to identify nonessential expenses that you can cut back on. - Make more than the minimum payment on your balance. - Start with the card or loan that charges the highest interest rate. - Try negotiating with credit card companies for a lower interest rate. - Consider paying off your debt with a home equity loan. -
#3 Create an emergency fund to prepare forthe unexpectedTo keep from dipping into long-term investments or borrowing atunattractive rates when you need cash in a hurry, create anemergency fund to cover at least six to eight months of essentialliving expenses like rent, mortgage, utilities, food and transportation.Keep emergency money in an account that is easy to access- Savings or Checking Account- Money Market Account- Home Equity Line of Credit
#5 Start saving early for a child s education If you have children in the family, one of your goals is probably to set asidefunds for their education.529 College Savings Plan Money can be withdrawn tax-free to pay for college expenses liketuition, books, supplies and in some cases room, board and computers.Coverdell Education Savings Account- May be used for qualified elementary, secondary and college educationexpenses.- You can put away $2,000 each year per child (if eligible).- Potential earnings grow tax-free, and distributions for qualifiedexpenses are free of federal income taxes.- Income limits apply.
#6 Saving for a houseChoices to consider for down payment savingsShort-term CDs Choose a CD that matures when you plan to buy your house. CDs are FDIC insured.Money Market Funds Choose these funds when you start shopping for a house and want quick access to your money. Not FDIC insured.Short-term bonds Choose bonds that come due when you rready to buy or funds containing high-quality bonds ( A or better credit rating).Treasury Bills Choose a maturity that matches your plans. Values fluctuate prior to maturity. Backed by the US Treasury.
#7 Pay down tax-deductible, high-interestrate debtReducing high-interest-rate debt—even if it s a tax-deductiblemortgage, home equity line of credit or student loan—can enhance yourability to save. Refinancing considerations- If interest rates have fallen since you took out your mortgage,refinancing could lower monthly payments in the near term and saveyou money over time.- Be sure to factor in any transaction and closing costs that may beincluded in refinancing.
Credit Score & Personal Finance• Understand & Improve Your FICO & Credit Score Reports• What Affects Your FICO Score? • Credit types • Homeownership • Length of credit history • How do you use credit • Negative credit events
Federal Reserve• The size of the total consumer debt grew nearly five times in size from 1980 ($355 billion) to 2001 ($1.7 trillion). Consumer debt in 2010 now stands at $2.4 trillion.• The average household in 2010 carried nearly $6,500 in credit card debt.• As of the twelve months ending June 2006, there were 1.5 million consumer bankruptcy filings, including 1.1 million Chapter 7 filings, 0.1 million filings for Chapter 11 and 0.3 million Chapter 13 bankruptcies.
Consumer Loan Rates• New Car financing rates Consumer Loan Trends declined by almost 200 14 bps between 06 & Feb 12 ’11 10 8 interest Rates 6• During the same period 4 personal credit card rates 2 declined by 140 bps. 0 2011 2006 2007 2008 2009 2010 -Feb New Car 7.72 7.77 7.02 6.2 6.21 5.86 Interest Rates Personal 12.41 12.38 11.37 11.1 10.87 11.01 Credit cartds Source: Federal Reserve
• Amounts Financed Consumer Loan Trends decrease over 7% 28,500 100 between 2007 and 2008. 95 28,000• Beginning in 2008 90 during the Credit/ Amounts Financed Loan-to-Value 27,500 Liquidity Crisis the amounts financed 85 approximately 6%. 27,000 80• More telling is from 26,500 2006 to current the 75 loan-to-values adjusted down to 80% 26,000 70 1 2 3 4 5 6 from a high of 94%. Amount Financed 26,220 28,287 26,178 28,272 27,959 26,673 “Skin-in-the-Game” (Dollars) Loan-to-Value Ratios 94 95 91 90 86 80 Source: Federal Reserve
Credit & the Undergraduate Students• In each school year between 2000–2001 and 2006–2007, an estimated 60% of bachelor s degree recipients borrowed to fund their education. Average debt per borrower rose 18%, from $19,300 to $22,700 over this time period. Average debt per bachelor s degree recipient increased from $10,600 to $12,400. (Source: The College Board, Trends in Student Aid, 2008)• In 2008, 84% of undergraduates had at least one credit card, up from 76% in 2004. The average number of cards has grown to 4.6 per student, and half of college students had four or more cards. (Source: Sallie Mae, How Undergraduate Students Use Credit Cards, 2009)• Undergraduates are carrying record-high credit card balances. The average (mean) balance grew to $3,173, the highest in the years the study has been conducted. Median debt grew from 2004s $946 to $1,645. 21% of undergraduates had balances of between $3,000 and $7,000, also up from the last study. (Source: Sallie Mae, How Undergraduate Students Use Credit Cards, 2009)
Epidemic DebtRoughly 2.0 to 2.5 million Americans seek the help of a credit counselor each year,mostly to avoid bankruptcy.From 1990 to 2000, the number of Americans seeking the help of a credit counselordoubled.In two thirds of the counseling cases, the individual is referred to ahousehold budget counselor, financial advisor or a social worker.Many individuals experiencing financial difficulties have experienced a job loss, aninterruption to their income due to illness, or a divorce / separation.Nearly 75% of those seeking help from a credit counselor held a credit card.The average client seeking the help of a counselor had $43,000 in debt, of which$20,000 was consumer debt and $8,500 was revolving debt.
QUESTIONS orCOMMENTS? John M. Beckem II, PhD Ralph A. Armenta, MBA, MS Finance SUNY/ESC CDL Conference April 30, 2011
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