Budgets and Debt

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  • Budgets and Debt

    1. 1. Senior Opportunity Series Building a Health Financial Future February 8, 2006 Katherine Cannon
    2. 2. Building a Health Financial Future <ul><li>Unique time in life to Build a Healthy Financial Future. </li></ul><ul><ul><li>Time is your friend – take advantage of it </li></ul></ul><ul><ul><li>First professional job with good earning potential </li></ul></ul><ul><ul><li>Time to establish a health financial life </li></ul></ul><ul><ul><ul><li>Establish good credit and/or correct any existing problems </li></ul></ul></ul><ul><ul><ul><li>Create a foundation for achieving goals – budgeting and planning </li></ul></ul></ul><ul><ul><ul><li>Time to save enough to achieve all your goals! </li></ul></ul></ul>
    3. 3. Senior Opportunity Series Topics <ul><li>Budgeting </li></ul><ul><li>Saving options </li></ul><ul><li>Borrowing and Credit Cards </li></ul><ul><li>Credit History – FICO scores </li></ul><ul><li>Managing Student Loans </li></ul><ul><li>Questions to Answer when buying or leasing a car </li></ul>
    4. 4. Personal Budgeting <ul><li>Company - Budget is framework for profit </li></ul><ul><li>Personal - Budget is framework for healthy financial future </li></ul><ul><ul><li>Longer life expectancy </li></ul></ul><ul><ul><li>Result- need to increase retirement income </li></ul></ul><ul><ul><li>Translates - need for increased retirement savings </li></ul></ul><ul><ul><li>Many living paycheck to paycheck – recent college grads </li></ul></ul><ul><ul><li>Easy access to credit </li></ul></ul><ul><ul><li>Reach long-term financial goals </li></ul></ul><ul><li>Effective Personal Budgeting addresses these issues and reduces stress </li></ul>
    5. 5. Budgeting-Why Not <ul><li>Do not see value – I don’t have enough income to bother with a budget! </li></ul><ul><li>No Desire – too much work, I don’t want to know. </li></ul><ul><li>Don’t want to restrict spending – when I see those perfect shoes or my favorite artist has a new CD out – I want it NOW. </li></ul><ul><li>Fear – I don’t want to see the bottom line – it’s too frightening. </li></ul>
    6. 6. Not Budgeting – Results <ul><li>Buy on impulse without consideration of consequence </li></ul><ul><li>Growing Debt </li></ul><ul><li>Higher interest expense </li></ul><ul><li>Increased bankruptcy </li></ul><ul><li>Stress </li></ul><ul><li>Divorce </li></ul>
    7. 7. Budgeting – Advantages <ul><li>Change behavior patterns – you CONTROL money. Don’t let money CONTROL you. </li></ul><ul><li>Prevent future accumulation of debt </li></ul><ul><li>Reduce existing debt </li></ul><ul><li>Allows saving for future – retirement and emergencies </li></ul><ul><li>Provides framework for achieving goals – new car, new house, exotic vacations…. </li></ul><ul><li>Reduce financial related stress – sleep better! </li></ul>
    8. 8. Budgeting – Tools Available <ul><li>Many tools available to assist in calculation – many on-line. These are a few suggestions: </li></ul><ul><li>http://www.personal-budget-planning-saving-money.com/ </li></ul><ul><li>http://financialplan.about.com/od/moneyandcollegestudents/l/blcollbudget.htm </li></ul><ul><li>http://www.moneyinstructor.com/budgeting.asp: </li></ul>
    9. 9. Budgeting – Tools Available <ul><li>Basic Concept of a budget include: </li></ul><ul><ul><li>Step One - Total monthly income </li></ul></ul><ul><ul><li>Step Two - Total monthly expense </li></ul></ul><ul><ul><li>Step Three Calculate result </li></ul></ul><ul><li>If expense > income – ADJUST – Either or Both: </li></ul><ul><li>Increase income </li></ul><ul><ul><li>Part-time job </li></ul></ul><ul><ul><li>Education to increase job opportunities </li></ul></ul><ul><li>Reduce expenses </li></ul><ul><ul><li>Discretionary spending </li></ul></ul><ul><ul><li>Downsize vehicle or living arrangements </li></ul></ul><ul><li>Always Include savings for retirement, emergency and debt reduction if appropriate </li></ul>
    10. 10. Budgeting – Pitfalls <ul><li>Credit Cards – Temptation </li></ul><ul><ul><li>Eliminate or reduce to only one </li></ul></ul><ul><ul><li>Leave it at home in inconvenient location </li></ul></ul><ul><li>Impatience – immediate satisfaction </li></ul><ul><ul><li>Want car, new outfit, stereo - NOW </li></ul></ul><ul><li>Lack of Adjustment to Budget – frustration </li></ul><ul><li>Holiday Spending – Not planned for </li></ul><ul><li>Vacations – Failure to factor all costs – entertainment and increased food expense </li></ul><ul><li>GIVING IN – DOES NOT MEAN GIVING UP – FORGIVE YOURSELF AND START AGAIN! </li></ul>
    11. 11. Credit and Borrowing <ul><li>Advantages </li></ul><ul><ul><li>Ability to purchase needs items immediately </li></ul></ul><ul><ul><li>Eliminate need to carry much cash </li></ul></ul><ul><ul><li>Creates a record of purchase </li></ul></ul><ul><ul><li>Consolidates bills into one payment </li></ul></ul><ul><ul><li>Convenient </li></ul></ul><ul><ul><li>Establish credit history </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Potential higher cost of purchase (interest & finance) </li></ul></ul><ul><ul><li>Increases impulse buying </li></ul></ul><ul><ul><li>More likely to overspend that result in financial difficulties </li></ul></ul>
    12. 12. Credit-ED/Harris Financial Literacy Survey <ul><li>90% recognize & value good credit as an important financial goal </li></ul><ul><li>80% feel knowledgeable enough to manage their finances after graduation </li></ul><ul><li>HOWEVER </li></ul><ul><li>32% have already missed or been late on a credit card payment </li></ul><ul><li>24% have written a check that bounced </li></ul><ul><li>52% believe their spending habits now will NOT impact their credit report in the future </li></ul><ul><li>37% think opening unnecessary, new credit cards will NOT lower their credit score </li></ul><ul><li>72% of students have never requested a copy of their credit report </li></ul><ul><li>28% do NOT save money for future purchases </li></ul><ul><li>The average credit card balance for college students has increased from $1,236 in 2000 to $2,437 according to Bankrate.com </li></ul>
    13. 13. Hints for Managing Credit Cards <ul><li>Get one or two cards with a low limit – you don’t need a lot of cards </li></ul><ul><li>Don’t apply for multiple cards or store credit cards (Old Navy, GAP, Gas cards) </li></ul><ul><li>Pay your bill every month and on-time </li></ul><ul><li>Avoid paying for small purchases – you do not want to pay interest on a hamburger and fries! </li></ul><ul><li>$2,000 balance, 16% APR, 2% min pay= 24 years to pay-off at a cost of $3,329.14 </li></ul>
    14. 14. Credit Card Debt – if you find yourself in trouble <ul><li>Stop charging – PAY WITH CASH OR DEBIT CARD. </li></ul><ul><li>Always pay more than the minimum. </li></ul><ul><li>Pay off the credit card with the highest interest rate first, then go to the next highest interest card, and so on. </li></ul><ul><li>Talk about money management with someone you trust and respect. </li></ul><ul><li>Compound interest can double the price of your purchase. </li></ul><ul><li>It takes many years to recover from a bad credit score – so be aware! </li></ul>
    15. 15. What is Credit History and Why should I care? <ul><li>How FICO® Scores Work </li></ul><ul><li>When you apply for credit lenders want to know what risk they’d take by loaning money to you. </li></ul><ul><li>FICO scores are the credit scores most lenders use to determine your credit risk. </li></ul><ul><li>Your 3 FICO scores affect both how much and what loan terms (interest rate, etc.) lenders will offer you at any given time - Experian, TransUnion, and Equifax </li></ul><ul><li>Taking steps to improve your FICO scores can help you qualify for better rates from lenders. </li></ul><ul><li>Find out what your FICO scores are – you are entitled to one free credit report per year </li></ul>
    16. 16. Good Credit Pays Off- Higher FICO score= less you pay for Credit <ul><li>$216,000 30-year, fixed-rate mortgage: </li></ul><ul><li>FICO score Int. rate Monthly payment </li></ul><ul><li>760 – 850 5.91% $1,282 </li></ul><ul><li>700 – 759 6.13% $1,313 </li></ul><ul><li>680 – 699 6.31% $1,338 </li></ul><ul><li>660 – 679 6.52% $1,368 </li></ul><ul><li>640 – 659 6.95% $1,430 </li></ul><ul><li>620 – 639 7.5% $1,510 </li></ul>
    17. 17. Saving – Pay yourself! <ul><li>SET SAVING GOALS! </li></ul><ul><li>Saving Accounts –– good for emergency fund </li></ul><ul><li>Certificate of Deposit (CD), Money Markets, Mutual Funds –longer-term saving vehicle. </li></ul><ul><li>Stock/bond market </li></ul><ul><li>Individual Retirement Accounts – IRA </li></ul><ul><ul><li>Simple IRA – pay tax when retire </li></ul></ul><ul><ul><li>Roth IRA - pay tax upfront – earnings interest free. </li></ul></ul><ul><li>401K - For-Profit company employer sponsored retirement plan </li></ul><ul><li>403B – Non-Profit organization employer sponsored retirement plan </li></ul>
    18. 18. Saving – How long to first Million? <ul><li>Factors: </li></ul><ul><li>Initial Deposit </li></ul><ul><li>Frequency of Deposits </li></ul><ul><li>Amount of Deposits </li></ul><ul><li>Interest Rate </li></ul><ul><li>Income Tax Rate </li></ul>
    19. 19. Saving – Start Early! <ul><li>Sally stares investing $1,000 a year at age 22, has children at 30 and stops investing. </li></ul><ul><li>Charles has fun for the first few years out of college and starts saving $1,000 a year at age 30 and ends at age 65. </li></ul><ul><li>Both earn 10% on their investments. </li></ul>$329,039 $388,865 Value at 65 $294,039 $380,865 Earned $35,000 $8,000 Saved Charles Sally
    20. 20. Saving – How long to first Million? How do Taxes Impact it? 23 yrs, 6 months 29 yrs, 10 months 32 yrs, 4 months 43 yrs, 5 months Number of Years $1,004,687 $1,003,819 $1,006,597 $1,004,831 Total Saved 0 972,300 0 334,010 Total Tax Paid 9% 9% 9% 9% Assumed Earnings rate 0% 28% 0% 28% Tax Rate 1,000 1.000 400 400 Deposit Monthly 5,000 5,000 5,000 5,000 Initial Deposit Tax Exempt Taxed Tax Exempt Taxed
    21. 21. Saving – Another Option - Reducing Interest Expense <ul><li>Credit card Balance = $3,000 – 18% Interest </li></ul><ul><li>Pay 2% minimum balance of $60.00 </li></ul><ul><li>Take 8 years to payoff </li></ul><ul><li>Total of $5,760 paid! </li></ul><ul><li>INSTEAD </li></ul><ul><li>Pay extra $50.00 = $110.00 a month </li></ul><ul><li>Payoff in 3 years </li></ul><ul><li>SAVE $1,800 in Interest! </li></ul>
    22. 22. Saving Tips – Retirement <ul><li>$1.00 a day in change – Invest in Roth IRA </li></ul><ul><ul><li>$30.00 a month </li></ul></ul><ul><ul><li>Rate of 10% annual return </li></ul></ul><ul><ul><li>30 years - $67,815 </li></ul></ul><ul><li>Reduce expenses – save difference </li></ul><ul><ul><li>$123.00 a month </li></ul></ul><ul><ul><li>Rate of 10% annual return </li></ul></ul><ul><ul><li>30 years - $278,040 </li></ul></ul><ul><li>!!!!!!!START SAVING EARLY!!!!!!! </li></ul>
    23. 23. Managing Student Loans <ul><li>When do I start to repay student loans? </li></ul><ul><ul><li>After you graduate, leave school, or drop below half-time. </li></ul></ul><ul><ul><li>Grace period </li></ul></ul><ul><ul><ul><li>Perkins – 9 months </li></ul></ul></ul><ul><ul><ul><li>Federal FFEL (Subsidized, Unsubsidized) – 6 months </li></ul></ul></ul><ul><ul><ul><li>Any leaves during education may count toward grace period unless you return to school before grace period is ended. </li></ul></ul></ul>
    24. 24. Managing Student Loans <ul><li>Who do I pay? </li></ul><ul><ul><ul><li>Perkins – repay school that made the loan or agency school hires for billing </li></ul></ul></ul><ul><ul><ul><li>Federal FFEL (Subsidized, Unsubsidized) – repay the lender who made the loan or a loan servicer </li></ul></ul></ul><ul><li>What is a deferment? </li></ul><ul><ul><li>Formal request process – pay until receive decision </li></ul></ul><ul><ul><li>Granted a deferment – you do not need to pay principal or interest. </li></ul></ul><ul><ul><li>Conditions: At least half time, study in approved graduate or rehabilitation training program for the disabled, unable to find full-time employment, economic hardship, engaged in services listed under discharge/cancellations conditions. </li></ul></ul>
    25. 25. Managing Student Loans <ul><li>What is consolidation? </li></ul><ul><ul><ul><li>Allows student to simplify the repayment process by combining several types of federal educational loans into one loan. </li></ul></ul></ul><ul><ul><ul><li>Provides the student the ability to have only one monthly payment. </li></ul></ul></ul><ul><ul><ul><li>Repayment can be from 10 to 30 years depending on amount of debt and repayment option you chose. </li></ul></ul></ul><ul><ul><ul><li>The longer the period – the more interest you pay. Consider this when making a decision to consolidate. </li></ul></ul></ul><ul><ul><ul><li>Caution when considering consolidating Perkins loans with other FFEL- you will lose some of the cancellations options available thru that program. </li></ul></ul></ul><ul><li>Who should I talk to if I have questions? </li></ul><ul><ul><li>Student Account Counselor for Perkins </li></ul></ul><ul><ul><li>Lender or service provider for FFELP </li></ul></ul>
    26. 26. Need a Car! ? Questions You Need to Answer. DO RESEARCH <ul><li>Buy or Lease? </li></ul><ul><li>New or Used? </li></ul><ul><li>Determine cars value – Kelly Blue Book website </li></ul><ul><li>Used – why sold, what is history, how many miles, what is condition ? Check Carfax using VIN number. </li></ul><ul><li>Dealer or Private Sale? </li></ul><ul><li>Financing </li></ul><ul><ul><li>What lender? </li></ul></ul><ul><ul><li>What terms? </li></ul></ul><ul><ul><li>What payment? </li></ul></ul>
    27. 27. Managing your Money and Your Future <ul><li>Budget </li></ul><ul><li>Save </li></ul><ul><li>Be aware of credit and potential problems </li></ul><ul><li>Know what impacts your credit </li></ul><ul><li>Be a responsible borrower – know your obligations and rights. </li></ul><ul><li>Make informed decisions – investigate using all resources: internet, experts, financial advisors, etc. </li></ul><ul><li>GIVE BACK TO CLARK – DONATIONS ARE TAX DEDUCTIBLE! </li></ul>

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