Common Sense for Your Dollars and Cents | SC Association of CPAs Financial Literacy Outreach Initiatives

What Is Financial Literacy?
Formal Definition: The ability to effectively evaluate and manage one’s finances in order to make prudent decisions toward reaching life’s goals.
More simply: Knowing what you need to know to achieve your financial goals, or common sense with your dollars and cents.
What we will cover:
Money and savings
Budgeting (AKA cash flow)
Debt/risk management
Taxes/basic financial concepts

America’s financial literacy
American families:
The average American family spends $1.22 for every dollar it earns.
One in five American families with annual household income of less than $50,000 is spending 40% of after-tax income to service its debt.
In 2003, the average American household owed over $8,000 in credit cards, compared to $2,600 in 1989.
In 2005, over 2 million Americans filed for bankruptcy – the highest amount in history.

America’s financial literacy
American families: (continued)
Only 26% of teens understand how card interest and fees work. (2007 Charles Schwab Teens & Money Survey)
The average college senior will graduate with $4,100 in credit card debt before they even have a job. (Sallie Mae’s 2009 National Study of Usage Rates and Trends)
Nearly 20% of bankruptcy filers are college students. (Sallie Mae’s 2009 National Study of Usage Rates and Trends)

Money and Savings
Time is money
Continuous education
Savings and the power of compounding interest
“Make all you can, save all you can, give all you can.”- John Wesley

Money and Savings
Time is money
How many hours do you need to work to pay for your rent/mortgage, car insurance, electricity bills, extras, etc?
Paid $10/hr
Rent is $200
Food is $100
Electric $50
If I make $10 hr then I will need to work 35 hours in order to pay out $350 that is due for that week.

Money and Savings
Continuing Education
Congratulations!
The other side of the time equation
More knowledge/skills = greater pay
You will either learn to manage money, or the lack of it will always manage you!
"All days are not same. Save for a rainy day. When you don't work, savings will work for you." - M.K. Soni

Money and Savings
The power of compounding interest
“Get Rich Quick” never works. You will lose your money. Saving faithfully over time will always build wealth – it just takes a little while (and patience)
The story of Ben and Arthur:
Both save $2,000 per year at 12%.
Ben starts at age 19 and stops at age 26, while Arthur starts at age 27 and stops at age 65.
At age 65, Ben has more than $2.2 million, while Arthur has only $1.5 million.

Savings and Investing –8 Simple Strategies
Start small
Contribute to your retirement plan
Save through payroll deduction plans
Round up your mortgage
Bank your raises
Keep paying off a loan
Pay off your credit cards
Keep track of where the money goes
"Money grows on the tree of patience." Proverb

Budgeting AKA Cash Flow Management
Budgeting
Prioritizing
“Life is like a coin you can spend it only once. Choosing one thing over all the rest throughout life is a difficult thing to do. This is especially true when the choices are so many and the possibilities are so close.” - Chuck Swindoll
You can only spend what you have if you want to reach your financial goals.

Creating a Budget
Your financial plan
Track income and expenses
Unique to you
Budget necessities/priorities first
Communication (with family, spouse, roommate or partner)
Today, there are three kinds of people: the have's, the have-not's, and the have-not-paid-for-what-they-have's. -Earl Wilson

Budgeting
Gross monthly income
Net income
Fixed expenses
Flexible expenses
Discretionary expenses
Total it up
Increase your savings
A nickel ain't worth a dime anymore. -Yogi Berra

Where Does Your Money Go?

Debt Management
Credit Cards
Pay Day Loans
Credit Reports

Know the Enemy
In 2003, 4 billion credit card offers were mailed
Capital One spends $280 million a year on credit cards offers
Citibank spends over $100 million a year on marketing to college students only
Debt Traps: Pay Day Loans, Title Loans, and Six month no interest credit card scams
It is an unfortunate human failing that a full pocketbook often groans more loudly than an empty stomach. -Franklin Delano Roosevelt

Steps to Getting Out of Debt
Stop using credit cards and other types of credit
Have a cash flow plan
Save $500 - $1000 for emergencies
Sell something to pay off a debt
Use money from a part-time job or overtime to payoff debt
Develop a plan to pay off your debt

Plan for Paying off Debt
List your debts starting with the smallest first
Make the minimum payments each month on each debt except for the smallest one
Pay more than the minimum on the smallest debt until it is paid off
Once the smallest debt is paid off, add that payment amount to the next debt on the list so that you are paying more than the minimum payment
Continue until all debts are paid off

Danger of Credit Cards – What You Don’t Know Can Hurt You
Be aware of teaser rates
Stick with one credit card
Pay in full every month
Stay within the limit
Review your statements
Report a lost or stolen card immediately
Protect personal information
Pay on time
Avoid cash advances
Protect your credit history
If you think nobody cares if you're alive, try missing a couple of car payments. -Earl Wilson

Pay Day Loans
A Pay Day Loan is a small advance, usually $300 - $500
The borrower gives the lender a postdated check or other authorization to repay the loan on payday
On payday, the borrower must repay the loan, plus pay a fee, but is also given the option to renew the loan
The borrower is led to believe that he is receiving more money and the new fees applied are not explained until the debt amount is unmanageable and the borrower is trapped
Pay Day lenders target low-income workers living paycheck to paycheck
91% of Pay Day loans are renewed 5 times or more
The average interest rate on a Pay Day loan is 400%

A Pay Day Loan Example
It’s a week before pay day. You take out a pay day loan for $300 and walk out with $250 cash
On pay day you go to payoff the loan. You are offered a renewal of the $300 loan
You renew the $300 and borrow another $150
You are charged another $50 fee and walk out with $100 cash
Next pay day, you don’t have $450 to repay the loan, so you renew without taking any money and owe another $50 fee
So now you have received $350 and owe $500
Next pay day comes, you don’t have $500, you renew and now owe $550
Living pay check to pay check, you are unable to repay the loan and are accruing $50 fees every pay day
Do you think a $150 fee on a $350 loan is a good deal?
Rule No. 1: Never lose money.
Rule No. 2: Never forget rule No. 1.- Warren Buffet

Pay Day Loan Alternatives
Many Credit Unions now offer an alternative to pay day loans
A $35 one-time fee is charged for a $500 line of credit.
An annual interest rate of 18% applies ($7.40 per month maximum interest charge)
For each withdrawal made, 5% is withheld in a restricted savings account until the restricted savings is enough to payoff the loan

A Pay Day Loan Alternative Example
It’s a week before pay day. You take out a pay day loan from the credit union for $300 and walk out with $250 cash and $15 deposited into your savings account. You are charged a $35 fee.
On pay day you go to payoff the loan. You are offered a renewal of the $300 loan.
You renew the $300 and borrow another $150.
You are not charged another fee and walk out with $143 cash and $8 deposited into your savings account.
Next pay day, you don’t have $450 to repay the loan, so you renew without taking any money and are not charged another fee.
So now you have received $393, have $23 in your savings account, and you owe $400.
Next pay day comes, you don’t have $400, you renew and now owe $403.
Living pay check to pay check, you are unable to repay the loan and are accruing $3 fees every pay day.
This loan is $110 less than a Pay Day Loan!

Credit Reports
You are eligible to receive one free credit report a year at www.annualcreditreport.com
There are other offers such as www.freecreditreport.com that charge a fee to get the same level of detailed information on your report, such as your score
It is important to check your credit report at least annually to protect yourself from identity theft or incorrect reporting
Incorrect reporting or bad credit could cause you to be denied a loan, to be required to provide more information to get a loan, or to be turned down for a job
Money talks; the secret is to hold it long enough to hear what is says.- W. G. P.

Credit Reports
Credit scores are usually between 300 – 900
The higher the score the better
Higher credit scores mean that you are able to save money by getting lower interest rates on mortgages and loans
A credit score above 720 is considered very good
A credit score above 650 is considered good
With a credit score between 620 and 650 you will probably need to provide more information to get a loan
A credit score below 620 means that you may have trouble qualifying for a loan

Risk Management
Is about building the walls around your financial plan so that you protect your assets and your money as you build wealth.
Emergency Fund
Insurance
Understanding and monitoring your credit score
Will and/or Estate Plan
Power of Attorney (Durable & Health Care)
Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver. - Ayn Rand

Risk Management
Insurance
Health insurance (If nothing else, high deductible plan)
Life insurance (If married & have kids)
Long-term disability insurance
Auto insurance
Home owners insurance
Identity theft protection

Taxes: RALs
RALs (Rapid Anticipation Loans)
Provide a check for tax payers with in 24 to 48 hrs.
However some portion of the checks are not available for 10 to 15 days.
Charges for RALs can range from ($250 -$500)
$25 Bank Fee
36% Interest
$110 to $160
Does not include the cost to cash the check for those who do not have a checking account.

Alternative Programs
VITA (Volunteer Income Tax Assistance Program)
LITCs (Low Income Taxpayer Clinics)
Focusing your life solely on making a buck shows a poverty of ambition. It asks too little of yourself. And it will leave you unfulfilled.- Barack Obama

VITA
Volunteer program provided by the IRS and SCDOR
The program is intended for anyone with income under $49,000 a year that is unable to prepare their own return.
Only basic returns; complicated returns, such as those with business are not eligible for this program.
Can receive money into a bank account in 10-15 days.

LITCs
Provided by non-profit organizations with partial funding from the IRS.
Represent low income taxpayers before the Internal Revenue Service and assist taxpayers in audits appeals and collections.
Also assist provide tax assistance for people who speak English as a second language.
Assistance is free or nominal cost.

Financial literacy education
Lifelong learning courses
Financial media
Internet resources
Your CPA
Can anybody remember when the times were not hard and money not scarce?
- Ralph Waldo Emerson

For more information
www.360financialliteracy.org features financial education to help consumers make more informed financial decisions through every stage of life.

Questions?

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Common Sense for Your Dollars and Cents | SC Association of CPAs Financial Literacy Outreach Initiatives

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Common Sense for Your Dollars and Cents | SC Association of CPAs Financial Literacy Outreach Initiatives — Presentation Transcript