Common Sense for YourdollarsandcentsPresentation Transcript
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
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 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. - AynRand
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.