How to be Money Smart:
Twelve Things You
Absolutely Need to Know
Barbara O’Neill, Ph.D., CFP®
Rutgers Cooperative Extensio...
Financial Capability is an
Important Life Skill
• Rutgers University School of Environmental and
Biological Sciences 2012 ...
How Much Do YOU Know
About Personal Finance?
Take the FINRA National Financial
Capability Study Knowledge Quiz:
http://www...
Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would
you have?
M...
National Financial Capability
Study Knowledge Quiz
Five financial literacy
quiz questions:
– Interest rate
question
– Infl...
Information Resource:
Jump$tart Coalition for
Personal Financial Literacy
• Washington DC-based non-profit
• Promotes fina...
Jump$tart’s Twelve Principles
of Personal Financial Literacy
• Twelve principles for young adults to
become financially su...
The Twelve Principles
• Know your take-home pay
• Pay yourself first
• Start saving young
• Compare interest rates
• Don’t...
1. Know Your Take-Home Pay
• Take-Home Pay = Net Pay = Disposable
Income
– Amount of income remaining after mandatory
dedu...
2. Pay Yourself First
• Treat savings as a household “expense”
• Give it the priority of a car loan payment
• Make savings...
3. Start Saving Young
Source: TIAA-CREF; assumes an 8% average annual return
Time + Money = Magic!
Source: NEFE High School Financial Planning Program
4. Compare Interest Rates
• Bankrate.com: http://www.bankrate.com/
• Consumer Action: http://www.consumer-action.org/
• Fe...
Rule of Three
Credit Card Comparison
• See Personal Finance class assignment
http://rci.rutgers.edu/~boneill/assignments/c...
Key Credit Terms
• Finance charge
– Total dollar amount you pay to use credit
– Includes interest costs and fees, such as ...
5. Don’t Borrow What You
Can’t Repay
Debt stinks! (http://www.itsahabit.com/musiccd.html)
– Ties up future income
– Preven...
What is the Worst Credit Card
Trap of All?
• Teaser rates?
• Default rates (penalty APRs)?
• Late fees?
• Annual fees?
• O...
The High Cost of Minimum
Payments
Data derived from Credit Card Smarts calculator
Warning Signs of Debt Problems
• Paying only the minimum balance each month
• Trouble even paying the minimum amount due
•...
Three Lessons About Credit
and Debt That Everyone
Absolutely Must Understand
• Borrowing obligates future income to suppor...
Wise Credit Management Quiz
http://njaes.rutgers.edu/money/wise-credit/
6. Budget Your Money
• Spending Plan Worksheet:
http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf
• Positive Cash Flo...
Seven Step Budgeting Process
1. Set financial goals and identify required savings
2. Estimate income from all sources
3. B...
What are Your Spending Leaks?
Embrace Frugality: Thrift Shops
Personal Experience: Four bags @ $5 = $20
40 usable items @ 50 cents (jackets, shoes, suit...
7. Money Doubles By
“The Rule of 72”
• Calculates the number of years it takes for principal to
double
– Number of Years =...
The Rule of 72
Source: Garman/Forgue, PERSONAL
FINANCE, Fifth Edition
8. High Returns Equals High
Risks
Source:
Garman/Forgue,
PERSONAL
FINANCE, Fifth
Edition
Investment Risk Factors
Source: Garman/Forgue, PERSONAL FINANCE, Fifth Edition
9. Don’t Expect Something
For Nothing
If it sounds too good to be
true, it probably is”
• Phishing scams
• “Pump and dump”...
10. Map Your Financial Future
• Be a “future-minded” planner
• Set SMART Goals:
http://njaes.rutgers.edu/money/pdfs/goalse...
11. Your Credit Past is Your
Credit Future
• People with low credit scores pay more to
borrow money
– FICO score range: 30...
Credit Scoring Factors
• Bill payment history, weighted to
emphasize past 12 months (35%)
• Proportion of outstanding debt...
12. Stay Insured
• Health insurance: “Age 26 law” (federal), NJ
“Dependent Under 31” law, and COBRA
– http://www.state.nj....
Key Messages
You are a “Millionaire in
the Making”
Time + Money = Magic!
The Two Sides of
Compound Interest
• When you invest,
compound interest
is your friend :-)
• When you pay
interest on cred...
Financial Education Resources
For Consumers
Young Adults
• NEFE Cash Course: http://www.cashcourse.org/
• Love Your Money:...
Financial Education Resources
for Financial Educators
• Building Your Future™ (The Acturarial Foundation):
http://www.actu...
Questions? Comments?
Experiences?
Happy Money
Smart Week!
NJCFE Webinar-How to be Money Smart-12 Things to Know-04-14
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Money Smart Week webinar slides that describe 12 Jump$tart Coalition personal finance principles

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NJCFE Webinar-How to be Money Smart-12 Things to Know-04-14

  1. 1. How to be Money Smart: Twelve Things You Absolutely Need to Know Barbara O’Neill, Ph.D., CFP® Rutgers Cooperative Extension oneill@aesop.rutgers.edu Twitter: @moneytalk1
  2. 2. Financial Capability is an Important Life Skill • Rutgers University School of Environmental and Biological Sciences 2012 Executive Dean’s Distinguished Lecture: “Reinventing the University for the 21st Century: http://www.dailytargum.com/calendar/lecture-reinventing-the-university-for- the-st-century/event_9441201e-486b-11e1-942b-0017a4a78c22.html and http://discovery.rutgers.edu/events/2012/davidehrenfeld.html • Key themes: – Natural resources are reaching critical limits – Students need to learn to be more self-sufficient and less dependent on the global economy – The university must prepare students to live this new and dangerous environment by teaching life skills – Personal finance is an important life skill
  3. 3. How Much Do YOU Know About Personal Finance? Take the FINRA National Financial Capability Study Knowledge Quiz: http://www.usfinancialcapability.org/quiz.php
  4. 4. Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have? More than $102 Exactly $102 Less than $102 Don’t know Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After 1 year, would the money in the account buy more than it does today, exactly the same, or less than today? More Same Less Don’t Know If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship? Rise Fall Stay the Same No Relationship Don’t Know True or False: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less. True False Don’t Know True or False: Buying a single company’s stock usually provides a safer return than a stock mutual fund. True False Don’t Know
  5. 5. National Financial Capability Study Knowledge Quiz Five financial literacy quiz questions: – Interest rate question – Inflation question – Bond price question – Mortgage question – Risk question Number of correct answers 2009 2012 None 7% 7% One 11% 12% Two 17% 19% Three 24% 23% Four 27% 25% Five 15% 14% Average number correct 2.99 2.88 http://www.usfinancialcapability.org/quiz.php
  6. 6. Information Resource: Jump$tart Coalition for Personal Financial Literacy • Washington DC-based non-profit • Promotes financial literacy for students from pre-K to college age • The NJ Coalition for Financial Education is a state affiliate of national Jump$tart
  7. 7. Jump$tart’s Twelve Principles of Personal Financial Literacy • Twelve principles for young adults to become financially successful – http://jumpstart.org/12-principles-calendars.html • Available as a calendar in PDF format
  8. 8. The Twelve Principles • Know your take-home pay • Pay yourself first • Start saving young • Compare interest rates • Don’t borrow what you can’t repay • Budget your money • Money doubles by “The Rule of 72” • High returns equals high risks • Don’t expect something for nothing • Map your financial future • Your credit past is your credit future • Stay insured
  9. 9. 1. Know Your Take-Home Pay • Take-Home Pay = Net Pay = Disposable Income – Amount of income remaining after mandatory deductions (e.g., taxes) and withholding • Discretionary Income – Money left after paying household expenses – Include savings for goals as an “expense” • Know these numbers before committing to large expenses
  10. 10. 2. Pay Yourself First • Treat savings as a household “expense” • Give it the priority of a car loan payment • Make savings automatic – Employer retirement savings plans – Mutual fund and DRIP stock automatic investment plans – Checking to savings transfers – Need more ideas? See http://www.americasaves.org/
  11. 11. 3. Start Saving Young Source: TIAA-CREF; assumes an 8% average annual return Time + Money = Magic!
  12. 12. Source: NEFE High School Financial Planning Program
  13. 13. 4. Compare Interest Rates • Bankrate.com: http://www.bankrate.com/ • Consumer Action: http://www.consumer-action.org/ • Federal Reserve: http://www.federalreserve.gov/creditcard/survey.html • CreditCards.com: http://www.creditcards.com/ • Other resources?
  14. 14. Rule of Three Credit Card Comparison • See Personal Finance class assignment http://rci.rutgers.edu/~boneill/assignments/creditcard.html • Key Criteria: – Annual fee – Late fee – Over-the-limit fee – Method for computing balance – Rewards for use – APR
  15. 15. Key Credit Terms • Finance charge – Total dollar amount you pay to use credit – Includes interest costs and fees, such as service charges or credit-related insurance premiums • Annual Percentage Rate (APR) – Percentage cost of credit on a yearly basis – Key to comparing costs when shopping for rates – “Apples to Apples” comparison required by law
  16. 16. 5. Don’t Borrow What You Can’t Repay Debt stinks! (http://www.itsahabit.com/musiccd.html) – Ties up future income – Prevents people from saving – Costs money (interest and fees) – Can lead to repossession, foreclosure, bankruptcy – Causes physical symptoms of stress
  17. 17. What is the Worst Credit Card Trap of All? • Teaser rates? • Default rates (penalty APRs)? • Late fees? • Annual fees? • Over-the-limit fees? • Minimum payments?
  18. 18. The High Cost of Minimum Payments Data derived from Credit Card Smarts calculator
  19. 19. Warning Signs of Debt Problems • Paying only the minimum balance each month • Trouble even paying the minimum amount due • Total balance increases every month • Missing loan payments or paying late • Using savings to pay for necessities • Getting second or third payment notices • Borrowing money to pay old debts • Exceeding the credit limits on your credit cards • Denied credit due to a bad credit report
  20. 20. Three Lessons About Credit and Debt That Everyone Absolutely Must Understand • Borrowing obligates future income to support today’s spending • Lower monthly payments usually mean that you pay more interest over the life of a loan • Your past debt payment history is your “financial reputation” and affects future credit (and other) opportunities
  21. 21. Wise Credit Management Quiz http://njaes.rutgers.edu/money/wise-credit/
  22. 22. 6. Budget Your Money • Spending Plan Worksheet: http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf • Positive Cash Flow: Income > Expenses – Increase income – Reduce expenses – Do both
  23. 23. Seven Step Budgeting Process 1. Set financial goals and identify required savings 2. Estimate income from all sources 3. Budget an emergency fund and goal savings 4. Budget fixed expenses (include 1/12 occasional expenses) 5. Budget variable expenses 6. Record spending amounts 7. Review spending and saving patterns  Review financial progress  Revise goals and budget allocations
  24. 24. What are Your Spending Leaks?
  25. 25. Embrace Frugality: Thrift Shops Personal Experience: Four bags @ $5 = $20 40 usable items @ 50 cents (jackets, shoes, suits, pants) 18 other items donated to Fire Department clothing box
  26. 26. 7. Money Doubles By “The Rule of 72” • Calculates the number of years it takes for principal to double – Number of Years = 72 divided by interest rate – Example: 72 ÷ 6% = 12 years • Calculates the interest rate it takes for principal to double – Interest rate = 72 divided by number of years – Example: 72 ÷ 10 = 7.2% http://www.moneychimp.com/features/rule72.htm (calculator)
  27. 27. The Rule of 72 Source: Garman/Forgue, PERSONAL FINANCE, Fifth Edition
  28. 28. 8. High Returns Equals High Risks Source: Garman/Forgue, PERSONAL FINANCE, Fifth Edition
  29. 29. Investment Risk Factors Source: Garman/Forgue, PERSONAL FINANCE, Fifth Edition
  30. 30. 9. Don’t Expect Something For Nothing If it sounds too good to be true, it probably is” • Phishing scams • “Pump and dump” scams • “Free lunch” seminars • “Guaranteed” returns > other investments • Exotic sounding deals • Exclusive, limited-time offers
  31. 31. 10. Map Your Financial Future • Be a “future-minded” planner • Set SMART Goals: http://njaes.rutgers.edu/money/pdfs/goalsettingworksheet.pdf – Short-Term: Under 3 years – Medium-Term: 3 to 10 years – Long-Term: 10 or more years • Match savings/investments to goals • “What you think about, you bring about”
  32. 32. 11. Your Credit Past is Your Credit Future • People with low credit scores pay more to borrow money – FICO score range: 300 (low) to 850 (high) • Negative information stays on your credit report for 7 years (bankruptcy- 10 years) • Credit scores are used in job hiring, car insurance premiums, apartment rentals
  33. 33. Credit Scoring Factors • Bill payment history, weighted to emphasize past 12 months (35%) • Proportion of outstanding debt to available credit limits (30%) • Length of credit history (15%) • Number of recent credit inquiries (10%) • Mix of types of credit used (10%)
  34. 34. 12. Stay Insured • Health insurance: “Age 26 law” (federal), NJ “Dependent Under 31” law, and COBRA – http://www.state.nj.us/dobi/division_consumers/du31.html • Life insurance (if dependents) • Disability insurance • Renter’s and Auto insurance with adequate liability limits; umbrella liability insurance
  35. 35. Key Messages You are a “Millionaire in the Making” Time + Money = Magic!
  36. 36. The Two Sides of Compound Interest • When you invest, compound interest is your friend :-) • When you pay interest on credit cards and loans, compound interest is your enemy :-(
  37. 37. Financial Education Resources For Consumers Young Adults • NEFE Cash Course: http://www.cashcourse.org/ • Love Your Money: http://loveyourmoney.org/ • Money Skill: http://www.moneyskill.org/ • Rutgers SEBS Personal Finance Course (Dr. O’Neill): http://rci.rutgers.edu/~boneill/ All Audiences • Rutgers Cooperative Extension: http://njaes.rutgers.edu/money/ • eXtension: http://www.extension.org/personal_finance • My Money.Gov: http://www.mymoney.gov
  38. 38. Financial Education Resources for Financial Educators • Building Your Future™ (The Acturarial Foundation): http://www.actuarialfoundation.org/programs/youth/getonthelist.shtml • Hard Core Financial Education Boot Camp (Rutgers Cooperative Extension and NJ Coalition for Financial Education): http://njaes.rutgers.edu/money/bootcamp/ • Learning, Earning, and Investing for a New Generation (CEE): http://www.hsfpp.org/ • Financial Fitness for Life (CEE): http://fffl.councilforeconed.org/ • Money Smart for Young Adults (FDIC): http://www.fdic.gov/consumers/consumer/moneysmart/young.html • NEFE High School Financial Planning Program®: http://www.hsfpp.org/
  39. 39. Questions? Comments? Experiences? Happy Money Smart Week!

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