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What Young Adults Need to Know About Money-03-16

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Class lecture presentation for college students

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What Young Adults Need to Know About Money-03-16

  1. 1. What Young Adults Need to Know About Money Barbara O’Neill, Ph.D., CFP® oneill@aesop.rutgers.edu Twitter: @moneytalk1
  2. 2. Financial Capability is an Important Life Skill • Dr. Ehrenfeld’s 2012 Executive Dean’s Distinguished Lecture: “Reinventing the University for the 21st Century • Key themes: – Natural resources are reaching critical limits. – The university must prepare its students to live this new and dangerous environment – Students need to learn to be more self-sufficient and less dependent on the global economy
  3. 3. More on Essential Life Skills • Dr. Ehrenfeld Lecture Summary/Video: http://discovery.rutgers.edu/events/2012/davidehr enfeld.html • Essential life skills include personal finance, growing food, basic cooking, basic home repairs, basic health care, computer trouble-shooting, clothing repairs, and bartering/labor exchange • SEBS Personal Finance class: http://rci.rutgers.edu/~boneill/
  4. 4. How Much Do You Know About Personal Finance? Take the FINRA National Financial Capability Study Knowledge Quiz: http://www.usfinancialcapability.org/quiz.php
  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. 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 :-(
  7. 7. 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
  8. 8. Jump$tart’s Twelve Principles of Personal Financial Literacy • Twelve principles for young adults to become financially successful – http://jumpstart.org/12-principles-calendars.html • Available as a calendar in PDF format: – http://jumpstart.org/assets/files/12%20Principle%20 Calendars/2012_J$_Calendar-time-CM.pdf
  9. 9. 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
  10. 10. 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
  11. 11. 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/
  12. 12. 3. Start Saving Young Source: TIAA-CREF; assumes an 8% average annual return Time + Money = Magic!
  13. 13. Source: NEFE High School Financial Planning Program
  14. 14. 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
  15. 15. 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
  16. 16. 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 It is important to shop around for credit
  17. 17. 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
  18. 18. What is the Worst Credit Card Trap of All? • Teaser rates? • Default rates (penalty APRs)? • Late fees? • Over-the-limit fees? • Minimum payments?
  19. 19. The High Cost of Minimum Payments Data derived from Credit Card Smarts calculator
  20. 20. 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
  21. 21. 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
  22. 22. 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
  23. 23. What are Your Spending Leaks?
  24. 24. 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)
  25. 25. The Rule of 72 Source: Garman/Forgue, PERSONAL FINANCE, Fifth Edition
  26. 26. 8. High Returns Equals High Risks Source: Garman/Forgue, PERSONAL FINANCE, Fifth Edition
  27. 27. Investment Risk Factors Source: Garman/Forgue, PERSONAL FINANCE, Fifth Edition
  28. 28. 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
  29. 29. 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”
  30. 30. 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
  31. 31. 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%)
  32. 32. 12. Stay Insured • Health insurance: “Age 26 law” (federal), NJ “Dependent Under 31” law, http://www.state.nj.us/dobi/division_consumers/du31.html • Also, COBRA, ACA exchanges: https://www.healthcare.gov • Life insurance (if dependents or co-signers) • Disability insurance • Renter’s and auto insurance with adequate liability limits (at least $300,000)
  33. 33. Closing Messages • You are a “Millionaire in the Making” • Time + Money = Magic! • Compound interest can be your best friend or your worst enemy
  34. 34. Financial Education Resources For College Students • Money Smart for Young Adults (FDIC): http://www.fdic.gov/consumers/consumer/moneysmart/young.html • NEFE Cash Course: http://www.cashcourse.org/ • Love Your Money: http://loveyourmoney.org/ • Money Skill: http://www.moneyskill.org/ • SEBS Personal Finance Course: http://rci.rutgers.edu/~boneill/ • Rutgers Cooperative Extension: http://njaes.rutgers.edu/money/
  35. 35. Questions? Comments? Experiences

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