managing your financial resources - mr. carlisle's class · 2018-09-01 · title loans...

Managing Your

Financial

Resources

What is Credit?

based on the trust that payment will be made in the future

Today’s Purchases Tomorrow’s Costs

The ability of a customer to obtain goods or services today

In exchange for an agreement to repay the debt plus interest later

Your credit is essentially your financial

reputation

It can determine the

resources, goods, and

services available to

you

https://www.youtube.com/watch?v=YzkBhfbwRkg

Credit Scores

• Most institutions will judge your credit based on your FICO Credit score

• The number representing how likely you are to repay your debts

How is my credit Score determined?

5 main components make up your credit score

Credit Score

Types of Credit Used

Payment History

Amount of Debt

Number of New Credit Accounts

Length of Credit

History

Credit Reporting

• Your financial behavior is tracked by 3 Credit Reporting Agencies who determine your credit score

– Experian

– Trans Union

– Equifax

• Every American has the right to one free credit report from each of these agencies per year

https://www.ftc.gov/faq/consumer-protection/get-my-free-credit-report

https://www.youtube.com/watch?v=6e7xvTfHoP8

What your credit score might be worth.

Mortgage rates, payments, and total interest

Sources of Credit

There are many sources

of credit including…

Private mortgage

companies

Banks/ Depository institutions

Automobile dealerships

Government

Credit card companies

Insurance agents

Pawn shops

What credit sources provide the most favorable terms?

An effective tool if managed responsibly

Create financial stress and negatively impact quality of life and financial well-being if not managed responsibly

Credit can be…

Managing Credit Responsibly Evaluate the Purpose

Ask Yourself

Does the loan/credit provide long-term benefits? Is the item a want or a need?

Investing in your human capital with an education loan

Purchasing a vehicle to get to and from

work with an automobile loan

Having a credit card to securely make online purchases

and for emergencies

Even if the loan provides long-term benefits, make sure the credit terms are still be favorable

Ask Yourself

• Is using money you already have in a saving or investment account a better option?

Ask Yourself

• Can you wait to purchase the item until you have enough money saved?

Managing Credit Responsibly Consider Your Options

No contract No interest or

fees

You are not spending your future income

Benefits:

Are the terms (such as interest rate) favorable?

Is the loan reasonable both in the present and in the future?

Are the terms consistent for the life of the loan?

Managing Credit Responsibly Evaluate the contract

A contract outlines how and when you will pay the money back

Credit Card Research Terms • Finance Charges- the cost of using credit (usually an interest rate)

• APR- Annual Percentage Rate, how much you can expect to pay per year

in interest on your principal balance

• Annual Fees- Cost per year of keeping a credit account open

• Cash Advance- Obtaining cash using a credit account, often through an ATM

• Balance Transfer- Using a credit account to pay off the remaining balance of another credit account

• Grace Period- The amount of time you have after the due date to make payments before fees and penalties are assessed

Amount you borrow

Total amount should be less than 20% of annual net

income

Monthly payment should be less than

10% of monthly net income

Rules to use when borrowing

Housing payments are the exception to the 10% rule

What it is…

Loan which the borrower must repay the amount in a specified number of equal payments

Features…

Contract outlining repayment terms

Usually a Fixed Rate

Examples…

Mortgage

Automobile loan

Personal loan

Student loan

Installment Credit

$313.36

$313.36

$313.36

$313.36

$313.36

$313.36

Example installment credit

Toby applied for a $10,000 automobile loan at 8%. He signs a contract with the lender to pay $313.36 per month for 36 months

to repay the loan.

Toby could pay more than $313.36 per month to pay off the loan earlier, but he must pay at least $313.36 per month.

What it is…

A line of credit established in advance

Features…

Loan may be paid (usually monthly) in a single payment or series of unequal payments

Example…

Credit card

Revolving Credit

$20

$30

$20

$40

$50

$30

Example Revolving credit

Whitney charged $200 to her credit card with a 13% interest rate. She receives her credit card bill with a $20 minimum payment.

Whitney has many options for paying back the $200 as long as she makes the minimum payment.

$200

$0

$0

$0

$0

$0

$34.61

$34.61

$34.61

$34.61

$34.61

$34.61

May combine elements of

installment and revolving credit

Usually has higher interest rates and

fees

Examples:

Payday lending Title loans

Alternative credit

Since there is no legal limit to the amount these creditors can charge they are often viewed as predatory lenders meaning they lend to

the desperate and uneducated in order to earn huge returns

The loan…

• Total loan: $350

• Lender fees: $60 upon payment

On the agreed upon date (usually payday)…

• Lender seeks their fees

• By depositing the check or withdrawing the money

If the borrower does not have money in their account…

•Accumulate fees and possible legal action •Or, pay $60 fee again to keep the existing loan outstanding or take out a new loan

Types of Alternative Credit Payday Loan

Short-term loan that provides immediate cash by securing a borrower’s written check or automatic withdrawal form

Directions

• After each roll, record: – Number rolled

– Payday loan activity

– Cost

• Calculate the total cost of the loan

Discussion Questions

• What was the minimum amount Mario could have paid?

• What was the maximum?

Alternative Lending Hazard

Mario needs $300 to pay his car payment. He uses a payday lender.

Consumer Rights you have protection from abusive business practices!

• The Truth in Lending Act - 1968

– Part of the Consumer Protection Act

– Applies to all credit transactions

• Mortgages, credit cards, loans, etc.

• Requires clear disclosure of key terms and all

costs in lending agreements

The Truth in Lending Act

Three basic rules for lenders:

1. Lenders cannot advertise a good deal which is not available to all consumers

2. Advertisements must include all or none of the terms

3. If more than 4 installments are required to pay for the good or service, the agreement must say “The cost of credit is included in the price quoted for goods and services”

Lenders must disclose to consumers: • Interest rate expressed as the APR • Any other finance charges

Allows consumers to easily compare credit offers

Ponzi Schemes • Fraudulent investing scam promising high rates of

return for little risk

• Supposed to get you rich quick

• Also called a pyramid scheme since people at the top make money by gaining new investors at the bottom

According to the Federal Trade Commission (FTC):

Identity Theft

IDENTITY THEFT occurs when someone wrongfully acquires and uses a consumer’s personal identification, credit, or account

information

The FTC is a government agency that focuses on consumer protection

https://www.youtube.com/watch?v=PGplT4lYIe4

• Average identity theft victims during 2012 reported personal expenses of more than $1500

• Victims also reported that it took 3 or more months to resolve the problems associated with identity theft after they discovered that their information was being misused

Identity Theft

Victims may have to spend time and money trying to fix the problems

that are caused by thieves

Personal Information

Name

Address & Telephone Number

Social Security Number

Driver’s License Number

Birth Date

Credit Card

Number

Bank Account Number

Identity thieves try to obtain personal

information from victims in order to

steal their identities. Personal

Information

• Thieves obtain personal information through a variety of methods: – Stealing - Information is taken from a purse or wallet, personnel records from a

workplace, tax information, bank or credit card statements, or pre-approved credit card offers from the mail.

– Diverting Mail - Thieves can complete a change of address form and have the victim’s bills and statements mailed to a different location.

– “Dumpster Diving” - Personal information is discarded and thieves remove it from the trash.

– Skimming - Thieves attach a device to card processors to steal credit and debit card information

– Phishing - Thieves use a form of electronic communication (usually email) to pretend to be a company or depository institution in order to get the victim to give up their personal information.

– Pretexting - Thieves use false pretenses to obtain your personal information from financial institutions, telephone companies, and other sources.

– Spyware - Software installed on the victim’s computer, without their knowledge or consent, that monitors internet use, sends pop up ads, re-directs the computer to other sites, and tracks key strokes.

– Hacking - Information is stolen by breaking into a computer system.

How Do They Do It?

How to protect yourself • Keep documents with personal info in a safe place (ie: don’t

carry your social security card memorize the number instead)

• Do not give out account numbers unless making a purchase YOU initiated

• Be careful about giving personal information over the phone/internet (look for security lock on web addresses)

• Keep computer passwords, pin numbers to yourself and use passwords and pin that are not easily guessed

• Avoid giving out personal information on social media that can be publicly viewed

What is a Spending Plan?

Spending Plan for: Time Period:

Planned Amount

Actual Amount

Income Earned Income

Wages or salary before deductions

Unearned Income Money from savings and investments to help pay expenses during this time period

Received Income from Government Programs Total Income $ $

Expenses Deductions Often Taken from Paychecks

Contributions to retirement programs (401k,

403b, pension, IRA)

Federal income tax and state income tax

Social Security and Medicare

Saving and Investing (Pay Yourself First) Contribution to savings and investments Insurance Premiums

Health, automobile, home or renters, life

Housing Costs Transportation Costs Food Costs Family Member Care Communication and Computers

Telephone landline, cell phone, Internet,

cable/satellite television

Medical Costs Not Covered by Insurance Clothing and Personal Care Educational Expenses Pet Care Entertainment Gifts and Charitable Contributions Credit Costs

Student loan, credit card, other loan payments

Total Expenses $ $ Net Gain or Net Loss (Income less Expenses) $ $

An income and expense statement sometimes referred to as a budget which records both planned and actual income and expenses over a period of time

A budget

Why is a Spending Plan an important

part of financial

planning?

Analyze the opportunity costs of your trade-offs

to maximize financial well-

being

Helps set and reach goals

Help manage your money in a positive manner

Increase net worth

Spending Plan Development Process

Step 1 - Track Current Income and

Expense

Step 2 - Personalize Your Spending Plan

Step 3 - Allocate

Money to Each Category

Step 4 - Implement and

Control

Step 5 - Evaluate and Make

Adjustments

Develop the spending plan

Maintain the spending plan

Track Current Income and Expenses

Completed by developing an Income

and Expense Statement

Or Spending Journal

Step 1 - Track Current Income and

Expense

Step 2 - Personalize Your Spending Plan

Step 3 - Allocate

Money to Each Category

Step 4 - Implement and

Control

Step 5 - Evaluate and Make

Adjustments

Ensures spending plan is realistic

Personalize Your Spending Plan Step 1 - Track

Current Income and Expense

Step 2 - Personalize Your

Spending Plan

Step 3 - Allocate

Money to Each Category

Step 4 - Implement and

Control

Step 5 - Evaluate and Make

Adjustments

How will you develop a

spending plan?

What is the intended time period for your

spending plan?

What categories will your spending

plan include?

Any written method

that works for you

How would you develop a spending

plan

Paper and pencil

Spreadsheet

Money management computer software

Applications

What is the intended time period for your spending plan?

What categories will your spending plan include?

• Usually concurrent with pay period or monthly

• Reference tracking from the Income and Expense Statement

• Do any categories need added, changed, or removed?

Allocate Money to Each Category

Look at your spending habits

from step 1

Determine what changes to make

Step 1 - Track Current Income and

Expense

Step 2 - Personalize Your Spending Plan

Step 3 - Allocate

Money to Each Category

Step 4 - Implement and

Control

Step 5 - Evaluate and Make

Adjustments

When allocating money consider:

Fixed or Contractual Variable Non-Contract

Trade-offs and opportunity

costs Goals

Expenses

Required to pay expense for a specific amount of time - not easy to reduce or eliminate

Easy to reduce or eliminate

Rent, Internet, Cell phone Food, entertainment

Budgets should also consider potential periodic expenses or expenses which occur irregularly throughout the year like car registration

Spending Plan Guide

10%

7%

30%

15%

15%

18%

Saving and Investing 10%

Insurance 7%

Housing 30%

Transportation 15%

Food 15%

Other Living Expenses 18%

Discretionary Spending 5%

5%

What variables may cause these percentages to be different?

Net Gain or Net Loss?

Income Expenses Net Gain

or Net Loss

Net Gain? Net Loss?

• Add more money to savings or another expense

• Increase income

• Decrease expenses

• Both

Charitable Giving donating your time, money, and other resources for the benefit of others

• In some cases giving your financial resources to others can be a benefit to you.

– Donations are tax deductible

– Giving can keep you involved and informed about issues of social injustice

– May improve you physical, social, or mental well-being

– Could provide opportunities to network and show leadership capabilities

• Be careful about where your donations go.

• Not all charities are what they appear to be.

Implement and Control

Make your planned spending decisions

Step 1 - Track Current Income and

Expense

Step 2 - Personalize Your Spending Plan

Step 3 - Allocate

Money to Each Category

Step 4 - Implement and

Control

Step 5 - Evaluate and Make

Adjustments

Use a control system to stay on track

Control Systems

Money management computer software

Which control system would

help you stick to your spending

plan? Internet-based spending plan program

Depository institution programs

Check register system

Envelope system

Evaluate and Make Adjustments

How well did your spending plan

work?

Step 1 - Track Current Income and

Expense

Step 2 - Personalize Your Spending Plan

Step 3 - Allocate

Money to Each Category

Step 4 - Implement and

Control

Step 5 - Evaluate and Make

Adjustments

Is your spending plan helping you

reach goals?

Do you need to make any

adjustments?