byf student book 4

Building Your Future:Succeeding

A Student and Teacher Resource for Financial Literacy Education

Copyright 2013, 2014The Actuarial Foundation

About This BookPersonal finance is part knowledge and part skill and the Building Your Future book series gives students a foundation in both. It addresses knowledge by covering the essential principles of banking in Book One, financing in Book Two, investing in Book Three, and succeeding in Book Four. The series also addresses the mathematical skills that students need to live a financially healthy life. Students will be able to see the real-world consequences of mastering their finances, which helps them understand the relevance of good mathematical skills. We hope you enjoy this Building Your Future book series.

The catalyst for this book series was based on an original book authored and donated to The Actuarial Foundation by an actuary, James A. Tilley, FSA, who was interested in financial literacy education in schools. We thank Mr. Tilley for his original works that inspired this Building Your Future series.

About The Actuarial FoundationThe Actuarial Foundation is a 501(c)(3) nonprofit organization. The mission of The Actuarial Foundation is to enhance math education and financial literacy through the talents and resources of actuaries. Through Advancing Student Achievement, a program that seeks to improve and enhance student math education in classrooms across the country, we are proud to add Building Your Future, a financial literacy education curriculum for teachers and students, to our library of math resources. Please visit the Foundations Web site at: www.actuarialfoundation.org for additional educational materials.

What is an Actuary? Actuaries are the leading professionals in finding ways to manage risk. It takes a combination of strong math and analytical skills, business knowledge and understanding of human behavior to design and manage programs that control risk. Actuary was included as one of the Best Careers of 2007 in US News and World Report. To learn more about the profession, go to: www.BeAnActuary.org.

Table of Contents

Chapter 1: Path to Employment

Career Planning Basics ..................................................................................................................................2 Investing in Career Education ....................................................................................................................4 Understanding Earning Potential .............................................................................................................5

Chapter 2: Paying for Post-secondary Education

Saving for College ....................................................................................................................................... 10 Scholarships .................................................................................................................................................. 10 Financial Aid Basics ..................................................................................................................................... 12 Grants and Work-Study ............................................................................................................................. 13 Loans ................................................................................................................................................................ 14

Chapter 3: Making a Living

Compensation Basics ................................................................................................................................. 20 Understanding Your Paycheck ................................................................................................................ 23 Costs of Changing Careers ....................................................................................................................... 25

Chapter 4: Making a Life

Wants vs. Needs ........................................................................................................................................... 29 Budget Basics ................................................................................................................................................ 30 Keeping It Balanced .................................................................................................................................... 34 Maintaining Good Credit .......................................................................................................................... 35 Building Your Credit History .................................................................................................................... 36 Identity Theft ................................................................................................................................................. 37

Chapter 5: Retirement

Retirement Basics ........................................................................................................................................ 39 Compounding Interest .............................................................................................................................. 40 Challenges of Saving for Retirement .................................................................................................... 41 Government Programs .............................................................................................................................. 42 Investing for Retirement ........................................................................................................................... 44

Some of the activities in this book reference specific Web pages. While active at the time of publication, it is possible that some of these Online Resource links may be renamed or removed by their hosts at some point in the future. Note that these links were provided simply as a convenience; a quick search should reveal some of the many other online resources that can be used to complete these activities. Facts and opinions contained are the sole responsibility of the organizations expressing them and should not be attributed to The Actuarial Foundation and/or its sponsor(s).

Building Your Future

Building Your Future, Book 4: Path to Employment 1

Chapter 1: Path to Employment

Key Terms:

Career path Bachelors degree

Earning potential Masters degree

Lifetime earnings Doctorate

Career aptitude Diploma

Skills Tuition

Employability Wages

Career clusters Hourly wage

Job shadowing Salary

Return on investment Tips

On-the-job training Commission

Apprenticeship Bonus

Internship Benefits

Associate degree

What Youll LearnKnowing your interests, strengths, skills and aptitudes can help you identify a number of different career options that you can consider as you move toward adulthood. In choosing a career, you should also be aware of the various types of education needed for different occupations and the cost of completing an educational program. Finally, when selecting the right profession and the path for achieving it, you should consider your return on investment how much you will gain from a certain career path if you invest in the required training.

Did You Know.

Unemployment and earnings are directly linked to educational attainment. In 2011 the average high school graduate earned $638 per week and had an unemployment rate of 9.4%, workers with associate degrees earned $768 per week and were unemployed at a rate of 6.8% and people with a 4-year degree earned $1053 weekly with an unemployment rate of only 4.9% according to the Bureau of Labor Statistics.


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Career Link

There is a bright employment outlook for those who want to work as Educational, Guidance, School and Vocational Counselors. The main focus of these occupations is to assist others with selecting a career through analyzing skills, interests and abilities and then finding the educational resources needed to prepare for the selected career. This line of work typically requires a Masters degree and has a median salary of over $54,000 annually.

2 Building Your Future, Book 4: Path to Employment

Career Planning BasicsChoosing a career path is one of the most important decisions people make. The occupation one chooses to pursue often determines earning potential and lifetime earnings, which affect everything from the type of housing and transportation a person can afford to the kinds of hobbies and interests they can pursue throughout their lives. Because ones career choice influences so many lifestyle factors, the path to employment is one that requires careful consideration and planning. Ultimately, you want to select an occupation that you will enjoy and that will provide you with the income necessary to support you throughout adulthood.

One of the first things to consider is career aptitude and skills. Identifying subject areas you enjoy in school, and in which you do well, is a good place to begin your career exploration. For example, if you are good at math and problem solving, then perhaps a career focused on numbers, such as actuarial science or accounting, would be worth considering. In addition, you must consider employability. Suppose you enjoy activities such as sports or acting. Building your career aspirations around these fields can be risky because jobs in these areas can be difficult to obtain and short-lived, and they require a high degree of skill in certain areas in order to succeed. Through studying career clusters, you can identify a number of potential occupations that utilize your career aptitudes and require varying levels of additional training and education.

First-hand experience is also a critical part of choosing your vocation. Arrange for job shadowing experiences that allow you to see in person what someone in a specific career field does on a daily basis. Use this activity as a means for interviewing people already working in the career field to tell you specifically about the pros and cons of the job and share their suggestions for the best path to follow if you are truly interested in working in that occupation.

career pathfrom a group of careers that share common features one

can select a path toward a specific job, knowing that with more education and

experience comes the ability to move up within the path

earning potentialthe amount of money a

person should be able to earn in his/her profession

lifetime earningsthe total amount of money

one can expect to be paid for work done in a specific career

field over the course of their working years

career aptitudean individuals innate ability,

suitability, readiness, disposition, capacity or

potential for being competent in a specific type of work

skillsthe ability to do something

with competence

employabilitya set of achievements, skills,

knowledge and personal attributes that make a person

likely to gain employment and be successful in their

chosen occupations

career clustersgroupings of occupations in

the same field of work that require similar skills

job shadowingaccompanying an

experienced worker on the job to learn the specific skills and

responsibilities associated with the successful

performance of a specific career


Try It!

Examples and Practice Visit O*Net Online at http://www.onetonline.org/find/career. There you

will find a list of 16 different Career Clusters. Browse a cluster that sounds interesting to you. Select the cluster and

click on Go. View the list of occupations. Pay special attention to those marked

with a Bright Outlook symbol as they represent jobs where there will be rapid growth, large numbers of openings or new and emerging fields.

Select one of the occupations from the list. Scroll through the entire entry and note the vast amount of information available about the occupation in terms of knowledge, skills, abilities and aptitudes.

In the Wages and Employment Trends section, select your state under State and National and click on Go. Observe the median salary, percentage of change and number of job openings in the nation compared with your state.

Create a spreadsheet that contains the columns shown at the bottom of this page, then populate with data.

As you construct the spreadsheet, think about the following: MedianWageDifference=MedianWageU.S.MedianWagein MyState

PercentageofJobGrowth(Decline)Difference=PercentageofJob Growth(Decline)U.S.PercentageofJobGrowth(Decline)My State

Howwouldyouexpresseachofthestatementsaboveasaformulaforthe spreadsheet?

Using the formulas, construct the spreadsheet and fill in the data for three different occupations that are of interest to you. They can be from any of the 16 career clusters. Basedonwhatyoulearnedaboutwagesinyourstate,wouldyoustillbe

interested in any or all of these careers? Why? Whydoyouthinkthereisadifferencebetweenthenationalmediansand

those of your state? Basedonwhatyoulearnedaboutthepercentageofjobgrowth/decline

for these careers both in your state and nationally, would you still be interested in any of them? Why?

A B C D E F G H

1

OccupationEducation Required

MedianWage,US

MedianWage,

MyState

MedianWage

Difference

%JobGrowth/

Decline,US

%JobGrowth/Decline, MyState

%JobGrowth/Decline, Difference


Investing in Career Education As you saw in the Did You Know fact, there is a direct connection between lifetime earnings and the amount of education you receive. However, since additional education after high school can be expensive, examining the return on investment for obtaining higher education or additional schooling is an important step to take in the career planning process. Seeing the possible earning potential you can gain from investing in education is an important step in navigating the path to employment.

Different jobs require different types of training. Sometimes this is on-the-job training or an apprenticeship or internship, where you work side-by-side with an industry expert to learn and practice what you need to know to master the required job skills and complete the work successfully. Some jobs that offer this type of training are found in fields like construction, auto service and manufacturing. The classroom and hands-on instruction that leads to these types of careers is often referred to as vocational education.

Other jobs require more specialized training, where one earns an associate, bachelors, masters or doctorate degree through completing a specific program of study at a college or university. When thinking about this type of training, keep in mind that completing high school and earning a diploma will be a requirement prior to starting one of these programs of study. Associate degree programs usually take two years and can be earned in a wide range of fields; they are typically awarded by community, junior or technical colleges. The completion of a certain number of credit hours in course work, passing necessary licensing exams and obtaining required licenses and permits will allow you to work once you have earned your degree. Remember, this training is paid for by the student in the form of tuition; it is an investment on your part.

The educational process is similar for bachelors, masters and doctorate degrees, although the number of credit hours and years of commitment vary. Bachelors degrees are designed to take four to five yearsor an additional two to three years after attaining an associates degree--to complete. Masters degrees usually take two to four years to complete and generally require a bachelors degree. A doctorate requires seven or more years of training beyond a bachelors degree, depending on the career that has been selected. The tuition for these types of programs is usually more because these degrees are awarded from colleges or universities, and these are often expensive.

When considering career training options, it is important to view education as an investment in your future. Consider that every type of employment has certain expenses associated with it. Sometimes it is the cost of a uniform or required equipment. Other times it is licensing or exam fees. Many times it is the cost of acquiring specific skills through getting education beyond what you receive in high school.

return on investmentmeasures what is gained from

an investment after subtracting the cost(s), usually

in money and/or time, of the investment

on-the-job traininghands-on training by an

experienced employee or trainer in the workplace to

teach an employee the specific skills needed for the position

apprenticeshipa combination of on-the-job

training and related instruction where workers

learn the practical and theoretical aspects of a highly

skilled occupation

internshipworking, usually for free or a

small wage, in your expected career field with supervision

from more experienced professionals as a means of

gaining the experience needed for an entry-level position

vocational educationtraining for a specific industry

or trade

associate degreea two-year academic degree

awarded by community colleges, junior colleges,

technical colleges and four year colleges and universities

after the completion of a course of study that typically

includes at least 60 credit hours

bachelors degreea four-year academic degree

awarded by a college or university after the completion

of a course of study that typically includes at least 120

credit hours

masters degreean advanced university degree

offeredinarangeofstudies,beyond a bachelors but not to

the doctorate level


Examples and Practice Create a spreadsheet like the one above that will help you evaluate the

return on investment for five different career choices. Note that not all career choices will have data that applies in all categories. Include the following information on your spreadsheet.

As you construct the spreadsheet, think about the following: TotalSalary=AnnualSalary+AnnualTips,Bonusesor

Commission LifetimeEarnings=TotalSalaryx40years TotalRawReturnonInvestment=LifetimeEarningsCostof

Education Howwouldyouexpresseachofthestatementsaboveasaformulaforthe

spreadsheet?

Using the formulas, construct the spreadsheet to calculate the data for the five career fields provided.

Lookingatthecareers,whichdoyouthinkhasthegreatestpotential return on investment? Explain why.

Thespreadsheetdoesnotaccountforthetimeinvestmentnecessaryto complete the training needed for some of the jobs. Taking into consideration the amount of education, potential lifetime earnings and the time investment needed for each job, which career would you select if you were making a decision today? Explain why.

Understanding Earning PotentialAs you look at occupational training options, there are several factors that come into play. First, you must consider your earnings. Many people focus only on the wages they receive. Depending on the type of job you have, you may earn an hourly wage or you may earn a salary. In addition, you could also have a job where some of your earnings come from tips, commissions or bonuses.

doctorate the highest level of a

universitydegreeofferedinarange of studies

diplomaa document issued by an

educational institution testifying that the recipient

has successfully completed a particular course of study

tuitionthe amount one must pay for

instruction

fair market price the price that a reasonable

investor would expect to pay for the bond

wagesmoney paid or received for

work or services completed, usually by the hour, day, or

week

hourly wagethe amount and employee is

paid by an employer for completing an hour of work

salarywages an employee receives

from the employer on a regular basis, usually weekly,

bi-weekly or monthly.

A B C D E F G H

1 FieldRequired

Education(Investment)

Cost of EducationInvestment

Annual Salary

Tips/Bonus/Commission

TotalSalary

LifetimeEarnings

(over40years)

TotalReturn onInvestment

2 Cashier None $0 $18,820 $0

3 Construction/Carpenter1 year as

apprentice $0 $40,010 $0

4 Licensed Practical NurseAssociates

degree $6,000 $41,150 $0

5 Actuary MBA $60,000 $91,060 $3,300

6 Lawyer Doctorate $195,000 $112,760 $4,500

Try It!


In addition to actual money paid to employees, there are many other benefits that employers often offer. These benefits can be everything from insurance and medical coverage to retirement plans, profit sharing and gym memberships; some may see job stability as a benefit as well. For many employees, these benefits are sometimes just as important as the salary being offered. Since medical and dental care is so expensive, employers who offer these options are often quite desirable.

Examples and Practice Create a spreadsheet that will help you evaluate the earning potential of various types of hourly wage careers. Include the columns shown at the bottom of this page. For the spreadsheet, assume that you have a 40 hour work week. Use the career data below to construct your spreadsheet.

Career 1: Cashier earning $7.25 per hour. You do not earn tips, a bonus or a commission. Career 2: Retail salesperson earning $10.10 per hour. You earn a commission of 5% of your hourly weekly wages if you meet your sales quota, which you do on a regular basis. Career 3: Barista earning $8.90 per hour. You earn an average of an additional $2.00 per hour in tips each week. Career4: Telemarketer earning $10.83 per hour. You earn a $25 bonus for each week that you sell 10 or more of your product. In an average week, you make 12 sales.

As you construct the spreadsheet, think about the following: TotalEarnings=HourlyWagexHoursWorked+WeeklyTips, Bonus or Commission

Howwouldyouexpressthestatementaboveasaformulaforthe spreadsheet?

Using the formulas, construct the spreadsheet to calculate the data for the five career fields provided.

Lookingatthecareers,whichdoyouthinkhasthegreatestearning potential? Howdoyouthinkvariablessuchastips,bonusesandcommissionsare affectedbyaweakeconomy?Astrongeconomy?

Try It!

tipsa sum of money one receives

from a customer in recognition of quality service

commissionmoney, in addition to regular

wages, that is paid for work done or products sold

bonusa sum of money given to an employee in addition to the

employees usual wages

benefitscompensation beyond a

salary or hourly wage such as insurance, paid vacation time,

retirement plan (such as 401K) or free parkingyield to

maturity the market rate of interest

on the bond

A B C D E F G

1 Career FieldHourly Wage

Hours Worked

Weekly Tips

Weekly Bonus

Weekly Commission

TotalEarnings


You are preparing to graduate from high school and need to determine your pathway to a successful career. Use what you have learned about career planning, earning potential, investing in continuing education and return on investment to explore three possible career paths. Use the PathwaytoSuccessWorksheet to complete your analysis of career path options.

Independent Practice

Building Your Future, Book 4: Paying for Postsecondary Education 9

Chapter 2: Paying for Postsecondary Education

Key Terms:

Total cost of attendance

Education IRA Work-study

529 account (ESA) Student loan

Tuition pre-payment Subsidized loan

Scholarship Unsubsidized loan

ACT Interest rate

SAT Grace period

Reserve Officers Training Corps Deferred payment

Financial aid Perkins loan

FAFSA Stafford loan

Estimated Family Contribution Parent Loan for Undergraduate Students

Grant Default

Pell Grant

What Youll LearnMany careers require additional instruction or training after high school. Some training takes weeks or months, other preparation takes years. Regardless of the duration of the training, it must be paid for. Knowing how to determine approximate post-secondary expenses, how to save for these expenses, and how to combine savings with financial aid, student loans, scholarships and work to finance your ongoing education can make post-secondary education more attainable.

Did You Know.

In 201011 the cost of undergraduate tuition, room, and board were estimated to be $13,600 at public institutions, $36,300 at private not-for-profit institutions, and $23,500 at private for-profit institutions? Between 200001 and 201011, prices for undergraduate tuition, room, and board at public institutions rose 42 percent, and prices at private not-for-profit institutions rose 31 percent.


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Career Link

Information on the role actuaries play in the financial aid process as student loan and aid applications are analyzed for approval and for the awarding of funds.

Supplemental Educational Opportunity Grant

10 Building Your Future, Book 4: Paying for Postsecondary Education

Post-secondary education can be a major expense and, like any major expense, there are different options for covering the cost. Some families may begin saving years in advance, building up a sizable account to meet their anticipated expenses. Some may look for additional sources of funding, such as scholarships, grants and work-study programs to reduce their out-of pocket costs. Some may borrow the money, assuming they will be able to pay the loan back out of their increased earnings. Most will ultimately pursue a mix of these options.

This chapter will offer information on each option available to you so you can begin planning now to cover the post-secondary expenses you expect to incur after high school. Remember to also look at other ways of increasing income such as working while attending college or reducing your expenses by living at home or buying used textbooks instead of new ones. Anything you can do to reduce your total cost and increase the funds you have available to pay those costs will help make college a more affordable proposition.

Saving for CollegeAs you learned in Chapter 1, the cost of obtaining education after high school can be quite high. When considering the total cost of attendance and the continued rising price of tuition and fees, covering the entire cost in advance through savings for education can seem impossible. There are, however, many ways that students and their families can finance future education. Preparing now to cover those future expenses is a smart move, and there are programs available that can help you leverage your education savings.

One option to consider is an educationIRA or a 529 account. These types of savings plans can be started when a child is born, with the funds available for withdrawal when the child is ready for college. These accounts build wealth over time, much like retirement savings accounts, and rely on compounded interest to grow the principle investment. There are also significant tax benefits associated with these plans. While contributions are not deductible, distributions used to pay for college can be withdrawn without any federal taxes. There may be tax benefits at the state level as well, depending on your location.

Another avenue to consider is tuition pre-payment programs. By purchasing tuition credits, parents can pay for college tuition while a child is still in pre-school. The advantage to this type of purchase is that one can avoid the annual 6-7% increase in tuition costs.

ScholarshipsStudents should also consider applying for scholarships. There are a wide range of scholarships awarded each year from all types of public and private groups. Some are based on academic performance in school along with scores on tests such as the ACT or SAT. Other scholarships are awarded based on involvement in certain activities, majoring in specific types of studies, financial

total cost of attendance

the price youd pay to attend college for a year including

tuition, room and board, books and fees

educationIRAan education savings plan thatofferstaxadvantages

529account(ESA)a higher education savings

plan where the funds can be withdrawn tax-free when they

are needed for educational purposes

tuition pre-paymentstate loan in which families

can purchase tuition credits at their present price and use the

credits in the future, when tuition costs will have most

likely increased

scholarshipan award of financial aid for a

student to further their education, often based on

merit such as academic achievement or athletic skill

ACTa standardized achievement

examination for college admissions

SATa standardized test for college

admissions in the United States


need and a range of other criteria. Many require that recipients maintain a certain level of academic performance while in college.

There are a number of websites dedicated to helping students locate and secure scholarships as well as assisting with completing scholarship applications including http://www.finaid.org/scholarships/ and http://studentaid.ed.gov/types/grants-scholarships/finding-scholarships. Since scholarships are awards that generally do not have to be repaid, applying for this free money is usually time well spent.

Students who may be interested in the military and also in obtaining a college education may consider exploring the ReserveOfficersTrainingCorps(ROTC) program. This program provides a career path into the military while paying a students college tuition. The training provided by this program does obligate students to serve as reservists for up to 8 years and can include deployment to active duty. To learn more about ROTC, visit http://www.todaysmilitary.com/before-serving-in-the-military/rotc-programs?campaign_id=SEM2012:on:google:ROTC-r_o_t_c:exact.

Another route to consider is enlistment in the armed forces. Completing successful military service offers the opportunity to obtain job training in many different areas while serving ones country. In addition, individuals who have served in the armed forces and completed their enlistment can access, additional educational program and opportunities through the Department of Veterans Affairs. These programs assist veterans with paying for many types of post-secondary education in return for their active military. To learn more about specific programs, visit http://www.gibill.va.gov/.

Reserve Officers TrainingCorps(ROTC)

a college-based program for training commissioned

officers of the U.S. armed forces by providing

competitive, merit-based scholarships for tuition in

return for an obligation of active military service after

graduation


Examples and Practice Create a spreadsheet that contains the columns shown above so you

can calculate the total cost of attendance.

As you construct the spreadsheet, think about the following: The school year is two semesters, or approximately 9 months long Tuition is generally calculated as a rate per credit hour. As a full-time

student, you will be expected to take 15 hours of weekly classes per semester (which is usually 5 courses per semester)

You need books for every class Student fees are assessed each semester Base your calculations on the data below. Monthly rent and utilities = $300 Monthly food and other living expenses = $150 Tuition is $275 per credit hour Books average $125 per course Student fees are $375 per semester

Howwouldyouexpresseachofthestatementsaboveasaformulaforthe spreadsheet?

Howdoesyourtotalcostforattendancecomparetothenationalaverages in the Did You Know factoid?

Dotheseexpensesseemreasonabletoyou?Whyorwhynot? Howcouldyoulowerthecostofattendingcollegewithoutsacrificingthe

number of classes you take or the quality of the education?

Financial Aid BasicsEven with savings and scholarships, most students will still need additional resources to complete their post-secondary education. This is typically referred to as financial aid. Understanding how to navigate the world of college financial aid can give students additional resources for financing their education. Once you are on the road to saving and are exploring scholarship opportunities, the next step will be to complete the FAFSA. FAFSA is the Free Application for Federal Student Aid, and completing this application is the only way to apply for federal student aid. This aid is awarded based on financial need, and financial information related to both the student and parents is considered when determining the level of need. This level of need is reported in a letter called a Student Aid Report. The report provides your Estimated

Try It!

financial aidgrant or scholarship, loan or paidemploymentofferedtohelp a student meet his/her

college expenses

FAFSAFree Application for Federal

Student Aid, a form that must be completed in order to

qualify for any type of governmental financial aid

for higher education

Estimated Family Contribution(EFC)

The amount of money that a students family is expected to contribute to college costs for

one year

A B C D E F

MonthlyRentandUtilities

MonthlyFoodandOtherLivingExpenses

Tuition Books FeesTotalCostofAttendance


FamilyContribution(EFC), and this data is used by schools to determine what aid the student qualifies to receive. Submitting the FAFSA by the required guidelines is critical to receiving financial aid, and all required data and due dates must be followed in order to receive aid.

Examples and Practice Visit the FAFSA website and review the student and parent information

required on the form (http://www.fafsa.ed.gov/fotw1213/pdf/ PdfFafsa12-13.pdf).

AsyoureviewedtheFAFSAapplication,whatquestionsdidyouhave about the information you were asked to provide?

Grants and Work-StudyAfter completing all of the required financial aid applications, you will receive an award letter. In it, you will learn what kinds of financial support can be offered to you by each school. If you are considering more than one institution, it is important to compare the offers before deciding which school to attend. Aid is awarded in three main categories: grants, loans and work-study. Understanding the financial responsibilities of each of these is important when selecting which awards are most appropriate. Some students will receive a grant as part of the aid package. Since this money does not have to be repaid, it is an excellent way to pay for college expenses. A PellGrant can be awarded for up to $5,550* (*2012-2013 limit), but awards vary depending on need, the cost of the school attended and whether or not a student attends full or part-time. A student can receive a Pell Grant for up to 12 semesters (6 years) worth of undergraduate study. This money is typically applied first to the cost of tuition and fees and then to room and board for students who live on campus. In the event that a student does not live on campus, any remaining funds can be issued to the student.

Completing the FAFSA and submitting it early can be especially beneficial for students with a high need for financial assistance. Each year, schools receive a set amount of funds to distribute as Supplemental Educational Opportunity Grants. These grants of $100 to $4,000 per year are awarded on a first-come, first-serve basis to the students with demonstrated need.

Work-study is another part of many students financial aid packages. Part-time jobs are provided for students at the school, at a public agency, or at a not-for-profit organization. Students are paid the federal minimum wage for the hours worked, and this money is paid directly to the student. These funds can be used to pay for college tuition or living expenses.

grantmonetary award given by the

federal, state or local government to an eligible

student for educational expenses and without the expectation of repayment

PellGrantmoney for post-secondary

education that does not have to be repaid and is awarded

to eligible students based on financial need

Supplemental Educational

OpportunityGrant(SEOG)

need-based grants awarded to low-income undergraduate

students to finance the costs of postsecondary education

work-studyprogram that provides

students with part-time jobs while in school in order to

subsidize the cost of education

Try It!


Examples and Practice On the opposite page, there is an example of a standardized award

letter that students may receive regarding the types of financial aid that is available. This can also be found online at http://collegecost. ed.gov/shopping_sheet.pdf.

Review the following sections of the letter to see the types of data that will be presented to you when the award offer arrives. Section 1: The total cost of attendance at the particular institution Section 2: Grants and scholarships that are being offered to you Section 3: The cost you will have to pay out of pocket to attend the

institution Section 4: Work options available to you (i.e. work-study) Section 5: Loan options you can consider including the type of loan

and recommended amount based on the total cost of attendance Section 6: Other Options include the Family Contribution as calculated

by the FAFSA along with various institutional payment plans, military and service benefits offered by the institution, private education loan options and Parent PLUS loan options

The far right column contains a graphic that notes data related to the institution including graduation and loan default rates, median borrowing and loan repayment information

LoansEven with grants and work study, there is often additional funding needed to cover college expenses. This is where student loans become part of the equation. Within an award letter, there are a number of different loan options that can be provided. Most student loans offer low interest rates, a grace period and deferred payment options for repaying the amount borrowed. This allows students to borrow money for education without worrying about paying it back while they are still in school. The most popular loans for students are the PerkinsLoan and the StaffordLoan. Perkins loans are awarded based on need with a limit of $5,500* (in 2012-2013) annually. The interest rate on these loans is 5%, and borrowers have 10 years to pay back is the amount borrowed. Stafford loans have a higher interest rate of 6.8% and require you to begin repayment 6 months after graduating or dropping below a half-time student. Borrowers generally have 10 years to repay this loan.

If financial need still remains after grants, work-study and loans have been awarded, a ParentLoanforUndergraduateStudents(PLUS)can be considered. At a rate of 7.9% interest, this is a more expensive college loan and it is taken by the students parents, making them liable for repayment of the funds. The maximum amount of this loan is equal to the total estimated cost of attendance minus all other financial aid that has been offered. Repayment of the loan is expected to begin when the funds are disbursed, but loan recipients can make deferred payments if requested and approved.

defaultfailure to meet a financial

obligation such as repaying a loan

student loanloanofferedtostudentswhich

is used to pay education-related expenses including

college tuition, room and board or textbooks

interest ratethe percentage you pay on the

money you have borrowed

grace periodtime in which a debt may be

paid without accruing further interest or penalty

deferred paymentloan arrangement in which

the borrower is allowed to start making payments at some specified time in the

future

PerkinsloanA need-based, low-interest loan available to students with exceptional financial

need

Staffordloanloan that is provided by a

lending institution but backed by the federal government to

assure repayment

ParentLoanforUndergraduateStudents(PLUS)

federal loans for parents of undergraduate students to

use to help pay for college or career school

Try It!


MM / DD / YYYYI

RSTY O

E FV I

T

N

H

U

E University of the United States (UUS)

U SN EI TT E D S TAStudent Name, Identifier

Costs in the 2013-14 year

Estimated Cost of Attendance $ X,XXX / yr

Tuition and fees ............................................................................................... $ X,XXX Housing and meals ......................................................................................... X,XXX Books and supplies ......................................................................................... X,XXX Transportation .................................................................................................. X,XXX Other educational costs ................................................................................. X,XXX

Grants and scholarships to pay for college

Total Grants and Scholarships (Gift Aid; no repayment needed) $ X,XXX / yr

Grants from your school ................................................................................. $ X,XXX Federal Pell Grant ........................................................................................... X,XXX Grants from your state ................................................................................... X,XXX Other scholarships you can use .................................................................... X,XXX

What will you pay for college

Net Costs $ X,XXX / yr(Cost of attendance minus total grants and scholarships)

Options to pay net costs

Work options

Work-Study (Federal, state, or institutional) .................................................... $ X,XXX

Loan options*

Federal Perkins Loans ........................................................................................ $ X,XXXFederal Direct Subsidized Loan ......................................................................... X,XXXFederal Direct Unsubsidized Loan ................................................................... X,XXX

*Recommended amounts shown here. You may be eligible for a different amount. Contact your financial aid office.

Other options

Family Contribution $ X,XXX / yr(As calculated by the institution using information reported on the FAFSA or to your institution.)

Payment plan offered by the institution Military and/or National Service benefits

Parent PLUS Loan Non-Federal private education loan

8%9.8%

This institution National

Percentage of borrowers entering repayment and defaulting on their loan

Loan Default Rate

Graduation RatePercentage of full-timestudents who graduatewithin 6 years

LOW MEDIUM HIGH

71%

Students at UUS typically borrow $X,XXX in Federal loans for their undergraduate study. The Federal loan payment over 10 years for this amount is approximately $X.XXX per month. Your borrowing may be different.

Median Borrowing

Repaying your loans

To learn about loan repayment choices and work out your Federal Loan monthly payment, go to: http://studentaid.ed.gov/repay-loans/understand/plans

For more information and next steps:

University of the United States (UUS)Financial Aid Office123 Main Street Anytown, ST 12345Telephone: (123) 456-7890E-mail: [email protected]

Customized information from UUS


subsidized loan a loan on which the

government pays the interest while the student is enrolled is a qualified college/university,

essentially erasing the interest that would have been added

to the loan during the time of study.

unsubsidized loan a college loan usually taken

by students who do not meet financial need standards and

still need to fund their postsecondary education.

These loans accrue interest while the student is in school

and can result in significantly higher debt because of the interest added to the loan

over time.

Examples and Practice Using the data below, evaluate various student loan scenarios.

Loan A: $5500 at 5% interest for 10 years. Howmuchinterestdidyou pay?

Loan B: $5500 at 6.8% interest for 10 years. Howmuchinterestdidyou pay?

Loan C: $5500 at 7.9% interest for 10 years. Howmuchinterestdidyou pay?

Howdoestheinterestrateeffecttheminimummonthlypayment?The total amount paid for the loan?

Try It!A B C D

1 Item Loan A Loan B Loan C

2 Loan balance $5,500.00 $5,500.00 $5,500.00

3 Adjusted loan balance $5,500.00 $5,500.00 $5,729.17

4 Loan interest rate 5.00% 6.80% 7.90%

5 Loan fees 0.00% 0.00% 4.00%

6 Loan term 10 years 10 years 10 years

7 Minimum payment $40.00 $50.00 $50.00

8 Total years in college 4 years 4 years 4 years

9 Average debt per year $1,375.00 $1,375.00 $1,375.00

10

11 Monthly loan payment $58.34 $63.29 $69.21

12 Number of payments 120 120 120

13

14 Cumulative payments $7,000.18 $7,595.52 $8,034.88

15 Total interest paid $1,500.18 $2,095.52 $2,804.88

A B C D E F G H I

1 School TotalCostofAttendancePellGrant

Work Study Scholarships

PerkinsLoan

AmountEFC Moneyfrom529 Account

Remaining ExpensestobePaid

2 A $15,000 $2,200 $4,800

3 B $12,500 $2,800 $3,200

4 C $17,750 $2,500 $5,000


Using some of the data from this lesson, you will analyze three different financial aid options for attending three different schools. Each school offers a comparable program of study. Based on your calculations and what you have learned about financial aid, you will need to select the option you believe would be best in terms of financing your education.

Non-variable data: You plan to attend college for 4 years. You have $10,000 saved for you in a 529 account Your familys total EFC is $2700, and your parents do not intend to take a PLUS.

AwardOfferData:(inadditiontothedataprovidedearlier) School A: in your home town, a $500 scholarship School B: 200 miles away, and offers no additional aid School C: across the country, a $1000 academic scholarship, and a $2200 Perkins loan

As you construct the spreadsheet (use the format shown at the bottom of the previous page), think about the following: What can you do to reduce expenses? What can you do to increase your income? Would you consider taking a loan for the remaining expenses? If so, what kind? Why? If not, why not? How do you plan to cover those expenses?

After calculating the total debt for the year, answer each of these questions.1. Considering only the total debt and the type of debt you would incur, which school provided you with the best financial aid package? Explain why.2. When you consider the amount of time you will need to spend working and your own academic skills and study habits, which financial aid package would provide you with the proper amount of study time. Explain why.3. Doesanyschoolofferyouanoptionthatwouldrequirenoadditionaloutofpocket expenses if you consider price, location and work-study options? If so, explain.4. If your family was unable to provide the EFC, would that change the financial aid package you would select? Explain why.


Building Your Future, Book 4: Making a Living 19

Chapter 3: Making a Living

Key Terms:

Compensation package Profit sharing

Exempt Income taxes

Non-exempt Gross pay

Base pay Withholding

Bonus Net pay

Commission FICA

Variable pay Dependent

Benefits W-4

Insurance W-2

Paid time off (PTO) Career change

Sick leave

What Youll LearnWhen searching for the right job, it is important to consider the entire compensation package offered by potential employers. By learning to understand various types of compensation and how to calculate the total value of that compensation, you can ensure you are getting the most from the job you choose.

Did You Know.

Employees do not take home every dollar they earn. A percentage of what you earn is taxed to pay for programs such as Social Security and Medicare. It amounts to approximately 7.65% of what you earn. In addition, income taxes are also automatically deducted from your wages as well, and can range from an additional 10-35% deduction.


?

Career Link

Pension actuaries use mathematical and critical thinking skill to analyze financial and mortality risks to help pension providers set rates and develop retirement policies that will ensurethattheemployercancontinuetoofferretiredemployeesbenefitsandpaychecksas long as they live. The average pension actuary earns $87,650 per year and must have a Bachelors degree and pass some exams to be credentialed in this profession.

20 Building Your Future, Book 4: Making a Living

Compensation BasicsOnce you have completed your post-secondary education or job training program, you will begin seeking employment. As you look at which jobs to apply for and consider various employment offers from employers, understanding the entire compensation package being offered and analyzing its value is an important part of the decision making process.

One of the first things to determine is whether or not the position is exempt or non-exempt in terms of the way wages are paid. If you are hired as an exempt employee, you will be expected to perform full-time job-related work for a set amount of money, regardless of whether or not you work overtime hours. Full-time employment is typically considered 40 hours per week, but many salaried workers provide employers with more hours than this sometimes many more. Non-exempt employees are paid on an hourly basis, and federal law requires that they be paid an overtime rate of 1 times the hourly rate for all time they work in excess of 40 hours each week. In these types of positions, the hourly wage can vary greatly depending on the duties and responsibilities of the job.

While hourly pay may seem to be the better option if one expects to work overtime, there are drawbacks as well. Exempt employees are often paid for days they are sick or on vacation, whereas non-exempt employees are usually only paid for the hours they actually work.

When looking at a job offer, it is important that you clearly understand exactly what your base pay rate will be. For salaried positions, this figure is typically provided as a monthly or annual salary amount. For hourly positions, this amount is provided as an hourly wage. The federal government sets standards for the minimum hourly wage that employers can pay employees, but many hourly positions pay above this minimum.

compensation package

all of the wages (salary, bonus, commission) and

benefits provided by an employer

exemptclassification of an employee

who is paid a salary rather than hourly wages and is not

eligible for overtime pay

non-exemptclassification of an employee

who is paid on an hourly basis and is entitled to overtime

pay generally at a rate of 1 times the hourly wage

base paythe basic rate of pay for a

particular job not including overtime, bonuses or

commissions


Examples and PracticeRead the two scenarios below and construct a spreadsheet that helps you answer the questions that follow. Job1:exempt position, base pay = $2,500/month, average work week

= 47 hours Job2:non-exempt position, base pay = $10.25/hour, average work

week = 47 hours

Create a spreadsheet that will calculate: What is the weekly pay for Job 1? (Whatformulawillyouenterforthis

calculation?) What is the hourly wage for Job 1 including overtime hours? (What

formulawillyouenterforthiscalculation?) What is the weekly pay for Job 2? (Whatformulawillyouenterforthis

calculation?)

Whichofthetwojobswouldyouratherhave?Why?

Besides base pay, another important part of the compensation package is whether or not additional earning opportunities are available. These are often presented to employees as a bonus or a commission. In both cases, this is money that is offered to the employee in addition to the base pay. Sometimes known as variable pay, the employee usually has to earn a bonus or commission based on achieving a pre-determined objective set by the employer. Typical objectives would be achieving a certain amount of sales, reducing expenses by a certain amount, boosting departmental productivity, and so on. Bonuses are typically paid as a flat sum whereas commissions are usually a percentage amount. Below are two examples of how a bonus or commission might be presented to an employee.

Job1:Your boss offers you monthly bonus of $200 if you obtain five new customers each month Job2:Your boss offers you a 3% commission for every dollars worth of product you sell.

Examples and PracticeCompare the two jobs by calculating: Assumeyoumeetthegoalofobtainingfivenewcustomerspermonthfor

10ofthe12monthsoftheyear.Howmuchwouldyouearninbonus money for the year?

Assumeyousellanaverageof$700worthofproducteachweek.How muchwouldyouearnincommissionforthemonth?Howmuchwould that equate to throughout the year?

Basedonyourcalculations,andassumingidenticalbasepay,whichof these is a better job? Why?

Try It!

Try It!

bonusa sum of money given to an

employee (usually one that is paid a salary) in addition to

the employees usual wages; usually based on business or employee performance, not

guaranteed

commissiona fee paid to an employee or

agent for providing a service, such as a sale

variable paycompensation that must be

earned (such as commission) each time in order to be paid

to the employee


In addition to actual money paid to employees, there are many other benefits that employers may offer. These benefits can be everything from insurance and medical coverage to pensions, profit sharing and gym memberships. For many employees, these benefits are sometimes just as important as the salary being offered. Since medical and dental care is so expensive, employers who offer these options as part of the compensation package are often quite desirable.

Insurance is the primary means that most employers use to assist employees with the cost of medical, dental, and vision care. Employers often pay part or all of an employees insurance premium as a benefit of employment. The employer will sometimes even cover part of the cost of insurance for employees family members. This means that through the employer, the employee can gain medical, dental, life, vision and/or disability insurance at a reduced cost or even at no cost. When considering a job, the amount of money an employer will pay for insurance premiums and the types of insurance offered should be carefully considered.

Examples and PracticeRead the two scenarios below and answer the questions that follow.

Job1:The employer will pay half of the monthly insurance premiums for your medical, dental and vision insurance. The total cost for these each month is $470. You get disability insurance at no cost and an amount of life insurance equal to one years salary at no cost.

Job2:The employer will pay 75% of the $500 monthly insurance premiums for your medical and dental insurance. You can purchase vision insurance for $5 per month. Your disability insurance costs $35 per month and the employer provides an amount of life insurance equal to the value of 1 times your salary at no cost.

Compare the two jobs by calculating: Forjob1,howmuchwouldyouhavetopayforyourhalfofthemedical,

dental and vision insurance and all the other benefits listed? Forjob2,howmuchwouldyouhavetopayforyourportionofthe

medical, dental and vision insurance and all the other benefits listed? Allotherthingsbeingequal,whichjobwouldyouratherhave?Why?

Another important factor to consider when reviewing a job offer is paid time off(PTO). Paid time off can be used for many things: vacation, attending to personal business, etc. Employers may offer paid time off as set holidays such as Thanksgiving or as vacation where employees are paid their usual pay for work even though they are not performing any work for the employer. Sick leave is also offered by many employers, so that if an employee is ill or temporarily disabled, days may be taken off from work. Some employers offer

benefitscompensation beyond a

salary or hourly wage, such as insurance, vacation time,

contribution to a retirement plan (such as 401(k)) or free

parking

insurancethe promise to compensate a person for a specific potential

future loss in exchange for a periodic payment ( e.g., life,

health)

paidtimeoff(PTO)time not worked by an

employee for which the regular rate, a fixed or a

prorated amount of pay, is accrued and paid to the

employee

sick leavepaidorunpaidtimeofffrom

work for an employee temporarily unable to perform

duties due to illness or disability

Try It!


full or partial payment for a certain number of sick days, while others allow employees to take sick days without pay.

Profitsharing is another popular benefit that some employers offer. By issuing stocks, bonds or cash, the employer shares some of the companys profits with employees. Most of the time, this is not a guaranteed benefit. The company must reach a certain profit level before profits are shared with employees.

Examples and PracticeLets look at how benefits like paid time off and sick leave can add to the value of a compensation package. Read the two scenarios below and answer the questions that follow.

Job 1: The employer offers you five paid holidays, 40 hours worth of paid time off and two days of paid sick leave each year. All other days missed from work are unpaid. Your hourly wage is $12.00

Job2:The employer offers you three paid holidays and 80 hours worth of paid time off to use as vacation or sick leave if needed. All other days missed from work are unpaid. Your hourly wage is $12.00

Compare the two jobs by calculating: Whatisthetotalvalueofyourpaidtimeofffortheyearforeachjob? Whichoftheseisthebetterfinancialoffer?Explainwhy.

Understanding Your PaycheckWhen an employer agrees to pay an employee a certain amount of money, that does not mean the employee will see that amount of money when the paycheck is issued. All U.S. workers pay incometaxes on their earnings. These are federal, state and sometimes local taxes that are deducted from the employees gross pay. The deduction of these taxes is usually referred to as withholding. After all deductions and taxes have been removed from the gross pay, the employee is left with net pay, which is the amount of money the employee actually receives to spend.

profit sharinga program in which the

employer shares some of its profits with employees

through stocks, bonds or cash

incometaxespercentage of your income,

including wages, salaries, commissions and bonuses

paid to the government each year

gross payregular pay, overtime pay, and other taxable earnings paid to

an employee during a pay period before any obligations,

such as taxes, are deducted

withholdingpart of an employees wages or salary that is withheld by

the employer as partial payment of the employees

income taxes

net payremaining amount of pay

after taxes, retirement contributions and other

deductions are made

Try It!


When it comes to withholding taxes, the amount of money withheld for income taxes varies from person to person, depending on earnings. FICA, an abbreviation representing the Federal Insurance Contributions Act, is paid by every employee to fund programs such as Social Security and Medicare. This amounts to 5.65% of the amount of money earned each pay period. In addition, the employer also pays FICA taxes for each employee. Employers also pay FUTA (Federal Unemployment Tax Act) taxes, which is used to fund state workforce agencies.

The number of dependents that the employee chooses when completing the W-4 form can determine the amount of taxes deducted from each paycheck. The W-4 form helps the employer figure out the amount of taxes to withhold. For example, if you are a single person with no dependents, then you will generally claim one allowance selected on the W-4 form. This means you will have a higher amount in taxes withheld from your paycheck than another person with the exact same job and salary who has a spouse and 3 children as dependents. That person can select 5 withholding allowances, thus reducing the amount of taxes withheld from each paycheck. View a sample of a W-4 form at http://www.irs.gov/pub/irs-pdf/fw4.pdf to see how the form is completed.

Examples and PracticeLook at the sample pay stub on the next page.

On the left you can see this is an hourly employee. She is paid 1 times her hourly rate for overtime. She also gets holiday pay and reimbursement for tuition as benefits. On the right you can see the federal withholdings along with state and local taxes. Look at the various benefits the employee gets. You can see these listed under the Other category on the right side. Study the four numbers at the bottom of the pay stub: Totals, Taxable Gross, Deduction Totals and Net Pay. You can see how the various withholdings and deductions impact the amount of pay the employee takes home for the week. Note that Y-T-D refers to the Year to Date summary of each item.

Howmanyhoursdidsheworklastweek,includingovertime? Whatbenefitsdoesthisemployergivetheemployee? Doesshepaytaxesonthetuitionreimbursement?Howcanyoutell? Whatotherdeductionsarenottaxableandmadebeforetaxesare calculated? Whatpercentageofthemoneyearnedwasactuallypaidtotheemployee? Howmuchdidtheemployeeputintothe401(k)?Howmuchdidshepay fordental,medical(HMO)andlifeinsurance? Usingthedatafromthecurrentpayperiodcolumn,approximatelyhow muchwillbewithheldforthisemployeesannualfederaltaxes?How much has been withheld as a percentage of wages?

Try It!

FICAstands for Federal Insurance Contributions Act, a federal

payroll tax paid by employers and employees to fund

government programs that provide benefits to retirees

dependentsomeone (such as a child

under 18) who relies on an adult for support

W-4a form that the employee fills

out to let the employer know his or her tax situation and

figure out the correct amount of tax to withhold from the

employees paycheck


At the end of the calendar year, when income taxes are due, employees get credit for all of the money they have had withheld from their paychecks. This is reported to the employee and the IRS on a form called a W-2. If too much tax has been withheld, then the employee will get a tax refund from the government. If not enough tax has been withheld, the employee will have to pay additional taxes to the government. By selecting the proper number of dependents and withholdings, employees increase their chances of paying the correct amount in taxes so that neither a refund nor a payment is due.

A sample W-2 form with an explanation of the information that will be included on the form can be found on page 26. Costs of Career ChangeDuring the course of a lifetime, many people make a career change. While this can be very fulfilling emotionally, it can be financially costly. When an employee moves from one profession to another, there are sometimes expenses incurred for additional education and training. Since the employee is new to the occupation, they may have to start at an entry level job as they begin climbing their new career ladder. This could be a cut in base pay, benefits, and paid time off.

WhatsIncludedonaPaycheckStub

Wages Deductions

Current Y-T-D Current Y-T-DDescription Hours Rate Amount Amount Description Amount Amount

Regular 40.00 10.00 400.00 400.00 Federal Withholdings 37.29 37.29Overtime 1.00 15.00 15.00 15.00 Social Security Tax 24.83 24.83Holiday 0.00 Medicare 5.81 5.81Tuition * 37.43 37.43 Tax 8.26 8.26 NY State 5.11 5.11 Income Tax 0.61 0.61 NYC Income Tax NY SUI/SDI Tax

Other 401(k) * 27.15 27.15 Life Insurance 2.00 2.00 Loan 30.00 30.00 Dental * 2.00 2.00 HMO * 20.00 20.00 Dep Care FSA * 30.00 30.00

Totals 452.43 452.43 DeductionTotals 193.06 193.06

TaxableGross 335.85 335.85

NETPAY 259.38 259.38

ABC Corp.450 Chamber StreetSomewhere, USA 00010

Employee Name: Mary SmithSocial Security #: 999-99-9999Period End Date: 01/07/13

W-2a form that the employer

sends to the employee and the IRS that reports the

employees annual wages and the amount of taxes withheld

during the year

career changemoving from one profession

to another


On the other hand, sometimes making a career change can have just the opposite effect. If the former occupation is one that required little post-secondary education and little room for advancement in terms of the income that could be earned, then the potential to increase earnings and benefits should certainly be considered. All of these factors need to be weighed and considered when making the decision whether to make a career change.

WhatsIncludedonaW-2Form

A = Total pay for the year, less certain deferrals like 401(k) plansB = Federal income tax withheld from your wagesC = Amount of your wages that are taxed for Social SecurityD = Social Security tax withheld from your wagesE = Amount of your wages that are taxed for MedicareF = Medicare tax withheld from your wagesG = Total amount of tips you reportedH = Amount deducted from your wages for dependent care like day careI = Any distributions you received from a nonqualified deferred compensation planJ = Additional taxes or deductions not otherwise covered on the formK = Wages that are eligible for state income tax withholdingL = State income tax withheld from your wagesM = Wages that are eligible for local income tax withholdingN = Local income tax withheld from your wagesO = Name or code of your local jurisdiction

a Employees social security numberOMB No. 1545-0008

This information is being furnished to the Internal Revenue Service. If you are required to file a tax return, a negligence penalty or other sanction may be imposed on you if this income is taxable and you fail to report it.

b Employer identification number (EIN)

c Employers name, address, and ZIP code

d Control number

e Employees first name and initial Last name Suff.

f Employees address and ZIP code

1 Wages, tips, other compensation 2 Federal income tax withheld

3 Social security wages 4 Social security tax withheld

5 Medicare wages and tips 6 Medicare tax withheld

7 Social security tips 8 Allocated tips

9 10 Dependent care benefits

11 Nonqualified plans 12a See instructions for box 12Co d e

12bCo d e

12cCo d e

12dCo d e

13 Statutory employee

Retirement plan

Third-party sick pay

14 Other

15 State Employers state ID number 16 State wages, tips, etc. 17 State income tax 18 Local wages, tips, etc. 19 Local income tax 20 Locality name

Form W-2 Wage and Tax Statement 2012Department of the TreasuryInternal Revenue Service

Safe, accurate FAST! Use

Copy CFor EMPLOYEES RECORDS (See Notice to Employee on the back of Copy B.)

E F

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Building Your Future, Book 4: Making a Life 27

You currently have a job you enjoy, but have been hoping to find opportunities to increase your income. After interviewing and doing some additional online training classes, you think youve found the right position. Use what you have learned about making a living to construct a spreadsheet(s) that will help you calculate the value of your current job and the value of the new position. Then you will explain which job will best meet your needs over time.

CurrentJob Non-exempt employee, $14.25 per hour Average 44 hour work week Paid up to 5% of weekly salary in commission for meeting sales goals Currently paid $80 per week for health and dental insurance benefits You have no vision, life or disability insurance offered through your employer Your paid time off is equal to 100 hours annually at your hourly wage Withholding taxes average $85 per week

JobOffer Exempt employee, $30,000 annual salary Average 48 hour work week Opportunity for a bonus of up to $150 monthly for meeting sales goals Would pay $300 per month for health, dental and vision insurance benefits Disability insurance and life insurance of 1 times your salary is provided by the

employer You have 5 paid holidays and two weeks (10 days) of paid time off for vacation,

illness, etc. Withholding taxes would average $320 per month Based on your calculations, address these questions.

Whatistheannualnetpayforyourcurrentjob? Whatwouldtheannualnetpaybeforthejobbeingoffered? Whichjobwouldrequireyoutoworkmorehours?Howmanymore? Atwhichjobcouldyouearnmorevariablepay?Howmuchmore? Whichjoboffersabettercompensationpackage?Explainwhy. Basedonyourcalculations,whichjobmakesbetterfinancialsense,yourcurrentjob

orthejoboffer?Explainwhy.


28 Building Your Future, Book 4: Making a Life


Chapter 4: Making a Life

Key Terms:

Need Credit report

Expense Credit rating

Want FICO score

Budget Installment loan

Late fees Identity theft

Credit history

What Youll LearnLiving within their means - spending no more than a family has available from their income can be a struggle for people. Understanding the difference between a want and a need, knowing where money is spent, how to budget so that expenses do not exceed income and establishing and maintaining a good credit rating are all essential life skills. By identifying wants and needs and creating a spreadsheet to track income and expenses, you can see how to live your life on a balanced budget and avoid debt. Finally, we will explore identity theft, including what can be done to minimize the chance of being a victim as well as what strategies to use if your identity is stolen.

Wants vs. NeedsEveryone has certain needs that must be met in order to survive, including essentials such as food, water and shelter. When looking at needs realistically, living in society necessitates other expenses that qualify as needs even though they are not truly essential to existence. Some could include clothing,

Did You Know.

The average American family spends 34% of the household budget on housing. Cars are the second most costly item at 17.6% of the budget, while food holds the third place position at 12.4%.


?

Career Link

We need to get specific information on the role that actuaries play in helping creditors assessrisk.BankLoanOfficershelpcreditorsassessriskandaretypicallyemployedbyareemployed by commercial banks, credit unions and mortgage companies. They are primarily responsible for evaluating, authorizing and recommended whether or not loan applications should be approved for individuals and businesses.

needbasic survival necessities

expensean expenditure of money; cost


access to health care and hygiene products, transportation and basic household utilities such as electricity. Needs also include obligations, such as paying off a loan. While you will still survive if you dont pay off your debts, the consequences would be very serious, so its best to consider these types of bills as essential.

In addition to our needs, we all have things we wantthings it would be nice to have but that we could live without. For example, while we need clothing, expensive designer clothing is not essential. Similarly, transportation can take many forms. We might be able to get by with a bicycle or used car rather than a brand new luxury car. We need food, but we want candy bars.

Heres a simple test. Next time you are tempted to make a purchase, ask yourself: Do I need this to live, or is this purchase just something that would be nice to have? Many times, you will find that you purchase something because you want it, not because you need it.

Does this mean that we should never purchase wants? Absolutely not! What it means is that we should develop a plan for using our money wisely so we live within our means and have the ability to purchase wants without acquiring debt. How can I do this, you ask? Its simple. Create a budget.

Budget BasicsA budget is an itemized list of income and expenses over a given period of time; it allows you to plan how you will spend your money and see how what you actually spent compares to your plan. When you are developing a plan for how you will earn, save and spend your money, it is important to keep in mind that you have a finite amount of cash to work with. Using a budget to carefully track income and expenses can help ensure that you live within your means, meaning you do not spend more money than you make. Most people create monthly budgets since many major expenses such as housing, transportation costs and utilities are paid on a monthly basis.

As you establish your budget, you must think about meeting your needs first. After all of the needs have been listed, then you can begin adding wants to your budget. Before you allocate all your remaining funds to the things you want, you should set aside some money as savings or investments so you will have a safety net to prepare for retirement, or if something happens to your income unexpectedly.

On the following pages (pages 32-33) you will find a household budget. You will notice the following: Expenses are divided up into categories and some of those expenses have

variable amounts. There are three columns for expenses: the budgeted amount, the actual

amount and the difference between the two. When an item is over budget,

wantsomething a person desires

that is not essential

budgetan itemized list of income and

expenses over a given period of time


it appears in ( ) to show the overage. If an item is under budget, it simply shows up as a dollar amount. If an item is exactly on budget, an amount of $0.00 appears in the difference column.

Since each category has a total budgeted amount, actual amount and amount of difference, it is easy to see if a category is on, over or under budget.

The bottom two lines of the budget show the total amount of budgeted and actual expenses along with the amount under or over the budgeted amount.

The Cash short/extra category is especially important. By planning a budget that allows for extra money each month, you can help to build the safety net mentioned previously.

Examples and PracticeStudy the budget on the previous page create a spreadsheet with two lists, one labeled needs and the other labeled wants. Sort the line items from the budget into the appropriate category and note the amount of money budgeted for each item. Then calculate the overall percentage of income each item equates to each month based on the $3,500 monthly income shown on the budget.

When creating your budget, think about the following. PercentageofIncome=AmountBudgetedIncomex100 How would you express the statements above as a formula for the spreadsheet?

Looking at the data on the spreadsheet, address each question Whatisthetotalpercentageofincomethatwillbespentonneeds? Whatpercentageofincomeremainstobespentonwants? Whatwouldcausethetotalpercentageofincomebetweenthetwo categories not to equal 100%? Supposeyouareinacaraccidentandneedtopaya$750insurance deductible to repair your car and another $1000 in medical bills from injuries you sustained in the accident. In addition, you miss 2 weeks of work because of your injuries, resulting in the loss of pay (about $1750) duringthattimesinceyoudonthaveanypaidtimeoffremainingforthe year. All totaled, this equals approximately $3500, which is a full months wages. Review the budget carefully and decide where you can realistically make the cuts necessary to pay for your car repairs and medical bills and make up for lost wages over the course of one year.

Try It!

A B C

1 NeedsBudgetItem Amount Budgeted %ofIncome

2

3 WantsBudgetItem Amount Budgeted %ofIncome


A B C D

1 HOUSEHOLDBUDGET Budgeted Actual Difference

2 INCOME

3 Monthly Wages 3,500.00 3,500.00 0.00

4 Incometotals 3,500.00 3,500.00 0.00

5 EXPENSES

6 Home and Daily Living

7 Mortgage/rent 725.00 725.00 0.00

8 Utilities (electricity, water, natural gas, 250.00 246.00 4.00

9 Cellular telephone 80.00 79.00 1.00

10 Groceries 240.00 186.00 54.00

11 Dining out 200.00 227.00 (27.00)

12 Cable television 110.00 106.00 4.00

13 Trash service 20.00 20.00 0.00

14 Home repairs 75.00 42.00 33.00

15 Home totals 1,700.00 1,631.00 69.00

16 Transportation

17 Car payment 250.00 250.00 0.00

18 Gas/fuel 170.00 200.00 (30.00)

19 Insurance 75.00 75.00 0.00

20 Repairs and maintenance 50.00 140.00 (90.00)

21 Parking 75.00 55.00 20.00

22 Public transportation 20.00 28.00 (8.00)

23 Transportationtotals 640.00 748.00 (108.00)

24 Entertainment

25 Video/DVD rentals 10.00 6.00 4.00

26 Movies/plays 25.00 20.00 5.00

27 Sporting events 50.00 85.00 (35.00)

28 Concerts/clubs 50.00 60.00 (10.00)

29 Other activities 50.00 35.00 15.00

30 Entertainment totals 185.00 206.00 (21.00)


A B C D

1 HOUSEHOLDBUDGET Budgeted Actual Difference

31 Health

32 Health club dues 25.00 25.00 0.00

33 Insurance 150.00 150.00 0.00

34 Prescriptions 10.00 10.00 0.00

35 Over-the-counter drugs 10.00 7.00 3.00

36 Co-payments/out-of-pocket 25.00 10.00 15.00

37 Life insurance 20.00 20.00 0.00

38 Health totals 240.00 222.00 18.00

39 Personal Care and Services

40 Clothing 75.00 85.00 (10.00)

41 Dry cleaning 20.00 12.00 8.00

42 Salon/barber 40.00 30.00 10.00

43 Personaltotals 135.00 127.00 8.00

44 Financial Obligations

45 Long-term savings 100.00 100.00 0.00

46 Retirement (401k, Roth IRA) 100.00 100.00 0.00

47 Credit card payments 150.00 150.00 0.00

48 Other debt 0.00 0.00 0.00

49 Financial obligation totals 350.00 350.00 0.00

50 Misc. Payments

51 Charitable donations 75.00 75.00 0.00

52 Gifts 50.00 75.00 (25.00)

53 Other 75.00 48.00 27.00

54 Misc.paymentstotals 200.00 198.00 2.00

55

56 Totalexpenses 3,450.00 3,482.00 (32.00)

57

58 Cashshort/extra 50.00 18.00 32.00

59


late feesan extra charge imposed

when your payment is received after the due date or

grace period

credit historyinformation about the

number and types of credit accounts, how long the

accounts have been open, the amounts owed on each

account , the amount of available credit being used,

whether bills are paid on time, the number of recent credit

inquiries and information about bankruptcies, liens,

judgments and collections

credit reporta report detailing an

individuals credit history, including timeliness of

payments related to bills, loans, credit accounts and

bankruptcies; used to determine creditworthiness

credit ratinga ranking typically expressed

as a number or letter, based on ones credit history and

used by financial institutions for loan and credit approval

as well as determination of loan or credit terms

Keeping It BalancedThe key to successful budgeting lies in making sure you do not spend more than you make. Sometimes unexpected expenses occur. Your car might break down or you might have an unexpected medical expense. If your budget is tight and you have not put money aside to cover these sorts of events, then it can be very easy to get off budget and incur unexpected and unwanted costs.

If you face unexpected costs like those from the Try It exercise above and dont have the savings to cover them and cannot cut your budget enough to pay all of the unexpected costs, one of two things will likely happen. You will either have to extend your payments on some items by making payments past the established due dates, or you will have to borrow money to cover the costs. Both options create undesirable consequences. Borrowing, such as using a credit card, to cover unexpected costs will force you to incur additional costs, namely the interest expense associated with the use of the credit card. However, being late on payments may be worse. Not only will you likely have additional costs in the form of late fees, the late payments may also have a negative impact on your credit history, credit report and credit rating and drastically increase your interest rate for credit card payments.

Most service providers and lenders allow customers a set amount of time to pay their bills. When you receive your billing notice, or statement, a due date or pay by date is typically visible on the bill. In addition, the bill will include an explanation of what fees will be incurred if the payment for the bill is late. Sometimes these fees are a set amount ($25.00 or more in some cases) while other times they are a percentage of the amount due. In either case, the end result of late bill payment is a higher cost to you.

Building Your Future, Book 4: Retirement 35

Examples and PracticeCreate a spreadsheet that includes the data from the chart in the following columns.

Now enter the data into your spreadsheet Bill 1 = $200 with a set late fee of $35.00 if not paid on time. Bill 2 = $200 with a 3% late fee if not paid on time.

TotalAmountPaid=BillingAmount+EITHERtheSetLateFeeOR thePercentageLateFee

PercentageLateFee=BillingAmountxPercentageLateFee Howwouldyouexpressthestatementsaboveasformulasforthe

spreadsheet?

Looking at the data on the spreadsheet, address each question Inthisscenario,whichfeeresultsinagreatercosttoyou? Ifyoupaidbothofthesebillslate,whatwouldbethetotalamountof

money you would pay in late fees for the month?

Maintaining Good CreditWeve seen how not budgeting and not paying bills on time can be costly in terms of dollars and cents, but another major factor to consider is the effect the late payments have on your credit worthiness. There are many times in life when your credit report will be reviewed and considered. For example, if you want to purchase a car or a home, potential lenders will want to view your credit report so they can see your credit history and your credit rating. This will help them determine several things including whether or not they will give you a loan, what interest rate they will charge, and other terms such as the amount of a down payment they want you to pay. All of these items factor in to the overall cost of the loan. The better your credit rating is, the easier it is to get a low interest rate for major purchases such as cars and homes.

In addition to loans, many service providers also consider your credit report before extending service. Some who commonly use your credit rating to determine customer service terms include cell phone providers, utility companies and cable television providers. If these companies see that you have a history of not paying your bills on time, your ability to get service can be affected.

The most common means used for evaluating creditworthiness is a FICOscore. The higher the score is (on a scale from 300 to 850), the better your credit is because it shows you have a history of paying your bills on time, that you do not have access to more credit than you can afford to pay and that you do not

Try It!A B C D

1 Billing Amt. Set Late Fee % Late Fee TotalAmt.Paid

FICOscorepayment history, current level

of indebtedness, types of credit used and length of

credit history, and new credit information are used to

determine creditworthiness and risk by assessing a

number between 300 and 850

36 Building Your Future, Book 4: Retirement

pose a great risk of failing to repay the money you borrow. Typically the guidelines for various credit ratings are as follows:

FICOScore Rating Below 560 Bad 560-659 Still not good 660-724 OK 725-759 Better 760 or Above Great

Examples and PracticeFollow the link below to see an example of a typical credit report and the information contained on the report.

http://www.aie.org/managing-your-money/credit-scores-and-reports/read-a-credit-report.cfm

Roll your mouse over each section to see and read about the kind of reporting that is done by creditors. This will allow you to see examples of what a potential lender might see if you applied for a car or home loan. If you apply for a revolving line of credit such as a credit card, this same information is considered.

Building Your Credit HistoryWhile you want to save for as many unexpected expenses and major purchases as possible, it is important that you also take steps to develop a positive credit history. A strong credit history is important

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