Introduction to Personal Financial Literacy

1. Introduction to Personal Financial Literacy

2. The Choices We Make • Life is all about the choices we make and how they will impact us in now and in the future • Focus: How do our choices about education, career, and income influence our future options?

3. Basic Principles of Economic Reasoning • 1. People make choices • 2. All choices involves costs • What kind of costs? • 3. People respond to incentives in predictable ways

4. Basic Principles of Economic Reasoning • 4. People create economic systems that influence choices and incentives • 5. People gain when they trade voluntarily • 6. People’s choices have consequences for the futures • What are some choices you might make now that will impact you in the future?

5. Be Cool, Stay in School • If school is so boring and so many people hate it, why do most high schoolers stick it out and graduate?

6. Be Cool, Stay in School • Name some future consequences of deciding to drop out vs. staying in school.

7. Income • Two Types: • Wages • What you get in exchange for work that you do • Sometimes earned as a salary • Rent (Payments Received) • Given in exchange for using property

8. Income • Who are some people that have very high wages? • Why would their incomes be so high?

9. Budgeting and Financial Planning

10. Budgets • Budget – a plan for how a person, family, or organization will raise and spend money • Why is it important for families to create a budget?

11. Fixed Costs • Fixed Costs – Charges/Costs that will be the same every month, no matter how often something is used • Examples: Rent/Mortgage payments, Car payments • What could be some other fixed costs?

12. Variable Costs • Variable Costs – Charges/costs that will change depending on how much of something is used • Examples: food, travel, entertainment • What could be some other variable costs for people? • While wants and needs can impact your budget, fixed and variable costs also impact your spending

13. Banks • There are many decisions you make with your money • One of those is where to keep or invest it • Most likely, your money will end up in a bank • Banks offer different account options for you to store your money

14. Types of Accounts • Cash – You can keep all of your money in Piggy Banks and Shoe Boxes!! Redman knows how to do it!

15. Checking Account • You can keep your money in a checking account at a bank. All banks don’t offer the same services • Possible Characteristics: Checks, debit cards, easy access to money, interest • Why would banks choose not to offer interest on checking accounts? Why would they?

16. Savings Accounts • A savings account can be opened even if you have no other kind of account • Many varieties of savings accounts • Characteristics: • Most can be accessed with a check or debit card • Some banks charge extra each time a customer withdraws money from their savings account • Most offer higher interest rates than on a checking account

17. Certificates of Deposits (CDs) • This is like a savings account, except that consumers agree not to withdraw any money for a set period of time, often 6 months or a year • Collect interest

18. Individual Retirement Accounts (IRAs) • Accounts that allow you to deposit money now that is being saved for retirement • Money is usually invested in the stock market in hopes that it will grow faster than at normal interest rates • Many IRAs allow depositors to save their income without being taxed for its growth over time

20. Credit Cards and Debt • Debt – Money you owe to creditors • People build debt by taking loans for homes, cars, education, starting a new business, etc… • People also build debt when making purchases with credit cards. • Buying on credit is like taking out a small loan

22. Applying for a credit card Costs: • Annual Percentage Rate (APR) • Grace period • Annual fees • Transaction fees • Balancing computation method for the finance charge Features: • Credit limit • How widely the card is accepted • What services and features are available

23. Calculating Finance Charges Average daily balance: You pay interest on the average balance owed during the billing cycle. The creditor figures the balance in your account on each day of the billing cycle, then adds together these amounts and divides by the number of days in the billing cycle. Adjusted balance: You pay interest on the opening balance after subtracting the payment or returns made during the month. Previous balance: You pay interest on the opening balance, regardless of payments made during the month. Past-due balance: No finance charge is added if the full payment is received within the grace period. If it is not received, a finance charge for the unpaid amount is added on to your next bill.

25. Comparing Credit Cards • Type of account • Annual fee • Grace period • Annual Percentage Rate (APR) • Credit limit • Minimum monthly payment • Finance charge calculation method • Late payment fee, other fees • Other features

26. How much can you afford? (The 20/10 Rule) never borrow more than 20% of your yearly net income • If your net income (money after taxes) is $400 a month, then your net income in one year is: 12 x $400 = $4,800 • Calculate 20% of your annual net income to find your safe debt load. $4,800 x 20% = $960 • So, you should never have more than $960 of debt outstanding. • Note: Housing debt (i.e., mortgage payments) should not be counted as part of the 20%, but other debt should. monthly payments shouldn’t exceed 10% of your monthly net income • If your take-home pay is $400 a month: $400 x 10% = $40 Your total monthly debt payments shouldn’t total more than $40 per month. • Note: Housing debt (i.e., mortgage payments) should not be counted as part of the 10%, but other debt should be included, such as car loans, student loans, and credit cards.

27. Debt • What are good ways to use credit? • What are bad ways to use credit?

28. Debt • Building debt is not always a bad thing • Most people will need to take out a loan of some kind during their lives • Banks are more willing to offer loans, or low interest rates, to people with a good credit history or credit score • You can build a good credit score by paying back your debts on time or early • Credit Cards only help your score if you pay back the money quickly • You can also build credit by having bills/utilities in your name and paying them every time on time

29. How do you build good credit? • Following are 10 tried and true tips for building credit: • 1. Set a budget and live within it.Credit should not be used to live beyond your means. • 2. Provide complete, accurate and consistent identification on your credit applications.This information helps set up your credit history correctly from the beginning, ensures that your new accounts will be matched to the correct report and minimizes the chance that your credit file will be incomplete. • 3. Pay your bills on time.Late payments, called delinquencies, negatively affect your ability to get credit since they indicate a stronger likelihood that you will make late payments again or will be unable to pay your debts in the future.

30. How do you build good credit? • 4. Have some credit, but not too much.Having no credit history is almost as bad as having a negative credit history, and you only need a few accounts reported to the credit reporting companies to demonstrate credit management. • 5. Have a mixture of credit types.It is good to have a history of repaying an installment loan, but a revolving account demonstrates more clearly that you can responsibly manage credit. • 6. Keep credit card balances low.Keeping your balances low compared with credit limits shows that you aren’t tempted to charge more than you can pay. By charging a small amount on at least one card and paying the balance on time, you will show that you can handle larger amounts of available credit.

31. How do you build good credit? • 7. Use caution when closing accounts.Closing an account isn’t always a good thing. It can result in an increase to your balance-to-limit ratio, making you appear to be an increased credit risk. • 8. Be aware of your debt-to-income ratio.Mortgage lenders consider your monthly payments compared with your monthly income. • 9. Demonstrate stability.In making credit decisions, some creditors consider your length of employment, length of residence, whether you own or rent and if you have any savings. • 10. Contact your lenders if you fall behind on your payments.Many lenders will work with you to set up a different payment schedule or interest rate.

32. Savings/Investing • What’s the difference between saving and investing? • What do you use savings for, usually? • How does that differ with what you might invest for? • How might the value of a dollar change?

33. Building Wealth • Many strategies you can use to make your money work for you • 1. Put money in savings accounts and CDs: The money will grow at a slow rate of interest, but its guaranteed to grow • 2. Buy U.S. Government Bonds and Treasury Bills – Similar to a CD, when you buy a US govt. bond, you can sell it back to the govt. years later at a much higher price

34. Building Wealth • 3. Buy a home: In most economic situations, house prices raise over time. When you buy a house, you should be able to sell it several years later for a lot more money

35. Building Wealth • 4. Invest in the Stock Market: When you buy shares of stock you are buying pieces of ownership in a corporation • Two ways to make $ from Stocks: • Dividends – get a piece of the company’s profits for owning some of the company • Capital Gains – Selling your shares of stock at a higher price than when you bought it • Which strategies are safe? Which are risky? Why do people take the risk?

36. Consumer Protection • Consumer Protection – protection by the government from business practices that are unfair, deceptive, or fraudulent • Why?: Products are complicated and consumers cannot know everything about them

37. Consumer Protection • The Federal Trade Commission (FTC) – is the main government agency that regulates businesses in order to protect consumers

38. Consumer Protection • The FTC’s Bureau of Consumer Protection assists consumers with: • Identity theft issues • Getting credit and loans • Equal opportunities in jobs and education • Business scams and more

39. Consumer Protection • Trade-offs for protection: • Businesses must spend money on research and testing – the price is passed onto consumers • Competition may be reduced – hard for new or small businesses to stay in business

40. Insurance The Necessary Evil – Betting Against Yourself

41. Risk Management • “In exchange for a relatively small payment, which is the premium, you’re protected against the chance of a big financial setback, a large loss” • Means you use various ways to deal with potential personal or financial losses

42. Insurance • Insurance – protection against large-scale financial loss • Premium – the payment you make to an insurance company in exchange for its promise of protection and help • Can be monthly, quarterly, semi-annually, or annually

43. Insurance • Deductible – the amount of the loss you must pay out of your pocket before the insurance company begins to reimburse you • Range from around $100 - $1,000 • Shop for the best rates!

44. Insurance Claim • Insurance Claim – a demand made by the insured person to have a payment made as determined by the policy • Ex: car repairs, medical bills, etc… • Types of Insurance: Auto, Medical, Homeowners, Renters, Life • Will – A legal document that tells how you want your estate to be distributed after your death