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Managing Your
Financial
Resources
What is Credit?
based on the trust that payment will be made in the future
Today’s Purchases Tomorrow’s Costs
The ability of a customer to obtain goods or services today
In exchange for an agreement to repay the debt plus interest later
Your credit is essentially your financial
reputation
It can determine the
resources, goods, and
services available to
you
https://www.youtube.com/watch?v=YzkBhfbwRkg
Credit Scores
• Most institutions will judge your credit based on your FICO Credit score
• The number representing how likely you are to repay your debts
How is my credit Score determined?
5 main components make up your credit score
Credit Score
Types of Credit Used
Payment History
Amount of Debt
Number of New Credit Accounts
Length of Credit
History
Credit Reporting
• Your financial behavior is tracked by 3 Credit Reporting Agencies who determine your credit score
– Experian
– Trans Union
– Equifax
• Every American has the right to one free credit report from each of these agencies per year
https://www.ftc.gov/faq/consumer-protection/get-my-free-credit-report
https://www.youtube.com/watch?v=6e7xvTfHoP8
What your credit score might be worth.
Mortgage rates, payments, and total interest
Sources of Credit
There are many sources
of credit including…
Private mortgage
companies
Banks/ Depository institutions
Automobile dealerships
Government
Credit card companies
Insurance agents
Pawn shops
What credit sources provide the most favorable terms?
An effective tool if managed responsibly
Create financial stress and negatively impact quality of life and financial well-being if not managed responsibly
Credit can be…
Managing Credit Responsibly Evaluate the Purpose
Ask Yourself
Does the loan/credit provide long-term benefits? Is the item a want or a need?
Investing in your human capital with an education loan
Purchasing a vehicle to get to and from
work with an automobile loan
Having a credit card to securely make online purchases
and for emergencies
Even if the loan provides long-term benefits, make sure the credit terms are still be favorable
Ask Yourself
• Is using money you already have in a saving or investment account a better option?
Ask Yourself
• Can you wait to purchase the item until you have enough money saved?
Managing Credit Responsibly Consider Your Options
No contract No interest or
fees
You are not spending your future income
Benefits:
Are the terms (such as interest rate) favorable?
Is the loan reasonable both in the present and in the future?
Are the terms consistent for the life of the loan?
Managing Credit Responsibly Evaluate the contract
A contract outlines how and when you will pay the money back
Credit Card Research Terms • Finance Charges- the cost of using credit (usually an interest rate)
• APR- Annual Percentage Rate, how much you can expect to pay per year
in interest on your principal balance
• Annual Fees- Cost per year of keeping a credit account open
• Cash Advance- Obtaining cash using a credit account, often through an ATM
• Balance Transfer- Using a credit account to pay off the remaining balance of another credit account
• Grace Period- The amount of time you have after the due date to make payments before fees and penalties are assessed
Amount you borrow
Total amount should be less than 20% of annual net
income
Monthly payment should be less than
10% of monthly net income
Rules to use when borrowing
Housing payments are the exception to the 10% rule
What it is…
Loan which the borrower must repay the amount in a specified number of equal payments
Features…
Contract outlining repayment terms
Usually a Fixed Rate
Examples…
Mortgage
Automobile loan
Personal loan
Student loan
Installment Credit
$313.36
$313.36
$313.36
$313.36
$313.36
$313.36
Example installment credit
Toby applied for a $10,000 automobile loan at 8%. He signs a contract with the lender to pay $313.36 per month for 36 months
to repay the loan.
Toby could pay more than $313.36 per month to pay off the loan earlier, but he must pay at least $313.36 per month.
What it is…
A line of credit established in advance
Features…
Loan may be paid (usually monthly) in a single payment or series of unequal payments
Example…
Credit card
Revolving Credit
$20
$30
$20
$40
$50
$30
Example Revolving credit
Whitney charged $200 to her credit card with a 13% interest rate. She receives her credit card bill with a $20 minimum payment.
Whitney has many options for paying back the $200 as long as she makes the minimum payment.
$200
$0
$0
$0
$0
$0
$34.61
$34.61
$34.61
$34.61
$34.61
$34.61
May combine elements of
installment and revolving credit
Usually has higher interest rates and
fees
Examples:
Payday lending Title loans
Alternative credit
Since there is no legal limit to the amount these creditors can charge they are often viewed as predatory lenders meaning they lend to
the desperate and uneducated in order to earn huge returns
The loan…
• Total loan: $350
• Lender fees: $60 upon payment
On the agreed upon date (usually payday)…
• Lender seeks their fees
• By depositing the check or withdrawing the money
If the borrower does not have money in their account…
•Accumulate fees and possible legal action •Or, pay $60 fee again to keep the existing loan outstanding or take out a new loan
Types of Alternative Credit Payday Loan
Short-term loan that provides immediate cash by securing a borrower’s written check or automatic withdrawal form
Directions
• After each roll, record: – Number rolled
– Payday loan activity
– Cost
• Calculate the total cost of the loan
Discussion Questions
• What was the minimum amount Mario could have paid?
• What was the maximum?
Alternative Lending Hazard
Mario needs $300 to pay his car payment. He uses a payday lender.
Consumer Rights you have protection from abusive business practices!
• The Truth in Lending Act - 1968
– Part of the Consumer Protection Act
– Applies to all credit transactions
• Mortgages, credit cards, loans, etc.
• Requires clear disclosure of key terms and all
costs in lending agreements
The Truth in Lending Act
Three basic rules for lenders:
1. Lenders cannot advertise a good deal which is not available to all consumers
2. Advertisements must include all or none of the terms
3. If more than 4 installments are required to pay for the good or service, the agreement must say “The cost of credit is included in the price quoted for goods and services”
Lenders must disclose to consumers: • Interest rate expressed as the APR • Any other finance charges
Allows consumers to easily compare credit offers
Ponzi Schemes • Fraudulent investing scam promising high rates of
return for little risk
• Supposed to get you rich quick
• Also called a pyramid scheme since people at the top make money by gaining new investors at the bottom
According to the Federal Trade Commission (FTC):
Identity Theft
IDENTITY THEFT occurs when someone wrongfully acquires and uses a consumer’s personal identification, credit, or account
information
The FTC is a government agency that focuses on consumer protection
https://www.youtube.com/watch?v=PGplT4lYIe4
• Average identity theft victims during 2012 reported personal expenses of more than $1500
• Victims also reported that it took 3 or more months to resolve the problems associated with identity theft after they discovered that their information was being misused
Identity Theft
Victims may have to spend time and money trying to fix the problems
that are caused by thieves
Personal Information
Name
Address & Telephone Number
Social Security Number
Driver’s License Number
Birth Date
Credit Card
Number
Bank Account Number
Identity thieves try to obtain personal
information from victims in order to
steal their identities. Personal
Information
• Thieves obtain personal information through a variety of methods: – Stealing - Information is taken from a purse or wallet, personnel records from a
workplace, tax information, bank or credit card statements, or pre-approved credit card offers from the mail.
– Diverting Mail - Thieves can complete a change of address form and have the victim’s bills and statements mailed to a different location.
– “Dumpster Diving” - Personal information is discarded and thieves remove it from the trash.
– Skimming - Thieves attach a device to card processors to steal credit and debit card information
– Phishing - Thieves use a form of electronic communication (usually email) to pretend to be a company or depository institution in order to get the victim to give up their personal information.
– Pretexting - Thieves use false pretenses to obtain your personal information from financial institutions, telephone companies, and other sources.
– Spyware - Software installed on the victim’s computer, without their knowledge or consent, that monitors internet use, sends pop up ads, re-directs the computer to other sites, and tracks key strokes.
– Hacking - Information is stolen by breaking into a computer system.
How Do They Do It?
How to protect yourself • Keep documents with personal info in a safe place (ie: don’t
carry your social security card memorize the number instead)
• Do not give out account numbers unless making a purchase YOU initiated
• Be careful about giving personal information over the phone/internet (look for security lock on web addresses)
• Keep computer passwords, pin numbers to yourself and use passwords and pin that are not easily guessed
• Avoid giving out personal information on social media that can be publicly viewed
What is a Spending Plan?
Spending Plan for: Time Period:
Planned Amount
Actual Amount
Income Earned Income
Wages or salary before deductions
Unearned Income Money from savings and investments to help pay expenses during this time period
Received Income from Government Programs Total Income $ $
Expenses Deductions Often Taken from Paychecks
Contributions to retirement programs (401k,
403b, pension, IRA)
Federal income tax and state income tax
Social Security and Medicare
Saving and Investing (Pay Yourself First) Contribution to savings and investments Insurance Premiums
Health, automobile, home or renters, life
Housing Costs Transportation Costs Food Costs Family Member Care Communication and Computers
Telephone landline, cell phone, Internet,
cable/satellite television
Medical Costs Not Covered by Insurance Clothing and Personal Care Educational Expenses Pet Care Entertainment Gifts and Charitable Contributions Credit Costs
Student loan, credit card, other loan payments
Total Expenses $ $ Net Gain or Net Loss (Income less Expenses) $ $
An income and expense statement sometimes referred to as a budget which records both planned and actual income and expenses over a period of time
A budget
Why is a Spending Plan an important
part of financial
planning?
Analyze the opportunity costs of your trade-offs
to maximize financial well-
being
Helps set and reach goals
Help manage your money in a positive manner
Increase net worth
Spending Plan Development Process
Step 1 - Track Current Income and
Expense
Step 2 - Personalize Your Spending Plan
Step 3 - Allocate
Money to Each Category
Step 4 - Implement and
Control
Step 5 - Evaluate and Make
Adjustments
Develop the spending plan
Maintain the spending plan
Track Current Income and Expenses
Completed by developing an Income
and Expense Statement
Or Spending Journal
Step 1 - Track Current Income and
Expense
Step 2 - Personalize Your Spending Plan
Step 3 - Allocate
Money to Each Category
Step 4 - Implement and
Control
Step 5 - Evaluate and Make
Adjustments
Ensures spending plan is realistic
Personalize Your Spending Plan Step 1 - Track
Current Income and Expense
Step 2 - Personalize Your
Spending Plan
Step 3 - Allocate
Money to Each Category
Step 4 - Implement and
Control
Step 5 - Evaluate and Make
Adjustments
How will you develop a
spending plan?
What is the intended time period for your
spending plan?
What categories will your spending
plan include?
Any written method
that works for you
How would you develop a spending
plan
Paper and pencil
Spreadsheet
Money management computer software
Applications
What is the intended time period for your spending plan?
What categories will your spending plan include?
• Usually concurrent with pay period or monthly
• Reference tracking from the Income and Expense Statement
• Do any categories need added, changed, or removed?
Allocate Money to Each Category
Look at your spending habits
from step 1
Determine what changes to make
Step 1 - Track Current Income and
Expense
Step 2 - Personalize Your Spending Plan
Step 3 - Allocate
Money to Each Category
Step 4 - Implement and
Control
Step 5 - Evaluate and Make
Adjustments
When allocating money consider:
Fixed or Contractual Variable Non-Contract
Trade-offs and opportunity
costs Goals
Expenses
Required to pay expense for a specific amount of time - not easy to reduce or eliminate
Easy to reduce or eliminate
Rent, Internet, Cell phone Food, entertainment
Budgets should also consider potential periodic expenses or expenses which occur irregularly throughout the year like car registration
Spending Plan Guide
10%
7%
30%
15%
15%
18%
Saving and Investing 10%
Insurance 7%
Housing 30%
Transportation 15%
Food 15%
Other Living Expenses 18%
Discretionary Spending 5%
5%
What variables may cause these percentages to be different?
Net Gain or Net Loss?
Income Expenses Net Gain
or Net Loss
Net Gain? Net Loss?
• Add more money to savings or another expense
• Increase income
• Decrease expenses
• Both
Charitable Giving donating your time, money, and other resources for the benefit of others
• In some cases giving your financial resources to others can be a benefit to you.
– Donations are tax deductible
– Giving can keep you involved and informed about issues of social injustice
– May improve you physical, social, or mental well-being
– Could provide opportunities to network and show leadership capabilities
• Be careful about where your donations go.
• Not all charities are what they appear to be.
Implement and Control
Make your planned spending decisions
Step 1 - Track Current Income and
Expense
Step 2 - Personalize Your Spending Plan
Step 3 - Allocate
Money to Each Category
Step 4 - Implement and
Control
Step 5 - Evaluate and Make
Adjustments
Use a control system to stay on track
Control Systems
Money management computer software
Which control system would
help you stick to your spending
plan? Internet-based spending plan program
Depository institution programs
Check register system
Envelope system
Evaluate and Make Adjustments
How well did your spending plan
work?
Step 1 - Track Current Income and
Expense
Step 2 - Personalize Your Spending Plan
Step 3 - Allocate
Money to Each Category
Step 4 - Implement and
Control
Step 5 - Evaluate and Make
Adjustments
Is your spending plan helping you
reach goals?
Do you need to make any
adjustments?