Why is Financial Education/Literacy Important?

Why is Financial Education/Literacy Important?

Presented By:

Patrice B. Duncan, EVP

&Anthony Harris, AVP

D&E, The Power Group

“Financial Empowerment”

What is Financial Empowerment?

• Empowerment itself is the process of increasing the capacity of individuals or groups to make choices and to transform those choices into desired actions.

• Financial empowerment therefore is the transfer of personal money power (financial independence) to an individual.

• It is a process of moving from financial instability to a position of financial stability through investment.

What is Financial Literacy?

• Financial literacy is the knowledge about personal finance that enables people to confidently manage their financial lives.

• When it comes to managing your budget, paying bills, and knowing the right financial services for you, KNOWLEDGE IS POWER!

Case Study – Emily & Karen

• Emily and Karen are friends who borrow about the same amount of money over their lifetimes:

– Each gets $20,000 in private student loans to help pay for college.

Case Study – Emily & Karen

– During college they get their first credit cards, and each carry an $8,000 balance, on average, over the years.

– They buy new cars after graduation and replace them every seven years until they buy their last vehicles at age 70.

Case Study – Emily & Karen

– Each buys her first home with a $300,000 mortgage at age 30 and then moves up to a larger house with a $400,000 mortgage after turning 40.

– Each takes out a $50,000 home-improvement loan to remodel the second house.

Case Study – Emily & Karen• Emily has a FICO Score of 750, which is

considered good to excellent. – Emily maintains her good credit scores by always paying

her bills on time, applying for credit sparingly and never maxing out her credit cards.

– Lenders respond by increasing her credit limits and

giving her more offers of credit, allowing her to spread her balances across several cards and further protect her scores.

Case Study – Emily & Karen

Case Study Private student loans: An $8,000 difference

• Federal student loans don't take credit scores into account, but private student loans do, and the penalty for worse credit is significant. Interest rates vary by lender, but someone with a 750 score can expect rates that are around 5 to 6 percentage points cheaper than someone with a 650 score, said Mark Kantrowitz of FinAid.

Case Study – Emily & KarenPrivate Student Loans - $8,000 difference

Emily – 750 FICO Score

• Interest Rate - 7.25%

• Monthly Payment - $234 • Total interest paid (10 yrs)

• $8,176

Karen – 650 FICO Score

• Interest Rate - 13.25%• Monthly Payment - $302• Total interest paid (10 yrs)

• $16,189 • Karen's Penalty $8,013

Case StudyCredit Cards: $60 more a month

• Credit card issuers have tightened their lending standards in the past couple of years, which means higher rates and stricter standards for just about everyone.

• Whereas a 720 credit score used to get you the best rates and terms from many issuers, some now require 750. Even getting a card can be tough if your scores are below 675, according to Curtis Arnold of CardRatings.com. A few years ago, even those with "subprime" scores in the low 600’s had a slew of offers.

Case Study – Emily & KarenCredit Cards- $60 difference per mth.

Emily - 750 FICO Score

• Interest Rate - 10.99%• Annual Interest- $880 • Lifetime interest $44,000

Karen – 650 FICO Score

• Interest Rate – 19.99%• Annual Interest- $1,600• Lifetime interest $80,000• Karen's Penalty $36,000

Case Study Auto loans: $5,400 more per car

– A few years ago, Karen would have paid about 3 percentage points more for a 60-month new-car loan. Today, that penalty is more than twice as high, according to myFICO.com, which tracks rates for auto and mortgage loans based on FICO credit scores. The difference significantly inflates the interest costs for every $25,000 vehicle she finances over a lifetime.

Case Study – Emily & Karen Auto loans: $5,400 more per car

Emily - 750 FICO Score

• Interest Rate - 5.78%• Monthly Payment - $481 • Interest cost per car $3,843• Lifetime interest paid -

$30,768

Karen – 650 FICO Score

• Interest Rate – 13.24%• Monthly Payment - $572• Interest cost per car $9,310 • Lifetime interest paid

$74,480• Karen’s Penalty $43,712

The Role of Financial Education

• Financial education plays a significant role in our society by empowering people with required knowledge and skills to make accurate consumer decisions, follow appropriate financial practices, and achieve economic well being.

The Role of Financial Education

• However, some financial education programs narrowly focus only on changing people's financial knowledge and make the assumption that this leads automatically to changes in financial behavior.

The Role of Financial Education

• This assumption may work at times; however, changing financial behavior (not just increasing financial knowledge) is essential for a person to reach financial goals and achieve financial well being.

Major Topics of Financial Education

• Financial education is a very broad subject and typical topics covered include:– Budgeting– Cash-flow management – Credit– Banking – Savings and Investments.

Major Topics of Financial Education

Other topics of discussion can encompass:– Goal Setting – Wise Consumer Practices – Consumer Laws & Rights– Retirement Planning– Life & Death Insurance

Major Topics of Financial Education

• While the importance of some topics may change over time, other topics, such as – Decision-making

– Cash-flow management

– Savings

– Credit, debt, housing, and planning for the future will always represent the core topic areas of financial education.

Educational Settings

• Financial education is very similar to other educational programs. It takes place in formal, non-formal, and informal educational settings.

• Formal settings include credit courses offered in high school and colleges.

Educational Settings

• Non-formal settings include financial education training workshops and counseling programs provided by various organizations and individuals outside of formal educational institutions. i.e. non-profits

Educational Settings

• Informal financial education comes from everyday interactions with people and mass media, i.e. news, work, internet, family etc.

Key Elements

• Before the financial educator begins the program evaluation process, it is important to review the education program to make sure that it has all the key elements to function successfully.

Key Elements & Preparation

Must haves………..

• Identified target participant group

• Identified financial education needs

• Program objectives designed to meet identified needs

• Educational materials and lesson plans chosen to achieve learning objectives

Key Elements & Preparation

• Delivery method chosen to facilitate participant access to educational materials, i.e. lecture, internet, group, individual etc.

• Inclusion of evaluation plan and data-collecting instruments

Key Elements & Preparation

• Trained and/or certified financial educator(s) to facilitate learning, i.e. NeighborWorks, HUD, etc.

• Program monitoring plan to utilize evaluation data for building stronger programs and funding strategies

Target Audiences

• Target audiences of financial education are very diverse. Participants' ages, levels of education, socio-economic backgrounds, and learning needs can vary greatly. For example, the ages of potential audiences can range from youth to older adult.

Target Audiences

• The levels of education can range from elementary school to graduate school.

• This variation underscores the educational diversity of potential audiences of financial education programs.

Target Audiences

• Additionally, the need determines how to carefully select educational materials, delivery methods, and the evaluation approach based on the needs of each audience to achieve desired results.

Methods of Financial Education Delivery

• Various methods are used to deliver financial education programs. These methods can be classified under three main categories: – Individual Methods– Group Methods– Mass Methods

Methods of Financial Education Delivery

• Individual Methods – One-on-one counseling – Telephone advising – Computer/Internet Learning

Methods of Financial Education Delivery

• Group Methods – Seminars/presentations – Training workshops – Workshop series – Credit courses offered through formal

educational institutions

Methods of Financial Education Delivery

• Mass Methods – Web-based programs – Interactive CD programs – TV programs – Newsletters/papers – Radio programs

Evaluation Tools

• Evaluation is a key component of Financial Education Programs. There are many different types of evaluation tools depending on the object being evaluated and the purpose of the evaluation. Perhaps the most important basic distinction in evaluation types is that between formative and summative evaluation.

Evaluation Tools

• Formative evaluations strengthen or improve the object being evaluated -- they help form it by examining the delivery of the program or technology, the quality of its implementation, and the assessment of the organizational context, personnel, procedures, inputs, and so on.

Evaluation Tools

• Summative evaluations, in contrast, examine the effects or outcomes of some object -- they summarize it by describing what happens subsequent to delivery of the program or technology; assessing whether the object can be said to have caused the outcome;

Evaluation Tools

• Determining the overall impact of the causal factor beyond only the immediate target outcomes; and, estimating the relative costs associated with the object.

Evaluation Tools

• Formative evaluation includes several evaluation types: – Needs assessment determines who

needs the program, how great the need is, and what might work to meet the need

– Evaluability assessment determines whether an evaluation is feasible and how stakeholders can help shape its usefulness

Evaluation Tools

• Formative evaluation includes several evaluation types: – Structured conceptualization helps

stakeholders define the program or technology, the target population, and the possible outcomes

– Implementation evaluation monitors the fidelity of the program or technology delivery

Evaluation Tools

• Formative evaluation includes several evaluation types:

– Process evaluation investigates the process of delivering the program or technology, including alternative delivery procedures

Financial Education Resources & Curriculums

• FDIC Money Smart

• Freddie Mac – Credit Smart

• NEFE – National Endowment for Financial Education

• Federal Reserve Bank – Guide to Financial Literacy Resources

• Jump$tart Financial Literacy

Sample Presentation

Goal SettingBudgeting

Credit

Five Rules to Goal Setting

Rule #1: Set Goals that Motivate You

Making sure it is something that's important to you and there is value in achieving it.

Five Rules to Goal SettingRule #2: Set SMART Goals

-Specific-Measurable-Attainable-Relevant-Time Bound

Five Rules to Goal Setting

Rule #3: Set Goals in Writing

Put them on your walls, desk, computer monitor, bathroom mirror or refrigerator as a constant reminder.

Five Rules to Goal Setting

Rule #4: Make an Action Plan

Write out the individual steps, and then cross each one off as you complete it.

Five Rules to Goal Setting

Rule #5: Stick With It!

Remember to review your goals continuously.

How to Budget• Getting started with making a plan for your

money

• Planning how to spend your money

• Developing a spending plan to meet your goals

• Making your spending plan

• The importance of saving

• Getting help

Why Do You Need a Spending Plan?

• To prepare for large expenses

• To encourage savings

• To prepare for surprise expenses

• To identify wasteful spending

• To accomplish goals

Neighborhood Reinvestment Training Institute

Rate Your Spending Habits

• What would be hardest?

• Is a house worth giving these things up?

• Are you ready to do this now?

• Are there other things you want to do first?

• What things would be easiest to change?

The Steps in Establishing a Spending Plan

1. Determine your monthly net income

2. Calculate your monthly expenses

3. Subtract your regular expenses from your income

Neighborhood Reinvestment Training Institute

Keeping Track of Spending

• Save all receipts

• Use a small notebook

Setting Family Goals

• Talk about goals as a family

• Be specific

• Write down all family members’ goals and rank them in order of importance

• Agree on your top goals

• Figure out how much it will cost to reach your goals

Wants vs. Needs

• Needs= items you must have for basic survival

• Wants= things you desire but can live without

Money Management Tips

• Plan according to current income

• Plan ahead for six months

• Include spending money for all

• Keep record keeping simple

Money Management Tips

• Set money aside for maintenance

• Pay yourself first at least 10% of take-home pay

• Get consensus from entire family

Reviewing the Plan

• Is our spending plan working?

• Are all family members able to follow it?

• Which costs always seem to be over the planned amount?

• Are we getting closer to reaching our goals?

Ways to Make Money Management Easier

Consider consolidating credit card accounts

Consider selling a car

Check your interest rates

Stick to the plan

Importance of Saving

$1,504.09 in 2 years$2/ day 2% interest =

Try to save 10% of your income on a monthly basis!

Types of Savings Accounts

• Regular savings account

• Club account

• Certificate of deposit (CD)

• Money market account

• Matched savings account

Tips for Savers

• Pay yourself first

• Open a savings account far away from home and work

• Save change at end of day

• Bank your surprises

Saving $1 a DayNo Interest 5% Daily

Compounding

Year 1 $365 $374

Year 5 $1,825 $2,073

Year 10 $3,650 $4,735

Year 30 $10,950 $25,415

Key Points

The value of credit

Different types of loans

What a credit report is and how it is used

How to read a credit report

How to start restoring credit

How to recognize credit restoration scams

Available credit resources

Key Points

The characteristics of a credit card

The costs of using a credit card

The potential problems with credit card use

Importance of Credit

Can be useful in times of emergencies

Is sometimes more convenient than cash

Allows you to make large purchases

Types of Credit

Secured

Unsecured

Collateral Items

Automobiles

Homes

Savings and investment accounts

Consumer Installment Loans

Automobile

Computer

Furniture

College tuition

Credit Cards

Ongoing ability to borrow money for:

– Household

– Family

– Personal expenses

Cost of Credit

Amount financed $5,000

APR 12%

Finance charge $675.31

Total of payments $5,675.31

Be careful of…

Rent-to-own services

Payday loans

Four C’s of Credit

Capacity

Capital

Collateral

(Character the 4th C)

Credit Reporting Agencies

EquifaxEquifax www.equifax.com(800) 685-1111

ExperianExperian www.experian.com(888) EXPERIAN (397-3742)

Trans UnionTrans Union www.transunion.com(800) 916-8800

For a merged report:For a merged report:

True Credit (merged) www.truecredit.com

Tips to Manage Your Credit

If possible, pay off your entire bill each month

Pay on time to avoid late fees and protect your credit

Always check your monthly statement to verify transactions

Tips to Manage Your Credit

Ignore offers creditors may send you to reduce or skip payments

Think about the cost difference if you purchase your item with cash versus credit

What is in a Credit Report?

Identifying information

Credit history

Public record information

Inquiries

Credit Scoring

Payment history 35%

Outstanding debt 30%

Credit history 15%

Types of credit 10%

Credit inquiries 10%

Credit Agencies’ Credit Score

Experian Fair Issac

Trans Union Empirica

Equifax Beacon

FICO Credit Scoring

– The higher the score the better

– Most consumers score between 300 and 850

– www.myfico.com

FICO Credit Scoring

– 660+ = easy to obtain credit at a low interest rate

– 620-660 = may need additional documentation to get a good rate

– <620 = may prevent the borrower from getting best rates

Definitions

Tax Lien - a claim against a property filed by the taxing authority for unpaid taxes

Judgment - a court order placing a lien on a debtor’s property as security for a debt owed to a creditor

Definitions

Collection account - a past due account that has been referred to a specialist to collect part or all of the debt

Bankruptcy - a legal proceeding that can legally release a person from repaying debts that a person cannot pay back

Bankruptcies

Chapter 13 - the debtor keeps all of his/her property and makes regular payments on the debts after filing for bankruptcy

Chapter 7 - the debtor gives up all nonexempt property and keeps exempt property (property that state law determines is needed for support of the debtor and his/her dependents)

Negative Credit Report Information

Type of negative Type of negative informationinformation

Maximum time on credit Maximum time on credit reportreport

General Civil Judgments

7 years from the date filed

Tax Liens7 years from the date paidIndefinite if not paid

Chapter 13 Bankruptcy- dismissed or discharged

7 years

All other Bankruptcies

10 years

When is your Credit Report free?

You have been recently denied credit

You have been recently denied employment or insurance

You suspect someone has been fraudulently using your account

When is your Credit Report free?

You are unemployed and intend to apply for employment within 60 days

You receive public welfare assistance

You live in certain states

Identity Theft

Contact the fraud department of the three major credit reporting agencies

Contact your creditors

File a report at your local police station

Identity Theft Resources

• www.consumer.gov/idtheft or 1-877-IDTHEFT (438-4338)

• www.fraud.org or 1-800-876-7060

What are ways to Build a Credit History?

Apply for a small loan at a bank or credit union where you have checking or savings accounts

Apply for credit with a local store

Make a large down payment on a purchase and negotiate credit payments for the balance

What are ways to Build a Credit History?

Ask a friend or relative with an established credit history to be a co-signer for you

Pay your bills on time

Establish nontraditional credit through regular rent and utility payments

To Rehabilitate Your Own Credit

Start by contacting credit reporting agencies to get copies of your credit report

If there are errors, request an investigation

Contact lenders to renegotiate payment plans

Visit a credit counseling agency

Tips for Credit Counseling

Interview several credit counseling agencies before signing a contract

Check with your state attorney general, local consumer protection agency and the Better Business Bureau for complaints

Ask for information from the agency about itself and its services

Ask questions about services and fees

True Statements about Credit Rehabilitation

No one can have accurate information removed from your credit report

If you have bad credit, it can take years to repair your credit legitimately

No one can create a new identity for you

You can order your credit report yourself and dispute any errors on your own

Credit Card Terms

Annual percentage rate- the rate of interest you are charged plus fees, expressed as a yearly rate

Fees- charges for annual usage, late payments or balances that over-the-limit

Credit Card Terms

Grace period - the number of days you have to pay your balance before a creditor starts charging interest

Balance computation method - how your interest is calculated

Interest Rate

Fixed - the interest rate will not change

Variable - the interest rate can increase or decrease

Shopping for a Credit Card

Decide how much you will use your card

Start small

Understand the terms

Be aware that introductory rates will change

Avoid application fees

Understand fixed and variable rates

Cost of making Minimum Payments

Item Price APR Interest Paid

How much you really pay

for the item

Total years to pay off

TV $500 18% $439 $939 8

Computer

$1,000

18% $1,899 $2,899 19

Furniture

$2,500

18% $8,781 $11,281

34

Benefit of Making Higher Payments

Original Balance

APR Monthly Paymen

ts

Total Number

of Paymen

ts

Total Years to Pay off

Total of Paymen

ts

$2,500 18% Minimum

payment

404 34 $8,781

$2,500 18% $50 94 8 $4,698

$2,500 18% $100 32 3 $3,163

Finance Charge Calculation

APR is 18%

Daily periodic rate is 0.0493% (18% divided by 365 days)

Multiply the average daily balance ($200) by the daily periodic rate

Equals $.10 per day (for each day you have the $200 balance)

Finance charge is $.10 x 30 days or $3.00

Tips for using Credit Cards

Pay your bills on timeKeep your receiptsProtect your credit card and account numbersKeep a record of your account numbersCarry only the credit cards you think you will usePay off the total balance each monthRead the fine print

Correcting Credit Card Problems

Pay off credit card and higher interest rate loans first

Pay for future purchases using check or cash

See a reputable credit counselor

Contact Us

D&E, A Financial Education and Training Institute, Inc.

4532 Jonesboro Road2nd floor

Forest Park, GA 302971-877-790-1831 toll

(770) 961-6900 office(770) 961-8900 fax

info@depower.org emailwww.depower.org website