Financial Literacy Today

Barbara O’Neill, Ph.D, CFP Rutgers Cooperative Extension

oneill@aesop.rutgers.edu

Workshop Objectives for Participants

• Learn why financial education is critical to students and the country

• Learn 12 key topics students need to know

• Learn resources to teach personal finance

• Build confidence to teach personal finance

Is There a Problem?

Alan Greenspan, 13th Chairman of the Federal Reserve, 1987-2006

Financial Literacy = KASH •Knowledge

•Action

•Skills

•How-to-Resources

Why Do Students Need To Be Financially Literate?

What Happens When Students are NOT Financially Literate?

Financial Literacy is an Important Life Skill

• Increases financial resilience • Promotes savings and financial success • Prevents costly financial errors and fraud • Reduces anxiety due to out-of-control finances • Cushions the impact of recessions

http://www.councilforeconed.org/2013/04/12/the-cost-of-financial-illiteracy/

How Much Do You Know About Personal Finance? Take the FINRA National Financial Capability Study Knowledge Quiz: http://www.usfinancialcapability.org/quiz.php

National Financial Capability Study Knowledge Quiz

Five financial literacy quiz questions:

– Interest rate question

– Inflation question

– Bond price question

– Mortgage question

– Risk question

Number of correct answers 2009 2012

None 7% 7%

One 11% 12%

Two 17% 19%

Three 24% 23%

Four 27% 25%

Five 15% 14%

Average number correct 2.99 2.88

http://www.usfinancialcapability.org/quiz.php

Health Literacy Quiz http://www.washingtonpost.com/blogs/wonkblog/wp/2013/08/08/do-you-understand-health-insurance-most-people-dont/ (Loewenstein et al., Journal of Health Economics)

• Four basic health insurance terms: Deductible, Coinsurance, Copayment, Out-of-Pocket (OOP) Maximum

• Only 14% of sample got all 4 questions correct

• Worse yet, with a hypothetical example of health insurance coverage for medical expenses involving a hospital stay, only 11% could calculate the OOP cost

Jump$tart Coalition for Personal Financial Literacy

• Washington DC-based non-profit

• Promotes financial literacy for students from grades K to 16 (college age)

• NJ Coalition for Financial Education is a state affiliate of national Jump$tart

• Twelve principles for young adults to become financially successful and accompanying lesson plans – http://jumpstart.org/12-principles-calendars.html

Twelve [Timeless] Jump$tart Coalition Principles

• Know your take-home pay

• Pay yourself first

• Start saving young

• Compare interest rates

• Don’t borrow what you can’t repay

• Budget your money

• Money doubles by “The Rule of 72”

• High returns equals high risks

• Don’t expect something for nothing

• Map your financial future

• Your credit past is your credit future

• Stay insured

1. Know Your Take-Home Pay • Take-Home Pay = Net Pay = Disposable Income

– Amount of income remaining after mandatory deductions (e.g., taxes, FICA) and withholding

• Discretionary Income

– Money left after paying household expenses

– Include savings for goals as an “expense”

Key Take-Away: Know these numbers before committing to large expenses

2. Pay Yourself First • Treat savings as a household “expense”

• Give it the priority of a car loan payment

• Make savings automatic

– Employer retirement savings plans

– Mutual fund and DRIP stock automatic investment plans

– Checking to savings transfers

– Need more ideas? See http://www.americasaves.org/

3. Start Saving Young

Source: TIAA-CREF; assumes an 8% average annual return

Time + Money = Magic!

The Two Sides of Compound Interest

• When you invest, compound interest is your friend :-)

• When you pay interest on credit cards and loans, compound interest is your enemy :-(

Source: NEFE High School Financial Planning Program

4. Compare Interest Rates • Bankrate.com: http://www.bankrate.com/

• Consumer Action: http://www.consumer-action.org/

• Federal Reserve: http://www.federalreserve.gov/creditcard/survey.html

Rule of Three Credit Card Comparison • See Personal Finance class assignment

http://rci.rutgers.edu/~boneill/assignments/creditcard.html

• Key Criteria: – Annual fee – Late fee – Over-the-limit fee – Method for computing balance – Rewards for use – APR

Key Credit Terms • Finance Charge

– Total dollar amount you pay to use credit – Includes interest costs and fees, such as service

charges or credit-related insurance premiums

• Annual Percentage Rate (APR) – Percentage cost of credit on a yearly basis – Key to comparing costs when shopping for rates – “Apples to Apples” comparison required by law

5. Don’t Borrow What You Can’t Repay

Debt stinks! (http://www.itsahabit.com/musiccd.html)

– Ties up future income

– Prevents people from saving

– Costs money (interest and fees)

– Can lead to repossession, foreclosure, bankruptcy

– Causes physical symptoms of stress

What is the Worst Credit Card Trap of All?

• Teaser rates?

• Default rates (penalty APRs)?

• Late fees?

• Over-the-limit fees?

• Minimum payments?

The High Cost of Making Minimum Payments

Data were derived from the Credit Card Smarts calculator, Advantage Publications

Warning Signs of Debt Problems

• Paying only the minimum balance each month

• Trouble even paying the minimum amount due

• Total balance increases every month

• Missing loan payments or paying late

• Getting second or third payment notices

• Borrowing money to pay old debts

• Exceeding the credit limits on credit cards

• Denied credit due to a bad credit report

Two Simple Student Loan Guidelines

• Limit total student loan debt at graduation to < starting salary for first post-college job

• Example: $35,000/yr income = $35,000 total student loan debt

• Estimate monthly student loan payments at approximately 1% of loan balance

– Example: $30,000 debt = Approx. $300/month payment

Resource: http://www.finaid.org/calculators/loanpayments.phtml

6. Budget Your Money • Spending Plan Worksheet:

http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf

• College Student Spending Plan: https://www.cicmoney101.org/Calculators/Budget-Worksheets/Traditional-College-Student.aspx

• High School Student Spending Plan: https://www.cicmoney101.org/Calculators/Budget-Worksheets/High-School-Student.aspx

• Positive Cash Flow: Income > Expenses

– Increase income

– Reduce expenses

– Do both

Seven Step Spending Plan (Budgeting) Process

1. Set financial goals and identify required savings

2. Estimate income from all sources

3. Budget an emergency fund and goal savings

4. Budget fixed expenses (include 1/12 occasional expenses)

5. Budget variable expenses

6. Record spending amounts

7. Review spending and saving patterns

Review financial progress

Revise goals and budget allocations

What are Your Spending Leaks?

Needs vs. Wants Item Need Want Food Groceries Eating Out

Transportation

Public Transportation

Car, Gas, Insurance, etc.

Clothing The Basics Trendy Styles and Brands; multiples of items (e.g., 50 shoes)

7. Money Doubles By “The Rule of 72”

• Calculates the number of years it takes for principal to double – Number of Years = 72 divided by interest rate – Example: 72 ÷ 6% = 12 years

• Calculates the interest rate it takes for principal to double

– Interest rate = 72 divided by number of years – Example: 72 ÷ 10 = 7.2% http://www.moneychimp.com/features/rule72.htm (calculator)

The Rule of 72 in a Picture Source: Garman/Forgue, PERSONAL FINANCE, Fifth Edition

8. High Returns Equals High Risks

Source: Garman/Forgue, PERSONAL FINANCE, Fifth Edition

Investment Risk Factors

9. Don’t Expect Something For Nothing If something sounds too good to be true, it probably is” • Phishing scams • “Pump and dump” scams • “Free lunch” seminars • “Guaranteed” returns > other investments • Exotic sounding deals • Exclusive, limited-time offers

10. Map Your Financial Future

• Be a “future-minded” planner

• Set SMART Goals: http://njaes.rutgers.edu/money/pdfs/goalsettingworksheet.pdf

– Short-Term: Under 3 years

– Medium-Term: 3 to 10 years

– Long-Term: 10 or more years

• Match savings/investments to goals

• “What you think about, you bring about”

Net Worth Statement • A financial statement that reports what an

individual or family owns and owes as of a specific date

• Also called: –Balance sheet –Statement of financial position

Items of Value (what you own) - Amounts owed

(what you owe) Net Worth

(your wealth) =

11. Your Credit Past is Your Credit Future

• People with low credit scores pay more to borrow money (higher APRs)

– FICO score range: 300 (low) to 850 (high)

• Negative information stays on your credit report for up to 7 years (Chapter 7 bankruptcy- 10 years)

• Credit scores are used in job hiring, car insurance premiums, apartment rentals

Credit Scoring Factors • Bill payment history, weighted to emphasize past 12

months (35%)

• Proportion of outstanding debt to available credit limits (30%)

• Length of credit history (15%)

• Number of recent credit inquiries (10%)

• Mix of types of credit used (10%)

12. Stay Insured • Health insurance: “Age 26 law” (federal), NJ “Dependent

Under 31” law, http://www.state.nj.us/dobi/division_consumers/du31.html

• Also, COBRA, ACA exchanges: https://www.healthcare.gov

• Life insurance (if a young adult has dependents or private student loan co-signers)

• Disability insurance

• Renter’s and auto insurance with adequate liability limits (at least $300,000)

Financial Education = MONEY

• Motivating/Empowering

• Original/Creative

• Necessary

• Enjoyable/Fun

• Yeast-Like (it multiplies!)

Resource: Next Gen Personal Finance (NGPF)

Resource: Take Charge Today https://takechargetoday.arizona.edu/

Resource: NEFE HSFPP® • Six student guide booklets

• Teacher lesson plans and PowerPoints

• Activities and handouts

• Online student practice quizzes and polls

• Performance-based assessments

http://www.hsfpp.org/

Resource: Council for Economic Education

• Financial Fitness for Life: http://fffl.councilforeconed.org/

• Learning, Earning, and Investing: http://lei.councilforeconed.org/

Resource: Hard Core Financial Education Boot Camp

• Archived professional development workshop for teachers

• Presentations on credit, insurance, and investing

• Teacher interviews

• Includes videos and PowerPoint slide handouts

http://njaes.rutgers.edu/money/bootcamp/

Resource: Rutgers Cooperative Extension/NJ Department of Education

Financial Education Lesson Plans

• Risks and Benefits of Entrepreneurship (85k PDF)

• Compound Interest: Your Best Friend or Worst Enemy (106k PDF)

• Know the Score: Credit Score Modeling and Impacts (360k PDF)

• The Impact of Inflation (128k PDF)

• Monetary Transaction Tools (572k PDF)

http://njaes.rutgers.edu/money/

Call to Action “This country simply can’t continue to have so many of its citizens unable to manage their finances, making serious money mistakes, and waiting for chance-rather than choice-to determine their financial future.” http://www.councilforeconed.org/2013/04/12/the-cost-of-financial-illiteracy/

Barbara O’Neill, Rutgers University

Comments? Questions? Experiences?