How to be Money Smart: Twelve Things You

Absolutely Need to Know

Barbara O’Neill, Ph.D., CFP® Rutgers Cooperative Extension oneill@aesop.rutgers.edu Twitter: @moneytalk1

Financial Capability is an Important Life Skill

• Rutgers University School of Environmental and Biological Sciences 2012 Executive Dean’s Distinguished Lecture: “Reinventing the University for the 21st Century: http://www.dailytargum.com/calendar/lecture-reinventing-the-university-for-the-st-century/event_9441201e-486b-11e1-942b-0017a4a78c22.html and

http://discovery.rutgers.edu/events/2012/davidehrenfeld.html

• Key themes: – Natural resources are reaching critical limits

– Students need to learn to be more self-sufficient and less dependent on the global economy

– The university must prepare students to live this new and dangerous environment by teaching life skills

– Personal finance is an important life skill

How Much Do YOU Know About Personal Finance?

Take the FINRA National Financial Capability Study Knowledge Quiz: http://www.usfinancialcapability.org/quiz.php

Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have? More than $102 Exactly $102 Less than $102 Don’t know Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After 1 year, would the money in the account buy more than it does today, exactly the same, or less than today? More Same Less Don’t Know If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship? Rise Fall Stay the Same No Relationship Don’t Know True or False: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less. True False Don’t Know True or False: Buying a single company’s stock usually provides a safer return than a stock mutual fund. True False Don’t Know

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

Information Resource: Jump$tart Coalition for

Personal Financial Literacy • Washington DC-based non-profit • Promotes financial literacy for students

from pre-K to college age • The NJ Coalition for Financial Education is

a state affiliate of national Jump$tart

Jump$tart’s Twelve Principles of Personal Financial Literacy

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

• Available as a calendar in PDF format

The Twelve 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) and withholding

• Discretionary Income – Money left after paying household expenses – Include savings for goals as an “expense”

• 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!

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

• CreditCards.com: http://www.creditcards.com/

• Other resources?

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?

• Annual fees?

• Over-the-limit fees?

• Minimum payments?

The High Cost of Minimum Payments

Data derived from Credit Card Smarts calculator

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

• Using savings to pay for necessities

• Getting second or third payment notices

• Borrowing money to pay old debts

• Exceeding the credit limits on your credit cards

• Denied credit due to a bad credit report

Three Lessons About Credit and Debt That Everyone

Absolutely Must Understand • Borrowing obligates future income to support

today’s spending

• Lower monthly payments usually mean that you pay more interest over the life of a loan

• Your past debt payment history is your “financial reputation” and affects future credit (and other) opportunities

Wise Credit Management Quiz http://njaes.rutgers.edu/money/wise-credit/

6. Budget Your Money

• Spending Plan Worksheet: http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf

• Positive Cash Flow: Income > Expenses – Increase income

– Reduce expenses

– Do both

Seven Step 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?

Embrace Frugality: Thrift Shops

Personal Experience: Four bags @ $5 = $20 40 usable items @ 50 cents (jackets, shoes, suits, pants) 18 other items donated to Fire Department clothing box

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 Source: Garman/Forgue, PERSONAL FINANCE, Fifth Edition

8. High Returns Equals High Risks

Source: Garman/Forgue, PERSONAL FINANCE, Fifth Edition

Investment Risk Factors Source: Garman/Forgue, PERSONAL FINANCE, Fifth Edition

9. Don’t Expect Something For Nothing

If it 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”

11. Your Credit Past is Your Credit Future

• People with low credit scores pay more to borrow money

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

• Negative information stays on your credit report for 7 years (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, and COBRA – http://www.state.nj.us/dobi/division_consumers/du31.html

• Life insurance (if dependents)

• Disability insurance

• Renter’s and Auto insurance with adequate liability limits; umbrella liability insurance

Key Messages

You are a “Millionaire in the Making” 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 :-(

Financial Education Resources For Consumers

Young Adults

• NEFE Cash Course: http://www.cashcourse.org/

• Love Your Money: http://loveyourmoney.org/

• Money Skill: http://www.moneyskill.org/

• Rutgers SEBS Personal Finance Course (Dr. O’Neill): http://rci.rutgers.edu/~boneill/

All Audiences

• Rutgers Cooperative Extension: http://njaes.rutgers.edu/money/

• eXtension: http://www.extension.org/personal_finance

• My Money.Gov: http://www.mymoney.gov

Financial Education Resources for Financial Educators

• Building Your Future™ (The Acturarial Foundation): http://www.actuarialfoundation.org/programs/youth/getonthelist.shtml

• Hard Core Financial Education Boot Camp (Rutgers Cooperative Extension and NJ Coalition for Financial Education): http://njaes.rutgers.edu/money/bootcamp/

• Learning, Earning, and Investing for a New Generation (CEE): http://www.hsfpp.org/

• Financial Fitness for Life (CEE): http://fffl.councilforeconed.org/ • Money Smart for Young Adults (FDIC):

http://www.fdic.gov/consumers/consumer/moneysmart/young.html

• NEFE High School Financial Planning Program®: http://www.hsfpp.org/

Questions? Comments? Experiences?

Happy Money Smart Week!