Unit 4 - Good Debt, Bad Debt: Using Credit Wisely

1. Unit 4 - Good Debt, Bad Debt: Using Credit Wisely Mr. Vogel

2. Financial Planning Goals (SMART) Insurance Budget Save Spend Share Short Long Term Term Loan Own Career Planning Risk/Return Credit/Debt

3. Action Steps Forward Assemble a personal budget for your circumstances today Set aside some small PYF savings Find a way to balance your budget Track your daily expenditures – starting TODAY Reconcile your cash –make sure you fix your “leaks” Analyze how the real world is tracking your plan Make adjustment as needed to keep your budget balanced Ask others in your family or other adults for their experiences See if you can learn other budgeting tricks Share your successes with others Keep your expectations reasonable Rome was not built in one day Focus on progress in the right direction vs. perfection

4. Credit Facts Nearly 33% of teens owe money to either a person or company, with an average debt of $230. About 26% of teens ages 16-18 already have more than $1,000 in debt. 30% of teens say they understand how credit card interest and fees work. 36% of teens say they know how to establish good credit.

5. The Language of Credit • Credit is the amount of money or something of value that is loaned on trust with the expectation it will be repaid later to lenders. • Debt is the entire amount of money you owe to lenders. • APR (Annual Percentage Rate) is the total cost to use credit in a year. • Term is how long you have to repay a loan, often expressed in months. • Fees are charged to use credit. Examples: Annual Credit Card Fee, Loan Origination Fee, Over-the-Limit Fee

6. Types of Credit Installment Credit Fixed payments Set period of time to repay Set or varying interest rates Revolving Credit No stated payoff time Limit to credit Minimum monthly payments Interest rates vary or not Finance charges

7. Types of Credit Installment Revolving Mortgage Loans (house) “Payday Loans” Secured Auto Loans Student Education Loans Bank Credit Cards Unsecured Retailer Credit Cards Signature Loans

8. The Concept of Compound Interest “Rule of 72” Years to Double 72 Interest Rate = $100.00 10% $100.00 20% Borrow Interest Rate Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 [$100.00 x 0.20 = $20.00] $120.00 [$120.00 x 0.20 = $24.00] $144.00 [$144.00 x 0.20 = $28.80] $172.80 [$172.8 x 0.20 = $34.56] $207.36 [$100.00 x 0.10 = $10.00] $110.00 [$110.00 x 0.10 = $11.00] $121.00 [$121.00 x 0.10 = $12.10] $133.10 [$133.10 x 0.10 = $13.31] $146.41 [$146.41 x 0.10 = $14.64] $161.05 [$161.05 x 0.10 = $16.11] $177.16 [$177.16 x 0.10 = $17.72] $194.88 [$194.88 x 0.10 = $19.49] $214.37 72/20 = 3.6 Years 72/10 = 7.2 Years

9. You are HERE T I M E T I M E T I M E T I M E T I M E T I M E T I M E T I M E

10. Running the Race of Your Life Born Childhood Education 22 Years Start Career 40 Years Work/Professional Career Possible Raising of Family Only Opportunity to Accumulate Wealth Retirement 25 Years Retirement Period Escalating Health Care & Maintenance Needs Death 0 22 62 87

11. Answer Debt is a powerful tool IF it is part of a thoughtful plan Debt is a DANGEROUS path when it is impulsive and not well planned Is Going Into Debt Worth It ??? Is this part of your “Plan” (Budget) ? Your Plan SHOULD lead to a Retirement Net Worth adequate to carry you through your senior years Emergencies Emergencies SHOULD be covered by your budgeted “emergency fund” – about 6 months of normal expenditures Catastrophes Catastrophes SHOULD be covered by your Insurance coverage Insurance should be part of your budgeted expenses

12. My Recommendations on Debt (For What It Is Worth !) Education: An Investment in Yourself – and you are definitely “worth it” Can Pay Life Long Dividends in Higher Income Make Your Education RELEVANT to the Real World Borrow As Required for Tuition/Fees – and Study Hard! Routine Consumer Purchases (aka “Stuff”): Follow Your Budget !!! If You Can’t Pay Cash, You Don’t Need It Yet NO Debt – especially no credit card debt Automobiles: Cars are NOT investments – they are expenses (and expensive!) Choose MODESTLY – just fit your Basic needs ALWAYS buy USED – Never New Strongly avoid debt for cars. Pay Yourself First and build a reserve; pay cash

13. 2 years Ownership $7,140 5 years Ownership $1,600 New Cars are for OLD, Rich People !! 2011 Dodge Ram Pickup 1500 – Regular Cab RWD; 3.7L 6 Cyl. Delivered Price: $21,000

14. My Recommendations on Debt (For What It Is Worth !) Education: An Investment in Yourself – and you are definitely “worth it” Can Pay Life Long Dividends in Higher Income Make Your Education RELEVANT to the Real World Borrow As Required for Tuition/Fees – and Study Hard! Routine Consumer Purchases (aka “Stuff”): Follow Your Budget !!! If You Can’t Pay Cash, You Don’t Need It Yet NO Debt – especially no credit card debt Automobiles: Cars are NOT investments – they are expenses (and expensive!) Choose MODESTLY – just fit your Basic needs ALWAYS buy USED – Never New Strongly avoid debt for cars. Pay Yourself First and build a reserve; pay cash House: Can be an “OK” Investment (Caution: Real Estate is not “liquid”) Wait until you have the Downpayment Saved Choose MODESTLY – Don’t be “House Poor” A Good Use of Debt – Go for Maximum Term (30 Yrs) for Flexibility

15. The Dark Cloud of Debt Stressful – Trying to always juggle the payment of bills Lose Hope – Feeling you can never catch up Marital Problems – Arguments with spouse over money Strained Relationships – Family & Friends Embarrassment – Bill Collector Calls

16. Ways Out of a Crushing Debt Load Credit Counseling Relearn skills in budgeting Coaching to adhere to your budget plan Debt Consolidation New (single) loan to “pay off” various outstanding debts Requires collateral (secured loan) Can reduce monthly payments (lower APR and/or longer term) Bankruptcy A very painful last option Trashes your credit ratings; impacts future ability to borrow Stays with you for life Social stigma

17. U.S. Bankruptcy Code • Chapter 13 – Adjustment of Debts for an Individual with • Regular Income • Wages are garnished, typically for 5 years • All disposable income goes to trustee for payment of debt • Creditors MAY agree to a reduce payback • Remains on credit record for 7 years • Chapter 7 – Liquidation • Must fail a “means test” • Homestead Exemption (varies by state); can keep minimum assets • Balance of assets are sold by force • Proceeds used to pay creditors on pro rata basis • Certain debt is exempt: student loans; child support; taxes, etc. • Court mandated education on credit management • Remains on credit record for 10 years

18. What are the Priorities? Exercise 4G Page 56 4 1 5 2 3 A car loan with a balance of $6,000, monthly payments of $250, and an interest rate of 8.9%. A bank credit card with a balance of $800 minimum monthly payments of $20, and an interest rate of 19.5%. A student loan with a balance of $30,000, monthly payments of $175, and an interest rate of 6%. A store credit card with a balance of $2,300, minimum monthly payments of $70, and an interest rate of 15.9%. A credit union credit card with a balance of $3,500, minimum monthly payments of $110, and an interest rate of 12%. _____ _____ _____ _____ _____

19. What is the U.S. National Debt – per person? A. $ 857 B. $ 1,021 C. $ 1,634 D. $ 4,789 E. $ 34,018