Personal Finance Training January 2010
Personal Finance Topics • Budgeting • Mortgages • Credit Cards
Budgeting Topics • What is a Budget? • Why should I create a budget? • Getting Started • Sample budgets • Do’s and Don’ts
What is a budget? • An estimate, often itemized, of expected income and expense for a given period in the future. (dictionary.com) • Defining how you want to spend your life’s energy • Step 1- You show up at work and trade your time and energy for money • Step 2- You spend your money (But do you know where it is all going?)
Why should I create a budget? • Lifespan • The average lifespan in the U.S. is 78 years • The average age of retirement is 62 • Control • Being able to set and meet goals • Being able to cope with the unexpected • Communication • Can be a tool to resolve personal differences in a relationship about the handling of money • Know what is going on • We all work hard for the money that comes into our lives • We should all be making a conscious decision about how we consume the money that we work so hard to earn • It is not about saying what we can or we cannot do with our money!
Getting Started • Set Goals • Is your current money situation where you want to be 5 years from now? (10, 15, 20, etc…) • Retirement savings, home, car, vacation, college fund, etc.. • Where is it all going? • Keep track of all your income and expenses • If you don’t know where it is all going, you cannot do anything to change it • Information is power (write it down) • Establish a budget • Use available tools in conjunction with your goals • Track your progress against your budget (write it down) • At least monthly, preferably weekly
Sample Budget Worksheet http://www.free-financial-advice.net/budget.xls
Sample Budget • The 60% Solution (http://moneycentral.msn.com/home.asp) • 60% Committed Expenses • 10% Retirement Savings • 10% Long-term Savings • 10% Short-term Savings • 10% Fun money • *All items are calculated off of gross income
Sample Budget • 60% Committed Expenses (All normal recurring bills) • Basic food and clothing • Essential household expenses • Insurance premiums • Utilities (even non-essentials, cable, internet, cell phone) • Taxes • Charitable contributions • 10% Retirement • 401K • IRA
Sample Budget • 10% Long-term Savings • Pay down debt • Investments • Savings for longer term goals • Emergency fund • 10% Short-term Savings • Vacations • Repairs • New appliances • Holiday gifts • 10% Fun Money • Hobbies • Anything else you may want
Budgeting Do’s and Don’ts • Do’s • Come up with a plan • Write everything down (all income and expenses) • Automate when possible (direct deposit) • Use available tools (internet/books) • Include your spouse/significant other • Monitor progress (at least monthly) • Don’ts • Use credit cards or other accounts to make up for budget shortfalls • Leave items out of your spend tracking • Get discouraged if you don’t succeed immediately…this is about progress
Last Thoughts • Budgeting is not about seeking perfection, but rather continuous improvement. • It is very easy to get discouraged and throw away the budget • Learn to incorporate mistakes or experience from prior budgets into new budgets • Keep a long-term focus • Chart progress each month / year
Mortgage Topics • Why own a home? (Pro’s and Con’s) • Mortgage Trivia • Sample Calculations • Do’s and Don’ts
Trivia Question # 1 What is the average mortgage amount for a house in Chautauqua County, NY? A.) $47,000 B.) $63,000 C.) $79,000 D.) $88,000
Trivia Answer # 1 What is the average mortgage amount for a house in Chautauqua County, NY? A.) $47,000 B.) $63,000 C.) $79,000 D.) $88,000
Trivia Question # 2 How much cash do you need to close on a $65,000 house if you are going to put a 5% down payment (hint: includes taxes, appraisal, title ins, etc…)? A.) $3,200 B.) $4,500 C.) $6,500 D.) $8,400
Trivia Answer # 2 How much cash do you need to close on a $65,000 house if you are going to put a 5% down payment (hint: includes taxes, appraisal, title ins, etc…)? A.) $3,200 B.) $4,500 C.) $6,500 D.) $8,400
Sample calculations http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx
What about tax deductions? • Standard deduction vs itemized deduction • 2010 Standard deduction rates • Single- $5,700 • Married- $11,400 • Itemized deduction • Mortgage interest, property tax, medical bills (above 7.5% of AGI), state income tax, charitable contributions, etc… • Tax savings = (Itemized deduction – standard deduction) * tax rate
Credit Card Topics • Credit Card Statistics • Credit Card Billing Cycle • Credit Card Dos and Don’ts • What new legislation (Credit CARD Act of 2009) means for consumers • Reducing Credit Card Balances
Credit Card Statistics $10,679 • What is the average credit card debt for the 78% of households that have a credit card at the end of 2008? (Nilson Report, April 2009) At the end of 2008, what was Americans’ total credit card debt? (Nilson Report, April 2009) $972.73 billion What is the average number of credit cards per consumer as of the fourth quarter of 2008? (Experian, March 2009) 5.4 cards One out of every how many families pay only the minimum due every month? (VISA USA statistics, Q4 2006) One out of every six families pay only the minimum due every month
Credit Card Statistics (Contd) What is the average interest rate for purchases on credit cards? (Consumer action credit card survey, July 2008) 13.54% What percentage of people surveyed say they read the terms and conditions of their credit cards? (CreditCards.com survey, June 2007) Only 25% of people say they read the terms and conditions of their credit cards.
Pro’s and Con’s of Using Credit Cards • Pro’s • Convenience • Making large purchases • Build credit/improve credit score • Rewards (cash back, merchandise, travel, etc.) • Con’s • Interest and fees to be paid if balance not paid off within grace period • Convenience – (easier to spend) • Can hurt credit score if you do not make payments on time
Dos and Don’ts of Using Credit Cards Responsibly (Contd) Dos- Do make sure you know the terms of your credit card agreement (interest rates, fees, etc.) • Do make smart decisions about buying things you want vs things you need • Do call your credit card company to request a lower interest rate Do notify your credit card company in advance if you won’t be able to make a monthly payment on time Do maintain lower credit card balances to keep your credit score higher
Dos and Don’ts of Using Credit Cards Responsibly Don’ts- Don’t pay only the minimum payment as this will increase the amount of time it takes to pay off your debt and will also increase the amount of interest you pay. • Don’t use your credit card to buy things you can’t afford. • Don’t use your credit card to make everyday purchases.
New Credit Card Legislation (Credit CARD Act of 2009) • No interest rate increases during the first 12 months of opening a credit card (unless rate increase was disclosed when account opened) • Promotional rates must last at least 6 months • If your credit card company increases your interest rate, they must give you 45 days advance notice and they cannot increase the interest rate on existing balances, only new balances
New Credit Card Legislation (Credit CARD Act of 2009) (Contd) • Any payment made above the minimum payment amount must be applied to balances with the highest interest rates • You cannot be charged fees to make your credit card payment online, by mail or over the phone (unless you make a last-minute payment over the phone and your bill is due the same or next day) • You cannot be charged over the limit fees unless you request the over the limit transactions be processed (otherwise transactions will be denied)
New Credit Card Legislation (Credit CARD Act of 2009) (Contd) • Billing statements must be sent 21 days before the due date, giving more time to pay bill before penalties and late fees are assessed • Limits the number of fees that can be charged per billing cycle • Requires credit card companies to consider payments as on time if your due date falls on a weekend or holiday and your payment is received the following day
Reducing Credit Card Balances • Determine how much money you have monthly to pay down your credit card balances and use that money towards your credit card debt • If at all possible, to reduce your credit card balances you will need to pay more than the minimum payment • Pay off higher interest rate credit cards first, saving you interest • Contact your credit card company to discuss options such as lowering your interest rate, that may be able to help you reduce your credit card balances
Reducing Credit Card Balances (Contd) http://www.bankrate.com/calculators/credit-cards/credit-card-payoff-calculator.aspx
Summary • Create a budget • Set your goals • Write everything down! • Learn to expect the unexpected • Track progress • Don’t get discouraged • Mortgages • Don’t buy more house than you can afford • Importance of good credit • Plan for the unexpected • Understand how tax savings really work • Pay more than minimum monthly payment if possible • Credit Cards • Only spend what you can pay off at the end of the month • Never make just the minimum payment • Never finance short-term spend items on a credit card (i.e. groceries) • If you can’t afford to pay for it now, you can’t afford to pay for it later with interest added on
Summary • You are responsible for your financial success or failure • Kids will get sick and have injuries • Vehicles will need maintenance • Christmas is going to happen again next year • Learn to plan for the unexpected • You have the power!