Cranbrook Kingswood Alumni Association

1. Cranbrook Kingswood Alumni Association Senior/Junior Financial Seminar “Raising a Financially Savvy Young Adult & Managing Finances in College” April 3, 2014 Cranbrook Kingswood Alumni Association

2. Presenters • Kristen L. Baiardi, CK ’02, - Abbott Nicolson P.C. • Olaf “Cory” Kroneman CRPS, CK ’97 – Morgan Stanley • Scott M. Strickland, CFP, CIMA, CPWA, CK ’01 – Morgan Stanley CranbrookKingswood Alumni Association

3. Checking and Savings • Budgets • Checking + Debit Cards • Credit Cards • Savings CranbrookKingswood Alumni Association

4. Your Mission: FINANCIAL INDEPENDENCE • Stick to your budget • Keep track of your $ • Avoid pitfalls (pitfalls = pain) • Plan for tomorrow How to Get There? • Start now - don’t wait until you leave for college • Use tools to stay on track (hint: you have to use them) • Find a student-friendly bank CranbrookKingswood Alumni Association

5. Budgets - NOW PARENTS: • If you give them your credit cards now – stop • If you hand out “cash on demand” – stop • Establish a monthly allowance based on their spending patterns and your resources • Until they leave for college, keep a joint account with them at your bank and monitor it • EVERY MONTH - set up a meeting to review how they did, adjust, and fund next month • Include CK Scrip cards in their allowance whenever you can (gas, food, clothes) STUDENTS: • Your parents are not ATM machines • Make a list of what you spend now and negotiate a monthly allowance • Use your debit (not credit) card vs. cash whenever possible to track expenses • Work to keep “emergency funding” to a minimum • Meet with your parents once a month to talk about your budget – what’s working, what’s not CranbrookKingswood Alumni Association

6. Budgets - College • Adjust your “at home” budget based on what you expect to spend (make a list). • Plan for a major bump to the budget month #1 for “Dorm Décor”. • Plan to spend at least 200% of what you budgeted for Dorm Décor. • Plan to spend @ $500 per semester on textbooks (more if you are a science major). • Plus the Regular Monthly Expenses: • Food - beyond the Meal Plan (parents: they can’t live on dorm food 24/7) • Clothes • Entertainment - movies, sports tickets • Clubs - intercollegiate sports, going Greek, dues to build your resume • Miscellaneous – road trips, toiletries, etc. Hint to parents: if you fund less than a reasonable budget, expect a lot of panicked text messages/phone calls from your student at the end of the month. • Find out when next year’s housing contracts firm up. Surprise! October??? Sooner than you expect, lease deposits can rock your budget. CranbrookKingswood Alumni Association

7. Budgets – build your own • NOTES: • The above is an Excel spreadsheet – you can use paper or any other method. • Wikipedia’s list/analysis “Comparison of accounting software” is a great resource to find personal accounting software (including free downloads) if Excel isn’t your cup of tea. Quicken is the most commonly used personal proprietary software. • Budgeting by month is helpful – note the variance month/month. • Good news! After a few months (once the patterns are established), you might not need to maintain this type of detail as a student, but using financial software is a good discipline for any household. CranbrookKingswood Alumni Association

8. Checking + Debit Cards BEFORE COLLEGE: • Open a student checking account - joint with parent at their bank. • Your monthly allowance goes into this account. • Don’t order many paper checks – students rarely use them. • Attach a debit card to this checking account and LEARN HOW TO USE IT. • REMEMBER: a debit card is NOT a credit card, even if it looks like one. • Debit cards take money from your checking account. • Debit card purchases and ATM withdrawals will hit your checking account within 1-3 days. If there is no money there to cover -> bad news! (see slide on “pitfalls”). • Figure out what works for you to keep track of the balance in your checking account. • Suggestion: Save receipts, send yourself a text, write it in your planner, track it on the bank’s website, or use the check register that the bank sends in the box with your checks. CranbrookKingswood Alumni Association

9. Checking + Debit Cards AT COLLEGE : • Find the best and most popular bank at your school. • Look for nearby locations and ATM machines • Check out the STUDENT ACCOUNTS section on the bank’s website (it should be friendly, tailored to students, and easy to navigate) • Open an account at Friendly Bank. Take advantage of their Student Specials (free checks, overdraft protection, seminars, toasters, whatever). • You may ask at least one parent to join you as a signer (you are the primary). • Get a debit card linked in and use it. Figure out how to access your account on-line. • If offered, open ONE credit card with you as the primary signer co-signed by parent, or in this case better yet - you by yourself (if offered). Most come with $500 limits (don’t ask for more). These Student cards are linked to checking only as overdraft protection. Don’t confuse this with your debit card. Hint to parents: you will need the ABA (Bank Routing number – the first set of numbers at the bottom of the checks) and the student’s account number to send funds electronically from your bank. Allow 1-3 days. CranbrookKingswood Alumni Association

10. Credit Cards • To begin to establish credit in your own name, open one credit card at your new Friendly Bank (often used for overdraft protection). A parent may co-sign, but you are the primary cardholder. • They will set a low limit ($500 usually). • AVOID ALL STORE ISSUED CARDS (J Crew, Victoria’s Secret, Target, etc. ). • Check the activity on the card regularly via their website. • When the bills arrives, pay it. Pay all of it. • Report any lost cards or suspected fraudulent activity immediately. CranbrookKingswood Alumni Association

11. PITFALLS IDENTITY THEFT • SAFEguardyour personal information, especially your social security number. Memorize it. Do not write it down in your wallet or provide it to anyone over the internet or on a cell phone. • Do not reply to any odd emails asking for personal information. • Your bank may offer ID protection, but you really don’t need it yet, even at a reasonable price (@ $7 /month is average). CREDIT or DEBIT CARD FRAUD • Make copies of the front and back of all credit cards and keep them somewhere safe. This will provide contact info and card numbers in the event they are lost. • Check your activity regularly on-line to make sure it’s all yours. • Report any lost or stolen cards immediately. CranbrookKingswood Alumni Association

12. MOREPITFALLS • OVERDRAFTS, OVERLIMITS – ouch! • This is the worst kind of habit. Preventable. Expensive (even with Student Accounts). PLUS, this is reported and tracked and stays with your “credit id” (your social security number) forever. • DO NOT DO THIS. Keep track of what you spend. • LATE PAYMENTS – bigger ouch! • Pay all bills (especially credit card payments) on time. • Late payments on any consumer debt (for students: credit cards, cable bills, phone bills, even movie rentals not returned or paid for) may be reported to the credit agencies and this DAMAGES YOUR CREDIT SCORE. Beware! Your credit score stays with you forever. REALITY CHECK: your future costs and ability to borrow depends upon your credit score. Don’t trash it! CranbrookKingswood Alumni Association

13. Pitfalls - Examples Scenario #1 – the delayed debit: • You have $50 in your account. You use your debit card to pump $25 of gas to refill your friend’s car. Your account will immediately show a $1 “test”. This is a reminder of more to come! • You drive off, and forget to write it down. In fact, you forget about it entirely. • The next day, you take a $40 ATM cash withdrawal, leaving $10 in your account. • Two (or three) days later, the gas charge hits and OOPS… you are now overdrawn (most banks will not reject small pre-tested debits for gas). Fees! Scenario #2 – the delayed credit: • Your parents tell you that they sent your monthly allowance to arrive on the 1st. • You plan a big evening on the 1st, but your debit card is rejected by the restaurant after you have consumed their food. You have no cash. You have to call a friend to bail you out (and promise to buy her dinner to make up for it). • Your allowance arrives on the 2nd (it can take a few days). You spend a big chunk of it repaying your friend. CranbrookKingswood Alumni Association

14. Credit Cards – Pro’s & Con’s • Establishing Credit • Liability • Costs of Borrowing • Credit Score CranbrookKingswood Alumni Association

15. Establishing Credit • Credit – receiving cash, goods or services with an obligation to pay later • Open/Revolving Credit – line of consumer credit extended before you make a purchase. Once you’ve used open credit, you can pay back your debt at whatever pace you like so long as you pay the specified minimum balance monthly • Credit Evaluation – lenders look at the “5 C’s” • Character – have you established a record of timely repayment of past debts • Capacity/Capital – evaluate current income, current level of borrowing and size of financial holdings/investment portfolio • Collateral – assets or property offered as security to obtain credit • Conditions – impact the current economic environment may have on your ability to repay any borrowing CranbrookKingswood Alumni Association

16. Credit Evaluation & Determination • Credit Bureau – private organization that maintains credit information on individuals, which it allows subscribers access for a fee • Credit Scoring – numerical evaluation of applicants based on their answers to a simple set of questions. Examples include - • Employment & Annual Income • Age • Number of bank accounts and credit cards • Credit history • Creditworthiness determines whether you qualify for credit & what interest rate you’ll be offered • FICO (Fair Isaac Corporation) Score – represents potential credit risk. Scores range from 300 (most risk) – 850 (least risk) • Average FICO 2011 - 692 CranbrookKingswood Alumni Association

17. Costs of Borrowing • Annual Percentage Rate (APR) – true simple interest rate paid over the life of the loan. Calculated the same way by all lenders • Variable Rate – the rate you pay is tied to another interest rate (i.e. Prime) • Fixed Rate – interest rate is “fixed” for the duration of the loan • CAREFUL – these can change. Credit card company needs to inform you in writing at least 15 days before changing rates • Teaser Rates – initial rates (3 months – 1 year) will run as low as 0.00% but typically jump to 17-18% after the introductory period is over • Cash Advances – Extremely expensive way to borrow money • Begin paying interest immediately • Credit card companies charge a higher rate of interest on cash advances • Carry an up front fee of 2-4% of the amount advanced • Penalty Rates – rate you pay if you don’t make minimum payments on time. These rates are typically 10% (or more) higher than standard rates. CranbrookKingswood Alumni Association

18. Pro’s & Con’s • Pro’s • Convenience & ease of shopping • Emergency use • Allows for consumption before purchase is fully paid for • Source of interest-free credit • Accumulation of points and other benefits • If used properly, builds credit score • Con’s • Lose control of spending • High interest rates • Fees • Interest on Interest • SOLUTION – PAY BALANCE COMPLETELY EVERY MONTH! CranbrookKingswood Alumni Association

19. Credit Card Payment Example • Assumptions - • $5,000 Initial Balance • Pay $100 per month • Interest Rate = 18% • Results • It will take 94 Months to pay off • You will pay $4,311 in interest in addition to you $5,000 in principal CranbrookKingswood Alumni Association

20. Lease Agreements • Lease Agreements – Terms • Renter’s Insurance • Responsibilities of Tenants • Sub-Letting – Pro’s & Con CranbrookKingswood Alumni Association

21. Housing Contracts • Housing contracts incorporate by reference Terms and Conditions • Example (U of M): CranbrookKingswood Alumni Association

22. U of M North Quad Dorm, March 28, 2011 Credit: annarbor.com

23. Leases • All of these agreements constitute binding and enforceable contracts and create important legal duties and ramifications • Who is named as a tenant? (joint and several liability) • Amount of rent? When/where is rent due? • Security Deposit • Utilities? • Late fees CranbrookKingswood Alumni Association

24. Other Important Lease Terms • Hold harmless/indemnification-you are responsible! • Alterations- what are you permitted to do to the premises? • Are pets allowed? • Holding over- what happens if you do not leave the premises at the end of the lease term CranbrookKingswood Alumni Association

25. Renter’s Insurance • Generally, your personal property is your own responsibility. The landlord’s insurance only covers the building itself. • You should consider obtaining renter’s insurance to protect your belongings in the event of a loss. Policies are generally available at very reasonable rates. CranbrookKingswood Alumni Association

26. Subletting • Does the lease permit subletting? • Tenant “on the lease” remains responsible for payment of rent to Landlord • Have written sublease with sublessee • Are there local ordinances that prohibit the number of occupants in a premises? CranbrookKingswood Alumni Association

27. Truth in Renting Act • Requires certain disclosures in every residential lease • Prohibits certain waivers of tenant’s legal rights CranbrookKingswood Alumni Association

28. Modifications must be in writing! • Lease will generally contain an “integration” clause. This means that the lease is the entire agreement between the parties and that prior or contemporaneous oral agreements are not binding CranbrookKingswood Alumni Association

29. Inventory Checklist • Fill out inventory carefully at beginning and end of tenancy. Save copies for your files so that you are able to prove the condition of the premises. CranbrookKingswood Alumni Association

30. Basics of Investing • Establishing an IRA • Types of Investments • Costs of Investing CranbrookKingswood Alumni Association

31. Why Invest? • Investing is important in order to meet certain financial goals in life and to overcome the effects inflation has on purchasing power • What is Inflation? • The overall general upward price movement of goods and services in an economy (measured by consumer price index – CPI) • Historically, inflation has fluctuated greatly, ranging from zero to almost 23% • Postage stamps – 30 years ago were $0.20 and today are $0.46 • In 1950 a gallon of gas cost 25 cents. (avg in MI $3.85) • Things you will need to invest for in the future…. • Down payment on a home • Retirement • College • Weddings CranbrookKingswood Alumni Association

32. Saving For Retirement • We are living longer and therefore the risk of outliving assets during retirement increases • In the UK the Office for National Statistics estimates that 1 in 3 children born today will live to age 100 and the first person that will live to be 150 years old is alive today. • What’s the solution? • You MUST start saving early to take advantage of the power of compounding • Recommend contributing 10-15% of your income annually to retirement plans/investment accounts • Example – save $10,000 per year for 40 years, earning 8% per year on your investments • Result – $2,590,565 “Compounding interest is the most powerful force in the universe.” – A. Einstein “Some one is sitting in the shade today because someone planted a tree a long time ago.” - W. Buffett CranbrookKingswood Alumni Association

33. Some Concepts: Trade-Offs CranbrookKingswood Alumni Association

34. Some Concepts: Savings CranbrookKingswood Alumni Association

35. Individual Retirement Accounts (IRA) • Traditional IRA • Contribute 100% of compensation or $5,500 • Contribution is tax deductible • Money grows tax deferred until withdrawn • Withdrawals pre 59 ½ carry a 10% penalty plus income tax (unless qualify for exception) • Roth IRA • Contribute 100% of compensation or $5,500 • Contribution NOT tax deductible • Money grows tax free (no income tax due when withdrawn) • Several withdrawal exceptions for pre 59 ½ so long as the plan has been in existence > 5 years CranbrookKingswood Alumni Association

36. Types of Investments • Equity(stock) – an instrument that signifies an ownership position in a corporation, and represents a claim on its proportional share in the corporation’s assets and profits • Voting rights for certain corporate decisions • No set maturity • Higher risk, higher expected return • No claims in event of bankruptcy • Debt (Fixed Income/Bond) – a promise to repay principal along with interest (coupon) on a specified date (maturity) • Issued by the Federal government, states, cities, corporations and several other institutions • Taxable and Tax Free (Municipal) • Receive principal back at maturity • No voting rights • Greater claim on an issuer’s income than equity holder • Lower risk, lower expected return CranbrookKingswood Alumni Association

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38. The Power of Compounding • Start with $1,000 • Invest for 40 years • Earn a return of 2.5%, 5% or 10% annually on investment CranbrookKingswood Alumni Association

39. The Effect of Inflation on Purchasing Power Annualized Rate of Inflation: 3.97% (CPI) CranbrookKingswood Alumni Association

40. Quote to Remember…… Warren Buffett Chairman, Berkshire Hathaway 2011 Shareholder Letter “The riskiness of an investment is not measured by Beta….but rather by the reasoned probability of that investment causing a loss of purchasing power over the contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power…. A non-fluctuating asset can be laden with risk.” CranbrookKingswood Alumni Association