AN INTRODUCTION TO BASIC FINANCIAL PRINCIPLES

1. AN INTRODUCTION TO BASIC FINANCIAL PRINCIPLES Presented by: Sis. Valerie B. Young, M.S.

2. SEMINAR OUTLINE • INTRODUCTION TO FINANCIAL MANAGEMENT • BASIC BUDGETING • HOW CREDIT AFFECTS FINANCIAL HEALTH • NET WORTH VS. INCOME • REAL ESTATE • SAVINGS/RETIREMENT PLANNING • INSURANCE • Q&A

3. INTRODUCTION • What is financial management? • Financial management involves handling your financial situation in a responsible manner in order to achieve financial independence. • Why is financial management important? • The decisions you make regarding your personal finances affect many aspects of your life, as well as the lives of your family. • Wealth and poverty (defined) • Wealth is defined as an abundance of valuable material possessions or resources(i.e., your money works for you, you do not have to work for your money). • Poverty is defined as the state of being poor or having a lack of the means of providing material needs or comforts (not the same as being “broke”).

4. PRINCIPLE # 1 – YOU MUST WORK(I Tim. 5:8; II Thess. 3:10) • God expects us to work. It does not matter what type of job we have, all that matters is the effort we place into our job, and how we behave while on the job (i.e., displaying integrity). • The provider of a home should work diligently to provide adequately for themselves, as well as their family. • When we do this, we will be in a better financial position to help others, as well as ourselves.

5. PRINCIPLE # 2 – A BASIC BUDGET IS ESSENTIAL TO YOUR FINANCIAL HEALTH (Prov. 27:23; Luke 14:28-30) • A budget is a practical way of analyzing your current spending. Preparing a budget will help you to determine if your money is being used in an appropriate manner. • Creating a basic budget requires three steps: • Identifying how you currently spend your money; • Evaluating your current spending, and setting goals that take into account your financial objectives; and • Tracking your spending to make certain it stays within those guidelines.

6. BUDGETING TIPS • Your budget should be tailored to your specific needs, values, and priorities, with special consideration given to personal goals. • It is important to be realistic when establishing spending categories and quarterly expenses. • Let your budget determine your discretionary income (money left over after living expenses) before you decide to pursue additional installment debt. • Keep your records simple. • Remember, you are the only one who can maintain your budget. Making purchases without careful thought and planning can (and will) destroy your spending and savings plan. • Do not panic if your expenses exceed your income. It may be necessary to revise your budget by reducing spending as much as needed. If your expenses are less than your income, you should begin allocating funds for future goals.

7. PRINCIPLE # 3 – MAINTAINING GOOD CREDIT IS ESSENTIAL TO YOUR FINANCIAL HEALTH(Ps. 37:21; Prov. 22:1) • Credit is the amount of money that is available to you by lenders. Credit is a “promise to pay.” • Your credit score identifies the risk associated with extending you services. A computer-generated mathematical calculation of this information appears on your credit report (commonly known as your “FICO Score”). The lower your credit score, the higher the interest rate. • A credit score is comprised of the following: • Payment History (35%) • Amounts Owed (30%) • Length of Credit History (15%) • New Credit (10%) • Types of Credit Used (10%) • There are three credit bureaus: • Experian, Trans Union, and Equifax • It is important to note that not all bureaus have the same information. Thus, your score can different with each credit bureau.

8. MAINTAINING GOOD CREDIT • Having good credit should be important to everyone, it can help you to: • Obtain a home mortgage • Rent an apartment • Finance a vehicle • Obtain/Maintain employment • Set up utility accounts • It is also important to maintain good credit. The following steps will ensure that your credit rating remains positive: • Making payments on time • Not overextending yourself • Paying what you owe • Avoiding “impulse” purchases • Reviewing your credit report regularly for inaccuracies • The Fair Credit Reporting Act requires each of the nationwide consumer reporting companies to provide you with a free copy of your credit report, at your request, once every 12 months. To order, visit annualcreditreport.com or call 1-877-322-8228. • You are also entitled to a free credit report if you have been denied credit due to something on your credit report.

9. MAINTAINING GOOD CREDIT • Factors to considering when choosing credit: • What is the interest rate? Does it change based on credit history? • Is there a grace period? • Are there additional charges (i.e., annual fees)? • What are the penalties for late payments? • How to improve your credit rating: • If you have had financial difficulties that have negatively impacted your credit rating, do not despair. You can take steps to improve bad credit. While you cannot erase bad credit, you can replace it with good information. • Obtaining a secured credit card is one of the best ways to improve your credit rating. Many credit card issuers will offer you a secured credit card regardless of how poor your credit might be. These credit cards require individuals to deposit a certain amount of money as collateral, but once an individual has demonstrated a good payment history, he/she will normally qualify for a unsecured credit card.

10. PRINCIPLE # 4 – A POSITIVE NET WORTH IS ESSENTIAL TO YOUR FINANCIAL HEALTH(Deut. 8:18) • Net worth is defined as the total value of everything you own (assets), minus the total value of everything you owe (liabilities). • Salary is defined as the regular wages received by an employee from an employer on a weekly, biweekly, or monthly basis. • To date, Black Americans have a median net worth of $5,998 (compared to $88,651 for Caucasian Americans), and 32% of Black Americans have a zero or negative net worth. (Source: The Covenant)

11. NET WORTH • Why understanding your net worth is important: • Most people feel that if he/she is making “good money” then they are doing fine. However, if a family member were to lose his/her job, or someone were to become ill, there are often no resources to pull from. • The benefits of knowing your net worth: • You will know your current financial state • You will have a clear picture of your assets, as well as debts • You will be better able to ensure that you have adequate insurance • It will provide you with a concrete figure by which to track your wealth

12. NET WORTH • Strategies for increasing net worth: • Understand the difference between appreciating (assets that increase in value) and depreciating assets (assets with finite lives that lose value over time) • Invest in real estate • Reduce debt • Increase savings

13. NET WORTH • Assets that will likely appreciate: • Real estate properties • Savings accounts • Investments • Cash value in life insurance policies • “Assets” that will definitely depreciate: • Vehicles • Clothes • Cash (i.e., $100 today will only be worth approximately $94.00 next year due to the “time value of money”)

14. VEHICLES – A DEPRECIATING “ASSET” • Why should you consider purchasing a “pre-owned” vehicle? • Today, late-model used cars are not only a safe buy, they also make good financial sense. Buying used enables you to avoid the heaviest depreciation hit. • More and more manufacturers offer "certified pre-owned" programs. Cars sold as certified pre-owned (CPO) bridge the gap between new and used. They are subject to a rigorous inspection and repair process, and usually are covered by a warranty from the manufacturer. CPO cars usually cost more than other used cars, but the added warranty and peace of mind make them a good value.

15. VEHICLES – A DEPRECIATING “ASSET” • We will now look at some popular luxury vehicles, and how they depreciate: • 2006 Land Rover Range Rover HSE • MSRP - $74,285 • 1st year depreciation - $22,004 • 2nd year depreciation - $7,343 • 1st year opportunity cost* - $1,061 • 2007 Cadillac Escalade ESV • MSRP - $59,175 • 1st year depreciation - $18,465 • 2nd year depreciation - $3,855 • 1st year opportunity cost - $904 *Opportunity Cost is the cost of something in terms of an opportunity foregone (and the benefits that could be received from that opportunity).

16. VEHICLES – A DEPRECIATING “ASSET” • 2007 GMC Yukon XL Denali All-Wheel Drive • MSRP - $49,970 • 1st year depreciation - $12,225 • 2nd year depreciation - $3,827 • 1st year opportunity cost - $725 • 2007 Lexus GS 450h Sedan • MSRP - $54,900 • 1st year depreciation - $10,087 • 2nd year depreciation - $5,584 • 1st year opportunity cost - $773

17. VEHICLES – A DEPRECIATING “ASSET” • Now let us look at some popular mid-range cars, and how they depreciate: • 2007 Toyota Camry LE V6 • MSRP - $23,340 • 1st year depreciation - $4,051 • 2nd year depreciation - $2,280 • 1st year opportunity cost - $403 • 2007 Toyota Corolla LE • MSRP - $15,415 • 1st year depreciation - $2,268 • 2nd year depreciation - $1,577 • 1st year opportunity cost - $305

18. PRINCIPLE # 5 – INVESTING IN REAL ESTATE CAN IMPROVE FINANCIAL HEALTH(Luke 14:28-30) • The advantages of home ownership: • Building equity • When you purchase a home, (unless you have an interest-only mortgage) every monthly mortgage payment you make contributes to your equity—your actual ownership of that home. • A portion of your monthly payment is allocated to paying down the principal on your loan (the base amount for which you took out your home loan), while the balance goes toward interest and escrow items (such as your home insurance and taxes). • The longer you own your home, the larger the portion of each month’s payment that is applied to your principal—and the greater your equity. • However, when you rent, you never build equity. When you leave your apartment or rental home, you have no ownership stake in that property whatsoever.

19. INVESTING IN REAL ESTATE • The advantages of home ownership: • Tax advantages • The federal tax code offers many advantages to homeowners that are not available to people who rent. • First among these advantages is the homeowner’s ability to write off their mortgage interest. During the first several years of home ownership, this tax deduction can total thousands of dollars. • As a property owner, you will also be required to pay property taxes. These property taxes are generally deductible from your personal income taxes.

20. INVESTING IN REAL ESTATE • The advantages of home ownership: • Appreciation • In general, the value of your home will increase over time. Historically, homes in the United States have appreciated (gone up in value) around 5% each year. • Of course, homes do not always go up in value. Several times in the last 50 years, the American housing market has actually declined. When interest rates rise sharply, mortgage rates also rise, causing people to be less likely to want to buy homes. • Even though these “bust” cycles can be painful, homeowners who hold on to their properties for 5 or 10 years almost always see their homes appreciate in value.

21. INVESTING IN REAL ESTATE • Types of mortgages: • Fixed rate mortgage • These loans have an interest rate that is fixed for the life of the loan, and a monthly payment that stays the same. • Adjustable rate mortgage (ARM) • ARM Loans offer the opportunity to take advantage of a changing market. The interest rate on an ARM loan varies periodically as interest rate conditions change. Because the interest rate fluctuates, the initial rate on an ARM is lower than a fixed rate mortgage.

22. INVESTING IN REAL ESTATE • Balloon mortgage • With a balloon mortgage, borrowers get lower rates and payments for a specific period, usually anywhere from 3 to 10 years. At that point, the borrower must pay off the principal balance in a lump sum. Under certain conditions, the mortgage can be converted to a fixed or adjustable rate mortgage. • Interest-only mortgage • A mortgage is “interest only” if the monthly mortgage payment does not include any repayment of principal for some period, such as 5 years. During that period, the loan balance remains unchanged. At the end of that period, the payment is raised to the fully amortizing* level. In such case, the new payment will be larger than it would have been if the loan had been fully amortizing at the outset. The longer the interest only period, the larger the new payment will be when the interest only period ends. * Amortization is the process of paying off a loan through specifically structured periodic payments.

23. INVESTING IN REAL ESTATE • Subprime mortgage • These days, even individuals with less-than-stellar credit can purchase a home – as long as they are willing to accept higher interest rates, and agree to more difficult terms. Subprime mortgages are usually one to six points over the prime rate. • Black Americans are 3.6 times as likely as non-minorities to receive a subprime mortgage, and 4.1 times as likely as non-minorities to receive a refinance loan through a subprime lender. (Source: The Covenant) • You can avoid subprime mortgages through special home buyer programs such as NACA • NACA is a nonprofit corporation whose goal is to stabilize neighborhoods and maximize homeownership opportunities for working people and families. For more information, visit naca.com.

24. INVESTING IN REAL ESTATE • How much can I afford? As a rule of thumb, most lenders will qualify you for a loan that has a total monthly payment between 28% to 36% of your gross monthly income (in other words, your income before taxes). For example: Your yearly salary: $40,000 Your gross monthly income*: $3,333 Gross monthly income x 28% $933 Gross monthly income x 36% $1,200 Therefore, as a rough estimate, for a person making $40,000 a year, their lender will likely qualify them for a loan with a monthly payment in the $933 to $1,200 range. Assuming a 6% interest rate and 30-year mortgage, this homebuyer could qualify for a home priced between $142,000 and $183,000.-------------------------------------------* $40,000 divided by 12

25. INVESTING IN REAL ESTATE • A Home Equity Loan uses a portion of the value of your primary residence, above what you owe on your existing mortgage, as security for a loan. Home Equity Loans allow you to: • Receive your money in one lump sum; and • Pay it back in fixed principal and interest payments over a fixed period of time. • A Home Equity Loan often makes good sense if: • You need a set amount of money for a specific purpose, such as an addition to your home.

26. INVESTING IN REAL ESTATE • A Home Equity Line of Credit is a form of revolving credit in which your home serves as collateral, with a Home Equity Line of Credit, the individual: • Receives an established credit limit with a variable interest rate that you can access with checks and sometimes a credit card; • The individual is given a set period of time, known as the draw period, during which he/she can draw on their line of credit; and • The lender may include the option to renew your credit line when the draw period expires. • A Home Equity Line of Credit often makes good sense if: • You want to have money available for different reasons over a long period of time • CAREFUL consideration should be taken with either option. If you fall behind in your payments, you are putting your house at risk!

27. INVESTING IN REAL ESTATE • Cautions about these types of loans: • Watch out for low introductory rates, especially on revolving credit lines. Your loan rate may start at 6 percent, but 4 months later increase to 12 percent. The loan rate may be variable, based on the prime rate in the future. Many variable rate loans have no cap on how high the interest rate may go. Consumers should avoid loans without "caps" or with "caps" higher than they can afford to pay, no matter how low the current rate. • Watch out for points and closing costs that could total several hundred dollars. • Watch out for balloon payments. If you cannot pay the balloon, you may lose your home. • Also, beware of loans packed with unnecessary or expensive life insurance, property insurance, or credit insurance. Buying credit or disability insurance cannot be made a condition of getting a loan. Property insurance can be required, but can always be purchased through your own insurance company.

28. PRINCIPLE # 6 – SAVING AND RETIREMENT-PLANNING IS ESSENTIAL TO YOUR FINANCIAL HEALTH(Prov. 6:6-8) • As a good steward, it is your responsibility to not only address the short term financial needs of your household, but the long term financial needs as well. • First, it is important to understand the difference between the “saving” and “investing”. Saving money merely means to put it aside as a reserve. However, investing money means to commit the funds to a financial vehicle in order to earn a financial return.

29. SAVING AND RETIREMENT-PLANNING • Why save money? • To build a strong financial foundation (saving): • A strong financial foundation is designed to take the anxiety, pressure, and stress out of personal money management. It places a buffer between you and danger. A strong financial foundation should be established in order to deal with the inevitable, unexpected, and negative financial events in life.

30. SAVING AND RETIREMENT-PLANNING • To build a strong financial future (retirement planning): • Now more than ever, saving for retirement has become extremely important. With the average life expectancy in the U.S. increasing, and a large population of Baby Boomers currently approaching retirement age, Social Security may not be enough to support you through your retirement years. Regardless of your age, now is the time to start building your nest egg in order to maintain a comfortable lifestyle throughout your retirement. • The need to build a strong financial future is a reality that we all must face. Once your financial foundation is established, you should then start working on your financial future.

31. SAVING AND RETIREMENT-PLANNING • To save money, you must do one of two things, or a combination of both: • Limit your lifestyle • Increase your income • What should I do with the money I save? • For short-term savings, open a savings account • Internet banks (such as ING) offer better rates than “traditional” banks • For long-term savings (retirement planning), consider the following: • Company-sponsored 401(k), 403(b), TSP • Individual Retirement Account (IRA) • Annuities

32. PRINCIPLE # 7 – OBTAINING INSURANCE IS ESSENTIAL TO YOUR FINANCIAL HEALTH(Prov. 27:1; Prov. 27:12) • Life is filled with uncertainties, and we are all required to take risks daily. The purpose of insurance is to allow individuals to transfer the unacceptable risk of loss to someone else (the insurance company). • It is important to determine the risks that you and your family face in order to make an informed decision about insurance. You must decide whether to insure some risks (through obtaining insurance), or depend on your own resources to cover those risks (self insure). • The unknown CAN happen. Catastrophic losses DO occur. Even the best financial plan can fail if it does not consider risks such as death, disability, personal liability, and loss or damage of substantial assets.

33. QUESTIONS?? • THANK YOU!!

34. …ABOUT THE PRESENTER Sis. Valerie B. Young, M.S. is a financial advisor, specializing in business and personal financial management. She obtained a Bachelors of Science degree in Marketing from Morgan State University in 1996, and a Masters of Science degree in Business Management from The University of Maryland, University College in 2006.