Autonomics and Other Important Financial Information

1. Autonomics and Other Important Financial Information Brought to you by the West Texas Center for Economic Education College of Business West Texas A&M University Canyon, Texas

2. Contents: 1. Top 10 Mistakes 2. Understanding Credit 3. Managing Your Money 4. FAFSA and College

3. Mistake #1 • Not realizing how much work it takes to make a car payment • Consider this • Your car payment is $300/month • You work for $8.00/hr (above minimum wage) • IRS takes 7.65% of your wages for Social Security, leaving you with $7.39/hr [$8.00(1-.0765)] • You need to work 41 hours just to make car payment

4. Mistake #2 • Forgetting to include car insurance in your monthly payments • Consider this • Assume you get really cheap insurance at $100/month • $100/$7.39 = 13.5 hours; so add 13.5 hours to your 41 hours for the car payment and you now have to work 54.5 hours each month!

5. Mistake #3 • Thinking you can get really cheap car insurance • Consider this • Texas requires you to have 25/50/25 minimum liability insurance (per person/all people/property damage) • If you finance the car, the lender will require collision and comprehensive insurance for the amount financed

6. Mistake #3 (con’t) • You will pay more for insurance than your parents; local insurance agent says likely will cost $200 - $300/mo • Factors that affect insurance rates: • Age • Gender • Driving record (tickets) • Credit record • Car selection (sporty, SUV, etc)

7. Mistake #4 • Buying a gas guzzler • Consider this • If your car gets 20 miles/gallon and gas is priced at $2.50/gallon, then gas costs 12.5 cents per mile • Driving to from Amarillo to Lubbock and back will cost $27.50 • What if the price increases to $3.00/galllon?

8. Mistake #5 • Buying a NEW car • Consider this • A new car loses 45% of its value in the first 3 years! • A car 3 years old is still a very good car – a used car is a much better buy

9. Mistake #6 • Focusing on payments amounts and not on the total car price • Consider this • If your only criteria for buying a car is having a low payment, you could get in financial trouble • Become “upside down” on the car • Extending the payments leads to higher interest paid over the length of the loan

10. Mistake #6 (con’t) • Learn to use a car payment calculator* to determine how much a payment will be • Multiply the amount of the payment by the number of payments to see total amount you will pay • * Go tohttp://www.bankrate.com/calculators/auto/auto-loan-calculator.aspx

11. Mistake #7 • Not understanding the importance of credit worthiness to get a car loan • Consider this • You can’t borrow money if you have bad or no credit (possible to get co-signer) • What are the basics lenders review before approving a loan? • Income, payment history, credit score, and collateral

12. Mistake #8 • Deciding if you can’t keep up with the payments, you could just sell the car or let the lender repossess it • Consider this • You may be “upside down” and unable to sell the car for what you owe • If the lender repossesses the car, that goes on your credit record for many years

13. Mistake #9 • Not researching car prices, safety and reliability factors, or desirable features which help the car maintain value • Consider this • Read Motor Trend, Road and Track, and Consumer Report for new car information • Know the invoice price prior to entering a showroom or sales lot • Use Kelley Blue Book or NADA Used Car Guide (online) to validate car price

14. Mistake #10 • Thinking your image as a person is totally tied to what you drive – it is just transportation! • Don’t be “car poor” because you believe “you are what you drive”

15. Basics of Credit • Credit history is the basis for obtaining credit and is your credit reputation • Interest payments are the cost of using a bank’s money for any purpose • Credit report includes information about credit accounts, outstanding loans, account balances, and credit inquiries • Check your credit report annually for free at www.annualcreditreport.com

16. Credit Information • History is visible on report for 7 years after last transaction (10 years for bankruptcy) • Remember: Credit decreases future buying power • Average young adults spend nearly 24 percent of income on debt payments2 • Beginning February 2010, students under the age of 21 must show proof of income to get a credit card or have co-signer

17. FICO Credit Score Calculation Scores range from 300 – 850 and are a snapshot in time; your score can change in either direction depending on your credit report

18. FICO Score Explanations • Payment history – most import component of credit score calculation • Amounts owed – balance owed compared to available credit • Length of credit history – length of time since first credit account was opened • New credit – credit inquiries and recent account openings • Credit types – mortgage, installment (auto), revolving (credit card), and other

19. Reviewers of Credit Report • Lenders • Potential or Current Employers • Landlords • Insurance Companies (premiums can increase if the score drops too low)

20. Managing Your Money • Establish checking and saving accounts • Banks offer many different accounts • Look for free checking accounts and no minimum balance requirements • Avoid bouncing checks and overdrawing your account • Check statements online frequently and report any errors immediately

21. Opening a Checking Account • Documents you need if under age 18 • Valid driver’s license • Social Security number • Alternate form of ID (passport, bill, etc) • Only takes about 30 minutes to complete • Must have legal guardian present if under age 18

22. Spending Plan (Budget) • Most important tool to ensure financial freedom • Reduces pressure of instant gratification purchases if money is already allocated • Keep track of all income and expenses • Use it to create emergency money fund to reduce or eliminate credit card charges

23. Setting Up a Spending Plan • List all income (i.e., wages or other regular income) • List all expenses (i.e., car insurance, gas, cell phone, car payment, dining out, rent, activities, groceries, clothes, savings, etc) • Subtract expenses from income to determine if there is sufficient income (surplus); if not, reduce expenses until a surplus is achieved • Many budget templates are available in Microsoft Excel to build a spending plan

24. Spending Plan Example

25. FAFSA • “Free Application for Federal Student Aid” • You can apply as early as Jan 1st of your senior year in high school • For the 2009-2010 (July 1st, 2009 – June 30th, 2010) school year, you must apply by June 30, 2010 • Apply early before financial aid funds at colleges run out

26. FAFSA Application • To apply, you will need • Social Security number • Driver’s license • W-2 forms • Federal Tax Returns – yours and parents • Current bank statements • Business and investment records • Alien registration or permanent resident card • Takes about 1 hour to complete

27. FAFSA Application (con’t) • Will receive a student aid report (SAR) • Look at the expected family contribution (EFC) on the SAR • Colleges will use your EFC to award financial aid • Check with individual schools for their financial aid application deadlines

28. FAFSA Application (con’t) “EFC”

29. Surviving College • Dos • Buy groceries and make dinner in your dorm – Ramen noodles are a great deal! • Take advantage of free entertainment – go to football or volleyball games • Don’ts • Buy fast food for every mean – it can be very expensive and/or unhealthy • Overspend on entertainment – going to concerts every weekend

30. Conclusion • Research the car you want to buy • Make sure you can afford the car • Credit is a privilege and not a right- it can be taken away if abused • Set up a spending plan and follow it closely • Fill out the FAFSA early • Learn from the mistakes of others