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Financial Literacy 101

Financial Literacy 101. Back to the Basics. Budgeting Tracking Income and Expenses Reducing Expenses Credit as a Consumer Credit Reports Credit Scores Improving Credit Power Pay Debt. Budgeting 101. Benefits: maximize assets, minimize debt Step 1: Calculating Income

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Financial Literacy 101

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  1. Financial Literacy 101

  2. Back to the Basics • Budgeting • Tracking Income and Expenses • Reducing Expenses • Credit as a Consumer • Credit Reports • Credit Scores • Improving Credit • Power Pay Debt

  3. Budgeting 101 Benefits: maximize assets, minimize debt Step 1: Calculating Income Step 2: Calculating Expenses • Tracking Step 3: Develop a Spending Plan Step 4: Minimize Expenses • Distinguish: necessities and luxuries

  4. Calculating Income, Basics • Always underestimate income • Include subsidies (insurance, housing, food) • Income fluctuates by # hours or days worked • Include financial aid, but deposit into draw account • Deposit lump sum into account and withdraw monthly “pay” • Miscellaneous income: VA payments, child support, disability payments

  5. Tracking Expenses, Basics • Determine where the money goes • Goal: get your money to last longer • Methods: • Keep receipts • Balancing a checkbook • Notebook or ledger • Calendar • Software or websites • Envelops with Money

  6. Tracking Necessity Expenses

  7. Tracking Luxury Expenses

  8. Ways to Reduce Spending • Standard of living expectations • Live large now with debt, live smaller later and longer • Eliminate or reducing eating out • Studio apt v. 1-bedroom apt • Living with roommates • Smart phone v. cellphone • Shop with Lists

  9. Increasing Income for Students • Full-time students: work 20 hours or less • FT: 12 credits or more • On-campus or off-campus • Part-time students: work 40 hours or less • PT: 11 credits or less • Downside: May add time to graduation • Benefits: • Time for more work experience for resume • Earning income to reduce need for financial aid debt • Lower cost per credit at 11 credits

  10. Credit Reports Purpose: to determine whether you will pay your debts in the future by looking at your past and current debt and payment history *** Created by Creditors for Creditors***

  11. Credit Report v. Credit Score Credit Reports: list of debt obligations with new obligations fist • Free from www.annualcreditreport.com • Transunion (Midwest), Experian (west coast), Equifax (east coast) • Used to calculate credit score Credit Score: numerical value of your credit risk • the higher the number, the less risk you are • Utilizes 45 data points from credit report

  12. Making the Most of Your Credit Report Information includes: • Employment & Address History • Number & Types of Inquiries • Payment History on All Debt • Amount, Age, and Types of Debts • Public Records: evictions, bankruptcies, court judgments • Negative information lasts 7 or 10 years

  13. Improving Credit # 1 Correct Errors • Send updates on addresses to credit bureaus • Contact credit for errors in payment history # 2 Pay Off Debts or Collections • Get payment plans or settlements in writing • Payments on collections will refresh for an additional 7 years

  14. Paying Down Debt • Standard: paying minimum payments • Accelerated: paying more than the minimum payments • Tip: Once 1 debt is paid off, use that payment towards the next debt • Tip: Pay extra to only 1 debt • Saves most money: highest interest debt • Most rewarding visually: lowest balance

  15. Power Pay with Student Loans • Benefit of payoff of student loans: few bankruptcy options and few limits on collectability • Advantageous to pay down private student loans before federal loans • Generally less flexible repayment terms, variable interest rates, and few discharges in the event of death or permanent disability • Thinking about ICR or IBR? • Have to balance interest rates with possible loan forgiveness eligibility • Federal student loans have flexible payment amounts, impacted by income: most debt has fixed payment

  16. Payment Example: Total Debt: $416,500 Total Monthly Payment: $2923 Total Payments without Power Pay: $848,475 and takes 30 years Total Paid with Power Pay, highest interest: $734,558 and takes 21 years Total Paid with Power pay, lowest balance: $739,405 and takes 21 years, - $109, 070 in savings or 13% If an extra $100 is paid per month: $701,821 and takes 19 years - $146,654 in savings or 17%

  17. Questions? Email: finaid@wmitchell.edu Call: 651-290-6403 Want a free spreadsheet to track your debt? Coming Attraction: October 23 and October 27 Financial PLP on Federal Loans and Public Service Loan Forgiveness

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