Why is Financial Education/Literacy Important?

“

Financial Empowerment”

Presented By : Patrice B. Duncan, EVP & Anthony Harris, AVP

D&E, The Power Group

What is Financial Empowerment?

•

Empowerment itself

is the process of increasing the capacity of individuals or groups to make choices and to transform those choices into desired actions.

• Financial empowerment therefore is the transfer of personal money power (

financial independence

) to an individual.

• It is a process of moving from financial instability to a position of financial stability through investment.

What is Financial Literacy?

• Financial literacy is the knowledge about personal finance that enables people to confidently manage their financial lives. • When it comes to managing your budget, paying bills, and knowing the right financial services for you, KNOWLEDGE IS POWER!

Case Study –

Emily & Karen • Emily and Karen are friends who borrow about the same amount of money over their lifetimes: – Each gets $20,000 in private student loans to help pay for college.

Case Study –

Emily & Karen – During college they get their first credit cards, and each carry an $8,000 balance, on average, over the years.

– They buy new cars after graduation and replace them every seven years until they buy their last vehicles at age 70.

Case Study –

Emily & Karen – Each buys her first home with a $300,000 mortgage at age 30 and then moves up to a larger house with a $400,000 mortgage after turning 40.

– Each takes out a $50,000 home improvement loan to remodel the second house.

Case Study –

Emily & Karen • Emily has a FICO Score of 750, which is considered good to excellent. – Emily maintains her good credit scores by always

paying her bills on time, applying for credit sparingly and never maxing out her credit cards.

– Lenders respond by increasing her credit limits and giving her more offers of credit, allowing her to spread her balances across several cards and further protect her scores.

Case Study –

Emily & Karen • Karen has a 650 FICO score , which is considered fair to average, even poor depending on the lender.

– Karen, on the other hand,

doesn't always pay on time and sometimes maxes out her cards, which makes lenders reluctant to extend more credit.

– She tends to carry larger balances on fewer cards than Emily, which further hurts her scores, and Karen has less ability to negotiate lower interest rates.

Case Study

P rivate student loans: An $8,000 difference

• Federal student loans don't take credit scores into account, but private student loans do, and the penalty for worse credit is significant. Interest rates vary by lender, but someone with a 750 score can expect rates that are around 5 to 6 percentage points cheaper than someone with a 650 score, said Mark Kantrowitz of FinAid .

Case Study –

Emily & Karen

Private Student Loans - $8,000 difference

Emily – 750 FICO Score Karen – 650 FICO Score

• Interest Rate • $8,176 7.25% • Monthly Payment - $234 • Total interest paid (10 yrs) • Interest Rate - 13.25% • Monthly Payment - $302 • Total interest paid (10 yrs) • • $16,189

Karen's Penalty $8,013

Case Study Credit Cards: $60 more a month

• Credit card issuers have tightened their lending standards in the past couple of years, which means higher rates and stricter standards for just about everyone. • Whereas a 720 credit score used to get you the best rates and terms from many issuers, some now require 750. Even getting a card can be tough if your scores are below 675, according to Curtis Arnold of CardRatings.com

. A few years ago, even those with "subprime" scores in the low 600’s had a slew of offers.

Case Study –

Emily & Karen

Credit Cards- $60 difference per mth.

Emily - 750 FICO Score Karen – 650 FICO Score

• Interest Rate - 10.99% • Annual Interest- $880 • Lifetime interest $44,000 • • Interest Rate – 19.99% • Annual Interest- $1,600 • Lifetime interest $80,000

Karen's Penalty $36,000

Case Study

Auto loans: $5,400 more per car

– A few years ago, Karen would have paid about 3 percentage points more for a 60 month new-car loan. Today, that penalty is more than twice as high, according to myFICO.com, which tracks rates for auto and mortgage loans based on FICO credit scores. The difference significantly inflates the interest costs for every $25,000 vehicle she finances over a lifetime.

Case Study –

Emily & Karen Auto loans: $5,400 more per car Emily - 750 FICO Score Karen – 650 FICO Score

• Interest Rate - 5.78% • Monthly Payment - $481 • Interest cost per car $3,843 • Lifetime interest paid $30,768 • Interest Rate – 13.24% • Monthly Payment - $572 • Interest cost per car $9,310 • • Lifetime interest paid $74,480

Karen’s Penalty $43,712

The Role of Financial Education

• Financial education plays a significant role in our society by empowering people with required knowledge and skills to make accurate consumer decisions, follow appropriate financial practices, and achieve economic well being.

The Role of Financial Education

• However, some financial education programs narrowly focus only on changing people's

financial knowledge

and make the assumption that this leads automatically to changes in

financial behavior.

The Role of Financial Education

• This assumption may work at times; however, changing financial behavior (not just increasing financial knowledge) is essential for a person to reach financial goals and achieve financial well being.

Major Topics of Financial Education

• Financial education is a very broad subject and typical topics covered include: – Budgeting – Cash-flow management – Credit – Banking – Savings and Investments.

Major Topics of Financial Education

Other topics of discussion can encompass: – Goal Setting – Wise Consumer Practices – Consumer Laws & Rights – Retirement Planning – Life & Death Insurance

Major Topics of Financial Education

• While the importance of some topics may change over time, other topics, such as – Decision-making – Cash-flow management – Savings – Credit, debt, housing, and planning for the future will always represent the core topic areas of financial education.

Educational Settings

• Financial education is very similar to other educational programs. It takes place in formal, non-formal, and informal educational settings. • Formal settings include credit courses offered in high school and colleges.

Educational Settings

• Non-formal settings include financial education training workshops and counseling programs provided by various organizations and individuals outside of formal educational institutions

. i.e. non-profits

Educational Settings

• Informal financial education comes from everyday interactions with people and mass media,

i.e. news, work, internet, family etc.

Key Elements

• Before the financial educator begins the program evaluation process, it is important to review the education program to make sure that it has all the key elements to function successfully.

Key Elements & Preparation

Must haves

………..

• Identified target participant group • Identified financial education needs • Program objectives designed to meet identified needs • Educational materials and lesson plans chosen to achieve learning objectives

Key Elements & Preparation

• Delivery method chosen to facilitate participant access to educational materials,

i.e. lecture, internet, group, individual etc.

• Inclusion of evaluation plan and data collecting instruments

Key Elements & Preparation

• Trained and/or certified financial educator(s) to facilitate learning, i.e. NeighborWorks, HUD, etc. • Program monitoring plan to utilize evaluation data for building stronger programs and funding strategies

Target Audiences

• Target audiences of financial education are very diverse. Participants' ages, levels of education, socio-economic backgrounds, and learning needs can vary greatly. For example, the ages of potential audiences can range from youth to older adult.

Target Audiences

• The levels of education can range from elementary school to graduate school. • This variation underscores the educational diversity of potential audiences of financial education programs.

Target Audiences

• Additionally, the need determines how to carefully select educational materials, delivery methods, and the evaluation approach based on the needs of each audience to achieve desired results.

Methods of Financial Education Delivery

• Various methods are used to deliver financial education programs. These methods can be classified under three main categories: – Individual Methods – Group Methods – Mass Methods

Methods of Financial Education Delivery

•

Individual Methods

– One-on-one counseling – Telephone advising – Computer/Internet Learning

Methods of Financial Education Delivery

•

Group Methods

– Seminars/presentations – Training workshops – Workshop series – Credit courses offered through formal educational institutions

Methods of Financial Education Delivery

•

Mass Methods

– Web-based programs – Interactive CD programs – TV programs – Newsletters/papers – Radio programs

Evaluation Tools

• Evaluation is a key component of Financial Education Programs. There are many different types of evaluation tools depending on the object being evaluated and the purpose of the evaluation. Perhaps the most important basic distinction in evaluation types is that between

formative

and

summative

evaluation.

Evaluation Tools

•

Formative evaluations

strengthen or improve the object being evaluated - they help form it by examining the delivery of the program or technology, the quality of its implementation, and the assessment of the organizational context, personnel, procedures, inputs, and so on.

Evaluation Tools

•

Summative evaluations

, in contrast, examine the effects or outcomes of some object -- they summarize it by describing what happens subsequent to delivery of the program or technology; assessing whether the object can be said to have caused the outcome;

Evaluation Tools

• Determining the overall impact of the causal factor beyond only the immediate target outcomes; and, estimating the relative costs associated with the object.

Evaluation Tools

•

Formative evaluation

includes several evaluation types: –

Needs assessment

determines who needs the program, how great the need is, and what might work to meet the need –

Evaluability assessment

determines whether an evaluation is feasible and how stakeholders can help shape its usefulness

Evaluation Tools

•

Formative evaluation

includes several evaluation types: –

Structured conceptualization

helps stakeholders define the program or technology, the target population, and the possible outcomes –

Implementation evaluation

monitors the fidelity of the program or technology delivery

Evaluation Tools

•

Formative evaluation

includes several evaluation types: –

Process evaluation

investigates the process of delivering the program or technology, including alternative delivery procedures

Financial Education

Resources & Curriculums • FDIC Money Smart • Freddie Mac – Credit Smart • NEFE – National Endowment for Financial Education • Federal Reserve Bank – Guide to Financial Literacy Resources • Jump$tart Financial Literacy

Sample Presentation

 Goal Setting  Budgeting  Credit

Five Rules to Goal Setting

Rule #1 : Set Goals that Motivate You

Making sure it is something that's important to you and there is value in achieving it.

Five Rules to Goal Setting

Rule #2 : Set SMART Goals -S

pecific -

M

easurable -

A

ttainable -

R

elevant -

T

ime Bound

Five Rules to Goal Setting

Rule #3 : Set Goals in Writing

Put them on your walls, desk, computer monitor, bathroom mirror or refrigerator as a constant reminder.

Five Rules to Goal Setting

Rule #4 : Make an Action Plan

Write out the individual steps, and then cross each one off as you complete it.

Five Rules to Goal Setting

Rule #5 : Stick With It!

Remember to review your goals continuously.

How to Budget

• Getting started with making a plan for your money • Planning how to spend your money • Developing a spending plan to meet your goals • Making your spending plan • The importance of saving • Getting help

Why Do You Need a Spending Plan?

• To prepare for large expenses • To encourage savings • To prepare for surprise expenses • To identify wasteful spending • To accomplish goals

Rate Your Spending Habits

• What would be hardest?

• Is a house worth giving these things up?

• Are you ready to do this now?

• Are there other things you want to do first?

• What things would be easiest to change?

Neighborhood Reinvestment Training Institute

The Steps in Establishing a Spending Plan

1.

Determine your monthly net income 2.

Calculate your monthly expenses 3.

Subtract your regular expenses from your income

Keeping Track of Spending

• Save all receipts • Use a small notebook

Neighborhood Reinvestment Training Institute

Setting Family Goals

• • • Talk about goals as a family Be specific Write down all family members’ goals and rank them in order of importance • • Agree on your top goals Figure out how much it will cost to reach your goals

Wants vs. Needs

• Needs= items you must have for basic survival • Wants= things you desire but can live without

Money Management Tips

• Plan according to current income • Plan ahead for six months • Include spending money for all • Keep record keeping simple

Money Management Tips

• Set money aside for maintenance • Pay yourself first at least 10% of take-home pay • Get consensus from entire family

Reviewing the Plan

• Is our spending plan working?

• Are all family members able to follow it?

• Which costs always seem to be over the planned amount?

• Are we getting closer to reaching our goals?

Ways to Make Money Management Easier

 Consider consolidating credit card accounts  Consider selling a car  Check your interest rates  Stick to the plan

Importance of Saving

$2/ day 2% interest = $1,504.09 in 2 years

Try to save 10% of your income on a monthly basis!

Types of Savings Accounts

• Regular savings account • Club account • Certificate of deposit (CD) • Money market account • Matched savings account

Tips for Savers

• Pay yourself first • Open a savings account far away from home and work • Save change at end of day • Bank your surprises

Saving $1 a Day

Year 1

No Interest

$365

5% Daily Compounding

$374 Year 5 Year 10 Year 30 $1,825 $3,650 $10,950 $2,073 $4,735 $25,415

Key Points

The value of credit Different types of loans What a credit report is and how it is used How to read a credit report How to start restoring credit How to recognize credit restoration scams Available credit resources

Key Points

The characteristics of a credit card The costs of using a credit card The potential problems with credit card use

Importance of Credit

Can be useful in times of emergencies Is sometimes more convenient than cash Allows you to make large purchases

Types of Credit

Secured Unsecured

Collateral Items

Automobiles Homes Savings and investment accounts

Consumer Installment Loans

Automobile Computer Furniture College tuition

Credit Cards

Ongoing ability to borrow money for:

–

Household

–

Family

–

Personal expenses

Cost of Credit

Amount financed $5,000 APR 12% Finance charge Total of payments $675.31

$5,675.31

Be careful of…

Rent-to-own services Payday loans

Four C’s of Credit

Capacity Capital Collateral (Character the 4 th C)

Credit Reporting Agencies

Equifax Experian www.equifax.com

(800) 685-1111 www.experian.com

(888) EXPERIAN (397-3742) Trans Union www.transunion.com

(800) 916-8800 For a merged report: True Credit (merged) www.truecredit.com

Tips to Manage Your Credit

If possible, pay off your entire bill each month Pay on time to avoid late fees and protect your credit Always check your monthly statement to verify transactions

Tips to Manage Your Credit

Ignore offers creditors may send you to reduce or skip payments Think about the cost difference if you purchase your item with cash versus credit

What is in a Credit Report?

Identifying information Credit history Public record information Inquiries

Credit Scoring

Payment history Outstanding debt Credit history Types of credit Credit inquiries 35% 30% 15% 10% 10%

Credit Agencies’ Credit Score



Experian



Trans Union



Equifax Fair Issac Empirica Beacon

FICO Credit Scoring

– The higher the score the better – Most consumers score between 300 and 850 – www.myfico.com

FICO Credit Scoring

– 660+ = easy to obtain credit at a low interest rate – 620-660 = may need additional documentation to get a good rate – <620 = may prevent the borrower from getting best rates

Definitions

Tax Lien

- a claim against a property filed by the taxing authority for unpaid taxes

Judgment

- a court order placing a lien on a debtor’s property as security for a debt owed to a creditor

Definitions

Collection account

- a past due account that has been referred to a specialist to collect part or all of the debt

Bankruptcy

- a legal proceeding that can legally release a person from repaying debts that a person cannot pay back

Bankruptcies

Chapter 13

- the debtor keeps all of his/her property and makes regular payments on the debts after filing for bankruptcy

Chapter 7

- the debtor gives up all nonexempt property and keeps exempt property (property that state law determines is needed for support of the debtor and his/her dependents)

Negative Credit Report Information

Type of negative information General Civil Judgments Maximum time on credit report 7 years from the date filed Tax Liens 7 years from the date paid Indefinite if not paid Chapter 13 Bankruptcy- dismissed or discharged 7 years All other Bankruptcies 10 years

When is your Credit Report free?

You have been recently denied credit You have been recently denied employment or insurance You suspect someone has been fraudulently using your account

When is your Credit Report free?

You are unemployed and intend to apply for employment within 60 days You receive public welfare assistance You live in certain states

Identity Theft

Contact the fraud department of the three major credit reporting agencies Contact your creditors File a report at your local police station

Identity Theft Resources

•

www.consumer.gov/idtheft or 1-877-IDTHEFT (438-4338)

•

www.fraud.org

or 1-800-876-7060

What are ways to Build a Credit History?

Apply for a small loan at a bank or credit union where you have checking or savings accounts Apply for credit with a local store Make a large down payment on a purchase and negotiate credit payments for the balance

What are ways to Build a Credit History?

Ask a friend or relative with an established credit history to be a co-signer for you Pay your bills on time Establish nontraditional credit through regular rent and utility payments

To Rehabilitate Your Own Credit

Start by contacting credit reporting agencies to get copies of your credit report If there are errors, request an investigation Contact lenders to renegotiate payment plans Visit a credit counseling agency

Tips for Credit Counseling

Interview several credit counseling agencies before signing a contract Check with your state attorney general, local consumer protection agency and the Better Business Bureau for complaints Ask for information from the agency about itself and its services Ask questions about services and fees

True Statements about Credit Rehabilitation

No one can have accurate information removed from your credit report If you have bad credit, it can take years to repair your credit legitimately No one can create a new identity for you You can order your credit report yourself and dispute any errors on your own

Credit Card Terms

Annual percentage rate

the rate of interest you are charged plus fees, expressed as a yearly rate

Fees

- charges for annual usage, late payments or balances that over-the-limit

Credit Card Terms

Grace period

- the number of days you have to pay your balance before a creditor starts charging interest

Balance computation method

your interest is calculated - how

Interest Rate

Fixed

- the interest rate will not change

Variable

- the interest rate can increase or decrease

Shopping for a Credit Card

Decide how much you will use your card Start small Understand the terms Be aware that introductory rates will change Avoid application fees Understand fixed and variable rates

Cost of making Minimum Payments

Item Price APR TV $500 Computer $1,000 Furniture $2,500 18% 18% 18% Interest Paid $439 How much you really pay for the item $939 $1,899 $2,899 $8,781 $11,281 Total years to pay off 8 19 34

Benefit of Making Higher Payments

Original Balance $2,500 $2,500 $2,500 APR 18% 18% 18% Monthly Payments Minimum payment Total Number of Payments 404 $50 $100 94 32 Total Years to Pay off Total of Payments 34 8 3 $8,781 $4,698 $3,163

Finance Charge Calculation

APR is 18% Daily periodic rate is 0.0493% (18% divided by 365 days) Multiply the average daily balance ($200) by the daily periodic rate Equals $.10 per day (for each day you have the $200 balance) Finance charge is $.10 x 30 days or $3.00

Tips for using Credit Cards

Pay your bills on time Keep your receipts Protect your credit card and account numbers Keep a record of your account numbers Carry only the credit cards you think you will use Pay off the total balance each month Read the fine print

Correcting Credit Card Problems

Pay off credit card and higher interest rate loans first Pay for future purchases using check or cash See a reputable credit counselor

Contact Us

D&E, A Financial Education and Training Institute, Inc.

4532 Jonesboro Road 2 nd floor Forest Park, GA 30297

1-877-790-1831 toll

(770) 961-6900 office (770) 961-8900 fax [email protected]

email www.depower.org

website