Transcript Autonomics and Other Important Financial Information

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
Contents:
1. Top 10 Mistakes
2. Understanding Credit
3. Managing Your Money
4. FAFSA and College
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
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!
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
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)
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?
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
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
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 to
http://www.bankrate.com/calculators/auto/
auto-loan-calculator.aspx
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
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
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
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”
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
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
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
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
Reviewers of Credit Report
•
•
•
•
Lenders
Potential or Current Employers
Landlords
Insurance Companies (premiums can
increase if the score drops too low)
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
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
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
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
Spending Plan Example
1 M onth - 80 hours worked
Inco me ( p / t @ $7.3 9 / hr )
Exp enses
Cell Phone
15
Food/Dining Out
50
Clothing
50
Auto Payment
300
Auto Fuel
120
Auto Insurance
100
Entertainment
45
T o t al Exp enses
Sur p lus/ ( D ef icit )
591
680
-89
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
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
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
FAFSA Application (con’t)
“EFC”
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
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