better test 2 consumer econ

Increased Income or Decreased Spending?

It's not what you make, it's what you keep" (Author Unknown)
"Financial freedom is more often the result of decreased spending than of
increased income" (Poduska, 2000, p. 12)
"Financial problems are usually behavior problems rather than money problems" (Poduska, 2000, p. 7)
These ideas emphasize:
Living within one's means (e.g., income)
Identifying behaviors preventing someone from living within one's means
Finding ways to reduce spending, especially if income is difficult to increase
We can all use ideas to help us use our money more effectively

Identify Your "Latte Factor

Develop a balanced spending plan and track your spending behaviors
Each month, develop a spending plan that accounts for your entire income and all expenses
Make monthly adjustments to your spending plan based on your actual behaviors
Track these behaviors for a minimum of three months
Tip: Use this information to identify potential "latte factors": behaviors that can be
reduced or cut to save money

Measure Your "Financial Health" Progress

Find out where you are currently and measure your progress over time
Tip: Determine Your Net Worth
The difference between your assets (what you own) and your liabilities (what you owe)

net worth

A net worth statement offers a snapshot of your financial condition on any given date
Updating your net worth allows you to examine how your financial condition changes over time
It is recommended to update your net worth at least once per year
A person's net worth ideally increases over time
Net worth does NOT equal self-worth
"The value of individuals should never be equated with their net worth" (Poduska,
2000, p. 15)
The contributions and differences we make in the lives of others are more
important than what we consume or accumulate
Many young adults will have a negative net worth, but their financial condition will
improve over time

Kick Murphy to the Curb!

Murphy's Law refers to if something bad can happen, it will happen
Emergencies and unexpected expenses will happen, and they can destroy our
spending plans

emergency fund

Tip: Establish an emergency fund
Be patient
On incomes smaller than $20,000, create an initial emergency fund of at least $500
On incomes above $20,000, create an initial emergency fund of at least $1,000
Gradually build up a 3-6 month emergency fund
Sell some unneeded items, if necessary, to get started
Use this fund only for emergencies!!!!!!!

Tips for Saving Money

You do not "need" everything right now
Sleep on it (or wait 2-3 days) before buying it
How many hours might you have to work to pay for this item?
What are some other things you can do with this money? (e.g., opportunity cost)
You save 100% of money you don't spend

Saving Money on Bigger Purchases

When possible, try to pay cash when purchasing appliances, furniture, cars, etc.
Avoid rent-to-own, "easy" payment plans, credit card interest, or loan interest
(when possible)
Tip: Save in advance of purchases
Estimate the total cost (plus tax and any "extra" items) of the item you are thinking of purchasing
Estimate the monthly payment
Save that amount each month
Shop around for the best prices before purchasing
A new car loses 20-25% of its value the instant you drive it off the car lot, as it
not becomes an "used" car

Tips to Save Money on Insurance

Insurance is intended to protect people from a catastrophic loss due to an unexpected event, such as an accident, illness, natural disaster, etc.
Comparison shop for the best rates
Bundle multiple insurance policies with the same company (e.g., home/renters
insurance and car insurance)
Increase your deductibles

deductables

Deductibles are the amount you must pay before insurance pays
Ask for a student discount (many companies give discounts for good grades)
Pay in full (six months or year) rather than monthly

Tips to Save Money on Utility Bills

Join a family plan or adjust your plan (cell phone)
Try to bundle when possible (cable with internet)
Avoid unnecessary bundles, such as those requiring land lines
Consider cutting internet and/or cable completely (go to campus for internet; substitute
cable with Netflix, etc.)
Adjust the thermostat (at night, when you leave home, put on a sweater; gas or
electricity)
Reduce the heat temperature in winter (68-72 degrees instead of 75+)
Increase the AC temperature in summer (72-75 degrees instead of 68-70)
Take shorter showers (water and gas or electricity)

Tips to Save Money on Grocery Shopping

Eat more at home than eating out
Drink water at restaurants instead of soda or tea
Use a shopping list
It's estimated that one-half of purchases are impulse buys (Zelenak & Reiboldt, 2010, pp.
266-267)
Keep a notepad in the kitchen to add items to your list
Buy a second of commonly used items (mustard, etc.) so you can purchase a
replacement when on sale
Buy a few extra items when they are on sale
Create a meal menu each week, including several options when "not in the mood"
*****You never save money purchasing things you do not need or use

cash flow statements

A record of all income and expenses covering a specific period of time in the
past, such as the previous month or year
Measures past financial experiences
Expenses are greater than Income = Deficit
Excess expenses are covered by credit/debt or taking money out of
savings/investments
Income is greater than Expenses = Surplus
Excess money is available to save/invest

net worth

Net Worth statement = Assets (what you own) - Liabilities (what you owe)
Provides a snapshot of current financial situation
When people experience deficits, their net worth tends to decrease
When people experience surpluses, their net worth tends to increase

What Is Credit?

Credit includes
Using borrowed money to purchase goods and services now, while later repaying the borrowed money with interest
Four types of credit:
Revolving credit
Charge cards
Service credit
Installment credit

Four Types of Credit

Revolving credit:
Includes most credit cards (VISA, Mastercard, etc.)
Balances may carry over from month to month
A maximum credit limit applies
Minimum monthly payments are required when balance is not paid in full
If balance is not paid in full each month, interest begins accruing at time of any
new purchases
Debit vs. Credit Cards
Charge cards:
Includes American Express credit cards
Balances must be paid in full each month
Maximum credit limit applies
Service credit:
Services are provided with the agreement customers will pay their bill each time
Services include rent, utilities, cell phone, gym membership, etc.
Installment credit:
Examples include home mortgages, car loans, student loans, etc.
Creditors loan a specific amount of money to purchase or pay for something
Generally, the purchased item serves as collateral (can be repossessed if payments are not made)
Borrowers pay back amount plus interest over a set period of time (e.g., 1 year, 5 years, etc.)

Why Is Credit Important?

Most people rely on credit to
Make major purchases (house or car)
Pay for school (student loans)
Credit histories and scores may determine if someone:
Is hired for a job
Can rent an apartment
Can obtain a loan or credit card
Is charged higher or lower interest rates for credit obtained

What Is a Credit History?

A credit history is a person's experience with credit
Credit histories are compiled primarily by three credit bureaus:
Equifax
Experian
Transunion
Each credit bureau:
Maintains a person's credit history in the form of a credit report
Provides this information to creditors upon request
Does not approve or give credit

What Is a Credit Report?

A credit report contains:
A comprehensive list of companies that have issued credit
The total amount owed on each type of credit issued
A history of payments, including whether payments were made on time and the
amount paid
Previous addresses and/or employers
Public records, such as bankruptcy or judgments
Companies that have asked to see your credit history
Requests are made as a soft or hard inquiry

Soft Inquiries

Creditors request access to limited credit information
Creditors do not need permission to review someone's credit information
Inquiries occur:
As part of a background check
To pre-approve someone for credit card offers
When someone checks own credit information
Inquiries may or may not appear on credit reports
Inquiries do not influence credit scores

Hard Inquiries

Creditors request full access to credit information
Inquiries used by creditors to make a final decision to lend credit
Creditors must obtain permission to review someone's credit report
Creditors must have legitimate reason to review someone's credit report
Inquiries lower credit scores
* Inquiries remain on credit report for two years

Obtaining a Credit Report

By law, everyone is entitled to review each of their credit reports every 12 months for free
Authorized by the Fair Credit Reporting Act (FCRA)
Checking your credit reports consistently helps to detect:
Mistakes
Potential identity theft
One helpful tip is to review one credit report, review a second report four months later,
and the third credit report four month after the second, and repeating the cycle every 12 months

What Is A Credit Score?

A credit score is
A numerical summary of a person's credit history
Used by creditors to determine a person's level of future credit risk
More than 40 different credit scores may exist
Two main credit scores are:
VantageScore (Used by ~10% of lenders)
A joint effort by the three credit bureaus FICO (used by ~90% of lenders)
Monitored by the Fair Isaac Corporation
***Credit Scores range between 300-850

How to Obtain a Free Credit Score

Credit scores are generally available by purchase only, but...
www.credit.com and www.creditkarma.com will provide you with a basic credit score
for FREE!!!!
These scores are estimates only
Requires creating a login and password and providing your Social Security
number
Beware of additional "signups" that may cost money (e.g., credit monitoring
services)
Discover card includes a free FICO score on monthly statements

Benefits of Good Credit Scores

Credit decisions are to be non-discriminatory
People obtain loans faster
Credit "mistakes" count for less
More credit is available
Interest rates and total costs are lower
Many first-time homebuyers apply for a home mortgage loan backed by the Federal Housing Administration (F.H.A.)
FHA loans require a FICO credit score of at least 520
However, many banks require a higher FICO credit score to qualify for loans
Wells Fargo bank requires at least a 640 (DiGangi, 2015)
Chase Bank also requires a higher credit score, calling FHA loans subprime
lending (Olick, 2015)

How to Establish Credit

Open a bank account (checking or savings) at a local bank
Opening an account will not establish credit, but it helps you to develop
relationships that may turn into other opportunities to build credit!
Review differences in account types and fees charged
Be responsible with any accounts opened
Rent an apartment, start telephone service or other utilities in your name
If the person who signs the contract does not pay what is owed, the co- signer is responsible for those expenses!
Not all rent or utility services are reported to credit bureaus, but you can ask if they can be reported
Pay all bills on time
Lenders like to see stability
Try to remain employed at the same company for a period of time

Secured credit cards

A deposit is required prior to using the card
Credit is limited to the amount on deposit
Higher interest rates are often applied

How to Repair Credit

Check your credit reports:
Does it contain inaccurate information?
If so, write a letter (or file a complaint on their website) to credit bureaus
disputing this information
Follow-up until dispute is resolved
Keep all documentation!!!
Identify what is hurting your credit (late payments, non-payment, bankruptcy, etc.)?
If late on payments, get current!
Use bill reminders for all payments
Contact the lender to find out if they will work with you to reduce fees, interest
rate, etc.
Reduce the amount of debt you owe
Don't just transfer it from one card to another card
Consider credit counseling through non-profit organizations
****Remember that late payments on a credit card may result in increased interest
rates

What is Debt?

Debt is...
Living beyond one's financial means
Money owed to someone else
An obligation against future income

Reporting Debt

Consumers may be underreporting debt, especially credit card debt
Consumers may not know how much debt they have
Consumers may be ashamed of and embarrassed by the amount of debt they
have

how much debt do americans have

U.S. consumers are reported to have a combined $12.84 trillion in debt (at end of Q2 2017)
Housing Debt: $9.14 trillion
Student Loan Debt: $1.34 trillion
Auto Loan Debt: $1.19 trillion
Credit Card Debt: $0.78 trillion
Other Debt: $0.38 trillion
Other debt includes consumer finance (sales financing, personal loans) and retail debt (clothing, grocery, department stores, home furnishings, etc.)

Why Do People Go Into Debt?

*Ignorance
Lacking financial literacy
Only five states require high school students to take a semester-long class on personal finance
Alabama, Missouri, Tennessee, Virginia, Utah
Few universities require a personal finance course before graduation
Some believe it is the parents' or students' role to develop positive financial capability
Not wanting to learn about finances *Carelessness
Not paying attention to prices/brands or reading the fine print in contracts Video: "Terms and Conditions Social Experiment"
Not knowing how much debt is owed
Not monitoring accounts
See Article: "I paid �26,000 [$40,000] into the wrong account" (Jones, 2014)
*Compulsiveness
Impulse purchases
Wanting items now without saving in advance
"Easy" payment plans; "90 Days Same as Cash" sales
*Pride- keeping up with the joneses
*neccesity-Not earning enough income to support self

When Debt Becomes Necessary

Understand how your credit history / score influence your ability to obtain a loan and interest rates
Determine how much you really need
Calculate what the total cost will be and how much will fit into your spending plan
Understand the terms of the loan
Shop around for the best terms on a loan
Pay off your debt as quickly as possible

The Debt Cycle/Spiral

Start with a little debt
Ignorance, carelessness, compulsiveness, or pride prompts people to get a single
credit card or take out a loan
Take on more debt to maintain new lifestyle
Student loan or credit card debt + car loan debt + mortgage debt + new furniture debt + ...
People continue to live at the same level but use more debt to cover the additional interest costs
Continue to take on more debt
Make minimum payments, while interest costs increase
Consolidate debts into a single loan, but existing behaviors lead to more debt
Existing balances prevent obtaining new credit
Suffer the consequences of debt
Monthly payments become overwhelming
People lose freedom, self-respect, etc.
Debt collection begins
Repossession / Foreclosure / Bankruptcy
In extreme circumstances, some people commit suicide because of
overwhelming debt

Debt Collection

If facing debt collection, know your rights:
You can ask them, in writing, to verify the debt is yours
You can ask them, in writing, to stop calling you
Debt collectors are NOT allowed to:
Discuss debt with your friends, family, neighbors, or employers
Lie about you or your debt
Give false information to credit agencies or courts
Call at unreasonable hours (before 8:00 am or after 9:00 pm)
Call you at work (you can request they not call you there)
Use unfair practices (charge additional fees, etc.)
Harass or threaten you

Strategies to Become Debt-Free

Debt Consolidation
Debt Negotiation
Bankruptcy
Debt Avalanche / Debt Snowball

Debt Consolidation

Smaller loans are combined into a single larger loan
Advantages:
Topic 07 Outline (with Answers), HDFS 3303 7
Often lowers interest rate and monthly payment
Single payment vs. multiple payments
If home equity loan is used, interest may be tax deductible
Disadvantages:
May not address behavioral issues that lead to problem - may continue
debt-inducing lifestyle
May have expensive loan-related fees
Unsecured debt may become secured debt, especially if home equity
loan is used

Debt Negotiation

Creditors may be willing to settle debt
Advantages:
May lower total amount owed
May reduce interest rate
May accept lower monthly payments
Disadvantages:
May require several months of non-payment before creditor is willing to
negotiate
Non-payment results in a lower credit score
Non-payments may result in a lawsuit
Creditors may require a lump-sum payment
Entire agreed upon amount must be paid at once
Companies that negotiate on your behalf may charge high fees
Settled amount may become taxable income
Negotiation is not guaranteed
Leaves you with continued debt, poor credit, and fewer options

Bankruptcy

Should be considered as a last resort
Chapter 7:
Assets are sold (e.g., liquidated) and creditors are paid from the proceeds of the sale
Most debt is wiped out
Chapter 13:
A repayment plan is established
Person keeps assets, but must pay for them
Makes monthly payments are paid to a trustee assigned by the court

Debt Snowball / Debt Avalanche

Strategy: Pay off one debt and using these same payments to pay off the next debt until
debt free
Debt Snowball:
Pay off debt with the lowest balance first
Provides motivation to pay off debt
Dave Ramsey encourages this approach
Debt Avalanche:
Pay off debt with the highest interest rate first
Saves more money over time

PowerPay

Powerpay (www.powerpay.org) is a valuable tool that calculates how long it will take to
pay off debt using various strategies:
Normal payments
Debt Snowball approach
Debt Avalanche approach
Powerpay is also available as an app

Keys in Becoming Debt-Free

Becoming debt-free requires
Understanding where you want to be in the future
Discipline
Sacrifice
The rewards of being debt-free include:
Flexibility
Less stress
Opportunity to save and invest these "payments

advantages and disadvatanges of bankruptcy

Advantages:
Frees a person of most unsecured debt (e.g., credit cards)
May postpone home foreclosure or repossession of property
Stops wage garnishment and debt collection harassment
May lower monthly payments
A person is able to keep some property, depending on what it is and the current
value
Property is identified as exempt / non-exempt
Each state has varied exemption laws, meaning if the value is below the
exemption amount, you can usually keep the item
Mississippi's exemption amount is $10,000 for all personal
property (vehicles, clothes, electronics, etc.) and $75,000 for a home (or $30,000 for a mobile/manufactured home)
Disadvantages:
Most items owned because of secured debt can still be taken (e.g., car loans,
home equity loans, etc.)
Bankruptcy remains on a credit report for 10 years
A person can only have one Chapter 7 bankruptcy every 8 years
Cosigners are still legally responsible to repay debt
If you are able to obtain credit, you will be charged a higher interest rate
Warning: Credit card companies will offer credit to people who have gone through bankruptcy because they can charge higher interest rates. People cannot file for bankruptcy again for eight years, meaning thecredit card companies have more time to earn more money from interest and other fees!
A person's reputation can be damaged
Some debt is not eligible for bankruptcy: student loans, alimony, child support,
legal judgments, unpaid taxes, etc.
Some things to consider before filing for bankruptcy:
Is bankruptcy really necessary? Have all other options been explored?
Is your debt eligible for bankruptcy?
Are you using bankruptcy as a legal way to avoid responsibility for debt (raises
issues of honesty and integrity)?
For many people, bankruptcy provides a clean slate allowing them to start over without
the pressure of debt collectors