Unit 4 - Good Debt, Bad Debt: Using Credit Wisely Mr. Vogel.
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Transcript of Unit 4 - Good Debt, Bad Debt: Using Credit Wisely Mr. Vogel.
Unit 4 - Good Debt, Bad Debt:Unit 4 - Good Debt, Bad Debt:Using Credit WiselyUsing Credit Wisely
Mr. Vogel
Financial Planning
Goals(SMART)
Budget
Save Spend Share
Loan Own Short LongTerm Term
Risk/Return Credit/Debt
Car
eer
Plan
ning
Insurance
Action Steps Forward
Assemble a personal budget for your circumstances todaySet aside some small PYF savingsFind a way to balance your budget
Track your daily expenditures – starting TODAYReconcile your cash –make sure you fix your “leaks”Analyze how the real world is tracking your plan
Make adjustment as needed to keep your budget balanced
Ask others in your family or other adults for their experiencesSee if you can learn other budgeting tricksShare your successes with others
Keep your expectations reasonableRome was not built in one dayFocus on progress in the right direction vs. perfection
Credit FactsCredit Facts• Nearly Nearly 33%33% of teens owe money to either a person of teens owe money to either a person
or company, with an average debt of or company, with an average debt of $230$230..
• About About 26%26% of teens ages 16-18 already have more of teens ages 16-18 already have more than $1,000 in debt.than $1,000 in debt.
• 30%30% of teens say they understand how credit card of teens say they understand how credit card interest and fees work.interest and fees work.
• 36%36% of teens say they know how to establish good of teens say they know how to establish good credit.credit.
• Credit is the amount of money or something of value that is loaned on trust with the expectation it will be repaid later to lenders.
The Language of CreditThe Language of Credit
• Debt is the entire amount of money you owe to lenders.
• APR (Annual Percentage Rate) is the total cost to use credit in a year.
• Term is how long you have to repay a loan, often expressed in months.
• Fees are charged to use credit. Examples: Annual Credit Card Fee, Loan Origination Fee, Over-the-Limit Fee
Types of CreditTypes of Credit
Installment CreditInstallment Credit• Fixed paymentsFixed payments• Set period of time to Set period of time to
repayrepay• Set or varying interest Set or varying interest
ratesrates
Revolving CreditRevolving Credit• No stated payoff timeNo stated payoff time• Limit to creditLimit to credit• Minimum monthly Minimum monthly
paymentspayments• Interest rates vary or Interest rates vary or
notnot• Finance chargesFinance charges
Types of CreditTypes of Credit
Installment Revolving
Sec
ure
d
Unse
cure
d
Mortgage Loans(house)
Auto Loans
“Payday Loans”
Student EducationLoans
Signature Loans
Bank Credit Cards
Retailer Credit Cards
The Concept of Compound Interest
Borrow
Interest Rate
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
[$100.00 x 0.10 = $10.00]$110.00
[$110.00 x 0.10 = $11.00]$121.00
[$121.00 x 0.10 = $12.10]$133.10
[$133.10 x 0.10 = $13.31]$146.41
[$146.41 x 0.10 = $14.64]$161.05
[$161.05 x 0.10 = $16.11]$177.16
[$177.16 x 0.10 = $17.72]$194.88
[$194.88 x 0.10 = $19.49]$214.37
[$100.00 x 0.20 = $20.00]$120.00
[$120.00 x 0.20 = $24.00]$144.00
[$144.00 x 0.20 = $28.80]$172.80
[$172.8 x 0.20 = $34.56]$207.36
“Rule of 72” 72
Interest Rate
Yearsto
Double=
72/10 = 7.2 Years
72/20 = 3.6 Years
$100.00
10%
$100.00
20%
Born
Start Career
Retirement
Death
0 22 62 87
22 Years
40 Years
25 Years
Childhood
Education
Work/Professional Career
Possible Raising of Family
Only Opportunity to Accumulate Wealth
Retirement Period
Escalating Health Care & Maintenance Needs
Running the Race of Your Life
Is Going Into Debt Worth It ???
Is this part of your “Plan” (Budget) ?Your Plan SHOULD lead to a Retirement Net Worthadequate to carry you through your senior years
EmergenciesEmergencies SHOULD be covered by your budgeted“emergency fund” – about 6 months of normal expenditures
CatastrophesCatastrophes SHOULD be covered by your Insurance coverageInsurance should be part of your budgeted expenses
Answer
Debt is a powerful tool IF it is part of a thoughtful plan
Debt is a DANGEROUS path when it is impulsive and not well planned
My Recommendations on Debt(For What It Is Worth !)
Education:An Investment in Yourself – and you are definitely “worth it”Can Pay Life Long Dividends in Higher IncomeMake Your Education RELEVANT to the Real WorldBorrow As Required for Tuition/Fees – and Study Hard!
Routine Consumer Purchases (aka “Stuff”):Follow Your Budget !!!If You Can’t Pay Cash, You Don’t Need It YetNO Debt – especially no credit card debt
Automobiles:Cars are NOT investments – they are expenses (and expensive!)Choose MODESTLY – just fit your Basic needsALWAYS buy USED – Never NewStrongly avoid debt for cars. Pay Yourself First and build a reserve; pay cash
New Cars are for OLD, Rich People !!
2011 Dodge Ram Pickup 1500 – Regular CabRWD; 3.7L 6 Cyl.Delivered Price: $21,000
0
5000
10000
15000
20000
25000
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
2 yearsOwnership$7,140
5 yearsOwnership$1,600
My Recommendations on Debt(For What It Is Worth !)
Education:An Investment in Yourself – and you are definitely “worth it”Can Pay Life Long Dividends in Higher IncomeMake Your Education RELEVANT to the Real WorldBorrow As Required for Tuition/Fees – and Study Hard!
Routine Consumer Purchases (aka “Stuff”):Follow Your Budget !!!If You Can’t Pay Cash, You Don’t Need It YetNO Debt – especially no credit card debt
Automobiles:Cars are NOT investments – they are expenses (and expensive!)Choose MODESTLY – just fit your Basic needsALWAYS buy USED – Never NewStrongly avoid debt for cars. Pay Yourself First and build a reserve; pay cash
House:Can be an “OK” Investment (Caution: Real Estate is not “liquid”)Wait until you have the Downpayment SavedChoose MODESTLY – Don’t be “House Poor”A Good Use of Debt – Go for Maximum Term (30 Yrs) for Flexibility
The Dark Cloud of Debt
Stressful – Trying to always juggle the payment of bills
Lose Hope – Feeling you can never catch up
Marital Problems – Arguments with spouse over money
Strained Relationships – Family & Friends
Embarrassment – Bill Collector Calls
Ways Out of a Crushing Debt Load
Credit CounselingRelearn skills in budgetingCoaching to adhere to your budget plan
Debt ConsolidationNew (single) loan to “pay off” various outstanding debtsRequires collateral (secured loan)Can reduce monthly payments (lower APR and/or longer term)
BankruptcyA very painful last optionTrashes your credit ratings; impacts future ability to borrowStays with you for lifeSocial stigma
U.S. Bankruptcy Code
Chapter 13 – Adjustment of Debts for an Individual withRegular Income
•Wages are garnished, typically for 5 years•All disposable income goes to trustee for payment of debt•Creditors MAY agree to a reduce payback•Remains on credit record for 7 years
Chapter 7 – Liquidation•Must fail a “means test”•Homestead Exemption (varies by state); can keep minimum assets•Balance of assets are sold by force•Proceeds used to pay creditors on pro rata basis•Certain debt is exempt: student loans; child support; taxes, etc.•Court mandated education on credit management•Remains on credit record for 10 years
What are the Priorities?Exercise 4G Page 56
A car loan with a balance of $6,000, monthly payments of $250,and an interest rate of 8.9%.
A bank credit card with a balance of $800 minimum monthly paymentsof $20, and an interest rate of 19.5%.
A student loan with a balance of $30,000, monthly payments of $175,and an interest rate of 6%.
A store credit card with a balance of $2,300, minimum monthly paymentsof $70, and an interest rate of 15.9%.
A credit union credit card with a balance of $3,500, minimum monthlypayments of $110, and an interest rate of 12%.
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