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%

T I M E

You areHERE

T I M E

T I M E

T I M E

T I M E

T I M E

T I M E

T I M E

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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1

2

4

5

3

What is the U.S. National Debt – per person?

A. $ 857

B. $ 1,021

C. $ 1,634

D. $ 4,789

E. $ 34,018