Economics Unit 5: Personal Financial Literacy
The Budget Categories: 10th Priority
Pay off any debt with high interest rates beyond just the minimum payment, any of your debts with an interest rate of 10% or higher. Typically, this will be credit card debt.
The Budget Categories: 9th Priority
Pay the maximum amount allowed in your 401(k)
Credit Card Debt
Purchases made on a credit card have astronomically high interest rates, usually between 15% - 21%, making credit card debt some of the worst debt you can have. A good rule of thumb is to avoid purchasing anything on a credit card unless you have the funds to pay it back immediately, before you are hit with the interest.
Insurance
Safety program purchased for homes, cars, and other property to reimburse you in case of damage or loss.
Credit Score Formula: 4. New Credit: 10%
Someone who suddenly applies for eight new credit cards and three car loans is seen as a credit risk.
Wealth
The value of assets you have managed to accrue.
Overdraft Fees
When you overdraw your account by writing a check that your account does not have enough money to reimburse, your bank will charge you a fee. The average fee is $35. Not only will your bank charge you, but often the business you gave the check to will charge you an additional fee.
ATM Fees
When you withdraw money out of an ATM owned by your bank, there is no fee. But if you use an ATM owned by anyone else, your bank and the ATM's owner will charge you a fee. This could cost you anywhere between $5 - $15 just to get your money!
The Advantages of Credit Unions 2. Charge Lower Fees
Whereas a bank customer might have to pay a fee for their checking account, credit union members will face a lower fee or no fee at all.
Disadvantages of Credit Unions 3. Fewer Rewards on Credit Cards
While a credit union will offer you a credit card that charges a lower interest rate than a bank will, their credit cards will also offer fewer rewards.
Disadvantages of Credit Unions 1. Membership is Limited
While anyone with funds to deposit can become a bank customer, credit unions generally limit their membership. Most credit unions serve a specific population, such as members of a particular profession, or only members of the armed forces, or based on geography, and only serve people who live in a certain city.
Credit Score
A rating that determines whether or not an individual will be approved for loans, and what interest rates they will pay. Based on: Payment History: 35%, Amounts Owed: 30%, Length of Credit History: 15%, New Credit: 10%, Types of Credit Used: 10%
Grants
A sum of money given by a governmental agency or community group.
Scholarships
An amount of money that is given by a school, an organization, etc., to a student to help pay for the student's education.
The Advantages of Credit Unions 1. Pay Higher Interest Rates on Customer Accounts
Because credit unions are not trying to earn a profit, they can pass those savings on to their members. Credit unions typically offer a higher interest rate on the money that its members deposit than banks can offer to their customers.
The Advantages of Credit Unions 4. Superior Service
Because credit unions exist to serve their members rather than to create profit for shareholders, people tend to be more satisfied with their service from credit unions.
Commercial Banks
Corporations that provide banking services to individuals and business. As corporations, they are owned by their stockholders and their goal is to make a profit off of the services they provide to consumers.
The Budget Categories: 7th Priority
Create a toiletries and incidentals budget
The Budget Categories: 4th Priority
Create your health care expenses budget. Not only is health insurance necessary in case you get into an accident, you are legally required to have it.
The Budget Categories: 2nd Priority
Create your monthly groceries budget
Disadvantages of Credit Unions 2. Fewer Branches
Credit unions are much smaller businesses. You might join a credit union but then move across town, finding that they have no branch close to you. It will also be much harder to find your credit union's ATM machines.
Disadvantages of Credit Unions 4. Fewer Services
Credit unions will offer less choice. In addition, the large banks have the resources to develop robust, online websites and phone apps, allowing customers to check their accounts and pay bills online. Credit unions generally have fewer resources than banks for developing sophisticated online options.
Student Loan Debt
Due to the high cost of a college education, most people need to borrow money to fund their college dreams. Oftentimes, college loans are subsidized by the government, leading to low interest rates. Many college loans even allow borrowers to wait until they are no longer in school before they start paying back their debt.
Subsidized Student Loan
Education loan where the federal government pays the interest while the student is in college
Unsubsidized Student Loan
Education loan where the student will be responsible for the interest accrued while they are in college.
3 main types of retirement accounts: 1. 401(k)
Employer-sponsored retirement account where the employer will match the funds that you invest.
The Budget Categories: 15th Priority
Entertainment and joy
The Advantages of Credit Unions 3. Charge Lower Interest Rates on Loans
If you need to borrow money for a car or a home, then credit unions are the way to go, as they charge less interest on loans.
The Budget Categories: 13th Priority
Invest in either a traditional IRA or Roth IRA for retirement
3 main types of retirement accounts: 3. Roth IRA
Investment account for retirement. Government will not charge income tax on profits taken out of the account.
3 main types of retirement accounts: 2. Individual Retirement Account (IRA)
Investment account for retirement. Money placed into it can be deducted from your taxable income.
Bankruptcy
Legal proceeding where a person attempts to have their debts cleared. Goes on their credit score for ten years.
4 main categories of assets that store wealth: 2. Liquid Assets
Liquid assets can be converted into cash. As you know from our last lesson, the more liquid an asset is, the more easily and immediately it can be converted into cash. This includes the money in your checking and savings accounts, or the stocks that you own.
Service Fees
Many banks require you to keep a minimum amount of money in your account. If your account is below this amount, then you are charged a service fee. You could also use a bank that has no minimum balances. Many online banks do not. However, since they are online, there aren't physical bank branches to go to, and there are fewer ATMs.
Automobile Debt
Many people need to borrow money in order to purchase their car. Car loans generally have a term of 3-5 years. One recommendation is to always get your car loan through a bank or credit union. Getting the loan from the dealership will often be more expensive as they charge higher interest rates.
Credit Unions
Non-profit institutions that provide the same services to its members as banks do, but they are actually owned by their members. When a customer deposits money into an account at a credit union, they become part owner of it.
The Budget Categories: 14th Priority
(Optional) Consider setting aside money each month to donate to a charity of your choice. You can also deduct any money you donate from your taxable income.
The Budget Categories: 12th Priority
(Optional) Pay off any debts with moderate interest rates, between 5-10%
Credit Score Formula: 1. Payment History 35%
Every time you pay a bill on time, this score goes up. Every time you are late with a payment or have a debt that you have never paid, this score goes down. It's not just missing a credit card payment or a car loan payment that can hurt your credit score. Not paying a bill, like your cell phone bill, can be reported to the credit rating agencies.
4 main categories of assets that store wealth: 4. Non-Liquid Investments
Finally, people may have money tied up in investments that they cannot access easily, or that they would face a penalty for accessing immediately.
Mortgage
Loan taken out to purchase a home that typically last 15-30 years. Therefore, a home appears as both wealth and debt. The percentage of your home that you have paid off counts as wealth, but the amount of your loan that has not been paid off yet is debt.
The Budget Categories: 5th Priority
Pay the minimum payment on all debts and loans
The Budget Categories: 3rd Priority
Pay your essential utilities: electric, water, gas bills
The Budget Categories: 6th Priority
Pay your non-essential bills: internet provider, cell phone bills, cable bill
The Budget Categories: 1st Priority
Pay your rent/mortgage + monthly home insurance
Credit Score Formula: 5. Types of Credit Used: 10%
People with a variety of credit lines, such as a mortgage, auto loan, and credit cards, versus people with only credit card debt, are considered less risky borrowers.
Federal Work-Study
Provides part-time jobs for undergraduate and graduate students with financial need, allowing them to earn money to help pay education expenses. The program encourages community service work and work related to the recipient's course of study.
The Budget Categories: 8th Priority
Put money into a savings account for a small emergency fund
The Budget Categories: 11th Priority
Put money into your emergency fund savings account so that you have 3-6 months' worth of living expenses
4 main categories of assets that store wealth: 3. Investments in Real Estate and Business
Some people own property purely to make money off of it. For example, you could purchase a condo with the intent to rent it out to others. Similarly, the owner of a strip mall can rent storefronts out to businesses.
Savings Account
2nd most liquid. Savings accounts will always offer an interest rate. You cannot spend money out of a savings account by using a debit card or checks. You may also be charged a fee if you do not keep a high enough balance, or if you withdraw money too frequently. Of course, the point of a savings account is to save money and not spend it frequently.
Money Market Account (MMA)
3rd most liquid. Think of an MMA as a mix of a checking and a savings account. Like a savings account, MMAs will pay you interest on your deposit. They typically offer a higher interest rate on an MMA than with a savings account. MMAs even allow you to spend money out of the account with a debit card or check. However, this ability is very limited. They only allow six withdrawals per month. Some might even require you to wait several days before the money can be withdrawn. Banks will require very high deposit minimums on MMAs, or they will charge you a high monthly fee.
Checking Account
Checking accounts are the most liquid account available. Some banks charge customers fees to maintain a checking account. Avoid these banks. There is no reason to pay money each month for this service, as there are numerous institutions that offer free checking. Even the banks that do charge fees will waive that fee if the customer maintains a high enough balance (the amount of money deposited in the account). Because the money here is so liquid, banks will generally not pay you any interest on money in a checking account.
Debt
The amount of money someone owes to another individual or financial institution.
Liquidity
The degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price. The rule of thumb is that the less liquid the account, then the more interest you earn on money in that account.
FAFSA
The free application you fill out to qualify for federal grant, work-study, and loan money.
4 main categories of assets that store wealth: 1. Homes
The value of owning a home is immense. Generally, home values increase over time, making them work as investments. Also, once the home is paid off, homeowners have a much cheaper living situation than renters, who will always have to pay rent each month.
Retirement Account
The wealth asset designed to help people retire on time. Those who wish to save for retirement should invest money into index mutual funds. By purchasing mutual funds through a retirement account, you can make your money grow even more.
Certificate of Deposit (CD)
They feature the least amount of liquidity. You deposit money into a CD for a set amount of time. The longer the term you commit to, the higher the interest rate banks will offer. During that time, your access to that money is extremely limited. If you withdraw any of it early, you will face a high fee.
Credit Score Formula: 3. Length of Credit History: 15%
This is based on how long you have used credit. Someone who has borrowed money and done a good job of paying it back over two decades is considered less of a credit risk than someone who got their first credit card a week ago. Because of this, it is often a good idea to keep your oldest credit card account open. Even if you never use it, having an account on your credit report that has been open for years and years (and that you have paid off responsibly) looks better to lenders.
Credit Score Formula: 2. Amounts Owed: 30%
This is based on the total amount of money you owe compared to the total amount of credit available. Someone who has spent $9500 on a credit card with a $10,000 limit is considered more of a credit risk than someone who has spent $100 on a credit card with the same limit.