Chapter 4 - Financial Management

Depreciation

A decrease or loss in value

Credit report

A detailed report of an individual's credit history

Credit score

A measure of an individual's credit risk; calculated from a credit report using a standardized formula

Annual fee

A yearly fee that's charged by the credit card company for the convenience of the credit card

Never cash out your 401(k), even if you think it could clean up a lot, or even all, of your debt. You will pay about 40% in taxes and penalties. Austin and Kayla need to simply live like they didn't get the raise. With $3,500 extra a month, they will be debt-free in 10 months.

Austin and Kayla have $35,000 in debt (student loan, credit cards, car loan) but have cut up all of their credit cards and started their debt snowball. Austin just got a substantial raise and their household income is now $125,000 ($3,500 more per month, net). Should he cash out his 401(k), which has about $25,000, pay off his debt, and start again from square one? Explain your answer.

Annual Percentage Rate

Cost of borrowing money on an annual basis; takes into account the interest rate and other related fees on a loan

Constantly owing money to others prevents you from paying yourself through saving and investing, making it difficult or even impossible to build wealth over time.

Describe the negative consequences of taking on debt. What effect can debt have on your future?

Put all your debts in order from smallest to largest Pay minimum payments on all your debts except for the smallest one Attack the smallest debt with intensity until is is paid off Apply the paid off debts payment to the next debt on the list continuing to "snowball" payments toward each larger debt

Explain how the debt snowball works.

Put all your debts in order from smallest to largest; pay minimum payments on all your debts except for the smallest one; attack the smallest debt with intensity until it is paid off; apply the paid off debt payment to the next debt on the list continuing to "snowball" payments toward each larger debt.

Explain how the debt snowball works.

Spreading the purchase of a car over four of five years hinders your ability to pay off debt or save money during that time - the car depreciates quickly which means you may end up owning more on the than it's worth.

Explain why financing a car is a bad idea.

You have to pay off loan and interest with time period. loan rolls over and people overpay interest

How do cash advance and car title companies keep people in the cycle of debt?

Get focused, cut your lifestyle back, pay off your debt, and then get into the retirement game. Only with no debt (except for the house) do you invest. The First Foundation is save a $500 ($1,000 in Jeremy's case) emergency fund, and the Second Foundation is pay off debt. Jeremy should be debt-free when he starts investing (the Fifth Foundation is build wealth and give). He should consider taking his savings down to $1,000 and using the extra to pay off his debt more quickly so he can move on to investing more quickly.

Jeremy has been out of school for two years, has a good job, and recently got a raise. He is excited about investing and always puts part of his check into savings. Although he has $6,500 in debt left to pay, he is making more than the minimum payments and should be debt-free in 15 months. Should he continue to save or pay off his debt? Justify your answer.

Keep saving for that car! The lottery is a "tax" on the poor to educate the rich. Next time there's a big jackpot, check out where the long lines form. Five dollars a week invested over time will always pay off, every time. Five dollars a week may not seem like a lot, Louis, but will it end there? Gambling is addictive, and the odds against winning are huge! Wealth doesn't come by luck. It comes by making good decisions.

Louis, a high school senior, is known by his friends for generally having good luck. Everything falls his way, including an academic scholarship and a great part-time job delivering pizzas. He's saving for a car to drive at college. Some guys at school heard about a group out west pooling their money for raffle tickets and winning big. They've now started doing that for weeks, with no results. They ask Louis to join them. Five bucks a week for a huge payday. He's tempted. You are his friend; talk him out of it.

The path to wealth begins by becoming debt-free. Borrowing for any reason is not the answer. More than three-fourths of the people who accept zero-interest credit card offers mess up and get slapped with high interest rates. And what if there really is an emergency? There goes your scheme! Max, you've got your emergency fund. Now focus on knocking out your debt snowball with real money, and say goodbye to debt for good.

Max just finished his $500 emergency fund and is now working the debt snowball. He's been offered a credit card with a $5,000 limit at zero percent for one year. Max plans on banking the $5,000 in his emergency fund and paying off the card in a year before any interest accrues. Max is positive he can do that. Meanwhile, he will have earned interest and have money in the bank in the event of a real emergency! What would you tell Max?

Debt snowball

Preferred method of debt repayment; includes a list of all debts organized from smallest to largest balance; minimum payments are made to all debts except for the smallest, which is attacked with the largest possible payments

Men love cars. That's a given. But debt makes you look rich when you aren't. Don't stay in debt to impress strangers, Ryan. Sell the car! Drive a car you paid for with cash. Save up, and then move up. Meanwhile, take pride in doing the right thing. And never again drive by a payday loan outfit. Those are sleazy companies that prey on low-income people.

Ryan is broke again. Payday is five days away, and his check for the payment on his new car will reach the bank tomorrow. That car is his pride and joy. It's a big part of his image. Once a month he slips away from work early, drives to a nearby military base, makes sure he doesn't see anyone he knows, and goes to a payday loan place to get some cash. Every month he gets a bit further behind. He's desperate enough to take some good advice, and he has turned to you. What will you tell him?

True

T or F: Buying used cars is a good way to minimize debt depreciation

False

T or F: Carrying cash results in an increase of spending versus paying with credit

False

T or F: Co-signing a loan is a way to help out a friend or relative

False

T or F: Debt consolidation is wise.

False

T or F: Home equity loans are a good way to consolidate debt

False

T or F: If you are a victim of identity theft, you are only responsible for paying back half of the debt.

False

T or F: It is best to attack your debt by consolidating many payments into one

True

T or F: It is never wise to take out an arm or balloon mortgage

False

T or F: Paying off the balance of your credit card each month is an acceptable use of credit

False

T or F: The elderly are the number one target of credit car companies

True

T or F: The lottery is a tax on the poor and on people who can't do math

False

T or F: Typical millionaires drive new cars

False

T or F: You must establish credit in order to buy a house.

False

T or F: You need a credit card to rent a car.

Loan term

Time frame that a loan agreement is in force, and before or at the end of which the loan should either be repaid or renegotiated for another term

Credit card

Type of card issued by a bank that allows users to finance a purchase

Go into debt

What CANNOT be done with a debit card but can be done with a credit card?

Getting a personal loan from a band Using credit cards Taking out a mortgage on a house

What are some factors in determining a FICO score?

Quit borrowing money Get a part-time job or work overtime Sell something

What are some good ideas for getting out of debt?

Use paper shredders when destroying papers and cards with your personal information on it Check credit report annually Create strong passwords Purchased identity theft protection Never give out your social security number (until absolutely needed)

What are some things you can do to protect your personal information?

Quit borrowing money Save money and sell something and get a part-time job or work overtime Use debt snowball

What are the five steps to get out of debt?

Paying cash for all purchases

What is NOT a factor in determining a FICO score?

Borrow money from your parents to pay off the debt

What is NOT a good idea for getting out of debt?

Adults have all the credit card offers they can get. so they advertise to teens

Why are teen such a major target of the credit card industry?

You spend 12-18% more than if you use cash

Why do people go into debt when they know that they will have to pay more for an item once they figure interest?

You pay for longer time and you dont break habits

Why does consolidation typically not save money

An ARM is a mortgage with an interest rate that changes based on market conditions. They are not recommended since there is incresed risk of losing your home if your rate adjusts higher.

Why is an adjustable rate mortgage (ARM) a bad idea?

Car loses 70% of its value when you leave the lot so you pay more than it's worth

Why is it better to buy a used car instead of a brand new vehicle?