GEB 3006 Financial Literacy Exam

What is the goal when running a business

-make more than you spend

-Goal: revenue> expenses

What two personality types do we fall under when it comes to money

savers and spenders

-learn how to save as a young age

-spenders should probably have debit cards

-savers should have credit cards

-keep 3 months pay saved for emergencies

-save about 10-15% of your salary

money grows...

exponentially

-but it takes about 25 years for it to grow like a rocket

what does warren buffet say is one of the biggest mistake people make?

What is the second biggest mistake?

1. not learning the habit of saving early

2. trying to get rich quick (avoid frauds and get rich quick schemes like gambling)

Why is consumer credit important

-individuals will borrow throughout their lifetime

-maintain a good credit rating will allow you to borrow when you need to and lower the cost of borrowing via a lower interest rate

-people in the workforce will look at your credit score before hireing you

fair and accurate reporting act

allows for free credit reports once a year from Experian, Transunion, and Equifax that keep track of your credit activities

Fair Isaac corporation (FICO)

take credit reports and develop a score

-the score most everyone is going to want to look at

-goes up to 850 and you want to target 740 or above

-FICO does not take your wealth into consideration

What makes up a FICO score?

-2/3 payment history(do you pay everything on time) and outstanding debt (do have have a lot or a little debt)

How to improve your FICO score

-pay your bills on time(35% of fico score)

-manage your debt to credit limit ratio (30%)

--->take debt/limit on credit, the lower the ratio the better

-protect your credit history (15%)

--->the longer your history the better and be careful about canceling a credit card (canceling a credit card can increase your ratio and hurt your credit score)

-have the right credit mix (20%)

--->mortgage debt is good debt, auto or installment debt is geed debt, lots of new credit cards is bad debt

if you dont have a fico score

get a credit card with a small limit and pay it off monthly, or piggyback off your parents card

will getting several bank quotes on a mortgage reduce your score

get quotes within a two week period

i cant pay all my credit cards this month

pay on time, pay at least the minimum with the excess going to the highest rate card

i want to take advantage of offers from sams and delta and get their cards

this is likely going to hurt your score

my spouce has ba credit, how should we apply for a mortgage

apply only in the name of the person with good credit and transfer title later

i am on my parents card and they have bad credit

get off the card

should i cosign a loan for a friend that has bad credit

no

Do I need to pay interest on my credit card to build credit?

no

will i inherit my parents debt

No, debts are not passed down to children, but all assets must be sold and given to creditors first before any inheritance is paid

Should i pay down cards with the highest rate or highest balance?

highest rate first, but be sure you first make minimum payments on all other cards to avoid penalties

what debt are the typical american paying

-70% is mortgage

-2% is home equity loans

-9% is auto loans

-6% credit card

-9% student loans

the last debt crisis 2008

ultra loose credit resulted in skyrocketing home prices and families incurring debt they could not repay

-now we are back to rational lending so you have to have a certain credit score to get a mortgage

Next Debt Crisis

ultra loose credit policies for student loans is contributing to skyrocketing tuition costs and students incurring debt they are struggling to repay

What is the impact of student debt?

-30% of graduates move back home

-11% are delinquent on payments

-bankruptcy is not an option

-graduates are delaying the purchase of their first home and getting married because of this

-seniors still owe $86 bill

How much should i borrow

Total student debt at graduation: Target no more than 50% of your starting salary. Make up difference with part-time work: Internships, resume, good grades.

How to save money

dont go out to eat, use busses, graduate on time, work and use scholorships

How do consumer interest rates get set

the treasury yield curve sets interest rates for corporations and individuals and you borrow at rates above the yield curve

-short term rates are lower than long term rates

-higher risk of default or slow payment, the higher the interest rate

-greater risk to the lender=higher interest rate

The federal reserve

feds increase interest rates to cool the economy and possibly cause a recession and lower interest rates to stimulate economic growth

what should investors do if interest rates are increasing or decreasing?

-increasing=keep short term horizon

-decreasing=lock in long term rates

what should borrowers do if interest rates are increasing or decreasing?

-increasing=lock in long term rates

-decreasing=borrow short term, wait for fall to lock in

home equity loan

Credit line offered by mortgage lenders that allows a homeowner to borrow money against the equity in their house

-you could lose your house if you fall behind on paying bills on time

Auto loans

allows you to borrow money from a lender and use that money to purchase a car

-never shop for a car based on a budgeted payment you can afford

-shop for car loans before visiting the dealor

401-k loans

Employees can borrow money on their retirement savings and repay themselves

-Borrowing on 401-k is a bad idea

-10% pentalty if you take money out of 401-K early

To improve your chances of getting the job of your dreams

-good grades

-have experience related to your major

-be active in professional groups

-advanced degree=higher pay and lower risk of unemployment

-get trained by best employer first

-employees can easily move down the chain but rarely you can move up

-your job sets your career

-the value of your job is greater than just your salary(have benefits too!!)

-keep in mind that government will take money out of your paycheck with social security and medicare

open enrollment

a time when employees can change their participation level in various benefit plans and switch between benefit options

Individual retirement accounts (IRA)

a self-funded retirement plan unrelated to your employer

Traditional IRA vs Roth IRA

Trad: pre tax 7000 limit, current year tax deduction, 10% penalty if w/drawn before 59.5 years old, money grows tax deferred, taxed when withdrawn

Roth IRA: after tax 7000 limit, money grows tax free, great for young people

401-k Vesting

employee savings and earnings are always vested(your money is yours to take)

-employer contribution and earnings vest after some period

self directed rollover IRA

when you leave your employer, rollover your savings and earnings to a self directed rollover IRA with a discount broker

401-k basics

-employees should always contribute enough to get full employer match otherwise you are giving up a substantial amount of free money with incredibly high return

-start saving early and meet the match, and invest in stocks

What is best: pay off 18% credit card or save in 401-K with 100% match

-100% match!!

after tax benefit value

pre-tax benefit value * (1 - tax rate)

-benefits provided by employer that are not subject to payroll and income taxes such as company paid parking, on sight health facilities, free air travel for flight attendants, and company portion of health care costs

Pre tax benefits

after-tax benefit value * (1 - tax rate)

-benefits provided by employer that are subject to payroll and income taxes such as salaries, bonus, and company car

Financial implications of purchasing decisions

over your lifetime, 60-70% of your earnings will be spent on consumer purchases, at $3 million of income

-save more on what you are buying, be methodical

-gather information on costs (use consumer reports)

-be methodical about contracts and warranties

-cars are not investments, they are depreciable assets that decline in value over time (negotiate, know what price you should get your car for, have a poker face, have a set price you want to pay for everything, trade in your car and save sales tax, buy smaller less expensive cars and drive safely, buy, dont lease)

-for buying a house (remember it is a good debt to buy a house, 3.5%-10% or 20% down payment)

Mortgage payments consist of PITI

Principal (remitted to lender monthly)

Interest (remitted to lender monthly)

Taxes (escrowed based on assessed values)

Insurance (escrowed based on estimate)

-can at 40% to the payment on your mortgage

Houseing expense ratio

PITI/GMI

-known as a front end ration

-28% for conventional loans

-29% for FHA

-needs to be those percentages or less to get the loan

total debt ratio

(PITI + LTO) / GMI

-lto=long term obligation (your car loans and student loans and such

-36% for conventional loans

-43% for FHA

-back end ratio

the 10 year treasury note drives the...

30 year mortgage rates

selecting a house

-do a comparative market analysis

-you are buying sq ft and you want to look at sq footage under air because that does not include the porch

-get a real-estate agent so you don't have to deal personally with the seller

-get preapproved by a bank beforehand

-want a 15 year mortgage instead of a 30 year (but most everyone can only afford a 30 year) because you will pay it off faster and your interest is lower

-when you close, the buyer pays for title insurance, cost of mortgage, appraisals, application fee, filing fees, and home inspection report)

-preclosing walk through house

-dont buy a house on two salaries (if someone looses a job or anything)

-dont need life insurance unless you have kids, you need less insurance as you get older

Bankruptcy risk

-borrowing more than you can pay

-no health insurance (you should always have health insurance)

-insufficient liability coverage

-you should always have an umbrella policy to protect house and car