Why is Financial Education/Literacy Important?

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Why is Financial Education/Literacy Important?
Financial Empowerment

• Presented By
• Patrice B. Duncan, EVP
• Anthony Harris, AVP
• DE, The Power Group

2
What is Financial Empowerment?

• Empowerment itself is the process of increasing
  the capacity of individuals or groups to make
  choices and to transform those choices into
  desired actions.
• Financial empowerment therefore is the transfer
  of personal money power (financial independence)
  to an individual.
• It is a process of moving from financial
  instability to a position of financial stability
  through investment.

3
What is Financial Literacy?

• Financial literacy is the knowledge about
  personal finance that enables people to
  confidently manage their financial lives.
• When it comes to managing your budget, paying
  bills, and knowing the right financial services
  for you, KNOWLEDGE IS POWER!

4
Case Study Emily Karen

• Emily and Karen are friends who borrow about the
  same amount of money over their lifetimes
• Each gets 20,000 in private student loans to
  help pay for college.

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Case Study Emily Karen

• During college they get their first credit cards,
  and each carry an 8,000 balance, on average,
  over the years.
• They buy new cars after graduation and replace
  them every seven years until they buy their last
  vehicles at age 70.

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Case Study Emily Karen

• Each buys her first home with a 300,000 mortgage
  at age 30 and then moves up to a larger house
  with a 400,000 mortgage after turning 40.
• Each takes out a 50,000 home-improvement loan to
  remodel the second house.

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Case Study Emily Karen

• Emily has a FICO Score of 750, which is
  considered good to excellent.
• Emily maintains her good credit scores by always
  paying her bills on time, applying for credit
  sparingly and never maxing out her credit cards.
• Lenders respond by increasing her credit limits
  and giving her more offers of credit, allowing
  her to spread her balances across several cards
  and further protect her scores.

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Case Study Emily Karen

• Karen has a 650 FICO score, which is considered
  fair to average, even poor depending on the
  lender.
• Karen, on the other hand, doesn't always pay on
  time and sometimes maxes out her cards, which
  makes lenders reluctant to extend more credit.
• She tends to carry larger balances on fewer cards
  than Emily, which further hurts her scores, and
  Karen has less ability to negotiate lower
  interest rates.

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Case Study Private student loans An 8,000
difference

• Federal student loans don't take credit scores
  into account, but private student loans do, and
  the penalty for worse credit is significant.
  Interest rates vary by lender, but someone with a
  750 score can expect rates that are around 5 to 6
  percentage points cheaper than someone with a 650
  score, said Mark Kantrowitz of FinAid.

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Case Study Emily KarenPrivate Student Loans
- 8,000 difference

• Emily 750 FICO Score

• Karen 650 FICO Score

• Interest Rate - 7.25
• Monthly Payment - 234
• Total interest paid (10 yrs)
• 8,176

• Interest Rate - 13.25
• Monthly Payment - 302
• Total interest paid (10 yrs)
• 16,189
• Karen's Penalty 8,013

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Case StudyCredit Cards 60 more a month

• Credit card issuers have tightened their lending
  standards in the past couple of years, which
  means higher rates and stricter standards for
  just about everyone.
• Whereas a 720 credit score used to get you the
  best rates and terms from many issuers, some now
  require 750. Even getting a card can be tough if
  your scores are below 675, according to Curtis
  Arnold of CardRatings.com. A few years ago, even
  those with "subprime" scores in the low 600s had
  a slew of offers.

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Case Study Emily KarenCredit Cards- 60
difference per mth.

• Emily - 750 FICO Score

• Karen 650 FICO Score

• Interest Rate - 10.99
• Annual Interest- 880
• Lifetime interest 44,000

• Interest Rate 19.99
• Annual Interest- 1,600
• Lifetime interest 80,000
• Karen's Penalty 36,000

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Case Study Auto loans 5,400 more per car

• A few years ago, Karen would have paid about 3
  percentage points more for a 60-month new-car
  loan. Today, that penalty is more than twice as
  high, according to myFICO.com, which tracks rates
  for auto and mortgage loans based on FICO credit
  scores. The difference significantly inflates the
  interest costs for every 25,000 vehicle she
  finances over a lifetime.

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Case Study Emily Karen Auto loans 5,400
more per car

• Emily - 750 FICO Score

• Karen 650 FICO Score

• Interest Rate - 5.78
• Monthly Payment - 481
• Interest cost per car 3,843
• Lifetime interest paid -30,768

• Interest Rate 13.24
• Monthly Payment - 572
• Interest cost per car 9,310
• Lifetime interest paid 74,480
• Karens Penalty 43,712

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The Role of Financial Education

• Financial education plays a significant role in
  our society by empowering people with required
  knowledge and skills to make accurate consumer
  decisions, follow appropriate financial
  practices, and achieve economic well being.

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The Role of Financial Education

• However, some financial education programs
  narrowly focus only on changing people's
  financial knowledge and make the assumption that
  this leads automatically to changes in financial
  behavior.

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The Role of Financial Education

• This assumption may work at times however,
  changing financial behavior (not just increasing
  financial knowledge) is essential for a person to
  reach financial goals and achieve financial well
  being.

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Major Topics of Financial Education

• Financial education is a very broad subject and
  typical topics covered include
• Budgeting
• Cash-flow management
• Credit
• Banking
• Savings and Investments.

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Major Topics of Financial Education

• Other topics of discussion can encompass
• Goal Setting
• Wise Consumer Practices
• Consumer Laws Rights
• Retirement Planning
• Life Death Insurance

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Major Topics of Financial Education

• While the importance of some topics may change
  over time, other topics, such as
• Decision-making
• Cash-flow management
• Savings
• Credit, debt, housing, and planning for the
  future will always represent the core topic areas
  of financial education.

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Educational Settings

• Financial education is very similar to other
  educational programs. It takes place in formal,
  non-formal, and informal educational settings.
• Formal settings include credit courses offered in
  high school and colleges.

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Educational Settings

• Non-formal settings include financial education
  training workshops and counseling programs
  provided by various organizations and individuals
  outside of formal educational institutions. i.e.
  non-profits

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Educational Settings

• Informal financial education comes from everyday
  interactions with people and mass media, i.e.
  news, work, internet, family etc.

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Key Elements

• Before the financial educator begins the program
  evaluation process, it is important to review the
  education program to make sure that it has all
  the key elements to function successfully.

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Key Elements Preparation

• Must haves..
• Identified target participant group
• Identified financial education needs
• Program objectives designed to meet identified
  needs
• Educational materials and lesson plans chosen to
  achieve learning objectives

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Key Elements Preparation

• Delivery method chosen to facilitate participant
  access to educational materials, i.e. lecture,
  internet, group, individual etc.
• Inclusion of evaluation plan and data-collecting
  instruments

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Key Elements Preparation

• Trained and/or certified financial educator(s) to
  facilitate learning, i.e. NeighborWorks, HUD,
  etc.
• Program monitoring plan to utilize evaluation
  data for building stronger programs and funding
  strategies

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Target Audiences

• Target audiences of financial education are very
  diverse. Participants' ages, levels of education,
  socio-economic backgrounds, and learning needs
  can vary greatly. For example, the ages of
  potential audiences can range from youth to older
  adult.

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Target Audiences

• The levels of education can range from elementary
  school to graduate school.
• This variation underscores the educational
  diversity of potential audiences of financial
  education programs.

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Target Audiences

• Additionally, the need determines how to
  carefully select educational materials, delivery
  methods, and the evaluation approach based on the
  needs of each audience to achieve desired
  results.

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Methods of Financial Education Delivery

• Various methods are used to deliver financial
  education programs. These methods can be
  classified under three main categories
• Individual Methods
• Group Methods
• Mass Methods

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Methods of Financial Education Delivery

• Individual Methods
• One-on-one counseling
• Telephone advising
• Computer/Internet Learning

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Methods of Financial Education Delivery

• Group Methods
• Seminars/presentations
• Training workshops
• Workshop series
• Credit courses offered through formal educational
  institutions

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Methods of Financial Education Delivery

• Mass Methods
• Web-based programs
• Interactive CD programs
• TV programs
• Newsletters/papers
• Radio programs

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Evaluation Tools

• Evaluation is a key component of Financial
  Education Programs. There are many different
  types of evaluation tools depending on the object
  being evaluated and the purpose of the
  evaluation. Perhaps the most important basic
  distinction in evaluation types is that between
  formative and summative evaluation.

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Evaluation Tools

• Formative evaluations strengthen or improve the
  object being evaluated -- they help form it by
  examining the delivery of the program or
  technology, the quality of its implementation,
  and the assessment of the organizational context,
  personnel, procedures, inputs, and so on.

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Evaluation Tools

• Summative evaluations, in contrast, examine the
  effects or outcomes of some object -- they
  summarize it by describing what happens
  subsequent to delivery of the program or
  technology assessing whether the object can be
  said to have caused the outcome

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Evaluation Tools

• Determining the overall impact of the causal
  factor beyond only the immediate target outcomes
  and, estimating the relative costs associated
  with the object.

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Evaluation Tools

• Formative evaluation includes several evaluation
  types
• Needs assessment determines who needs the
  program, how great the need is, and what might
  work to meet the need
• Evaluability assessment determines whether an
  evaluation is feasible and how stakeholders can
  help shape its usefulness

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Evaluation Tools

• Formative evaluation includes several evaluation
  types
• Structured conceptualization helps stakeholders
  define the program or technology, the target
  population, and the possible outcomes
• Implementation evaluation monitors the fidelity
  of the program or technology delivery

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Evaluation Tools

• Formative evaluation includes several evaluation
  types
• Process evaluation investigates the process of
  delivering the program or technology, including
  alternative delivery procedures

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Financial Education Resources Curriculums

• FDIC Money Smart
• Freddie Mac Credit Smart
• NEFE National Endowment for Financial Education
• Federal Reserve Bank Guide to Financial
  Literacy Resources
• Jumptart Financial Literacy

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Sample Presentation

• Goal Setting
• Budgeting
• Credit

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Five Rules to Goal Setting

• Rule 1 Set Goals that Motivate You
• Making sure it is something that's important to
  you and there is value in achieving it.

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Five Rules to Goal Setting

• Rule 2 Set SMART Goals
• -Specific -Measurable -Attainable -Relevant
  -Time Bound

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Five Rules to Goal Setting

• Rule 3 Set Goals in Writing
• Put them on your walls, desk, computer monitor,
  bathroom mirror or refrigerator as a constant
  reminder.

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Five Rules to Goal Setting

• Rule 4 Make an Action Plan
• Write out the individual steps, and then cross
  each one off as you complete it.

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Five Rules to Goal Setting

• Rule 5 Stick With It!
• Remember to review your goals continuously.

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How to Budget

• Getting started with making a plan for your money
• Planning how to spend your money
• Developing a spending plan to meet your goals
• Making your spending plan
• The importance of saving
• Getting help

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Why Do You Need a Spending Plan?

• To prepare for large expenses
• To encourage savings
• To prepare for surprise expenses
• To identify wasteful spending
• To accomplish goals

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Rate Your Spending Habits

• What would be hardest?
• Is a house worth giving these things up?
• Are you ready to do this now?
• Are there other things you want to do first?
• What things would be easiest to change?

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The Steps in Establishing a Spending Plan

1. Determine your monthly net income
2. Calculate your monthly expenses
3. Subtract your regular expenses from your income

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Keeping Track of Spending

• Save all receipts
• Use a small notebook

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Setting Family Goals

• Talk about goals as a family
• Be specific
• Write down all family members goals and rank
  them in order of importance
• Agree on your top goals
• Figure out how much it will cost to reach your
  goals

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Wants vs. Needs

• Needs items you must have for basic survival
• Wants things you desire but can live without

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Money Management Tips

• Plan according to current income
• Plan ahead for six months
• Include spending money for all
• Keep record keeping simple

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Money Management Tips

• Set money aside for maintenance
• Pay yourself first at least 10 of take-home pay
• Get consensus from entire family

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Reviewing the Plan

• Is our spending plan working?
• Are all family members able to follow it?
• Which costs always seem to be over the planned
  amount?
• Are we getting closer to reaching our goals?

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Ways to Make Money Management Easier

• Consider consolidating credit card accounts
• Consider selling a car
• Check your interest rates
• Stick to the plan

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Importance of Saving
1,504.09 in 2 years

2/ day
2 interest
Try to save 10 of your income on a monthly basis!
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Types of Savings Accounts

• Regular savings account
• Club account
• Certificate of deposit (CD)
• Money market account
• Matched savings account

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Tips for Savers

• Pay yourself first
• Open a savings account far away from home and
  work
• Save change at end of day
• Bank your surprises

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Saving 1 a Day
No Interest 5 Daily Compounding
Year 1 365 374
Year 5 1,825 2,073
Year 10 3,650 4,735
Year 30 10,950 25,415
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Key Points

• The value of credit
• Different types of loans
• What a credit report is and how it is used
• How to read a credit report
• How to start restoring credit
• How to recognize credit restoration scams
• Available credit resources

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Key Points

• The characteristics of a credit card
• The costs of using a credit card
• The potential problems with credit card use

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Importance of Credit

• Can be useful in times of emergencies
• Is sometimes more convenient than cash
• Allows you to make large purchases

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Types of Credit

• Secured
• Unsecured

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Collateral Items

• Automobiles
• Homes
• Savings and investment accounts

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Consumer Installment Loans

• Automobile
• Computer
• Furniture
• College tuition

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Credit Cards

• Ongoing ability to borrow money for
• Household
• Family
• Personal expenses

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Home Loans

• Home purchase loans
• Home refinance loans
• Home equity loans

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Fees

• Annual maintenance fees
• Service charges
• Late fees

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Cost of Credit

• Amount financed 5,000
• APR 12
• Finance charge 675.31
• Total of payments 5,675.31

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Be careful of

• Rent-to-own services
• Payday loans

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Four Cs of Credit

• Capacity
• Capital
• Collateral
• (Character the 4th C)

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Credit Reporting Agencies

• Equifax www.equifax.com [phone]
• Experian www.experian.com (888) EXPERIAN
  (397-3742)
• Trans Union www.transunion.com [phone]
• For a merged report
• True Credit (merged) www.truecredit.com

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Tips to Manage Your Credit

• If possible, pay off your entire bill each month
• Pay on time to avoid late fees and protect your
  credit
• Always check your monthly statement to verify
  transactions

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Tips to Manage Your Credit

• Ignore offers creditors may send you to reduce
  or skip payments
• Think about the cost difference if you
  purchase your item with cash versus credit

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What is in a Credit Report?

• Identifying information
• Credit history
• Public record information
• Inquiries

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Credit Scoring

• Payment history 35
• Outstanding debt 30
• Credit history 15
• Types of credit 10
• Credit inquiries 10

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Credit Agencies Credit Score

• Experian Fair Issac
• Trans Union Empirica
• Equifax Beacon

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FICO Credit Scoring

• The higher the score the better
• Most consumers score between 300 and 850
• www.myfico.com

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FICO Credit Scoring

• 660 easy to obtain credit at a low interest
  rate
• 620-660 may need additional documentation to
  get a good rate
• lt620 may prevent the borrower from getting
  best rates

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Definitions

• Tax Lien - a claim against a property filed by
  the taxing authority for unpaid taxes
• Judgment - a court order placing a lien on a
  debtors property as security for a debt owed to
  a creditor

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Definitions

• Collection account - a past due account that has
  been referred to a specialist to collect part or
  all of the debt
• Bankruptcy - a legal proceeding that can legally
  release a person from repaying debts that a
  person cannot pay back

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Bankruptcies

• Chapter 13 - the debtor keeps all of his/her
  property and makes regular payments on the debts
  after filing for bankruptcy
• Chapter 7 - the debtor gives up all nonexempt
  property and keeps exempt property (property that
  state law determines is needed for support of the
  debtor and his/her dependents)

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Negative Credit Report Information
Type of negative information Maximum time on credit report
General Civil Judgments 7 years from the date filed
Tax Liens 7 years from the date paid Indefinite if not paid
Chapter 13 Bankruptcy- dismissed or discharged 7 years
All other Bankruptcies 10 years
88
When is your Credit Report free?

• You have been recently denied credit
• You have been recently denied employment or
  insurance
• You suspect someone has been fraudulently using
  your account

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When is your Credit Report free?

• You are unemployed and intend to apply for
  employment within 60 days
• You receive public welfare assistance
• You live in certain states

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Identity Theft

• Contact the fraud department of the three major
  credit reporting agencies
• Contact your creditors
• File a report at your local police station

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Identity Theft Resources

• www.consumer.gov/idtheft or 1-877-IDTHEFT
  (438-4338)
• www.fraud.org or 1-800-876-7060

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What are ways to Build a Credit History?

• Apply for a small loan at a bank or credit union
  where you have checking or savings accounts
• Apply for credit with a local store
• Make a large down payment on a purchase and
  negotiate credit payments for the balance

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What are ways to Build a Credit History?

• Ask a friend or relative with an established
  credit history to be a co-signer for you
• Pay your bills on time
• Establish nontraditional credit through regular
  rent and utility payments

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To Rehabilitate Your Own Credit

• Start by contacting credit reporting agencies to
  get copies of your credit report
• If there are errors, request an investigation
• Contact lenders to renegotiate payment plans
• Visit a credit counseling agency

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Tips for Credit Counseling

• Interview several credit counseling agencies
  before signing a contract
• Check with your state attorney general, local
  consumer protection agency and the Better
  Business Bureau for complaints
• Ask for information from the agency about itself
  and its services
• Ask questions about services and fees

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True Statements about Credit Rehabilitation

• No one can have accurate information removed from
  your credit report
• If you have bad credit, it can take years to
  repair your credit legitimately
• No one can create a new identity for you
• You can order your credit report yourself and
  dispute any errors on your own

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Credit Card Terms

• Annual percentage rate- the rate of interest you
  are charged plus fees, expressed as a yearly rate
• Fees- charges for annual usage, late payments or
  balances that over-the-limit

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Credit Card Terms

• Grace period - the number of days you have to pay
  your balance before a creditor starts charging
  interest
• Balance computation method - how your interest is
  calculated

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Interest Rate

• Fixed - the interest rate will not change
• Variable - the interest rate can increase or
  decrease

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Shopping for a Credit Card

• Decide how much you will use your card
• Start small
• Understand the terms
• Be aware that introductory rates will change
• Avoid application fees
• Understand fixed and variable rates

101
Cost of making Minimum Payments
Item Price APR Interest Paid How much you really pay for the item Total years to pay off
TV 500 18 439 939 8
Computer 1,000 18 1,899 2,899 19
Furniture 2,500 18 8,781 11,281 34
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Benefit of Making Higher Payments
Original Balance APR Monthly Payments Total Number of Payments Total Years to Pay off Total of Payments
2,500 18 Minimum payment 404 34 8,781
2,500 18 50 94 8 4,698
2,500 18 100 32 3 3,163
103
Finance Charge Calculation

• APR is 18
• Daily periodic rate is 0.0493 (18 divided by
  365 days)
• Multiply the average daily balance (200) by the
  daily periodic rate
• Equals .10 per day (for each day you have the
  200 balance)
• Finance charge is .10 x 30 days or 3.00

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Tips for using Credit Cards

• Pay your bills on time
• Keep your receipts
• Protect your credit card and account numbers
• Keep a record of your account numbers
• Carry only the credit cards you think you will
  use
• Pay off the total balance each month
• Read the fine print

105
Correcting Credit Card Problems

• Pay off credit card and higher interest rate
  loans first
• Pay for future purchases using check or cash
• See a reputable credit counselor

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Contact Us

• DE, A Financial Education and Training
  Institute, Inc.
• 4532 Jonesboro Road
• 2nd floor
• Forest Park, GA 30297
• 1-877-790-1831 toll
• [phone] office
• [phone] fax
• info_at_depower.org email
• www.depower.org website