1 Knowledge to power the next generation
2 Overview Financial Building Blocks is an online education system that helps people learn the basics of personal finance. Our system organizes personal finance into seven essential blocks: Earning, Saving, Borrowing, Insurance, Housing, Education, and Retirement. Each block is important by itself, but together they form a powerful foundation for making good financial decisions. How do we help organizations? Financial Building Blocks provides organizations with an unbiased financial education platform to empower their people. More and more leaders today recognize that understanding personal finance plays a crucial role in leading a productive, successful, and happy life. Empowering Financial Building Blocks empowers people to make good financial decisions by helping them learn personal finance. Research from leading experts shows that learning about personal finance vastly improves people s overall financial health. Easy to Learn Our modular system allows people to learn on their own time, at their own pace. Our innovative question-and-answer format makes learning fast and fun. And people can track their progress in their personal Score Center. Unbiased Financial Building Blocks doesn t offer any banking, insurance, or investment products or advertising. That leaves us free to provide unbiased guidance that helps people grow their financial knowledge and make good decisions. Modular Learning System Because people often start off with different levels of financial knowledge, we built a customizable system that can be tailored to the specific needs of any group or organization. Measurable Results With our administrative dashboard you can easily track the progress of everyone in your organization at the individual, group, and enterprise level. People can earn points by successfully completing quizzes, and you have the ability to create a scoreboard that displays everyone s ongoing point total. Blended Learning Financial Building Blocks is an excellent platform for blended learning programs. Our online system can be used to supplement live instruction and training, and makes it simple to manage the details of testing, scoring, and data analysis. Custom Solutions Do you want to create a unique online learning environment for your organization? Financial Building Blocks can help. Learn more about our capabilities, including customized content, design, and branding. Call us at Copyright Financial Building Blocks. All rights reserved.
3 Earning A paycheck is a powerful thing. You use it to pay for what you need today, and to save for what you ll need tomorrow a down payment for a home, a college education, your retirement. In other words, your paycheck is the foundation for your entire financial life. Yet many people are mystified by it. Getting your financial house in order starts with understanding exactly what s going on with your paycheck. Your take-home pay is not the same as your salary Salary is what you earn before money is taken out for things like taxes and benefits. Your pay-check deductions are for things like federal and state taxes, Social Security, Medicare, health insurance, and retirement savings. How are federal taxes computed? The tax formula is complicated, but the more you earn the higher percentage you pay in taxes. This is what s known as a graduated tax system. How are state taxes computed? Each state has its own income tax system. Some use a graduated system. Some, like Massachusetts, have a flat rate, meaning everyone pays the same percentage regardless of their income. Some states, like New Hampshire, have no income tax at all. Social Security and Medicare taxes Social Security is a tax on your income. Your employer pays half of that tax and the rest is deducted from your paycheck. If you work for yourself, you re required to pay the entire percent tax. Medicare is a federal program that provides hospital insurance. To pay for it, the government collects a tax on your income. Your employer pays half of the tax and the rest is deducted from your check. If you work for yourself, you re required to pay the entire tax on your own. Quarterly estimated tax payments When you work for someone else, your taxes are automatically taken out of your check each pay period. But when you work for yourself, this doesn t happen. If you re self-employed, the government requires you to file taxes four times a year every three months. You pay based upon how much you estimate that you ll earn in the upcoming three-month period. Underestimating can result in penalties and interest charges. Other paycheck deductions Your company may offer other benefits, such as health and dental insurance, retirement-savings programs, or transportation subsidies. Each company will have its own benefits, and associated costs, and it will be up to you to decide which you d like to take advantage of. The money you contribute for some benefits your retirement savings, for example may be tax deductible, meaning you can subtract it from the amount you have to pay taxes on. 3 Copyright Financial Building Blocks. All rights reserved.
4 Saving There are all kinds of worthwhile reasons to save money: a home, college, retirement, even a vacation. But the very first thing to save for is a rainy day. If you don t have a safety net when the unexpected happens a car repair, an injury, a job loss you become vulnerable to making bad and expensive decisions. What is a rainy-day account? It s money you set aside specifically for emergencies. Rainy-day accounts can be difficult to build, but it s important to make the effort. Try to accumulate one month s worth of expenses. Why is a rainy-day account important? If an emergency hits and you don t have a cash reserve, you can find yourself having to turn to expensive alternatives, such as credit cards, payday lenders, or tapping a retirement account which comes with expensive fees and taxes. How to build a rainy-day account Start by opening a savings account at a bank. If you already have a checking account, keep it separate from your new savings account. The goal of your rainy-day account is not to earn interest, so don t be tempted by money-market accounts or other savings vehicles that promise higher potential earnings for your money but that also come with risk. Make the rainy-day account your top saving priority Saving for retirement is crucial, but before you worry about tomorrow, make sure that you re protected today. Build up one, three, or even six month s worth of expenses in your rainy-day account before you start contributing to your retirement account. What else to save for Once you have built your rainy-day account you can start saving for other things. The three main savings goals are your retirement, an education for you or a loved one, and a down payment for a house. Saving for retirement Putting away money for retirement helps you tomorrow, but it also has benefits today your retirement contributions are tax deductible. It s important to start saving for retirement as soon as possible because the longer your money has to grow, the more it will earn. Some companies even match some or all of their employees retirement contributions. Saving for a home Before a bank will give you a mortgage, it will expect you to contribute a down payment, typically between 5 percent and 20 percent of the purchase price. For a $200,000 home, that means you ll need to save somewhere between $10,000 and $40,000. Though the money you save for a down payment is not tax deductible, the interest that you pay on your mortgage is. Saving for an education 529s are special accounts that provide tax breaks on the money you save for college or other forms of higher education. The contributions are not tax deductible, but they grow tax-free. 4 Copyright Financial Building Blocks. All rights reserved.
5 Borrowing Borrowing is an important part of a happy and successful life imagine buying a home, a car, or paying for college without it. Some people get into big trouble when they borrow money, but you don t have to. With some planning, you can make good borrowing decisions that won t cause you problems. There are three elements of a loan The principle or balance, which is the amount of money you re borrowing. The interest, which is the cost of borrowing the money. It s the amount above and beyond the principal that you have to pay back. The timeframe in which you ll pay back the loan, which is the repayment schedule. Often you ll pay more in interest for a longer timeframe, and less in interest for a shorter one. Borrow only as much as you need Just because someone offers to lend you more money than you d expected doesn t mean it s a good idea to borrow the higher amount. Fixed v. variable interest rates Fixed interest rates stay the same for the life of the loan. Variable interest rates can chance throughout the life of the loan. The five C s of evaluating the credit worthiness of borrowers Character, Capacity, Collateral, Capital, and Condition Credit scores A credit score is a way that lenders evaluate your credit worthiness. There are three different credit bureaus that keep track of your use of credit. They examine your prior experiences with borrowing money and your overall financial picture to produce what s known as a credit report. Those reports are then given a credit score, often called a FICO score, which range from 300 to 850. The more problems with your credit history, the lower your score. And falling behind on payments can do more than lower your credit score it can also lead to extra fees, higher interest rates, and even repossession. Low credit scores have consequences They can make it difficult and expensive to get credit. A credit card is actually a kind of loan Carrying a balance can be very expensive because that s when interest charges are added. You can also be assessed fees if you are late making your credit card payments. 5 Copyright Financial Building Blocks. All rights reserved.
6 Housing Buying a home is an important part of both the American Dream and a successful financial future. The loan you take out to buy a home your mortgage will probably be the biggest and longest- lasting of your life, which makes it crucial that you understand the basics. From saving for a down payment to budgeting for maintenance, there s a lot more to buying a house than just plugging numbers into a mortgage calculator. How do people buy a home? A mortgage is the biggest loan most people will ever take out. There are strict lending requirements: You have to save up a lot of money of your own to contribute, and you need good credit and a good employment record to be approved for a mortgage. A down payment is the cash you have saved. A mortgage is the money you borrow. How much money is required for a down payment? Typically between 5 and 20 percent of what the house costs. The more money you can put down, and the better your credit score, the better the terms of the mortgage you can get a better interest rate and lower fees. Debt-to-income ratio It s how much you owe compared with how much you earn. That number gives lenders a sense of how much money you have left each month after paying your bills. They want to know that you can comfortably afford to pay back your mortgage. To figure out your debt-to-income ratio, add up your monthly bills and then divide that number by how much you make each month before taxes are taken out. The lower the number the better. Lenders want to see a ratio of.40 or less. Fixed-rate v. adjustable-rate mortgages (ARMs) The interest rate on a fixed-rate mortgage stays the same for the life of the loan, which is usually 30 years. That makes fixed-rate mortgages predictable and safer. The interest rate on an ARM usually starts off lower than a fixed-rate mortgage, but can change after a pre-set amount of time. That makes ARMs riskier, but they can also be a good deal if used responsibly. Refinancing means replacing your existing mortgage with a new one, usually at a lower interest rate. Hidden homeownership costs Just because you can afford the monthly payment doesn t mean you re ready to buy. You ll need to budget for other costs, otherwise it would be like buying a car without making sure you can afford insurance and gas. Property taxes can be hundreds of dollars a month, so they are tax deductible (an advantage of buying over renting). Homeowners insurance runs anywhere from $50 to $100 a month or more. Utilities, which include gas, oil, electricity, water and sewer, can add up to a couple hundred dollars a month depending on the time of year. Maintenance costs each year average about 1 percent of purchase price per year on upkeep. Condo fees, if applicable, can be another substantical cost. 6 Copyright Financial Building Blocks. All rights reserved.
7 Insurance Insurance is about protecting yourself against financial losses that come from unexpected events like a car accident, a medical emergency, or even the sudden death of a loved one. Sometimes insurance is required, like when you own a car or have a mortgage. Other times it s optional, but may be a good idea. What s important is knowing how to get insurance coverage that balances what you can afford to pay with what you can t afford to lose. What should you insure? Your dwelling a homeowners policy covers the physical structure of your home, as well as your belongings. Your car an auto policy covers your ride. Yourself you ll need health insurance, and many people require life insurance at some point, too. Is insurance required by law? For some things, yes. The Affordable Care Act mandates that most people carry health insurance, and many states require auto policies. Even when insurance isn t required by law, you may need it in order to get a loan. You can t get a mortgage without homeowners insurance, for instance, or a car loan without an auto policy. What is an insurance policy? It s a contract that you take out with an insurance company to provide a specific dollar amount of insurance coverage over a specific amount of time. Auto, home, and health policies tend to run for one year, while life insurance goes for 20 years or longer. What is a premium? It s the amount that you pay for insurance coverage. The premium is determined by factors including the type of insurance, your personal circumstances, and how much coverage you want. How much insurance do you need? Many states have minimum limits for certain types of coverage, like auto insurance. When you take out a loan to buy a home or a car, your bank may have minimum coverage requirements. It s up to you to decide whether the minimum coverage is enough. What is a deductible? The portion of any loss that you must pay for out of your pocket. It s counter-intuitive, but you want to go with the highest deductible you can comfortably afford to pay. Why? Because a higher deductible results in a lower premium. What is life insurance? If you die, it pays money to your family. If you have kids, you ll want it. Life insurance is relatively affordable while you re young because the price is based upon how likely the insurance company thinks you are to actually die while you have your policy. You want the policy to be in place long enough to cover the years when your children will still be financially dependent on your spouse or someone else. 7 Copyright Financial Building Blocks. All rights reserved.
8 Education Higher education has the power to both broaden our knowledge and develop our technical skills. Studies show that it can also result in significantly more income over the course of a lifetime. However, the cost on an education has increased dramatically, and the idea of paying for one whether for yourself or your children can be overwhelming. Education can now be nearly as expensive as a home or retirement. The good news, though, is that a long- term perspective can make higher education a manageable expense. There are three important things that make saving for higher education a challenge. The cost is typically an unknown. You don t know what the price of tuition and room and board will be, or how much you ll receive in financial aid. There are a patchwork of funding sources, each with its own rules and challenges: saving, borrowing (from both government and private lenders), scholarships, grants, gifts. There s a condensed timeframe. Unlike with a mortgage, which you pay for over 30 years, or retirement, which you save for over your entire career, the bills for higher education typically come over just four years. Paying for college requires a long-term approach that spreads the cost over decades. Break the payment cycle into three stages: Before, During, and After. Before: Starts at least ten years prior to the first class, and involves regular contributions to a higher-education savings account. During: Lasts for the duration of your time taking classes two to four years. You ll take out loans, and look for scholarships, grants, and other forms of student aid. After: Lasts ten years or more, and involves repaying the loans that you took out. Add it all up and you re looking at a process of 25 years or more. Higher-education savings accounts With these special accounts, the money you contribute gets invested, and you won t have to pay any taxes on the earnings as long as they re used to pay for higher education. A 529 savings account offers a tax-advantaged way to save for higher education. Each state offers its own 529, and many of them include financial incentives that are reserved for their residents, but you are free to select a 529 plan from any state. A second type of 529 allows you to buy tuition at today s prices that you ll use years from now when you begin taking classes. A Coverdell Education Savings Account (ESA) is another tax-advantaged way to save for education. An ESA offers more investment flexibility than a 529 savings account does. How to apply for financial aid Everything starts with FAFSA! The Free Application for Federal Student Aid covers federal aid, including loans, grants, and work-study opportunities. The FAFSA is free, and you can submit it online in about 30 minutes at FAFSA.gov. File early because aid is given first-come, first-served. The government uses the FAFSA to determine your expected family contribution, or EFC, which is the amount it figures your family can afford to pay toward your education. Your EFC is then subtracted from the cost of attending school, which leaves your financial need. 8 Copyright Financial Building Blocks. All rights reserved.
9 Education Also fill out the College Scholarship Service Profile, which is known as the CSS. It s used on more than 300 campuses for aid that comes directly from those schools rather than the government. Some of your financial aid may be in the form of loans that have to paid back! The Stafford federal loan comes in two versions: subsidized and unsubsidized. With a subsidized Stafford loan, the government pays the interest while you re enrolled (it s available only to those with demonstrated financial need). With the unsubsidized Stafford loan, you re responsible for the interest even while enrolled. In both cases, though, you don t have to begin paying back your loan until you re no longer enrolled. The Perkins federal loan is subsidized, and it s available only to those with financial need. Loans from private lenders Many people have more financial need than can be met by federal financial aid and take out loans from banks and other private lenders. Private loans are often unsubsidized and typically come with higher interest rates than federal loans. Education loans are a lifesaver for many students but they can be very sticky Unlike many forms of debt, the student loans of today can be hard to untangle from if you have financial hardship. You won t necessarily be able to rid yourself of the debt by declaring bankruptcy. The tax benefits of paying back your student loan The Student Loan Interest Deduction allows you to deduct some of the interest you pay on your student loans. The Lifetime Learning Credit is tax credit for a student or the person paying for a student s higher-education expenses. The American Opportunity Tax Credit is a tax credit for some higher education expenses. It s available only in the first four years of post-secondary education. (You can t claim both the Lifetime Learning Credit and the American Opportunity Tax Credit for the same student in the same year.) 9 Copyright Financial Building Blocks. All rights reserved.
10 Retirement Retirement means more free time, the ability to pursue your dreams, and the end of work. Sounds great! But retirement means the end of something else, too: a regular paycheck. That can be a challenge now that people are living longer than ever before and that your retirement might last nearly as long as your time in the workforce did. With a bit of planning and self- discipline, though, you can make sure you have enough income to support yourself throughout the retirement phase of your life. Social Security It s a federal retirement program that you pay into it during working years and draw from during retirement. It s a mandatory program, so everyone has to contribute. The average retired worker receives about $1,300 a month. Retirement plans that may be offered through work Pensions are retirement contributions that your employer makes on your behalf. Only 20 percent of Americans have pensions today, down from about 40 percent in (k)s are retirement plans offered by some employers. They allow you to put away money, and to choose how it s invested. Your contributions are tax deductible, and may be matched by your employer. 403(b)s and 457s are similar to 401(k)s, but are just for teachers, municipal workers, certain government employees, and people at non-profit institutions. What happens when you change jobs? If you leave your company, you can no longer contribute to its 401(k) program, but the money in your account still belongs to you. When you leave your company, you take your retirement savings with you by rolling over your 401(k) funds into a rollover IRA. There are no fees or taxes for this process because you re simply moving the money from one retirement account to another. Can I make a withdrawal from my retirement account before I actually retire? Yes, but you ll have to pay taxes on the amount you withdraw, plus a penalty of 10 percent. In general, avoid early withdrawals from your retirement account except for in cases of emergency. Retirement plans you fund on your own Individual Retirement Accounts (IRAs) allow you to save up to a set limit each year. With traditional IRAs, the money you contribute is tax deductible, but your withdrawals during retirement are taxed. With a Roth IRA, the money you contribute is not tax deductible, but you ll pay no taxes on your withdrawals during retirement. 10 Copyright Financial Building Blocks. All rights reserved.