LESSON 1 -- GETTING OUT OF DEBT

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1 LESSON 1 -- GETTING OUT OF DEBT LESSON DESCRIPTION AND BACKGROUND This lesson uses the Better Money Habits video Steps to Help You Get Out of Debt (www.bettermoneyhabits.com) to explain the concept of debt. It shows students some of the problems associated with debt and provides them with different steps to reduce their overall debt. Some of these steps include creating an emergency fund, tracking their spending, and following a budget or spending plan. The lesson helps students understand how debt is created and the potential long-term impact it can have. Other topics include the differences between secured debt and unsecured debt, and discusses debt consolidation loans. This lesson can be a supplement to the following lessons in Financial Fitness for Life, Grades Lesson 3: Decision Making; Lesson 8: Managing Your Money; Lesson 11: What Is Credit?, and Lesson 12: Making Credit Choices. The video is 6 minutes, and this lesson can be completed in about 30 minutes. BETTER MONEY HABITS VIDEO Debt: Getting Out of Debt: Steps to Help You Get Out of Debt (6:00) FINANCIAL FITNESS FOR LIFE CONNECTION, GRADES 9-12 Lesson 3: Decision Making Lesson 8: Managing Your Money Lesson 11: What Is Credit? Lesson 12: Making Credit Choices ECONOMIC AND PERSONAL FINANCE CONCEPTS Credit Interest Risk Debt BETTER MONEY HABITS: HIGH SCHOOL 1

2 NATIONAL STANDARDS FOR FINANCIAL LITERACY Standard 2. Buying Goods and Services, Benchmark: Grade Consumer decisions are influenced by the price of a good or service, the price of alternatives, and the consumer s income as well as his or her preferences. 5. People incur costs and realize benefits when searching for information related to their purchases of goods and services. The amount of information people should gather depends on the benefits and costs of the information. Standard 4. Credit, Benchmark: Grade Loans can be unsecured or secured with collateral. Collateral is a piece of property that can be sold by the lender to recover all or part of a loan if the borrower fails to repay. Because secured loans are viewed as having less risk, lenders charge a lower interest rate than they charge for unsecured loans. OBJECTIVES At the end of this lesson, the student will be able to: Identify the steps to getting out of debt. Explain the costs and benefits of credit. Describe ways to avoid debt problems. Describe ways to correct debt problems. TIME REQUIRED 30 minutes MATERIALS Handout 1.1: Getting Out of Debt Teaching Supplement 1.1 PROCEDURE 1. Ask students if they have ever borrowed money from anyone. Ask students if they have ever needed a loan to buy something. Explain that borrowing money causes debt because it must be repaid to the lender, whether it is their friends, their parents, a bank, or a credit card company. Ask students to describe how it feels to be in debt and owe money to someone else. Remind students that they will probably have debt at some point in time, even if they do not have any right now. BETTER MONEY HABITS: HIGH SCHOOL 2

3 2. Tell students that this lesson is designed to help them determine what steps are needed to get out of debt. Explain that owing a friend a dollar is much different than owing 100 friends a dollar, or owing a bank for the loan on a car; the more debt they have, the more challenging it is to repay. 3. Tell students they will be viewing a video that will discuss how people get into debt, the steps they can take to reduce their debt, the importance of having a budget or spending plan, the differences between secured and unsecured debt, debt consolidation loans, and the potential need to earn extra income to pay off their debt. 4. Distribute copies of Handout 1.1. Ask students to complete the handout with information from the video. Explain that you will be stopping the video at different points to allow them sufficient time to complete the handout. (A video transcript with recommended STOPS is included at the end of this lesson Teaching Supplement 1.1). 5. After completing the handout, have students discuss the challenges of getting out of debt. CLOSURE To summarize this lesson, remind students that establishing a budget or spending plan and updating it regularly can help reduce the potential of getting into debt problems. Also remind them that getting out of debt takes time and strategic planning; there are no easy or magical solutions. ASSESSMENT Refer to Question 6 on Handout 1.1. EXTENSION Have students complete a budget activity as suggested in the video. Or, review budgets they created earlier in the class. Refer to the following lessons in Financial Fitness for Life, Grades 9-12: Lesson 3: Decision Making; Lesson 8: Managing Your Money; Lesson 11: What Is Credit?, and/or Lesson 12: Making Credit Choices. BETTER MONEY HABITS: HIGH SCHOOL 3

4 HANDOUT 1.1 GETTING OUT OF DEBT Complete this handout while viewing Better Money Habits: Steps to Help You Get Out of Debt (www.bettermoneyhabits.com) 1. What is debt? What can happen if you have too much debt? 2. What is the purpose of a budget? How can it help you avoid getting into debt or help you get out of debt? 3. What is secured debt? Define and give an example. What is unsecured debt? Define and give an example. What can you do if you re having trouble making your minimum monthly payments? 4. What is a debt consolidation loan? When can be it a good option? 5. What are some ways you could reduce your spending? What are some ways you could earn extra money? 6. What did you learn from this video? BETTER MONEY HABITS: HIGH SCHOOL 4

5 HANDOUT 1.1 ANSWERS 1. Debt is owning money to someone else. Debt not only means you owe money you don't have, it can add stress and anxiety to your life. 2. A budget is a spending plan that allows you to track your income and expenses. Knowing where your money is going helps you make better choices about managing it. It can also help you make a plan to get out of debt. 3. Secured loans have fixed payments for a fixed amount of time. Examples are car loans and mortgages. Unsecured loans have variable payments that can also vary in length of time. Examples are credit cards or school loans. If you re having trouble even making the minimum monthly payments, you can always call your creditors. 4. A debt consolidation loan allows you to combine all of your debt into one loan with one payment, but it is only beneficial if it saves you interest and helps you avoid adding more debt. 5. Answers will vary. 6. Answers will vary. BETTER MONEY HABITS: HIGH SCHOOL 5

6 TEACHING SUPPLEMENT 1.1 VIDEO TRANSCRIPT FOR Transcript: Steps to Get Out of Debt Steps to help you get out of debt. Most of us have some kind of debt, right? I mean, uh, maybe a car loan, uh, mortgage, even, uh, even school loans. And not all debt is bad, but sometimes you find yourself having more debt than you can handle, and being in that kind of debt stinks. No doubt, plain and simple. 'Cause not only does it mean you owe money you don't have yikes uh, it can add a large amount of stress and anxiety to your life, and, and you don't want that. You know, you don't need that. No one needs that. So, what to do? Well, okay, it might be the easiest thing to hear, I know, but you, you need to make some changes in your life, 'cause it's the only way to climb out of the hole that seems to just get deeper and deeper every month. STOP: TELL STUDENTS TO ANSWER QUESTION 1 ON THEIR HANDOUT. AFTER COMPLETING QUESTION 1, TELL STUDENTS THE NEXT SECTION TALKS ABOUT GETTING OUT OF DEBT. RESTART THE VIDEO. First off, think about how long it took you to get into the position you re in, and then realize that it'll probably take some time to crawl out. Uh, that will take hard work, perseverance, patience, and motivation. So, what can get you started on the road to being debt-free? Uh, a budget. Now, if you already have one, make sure to, uh, update it to include all your debts and current monthly payments. Uh, if you've never used one, now would be the time to start. If you need some help, you can look online or download a budget worksheet from the "What To Do Now" section when you finish this video. (NOTE: You may choose to download this budget sheet at the end of the lesson as an extension or use Lesson 8 in Financial Fitness for Life, Grades 9-12). Why create a budget? Well, a good budget will help you see where your spending goes every month. And that means everything from, uh, from mortgage or rents, uh, to credit cards, even to, uh, to auto loans and, uh, electric bills, even those little things that you buy on a daily basis. Now, it's going to require a little time and effort, but believe me, it'll be worthwhile in the long run, really. Uh, and if you want even more tips on making one, we have a video yes we do called "How To Set a Budget and Stick To It" that can help. Once your budget is good to go, you'll have a better handle on what you have coming in, uh, what's going out, and, uh, what you can actually afford every month. BETTER MONEY HABITS: HIGH SCHOOL 6

7 STOP: TELL STUDENTS TO ANSWER QUESTION 2 ON THEIR HANDOUT. AFTER COMPLETING QUESTION 2, TELL STUDENTS THE NEXT SECTION FOCUSES ON SECURED AND UNSECURED DEBT. RESTART THE VIDEO. From there, you can make a plan. Start by taking a look at the kind of debt you have, and focus on addressing your secured loans. They usually, uh, have fixed payment amounts and are for things like, uh, like your car loan, uh, or mortgage. It's not that they're more important, but if you miss payments on them, you can end up losing whatever is being secured. Then, tackle your unsecured debts, like, um, your credit cards and school loans. Start by listing them out from highest interest rate to lowest, and then continue to pay at least the minimum monthly payment on everything, but where you can, yes, pay more than your minimum, starting with the loans with the highest interest rates first, of course. Uh, and if you're having trouble even making the minimum monthly payments, you can always call your creditors and let them know that you're having troubles. Now, okay, yes, this may seem intimidating, but there are people on the other end of the phone who can help you come up with a plan, and, and think about, really, it's in their best interest for you to pay your bills, right? STOP. TELL STUDENTS TO COMPLETE QUESTION 3. AFTER COMPLETING QUESTION 3, TELL STUDENTS THE NEXT SECTION DISCUSSES DEBT CONSOLIDATION LOANS. RESTART THE VIDEO. Another option to consider is a debt consolidation loan. This can help you by rolling all of your unsecured debt into one, but, uh, it's only beneficial if it saves you interest and helps you avoid adding more to your debt. So, this is the part where you get some tough love, yes. Now is the time to stop adding to your debt. There's no magic bullet here. It's the best way to reduce what you owe, and if you want to do this right, you're going to have to make some concessions in your life, which may mean you you know, you need to stop spending on nonessentials. Um, do, do you buy your lunch everyday? Hmm? Uh, you know, at seven bucks a day, 50 weeks a year, that habit costs a whopping 1750 bucks a year. Yeah. So why not make the effort brown bag it instead or, or, hey, how about your morning Joe? You make it at home and you can save over 700 bucks a year. Yeah. STOP. TELL STUDENTS TO COMPLETE QUESTION 4. AFTER COMPLETING QUESTION 4, TELL STUDENTS THE NEXT SECTION INCLUDES WAYS TO REDUCE SPENDING OR EARN EXTRA MONEY. RESTART THE VIDEO. Just think about where you can trim the fat in your budget, and then make changes in your life. Um, take public transportation to work, uh, use coupons when you shop, don't buy the latest and greatest device when what you have just works fine. Another way to stop adding to your debt is to use this rule of thumb, which I love: If you can't afford it, you can't have it. That will help you avoid buying things you'll end up paying for down the road. BETTER MONEY HABITS: HIGH SCHOOL 7

8 Finally, be creative. Let's face it, some of us live a little larger than we need to, so figure out what you can do without and get some cash for it. Hey, I mean, whether you clean your closet and, and visit a consignment shop, hold a yard sale or sell something online, I mean, there are plenty of ways to make some extra cash. Or, if you have a little time on your hands, why not try to pick up some extra hours at work or get a part time job? And, with the average tax refund around $3,000 according to CNBC think hard before you blow it on a vacation or something you don't really need. What you should be doing with that money instead is using it to pay down your debt. No excuses. Being in debt can make you feel isolated, and probably pretty bummed out, but if there's one thing to remember, it's that you're not alone, and there are people you can turn to for help. So, if you find yourself in a spot that you can't manage on your own, check with an accredited non-profit consumer credit counseling agency, one that's a member of the National Foundation for Credit Counseling. So, now that you've taken the first step toward getting out of debt, simply acknowledging that you need to take action can help you start down the right path. And if you follow these steps, you'll slowly but surely chisel away at what you owe. STOP. TELL STUDENTS TO COMPLETE QUESTION 5. AFTER COMPLETING QUESTION 5, HAVE THEM COMPLETE QUESTION 6 AS A REVIEW OF WHAT THEY LEARNED FROM THE VIDEO. RETURN TO PROCEDURES FOR THIS LESSON. BETTER MONEY HABITS: HIGH SCHOOL 8

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