Agenda. 1. Assessing Your Situation A. 3 types of consumers B. Net Worth C. Net Cash Flow

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2 Agenda 1. Assessing Your Situation A. 3 types of consumers B. Net Worth C. Net Cash Flow 2. Revolving Credit A. Credit vs. Charge vs. Debit Cards B. Tips on Revolving Credit C. Home Equity Line Credit vs. Loan 3. Credit and Loans A. Home Loan B. Auto Loan C. Co-Signing a Loan 4. Credit Reporting A. What is a Credit Report B. What is a Credit Score C. Who sees my Credit Report D. How do I improve my Credit Score E. Why is my Credit Score important F. Where can I get a copy of my Credit Report 5. Budgeting A. Create a Budget B. Savings & Reserves C. Retirement/College Investing D. Savings & Budgeting Tips 6. Keys to Successful Personal Financial Management 2

3 Assessing Your Financial Situation Buying a home is the most important purchase a consumer can make. Do you think you are ready to enter into this type of a transaction? Many of us feel we are handling our finances just fine, but are we? In this session we will talk you through the steps to identify what your financial strength currently is. Research tells us that there are 3 Types of Consumers. Those that: 1. Spend Above Your Means: This usually someone who spends more than they make each month and carries a heavy debt load. 2. Spend at Your Means: This consumer spends in proportion to their income. 3. Spend Below Your Means: This type of consumer is usually someone who saves their money and only purchases an object when they feel they have the means to pay for it. WHAT TYPE OF CONSUMER ARE YOU? 3

4 Rules for Success 1. Have a personal plan 2. Spend below your means 3. Make a monthly budget 4. Save for reserves, retirement, college and rainy day 5. Use charge cards and credit cards sensibly don t over charge 6. Be aware of your status on your credit report 7. Maintain a good credit score by paying your bills on time 4

5 Assessing Your Financial Situation It s time to take the steps to assess your financial strengths and weaknesses. This awareness will help you understand the mortgage loan process better. Most people have difficulty changing their spending habits. Changing and managing your spending habits are the key to successful personal financial management. The worksheets on the next few slides will help you recognize just where you are financially and also identify any areas that may need some attention. 5

6 This first worksheet will give you an overview of your net worth, which is a review of your assets and debts. The goal is to achieve a positive net worth. This is the amount of wealth you have Or don t have if the number is negative. Use this worksheet as a reference. On a blank piece of paper, write down your assets and debt. Then, subtract your total debt from your total assets. Assets Debt Cash $ Investments $ Cars $ Home Value $ Personal Property $ Credit Cards $ Student Loans $ Car Loan $ Home Loan $ Personal Loans $ Total Owned $ Total Owed $ Assets Minus Debt = Net Worth $ 6

7 This worksheet is designed to assess your monthly cash flow. The goal of this calculation to determine if you are spending more of your take home pay than you probably should. If your result is positive, you are spending at or below your means. This is an opportunity for savings. If your result is negative, you are spending above your means and need to change your spending habits. Grab a blank piece of paper and write your cash intake and cash outflow. Then, subtract the total cash outflow from the cash intake. Cash Intake Cash Outflow Take Home Pay $ Alimony/Child Support $ Rental Income $ Other Sources $ Total In $ Monthly Bills $ Food $ Gas $ Discretionary Spending* $ Alimony/Child Support $ Total Out $ Subtract The Total Cash Outflow from Total Cash Intake = Net Cash Flow Discretionary Spending is the money you have left over after paying your monthly bills. Ex: Money to go out to dinner, take a vacation, purchase a new sofa. 7

8 Credit Credit and Debit Cards Let s turn our attention to your credit. Our first area will be the definitions of the various types of Revolving Credit. Credit Card: Used to buy items and pay for them over time. Buying with credit is really a loan. You have to pay the money back with interest. Some card companies also provide courtesy checks to use in place of the card, again with interest. If you don t pay in full, you will owe a finance charge based on the interest rate (APR) and the outstanding balance. *Be aware that some cards, like American Express may requirement payment of the outstanding balance in full each month. Debit Card: Used to make purchases, but the money is immediately deducted from your checking or savings account. 8

9 Credit Tips on Revolving Credit Read the Fine Print Most cards carry fees that are added on top of finance charges. a. Annual Fee charged just for having the card b. Transaction Fees charged for cash advances, late payments or exceeding your credit limit APR annual interest rate charged on outstanding balances. May be fixed or variable (changes periodically). Always makes sense to shop around for a lower APR. Grace Period - Number of days you have to pay your balance in full until a finance charge is applied. Customer Service look for cards that have a 24 hour toll free phone number. Pay on time to avoid a late charge Automatic Payment Set up an automatic payment with your bank to ensure the payment is made in a timely manner. 9

10 Credit Tips on Revolving Credit Refunds If you have a credit balance on your account you can leave it to be applied against future charges or request a refund for that amount. Issuer must send you a refund within 7 business day. Unauthorized charges If your card is lost or stolen or used without your permission, typically you are responsible for up to $50. If you report the loss before the card is used, typically you are not responsible for any unauthorized charges. Payments Don t make just the minimum monthly payment. Paying just the minimum does not reduce your balance if you continue to use your credit card for purchases. Introductory Rate This rate may be low for a few months to get you to sign up for the credit card, then increase significantly after that. 10

11 Credit Home Equity Loan Have you heard the terms Home Equity Loan and Home Equity Line of Credit? Home Equity Loan this is a loan where your house is pledged as collateral. The amount you can borrow is based on the value of your home and the combined amount of the existing first mortgage and home equity loan. This type of loan has a term, interest rate and the total payments are designed to pay the loan in full at the end of the term. The funds can be used for home improvement, education, debt consolidation or other general uses. The funds are given to the borrow in a lump sum. The loan must meet Loan To Value (LTV) guidelines, which your lender will provide to you. 11

12 Credit Home Equity Line of Credit Home Equity Line of Credit like a home equity loan, this loan is secured by your home, funds can be used for home or personal uses, and the amount borrowed is subject to LTV calculation. The differences are: Interest rate generally variable and tied to prime or other index Funds are drawn over time by writing checks up to the full amount. Interest is only charged on the outstanding amount of the draws. Payments are interest only and will not pay off the loan. Generally the full principal amount is due at the end of the draw period, either as a lump-sum balloon payment or according to a loan amortization schedule. 122

13 Credit and Loans Let s move our discussion on credit to the area of loans. Home Loan Typically referred to as a mortgage, which is used to purchase a home. Generally lenders want a down payment of between 5% to 20% payment which requires mortgage insurance. If the borrower puts more than 20% down, then mortgage insurance is not required. Mortgages typically have a term of 30 years, meaning the borrower will make 360 payments of principal and interest (which pays the loan off) and taxes & insurance (which pays the annual property taxes and pays the home owners insurance premium). Also includes the mortgage insurance premium if required. Many loans today are a fixed rate where the interest stays the same for the term of the loan. Some are variable rate which have a fixed period then become adjusting according to the terms of the loan. There are closing costs to be paid by the borrower over and above the purchase price of the loan. There is usually a 15 day grace period after the due date and then a late fee is charged. If you do not make your payments, eventually your home will be taken as payment by the Lender. It is very important to pay your mortgage on time each month. You can contact your bank to set up automatic payment to your mortgage company to ensure the payment is received on time. 13

14 Credit and Loans Auto Loan Used to purchase a new or used vehicle. Typical term of months. Each payment is made up of principal and interest. At the end of the term the loan is paid in full and the title to the car is transferred into the borrowers name. The borrower is responsible for sales tax, maintenance, and paying for car insurance. If you make your car loan payments late, you will be charged a late fee. If you miss a number of payments, the lender will repossess your vehicle. Very important to make your payments on time. You can set up automatic payments with your bank to your auto lender to ensure on time payments. Student Loan - A student loan is a loan to help students pay for university tuition, books, and living expenses. There are two types of student loans: Federal (subsidized and unsubsidized) and private loans. It is very important to make student loan payments on time. First, late payments or a student loan default will be reported to the credit bureaus and will harm your credit score. Second, many student loans calculate interest based on a daily simple interest method. In a daily simple interest loan, interest grows daily on the amount of the loan. The daily simple interest method counts the number of days between the date your last payment is received and the date your current payment is received and charges interest for each day. If you make a late payment on a daily simple interest loan, you will pay interest for each additional day your payment was late (in additional to any late fees assessed). 14

15 Credit and Loans Co-signing a loan When you co-sign a loan for a friend or relative, you are risking your own credit worthiness. It is a risk to you. The document the lender will have you sign says: You are guaranteeing this debt. If the borrower does not pay, you will have to and if you do not pay, your credit score will be negatively affected. Can you afford this? You will have to pay the full amount still owed plus fees. The Lender can try to collect the amount owed from you first including possibly garnishing your wages. The liability, even if the borrower pays, may limit the amount of credit you can receive. If you pledge collateral, remember you can lose it. Always check State laws covering co-signing loans, so you understand the risks. 15

16 Credit Reporting Now we come to the reason for this whole discussion your credit and what impacts credit. Credit Report A credit report shows all your credit activity loans, inquiries, credit cards, legal action and what happened, late payments, collection activity, and tax liens. Also, when you made your payments, how much you borrowed, the type of credit, who the lender was, and when you opened the loan. All of your creditors report this activity to 3 reporting companies Equifax, Experian and TransUnion. The court system also reports bankruptcies, foreclosures, and repossessions. So all information about your borrowing and repayment history is captured in your credit report. 16

17 Credit Reporting What is my credit score? (Also known as a FICO score.) Your credit score is calculated and reported on your credit report by the 3 reporting companies. Your score is calculated in a formula created by the Fair Isaac Company using all of your credit/borrowing history. Your FICO score shows lenders what your ability is to pay your debt based on historical and current outstanding payment activity. The FICO score ranges from 300 (really bad) to 800 (excellent). Lenders usually have a minimum FICO score they will accept. So the higher your score, the better your chances of obtaining credit. 17

18 Credit Reporting Who Sees My Credit Report & Score? Prospective Lenders will review your credit report and score to determine if they will lend to you. Credit cards, home loans, student loans, auto loans, personal loans and home equity lines and loans will be present on your credit report and contribute to your credit score. Additionally insurance companies have begun to look at FICO scores to determine whether they will sell you a policy and what the premiums will be. Some prospective employers will review your credit report and score as part of the background screening process, especially if you are dealing with money or financial transactions. Generally, the lower your FICO, the higher your interest rate and other costs. 18

19 Credit Reporting What can I do to improve my credit score? Paying your bills on time positively affects your credit score. Are you at the limits on revolving debt? Keeping less than 75% utilization of your credit limits positively affects your credit score. How long have you had credit? Generally new borrowers have an insufficient credit history and it negatively affects their credit score, because of the short history of credit and repayment of debts. Limit the amount of credit you apply for. Scoring models negatively weigh lots of inquiries. Gives the impression that you are adding to your debt. Reduce the number of credit accounts that you have open. Too many credit cards on loans from finance companies negatively affects score. 19

20 Credit Reporting Why is my credit score important? Your credit score absolutely affects your ability to get credit, insurance, or even a job. Paying your bills on time, especially your mortgage, is one of the most important things you can do. It weighs heavily on your credit score, ensures you have a place to live, and provides an investment for your future. If at any time you have trouble paying your mortgage, contact your Mortgage servicing company to help identify options for you. Your home is one of the most valuable possessions you have. It is the roof over the head of your family, the heart of celebrations and joy. Always make it your priority. 20

21 Credit Reporting Where do I get a copy of my credit report? The 3 nationwide reporting agencies have set up a toll free number, website, and mailing address to order a free credit report once a year. After your first report, any other requests within 12 months can be obtained for a fee. Call Toll Free Go to the Website Mail Annual Credit Report Request P.O. Box Atlanta, GA Avoid other websites that offer free credit reports as there is usually a fee for service involved. 21

22 Budgeting Budgeting is important to keep your spending in line with your monthly income. Now it is time for you to create your budget! On the next screen, fill in the blanks for each item that applies to you on a monthly basis. 22

23 Budgeting Worksheet Use this worksheet to figure out your monthly budget. Grab that piece of paper one more time and write down your expenses. Begin with your monthly income, then subtract each of the items that follow. Your goal is to end up with a positive figure. Spending money is the amount of money left after subtracting all of the above monthly expenditures. This is also known as discretionary spending. Monthly Income $ Housing Expense -$ (28%-32%) Food -$ Transportation -$ Car Payment -$ Car Insurance -$ Health Care -$ Child Care -$ Credit Cards -$ School Costs -$ Savings -$ College -$ Retirement -$ Total = $ Spending Money $ Entertainment -$ Clothing -$ Other -$ Total = $ 23

24 Budgeting Savings & Reserves As we continue our discussion of budgeting, there are line items in your budget that are vey important to understand. Savings typically represents 5 10% of earnings of those who have a sound financial plan. The following items are the typical expenses you should budget for. a. House Repair Reserves unexpected repairs such as water heater, roof, furnace, etc. b. Job Loss Reserves Good to have 3 to 6 months income in reserve. c. College Savings This is the item most people forget to save for. Monthly deposits in 529 plans grow towards college tuition d. Rainy Day Fund This is your fun money for new household items, vacations, down payment on a new car. 24

25 Budgeting Investments / Retirement / College While Social Security will cover some retirement expenses, there is no guarantee it will be there or cover all your expenses. Setting up monthly withdrawals in retirement plans early in life will build and ensure financial stability later in life. Some types of plans are: a. Employer 401k automatic pretax withdrawals from your pay b. Roth IRA (Individual Retirement Accounts) accounts after tax deposits which are tax free when you begin to draw upon retirement c. IRA (Regular Individual Retirement Account) Pretax deposits that you pay tax on withdrawals when you retire d. Savings Bonds After tax, long term savings backed by US Government e. 529 Plans Education savings plan operated by a state or educational institution designed to help families set aside funds for future college expenditures 25

26 Budgeting Savings and Budget Tips Retirement: Goal is to replace 50% of your income at retirement. You need to save 16.62% of your salary for 30 years. The number drops to 8.77% after40 years. Home: Smart planning is to devote no more than 28 33% of your salary / income to your mortgage or rent. Maintaining your home: Don t forget to budget for upkeep and repairs. Keeping your home in good repair positively affects its value. Savings: Set aside 10% of your income in savings or 3 6 months reserves for job loss Discretionary Spending: Set aside 10% for basics and 15% for comfort or entertainment *Reminder: Your total monthly debt (excluding mortgage-related debt) should not exceed 20% of your monthly income. 26

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