Why is Financial Education/Literacy Important?

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Why is Financial Education/Literacy Important?

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Title: Why is Financial Education/Literacy Important?

1
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.

5
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.

6
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.

7
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.

8
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.

9
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.

10
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

11
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.

12
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

13
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.

14
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

15
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.

16
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.

17
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.

18
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.

19
Major Topics of Financial Education

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

20
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.

21
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.

22
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

23
Educational Settings

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

24
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.

25
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

26
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

27
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

28
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.

29
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.

30
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.

31
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

32
Methods of Financial Education Delivery

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

33
Methods of Financial Education Delivery

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

34
Methods of Financial Education Delivery

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

35
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.

36
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.

37
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

38
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.

39
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

40
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

41
Evaluation Tools

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

42
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

43
Sample Presentation

Goal Setting
Budgeting
Credit

44
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.

45
Five Rules to Goal Setting

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

46
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.

47
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.

48
Five Rules to Goal Setting

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

49
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

50
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

51
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?

52
The Steps in Establishing a Spending Plan

Determine your monthly net income
Calculate your monthly expenses
Subtract your regular expenses from your income

53
Keeping Track of Spending

Save all receipts
Use a small notebook

54
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

55
Wants vs. Needs

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

56
Money Management Tips

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

57
Money Management Tips

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

58
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?

59
Ways to Make Money Management Easier

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

60
Importance of Saving
1,504.09 in 2 years

2/ day
2 interest
Try to save 10 of your income on a monthly basis!
61
Types of Savings Accounts

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

62
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

63
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
64
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

65
Key Points

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

66
Importance of Credit

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

67
Types of Credit

Secured
Unsecured

68
Collateral Items

Automobiles
Homes
Savings and investment accounts

69
Consumer Installment Loans

Automobile
Computer
Furniture
College tuition

70
Credit Cards

Ongoing ability to borrow money for
Household
Family
Personal expenses

71
Home Loans

Home purchase loans
Home refinance loans
Home equity loans

72
Fees

Annual maintenance fees
Service charges
Late fees

73
Cost of Credit

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

74
Be careful of

Rent-to-own services
Payday loans

75
Four Cs of Credit

Capacity
Capital
Collateral
(Character the 4th C)

76
Credit Reporting Agencies

Equifax www.equifax.com (800) 685-1111
Experian www.experian.com (888) EXPERIAN
(397-3742)
Trans Union www.transunion.com (800) 916-8800
For a merged report
True Credit (merged) www.truecredit.com

77
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

78
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

79
What is in a Credit Report?

Identifying information
Credit history
Public record information
Inquiries

80
Credit Scoring

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

81
Credit Agencies Credit Score

Experian Fair Issac
Trans Union Empirica
Equifax Beacon

82
FICO Credit Scoring

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

83
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

84
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

85
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

86
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)

87
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

89
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

90
Identity Theft

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

91
Identity Theft Resources

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

92
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

93
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

94
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

95
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

96
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

97
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

98
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

99
Interest Rate

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

100
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
102
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