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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 D&E, The Power Group – PowerPoint PPT presentation

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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
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
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
102
Benefit of Making Higher Payments
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

104
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

106
Contact Us
  • DE, A Financial Education and Training
    Institute, Inc.
  • 4532 Jonesboro Road
  • 2nd floor
  • Forest Park, GA 30297
  • 1-877-790-1831 toll
  • (770) 961-6900 office
  • (770) 961-8900 fax
  • info_at_depower.org email
  • www.depower.org website
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