Presentation on theme: "Cranbrook Kingswood Alumni Association Senior/Junior Financial Seminar Raising a Financially Savvy Young Adult & Managing Finances in College April 3,"— Presentation transcript:
Cranbrook Kingswood Alumni Association Senior/Junior Financial Seminar Raising a Financially Savvy Young Adult & Managing Finances in College April 3, 2014
Cranbrook Kingswood Alumni Association Presenters Kristen L. Baiardi, CK 02, - Abbott Nicolson P.C. Olaf Cory Kroneman CRPS, CK 97 – Morgan Stanley Scott M. Strickland, CFP, CIMA, CPWA, CK 01 – Morgan Stanley
Cranbrook Kingswood Alumni Association Checking and Savings Budgets Checking + Debit Cards Credit Cards Savings
Cranbrook Kingswood Alumni Association Your Mission: FINANCIAL INDEPENDENCE Stick to your budget Keep track of your $ Avoid pitfalls (pitfalls = pain) Plan for tomorrow How to Get There? 1.Start now - dont wait until you leave for college 2.Use tools to stay on track (hint: you have to use them) 3.Find a student-friendly bank
Cranbrook Kingswood Alumni Association Budgets - NOW PARENTS: If you give them your credit cards now – stop If you hand out cash on demand – stop Establish a monthly allowance based on their spending patterns and your resources Until they leave for college, keep a joint account with them at your bank and monitor it EVERY MONTH - set up a meeting to review how they did, adjust, and fund next month Include CK Scrip cards in their allowance whenever you can (gas, food, clothes) STUDENTS: Your parents are not ATM machines Make a list of what you spend now and negotiate a monthly allowance Use your debit (not credit) card vs. cash whenever possible to track expenses Work to keep emergency funding to a minimum Meet with your parents once a month to talk about your budget – whats working, whats not
Cranbrook Kingswood Alumni Association Budgets - College Adjust your at home budget based on what you expect to spend (make a list). Plan for a major bump to the budget month #1 for Dorm Décor. Plan to spend at least 200% of what you budgeted for Dorm Décor. Plan to spend @ $500 per semester on textbooks (more if you are a science major). Plus the Regular Monthly Expenses: Food - beyond the Meal Plan (parents: they cant live on dorm food 24/7) Clothes Entertainment - movies, sports tickets Clubs - intercollegiate sports, going Greek, dues to build your resume Miscellaneous – road trips, toiletries, etc. Hint to parents: if you fund less than a reasonable budget, expect a lot of panicked text messages/phone calls from your student at the end of the month. Find out when next years housing contracts firm up. Surprise! October??? Sooner than you expect, lease deposits can rock your budget.
Cranbrook Kingswood Alumni Association Budgets – build your own NOTES: The above is an Excel spreadsheet – you can use paper or any other method. Wikipedias list/analysis Comparison of accounting software is a great resource to find personal accounting software (including free downloads) if Excel isnt your cup of tea. Quicken is the most commonly used personal proprietary software. Budgeting by month is helpful – note the variance month/month. Good news! After a few months (once the patterns are established), you might not need to maintain this type of detail as a student, but using financial software is a good discipline for any household.
Cranbrook Kingswood Alumni Association Checking + Debit Cards BEFORE COLLEGE: Open a student checking account - joint with parent at their bank. Your monthly allowance goes into this account. Dont order many paper checks – students rarely use them. Attach a debit card to this checking account and LEARN HOW TO USE IT. REMEMBER: a debit card is NOT a credit card, even if it looks like one. Debit cards take money from your checking account. Debit card purchases and ATM withdrawals will hit your checking account within 1-3 days. If there is no money there to cover -> bad news! (see slide on pitfalls). Figure out what works for you to keep track of the balance in your checking account. Suggestion: Save receipts, send yourself a text, write it in your planner, track it on the banks website, or use the check register that the bank sends in the box with your checks.
Cranbrook Kingswood Alumni Association Checking + Debit Cards AT COLLEGE : 1.Find the best and most popular bank at your school. Look for nearby locations and ATM machines Check out the STUDENT ACCOUNTS section on the banks website (it should be friendly, tailored to students, and easy to navigate) 2.Open an account at Friendly Bank. Take advantage of their Student Specials (free checks, overdraft protection, seminars, toasters, whatever). 3.You may ask at least one parent to join you as a signer (you are the primary). 4.Get a debit card linked in and use it. Figure out how to access your account on-line. 5.If offered, open ONE credit card with you as the primary signer co-signed by parent, or in this case better yet - you by yourself (if offered). Most come with $500 limits (dont ask for more). These Student cards are linked to checking only as overdraft protection. Dont confuse this with your debit card. Hint to parents: you will need the ABA (Bank Routing number – the first set of numbers at the bottom of the checks) and the students account number to send funds electronically from your bank. Allow 1-3 days.
Cranbrook Kingswood Alumni Association Credit Cards To begin to establish credit in your own name, open one credit card at your new Friendly Bank (often used for overdraft protection). A parent may co-sign, but you are the primary cardholder. They will set a low limit ($500 usually). AVOID ALL STORE ISSUED CARDS (J Crew, Victorias Secret, Target, etc. ). Check the activity on the card regularly via their website. When the bills arrives, pay it. Pay all of it. Report any lost cards or suspected fraudulent activity immediately.
Cranbrook Kingswood Alumni Association PITFALLS IDENTITY THEFT SAFEguard your personal information, especially your social security number. Memorize it. Do not write it down in your wallet or provide it to anyone over the internet or on a cell phone. Do not reply to any odd emails asking for personal information. Your bank may offer ID protection, but you really dont need it yet, even at a reasonable price (@ $7 /month is average). CREDIT or DEBIT CARD FRAUD Make copies of the front and back of all credit cards and keep them somewhere safe. This will provide contact info and card numbers in the event they are lost. Check your activity regularly on-line to make sure its all yours. Report any lost or stolen cards immediately.
Cranbrook Kingswood Alumni Association MOREPITFALLS MORE PITFALLS OVERDRAFTS, OVERLIMITS – ouch! This is the worst kind of habit. Preventable. Expensive (even with Student Accounts). PLUS, this is reported and tracked and stays with your credit id (your social security number) forever. DO NOT DO THIS. Keep track of what you spend. LATE PAYMENTS – bigger ouch! Pay all bills (especially credit card payments) on time. DAMAGES YOUR CREDIT SCORE Late payments on any consumer debt (for students: credit cards, cable bills, phone bills, even movie rentals not returned or paid for) may be reported to the credit agencies and this DAMAGES YOUR CREDIT SCORE. Beware! Your credit score stays with you forever. REALITY CHECK: your future costs and ability to borrow depends upon your credit score. Dont trash it!
Cranbrook Kingswood Alumni Association Pitfalls - Examples Scenario #1 – the delayed debit: 1.You have $50 in your account. You use your debit card to pump $25 of gas to refill your friends car. Your account will immediately show a $1 test. This is a reminder of more to come! 2.You drive off, and forget to write it down. In fact, you forget about it entirely. 3.The next day, you take a $40 ATM cash withdrawal, leaving $10 in your account. 4.Two (or three) days later, the gas charge hits and OOPS… you are now overdrawn (most banks will not reject small pre-tested debits for gas). Fees! Scenario #2 – the delayed credit: 1.Your parents tell you that they sent your monthly allowance to arrive on the 1 st. 2.You plan a big evening on the 1 st, but your debit card is rejected by the restaurant after you have consumed their food. You have no cash. You have to call a friend to bail you out (and promise to buy her dinner to make up for it). 3.Your allowance arrives on the 2 nd (it can take a few days). You spend a big chunk of it repaying your friend.
Cranbrook Kingswood Alumni Association Credit Cards – Pros & Cons Establishing Credit Liability Costs of Borrowing Credit Score
Cranbrook Kingswood Alumni Association Credit – receiving cash, goods or services with an obligation to pay later Open/Revolving Credit – line of consumer credit extended before you make a purchase. Once youve used open credit, you can pay back your debt at whatever pace you like so long as you pay the specified minimum balance monthly Credit Evaluation – lenders look at the 5 Cs – Character – have you established a record of timely repayment of past debts – Capacity/Capital – evaluate current income, current level of borrowing and size of financial holdings/investment portfolio – Collateral – assets or property offered as security to obtain credit – Conditions – impact the current economic environment may have on your ability to repay any borrowing Establishing Credit
Cranbrook Kingswood Alumni Association Credit Evaluation & Determination Credit Bureau – private organization that maintains credit information on individuals, which it allows subscribers access for a fee Credit Scoring – numerical evaluation of applicants based on their answers to a simple set of questions. Examples include - – Employment & Annual Income – Age – Number of bank accounts and credit cards – Credit history *Creditworthiness determines whether you qualify for credit & what interest rate youll be offered *FICO (Fair Isaac Corporation) Score – represents potential credit risk. Scores range from 300 (most risk) – 850 (least risk) *Average FICO 2011 - 692
Cranbrook Kingswood Alumni Association Costs of Borrowing Annual Percentage Rate (APR) – true simple interest rate paid over the life of the loan. Calculated the same way by all lenders Variable Rate – the rate you pay is tied to another interest rate (i.e. Prime) Fixed Rate – interest rate is fixed for the duration of the loan – CAREFUL – these can change. Credit card company needs to inform you in writing at least 15 days before changing rates Teaser Rates – initial rates (3 months – 1 year) will run as low as 0.00% but typically jump to 17-18% after the introductory period is over Cash Advances – Extremely expensive way to borrow money – Begin paying interest immediately – Credit card companies charge a higher rate of interest on cash advances – Carry an up front fee of 2-4% of the amount advanced Penalty Rates – rate you pay if you dont make minimum payments on time. These rates are typically 10% (or more) higher than standard rates.
Cranbrook Kingswood Alumni Association Pros & Cons Pros – Convenience & ease of shopping – Emergency use – Allows for consumption before purchase is fully paid for – Source of interest-free credit – Accumulation of points and other benefits – If used properly, builds credit score Cons – Lose control of spending – High interest rates – Fees – Interest on Interest *SOLUTION – PAY BALANCE COMPLETELY EVERY MONTH!
Cranbrook Kingswood Alumni Association Credit Card Payment Example MonthPaymentInterestPrincipleBalance 1$100.00$75.00$25.00$4,975.00 2$100.00$74.63$25.38$4,949.63 3$100.00$74.24$25.76$4,923.87 4$100.00$73.86$26.14$4,897.73 5$100.00$73.47$26.53$4,871.19 6$100.00$73.07$26.93$4,844.26 7$100.00$72.66$27.34$4,816.93 8$100.00$72.25$27.75$4,789.18 9$100.00$71.84$28.16$4,761.02 10$100.00$71.42$28.58$4,732.43 11$100.00$70.99$29.01$4,703.42 12$100.00$70.55$29.45$4,673.97 13$100.00$70.11$29.89$4,644.08 14$100.00$69.66$30.34$4,613.74 15$100.00$69.21$30.79$4,582.95 16$100.00$68.74$31.26$4,551.69 17$100.00$68.28$31.72$4,519.97 18$100.00$67.80$32.20$4,487.77 Assumptions - $5,000 Initial Balance Pay $100 per month Interest Rate = 18% Results It will take 94 Months to pay off You will pay $4,311 in interest in addition to you $5,000 in principal
Cranbrook Kingswood Alumni Association Lease Agreements Lease Agreements – Terms Renters Insurance Responsibilities of Tenants Sub-Letting – Pros & Con
Cranbrook Kingswood Alumni Association Housing Contracts Housing contracts incorporate by reference Terms and Conditions Example (U of M):
U of M North Quad Dorm, March 28, 2011 Credit: annarbor.com
Cranbrook Kingswood Alumni Association Leases All of these agreements constitute binding and enforceable contracts and create important legal duties and ramifications Who is named as a tenant? (joint and several liability) Amount of rent? When/where is rent due? Security Deposit Utilities? Late fees
Cranbrook Kingswood Alumni Association Other Important Lease Terms Hold harmless/indemnification-you are responsible! Alterations- what are you permitted to do to the premises? Are pets allowed? Holding over- what happens if you do not leave the premises at the end of the lease term
Cranbrook Kingswood Alumni Association Renters Insurance Generally, your personal property is your own responsibility. The landlords insurance only covers the building itself. You should consider obtaining renters insurance to protect your belongings in the event of a loss. Policies are generally available at very reasonable rates.
Cranbrook Kingswood Alumni Association Subletting Does the lease permit subletting? Tenant on the lease remains responsible for payment of rent to Landlord Have written sublease with sublessee Are there local ordinances that prohibit the number of occupants in a premises?
Cranbrook Kingswood Alumni Association Truth in Renting Act Requires certain disclosures in every residential lease Prohibits certain waivers of tenants legal rights
Cranbrook Kingswood Alumni Association Modifications must be in writing! Lease will generally contain an integration clause. This means that the lease is the entire agreement between the parties and that prior or contemporaneous oral agreements are not binding
Cranbrook Kingswood Alumni Association Fill out inventory carefully at beginning and end of tenancy. Save copies for your files so that you are able to prove the condition of the premises. Inventory Checklist
Cranbrook Kingswood Alumni Association Basics of Investing Establishing an IRA Types of Investments Costs of Investing
Cranbrook Kingswood Alumni Association Why Invest? Investing is important in order to meet certain financial goals in life and to overcome the effects inflation has on purchasing power What is Inflation? – The overall general upward price movement of goods and services in an economy (measured by consumer price index – CPI) – Historically, inflation has fluctuated greatly, ranging from zero to almost 23% – Postage stamps – 30 years ago were $0.20 and today are $0.46 – In 1950 a gallon of gas cost 25 cents. (avg in MI $3.85) Things you will need to invest for in the future…. – Down payment on a home – Retirement – College – Weddings
Cranbrook Kingswood Alumni Association Saving For Retirement We are living longer and therefore the risk of outliving assets during retirement increases –In the UK the Office for National Statistics estimates that 1 in 3 children born today will live to age 100 and the first person that will live to be 150 years old is alive today. Whats the solution? – You MUST start saving early to take advantage of the power of compounding – Recommend contributing 10-15% of your income annually to retirement plans/investment accounts – Example – save $10,000 per year for 40 years, earning 8% per year on your investments – Result – $2,590,565 Compounding interest is the most powerful force in the universe. – A. Einstein Some one is sitting in the shade today because someone planted a tree a long time ago. - W. Buffett
Cranbrook Kingswood Alumni Association Some Concepts: Trade-Offs
Cranbrook Kingswood Alumni Association Some Concepts: Savings
Cranbrook Kingswood Alumni Association Individual Retirement Accounts (IRA) Traditional IRA – Contribute 100% of compensation or $5,500 – Contribution is tax deductible – Money grows tax deferred until withdrawn – Withdrawals pre 59 ½ carry a 10% penalty plus income tax (unless qualify for exception) Roth IRA – Contribute 100% of compensation or $5,500 – Contribution NOT tax deductible – Money grows tax free (no income tax due when withdrawn) – Several withdrawal exceptions for pre 59 ½ so long as the plan has been in existence > 5 years
Cranbrook Kingswood Alumni Association Types of Investments Equity (stock) – an instrument that signifies an ownership position in a corporation, and represents a claim on its proportional share in the corporations assets and profits – Voting rights for certain corporate decisions – No set maturity – Higher risk, higher expected return – No claims in event of bankruptcy Debt (Fixed Income/Bond) – a promise to repay principal along with interest (coupon) on a specified date (maturity) – Issued by the Federal government, states, cities, corporations and several other institutions – Taxable and Tax Free (Municipal) – Receive principal back at maturity – No voting rights – Greater claim on an issuers income than equity holder – Lower risk, lower expected return
The Power of Compounding Year2.50%5.00%10.00% 1 $ 1,025 $ 1,050 $ 1,100 5 $ 1,131 $ 1,276 $ 1,611 10 $ 1,280 $ 1,629 $ 2,594 15 $ 1,448 $ 2,079 $ 4,177 20 $ 1,639 $ 2,653 $ 6,727 25 $ 1,854 $ 3,386 $ 10,835 30 $ 2,098 $ 4,322 $ 17,449 35 $ 2,373 $ 5,516 $ 28,102 40 $ 2,685 $ 7,040 $ 45,259 Start with $1,000 Invest for 40 years Earn a return of 2.5%, 5% or 10% annually on investment
Cranbrook Kingswood Alumni Association The Effect of Inflation on Purchasing Power Annualized Rate of Inflation: 3.97% (CPI)
Cranbrook Kingswood Alumni Association Quote to Remember…… The riskiness of an investment is not measured by Beta….but rather by the reasoned probability of that investment causing a loss of purchasing power over the contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power…. A non-fluctuating asset can be laden with risk. Warren Buffett Chairman, Berkshire Hathaway 2011 Shareholder Letter