Autonomics and Other Important Financial Information Brought to you by the West Texas Center for Economic Education College of Business West Texas A&M University Canyon, Texas

Contents: 1. Top 10 Mistakes 2. Understanding Credit 3. Managing Your Money 4. FAFSA and College

Mistake #1 Not realizing how much work it takes to make a car payment Consider this –Your car payment is $300/month –You work for $8.00/hr (above minimum wage) –IRS takes 7.65% of your wages for Social Security, leaving you with $7.39/hr [$8.00( )] You need to work 41 hours just to make car payment

Mistake #2 Forgetting to include car insurance in your monthly payments Consider this –Assume you get really cheap insurance at $100/month –$100/$7.39 = 13.5 hours; so add 13.5 hours to your 41 hours for the car payment and you now have to work 54.5 hours each month!

Mistake #3 Thinking you can get really cheap car insurance Consider this –Texas requires you to have 25/50/25 minimum liability insurance (per person/all people/property damage) –If you finance the car, the lender will require collision and comprehensive insurance for the amount financed

Mistake #3 (cont) You will pay more for insurance than your parents; local insurance agent says likely will cost $200 - $300/mo Factors that affect insurance rates: –Age –Gender –Driving record (tickets) –Credit record –Car selection (sporty, SUV, etc)

Mistake #4 Buying a gas guzzler Consider this –If your car gets 20 miles/gallon and gas is priced at $2.50/gallon, then gas costs 12.5 cents per mile –Driving to from Amarillo to Lubbock and back will cost $27.50 –What if the price increases to $3.00/galllon?

Mistake #5 Buying a NEW car Consider this –A new car loses 45% of its value in the first 3 years! –A car 3 years old is still a very good car – a used car is a much better buy

Mistake #6 Focusing on payments amounts and not on the total car price Consider this –If your only criteria for buying a car is having a low payment, you could get in financial trouble –Become upside down on the car –Extending the payments leads to higher interest paid over the length of the loan

Mistake #6 (cont) Learn to use a car payment calculator* to determine how much a payment will be Multiply the amount of the payment by the number of payments to see total amount you will pay * Go to auto-loan-calculator.aspx auto-loan-calculator.aspx

Mistake #7 Not understanding the importance of credit worthiness to get a car loan Consider this –You cant borrow money if you have bad or no credit (possible to get co-signer) What are the basics lenders review before approving a loan? –Income, payment history, credit score, and collateral

Mistake #8 Deciding if you cant keep up with the payments, you could just sell the car or let the lender repossess it Consider this –You may be upside down and unable to sell the car for what you owe –If the lender repossesses the car, that goes on your credit record for many years

Mistake #9 Not researching car prices, safety and reliability factors, or desirable features which help the car maintain value Consider this –Read Motor Trend, Road and Track, and Consumer Report for new car information –Know the invoice price prior to entering a showroom or sales lot –Use Kelley Blue Book or NADA Used Car Guide (online) to validate car price

Mistake #10 Thinking your image as a person is totally tied to what you drive – it is just transportation! Dont be car poor because you believe you are what you drive

Basics of Credit Credit history is the basis for obtaining credit and is your credit reputation Interest payments are the cost of using a banks money for any purpose Credit report includes information about credit accounts, outstanding loans, account balances, and credit inquiries Check your credit report annually for free at

Credit Information History is visible on report for 7 years after last transaction (10 years for bankruptcy) Remember: Credit decreases future buying power –Average young adults spend nearly 24 percent of income on debt payments 2 Beginning February 2010, students under the age of 21 must show proof of income to get a credit card or have co-signer

FICO Credit Score Calculation Scores range from 300 – 850 and are a snapshot in time; your score can change in either direction depending on your credit report

FICO Score Explanations Payment history – most import component of credit score calculation Amounts owed – balance owed compared to available credit Length of credit history – length of time since first credit account was opened New credit – credit inquiries and recent account openings Credit types – mortgage, installment (auto), revolving (credit card), and other

Reviewers of Credit Report Lenders Potential or Current Employers Landlords Insurance Companies (premiums can increase if the score drops too low)

Managing Your Money Establish checking and saving accounts Banks offer many different accounts –Look for free checking accounts and no minimum balance requirements Avoid bouncing checks and overdrawing your account Check statements online frequently and report any errors immediately

Opening a Checking Account Documents you need if under age 18 –Valid drivers license –Social Security number –Alternate form of ID (passport, bill, etc) Only takes about 30 minutes to complete Must have legal guardian present if under age 18

Spending Plan (Budget) Most important tool to ensure financial freedom Reduces pressure of instant gratification purchases if money is already allocated Keep track of all income and expenses Use it to create emergency money fund to reduce or eliminate credit card charges

Setting Up a Spending Plan List all income (i.e., wages or other regular income) List all expenses (i.e., car insurance, gas, cell phone, car payment, dining out, rent, activities, groceries, clothes, savings, etc) Subtract expenses from income to determine if there is sufficient income (surplus); if not, reduce expenses until a surplus is achieved Many budget templates are available in Microsoft Excel to build a spending plan

Spending Plan Example

FAFSA Free Application for Federal Student Aid You can apply as early as Jan 1 st of your senior year in high school For the (July 1 st, 2009 – June 30 th, 2010) school year, you must apply by June 30, 2010 Apply early before financial aid funds at colleges run out

FAFSA Application To apply, you will need –Social Security number –Drivers license –W-2 forms –Federal Tax Returns – yours and parents –Current bank statements –Business and investment records –Alien registration or permanent resident card Takes about 1 hour to complete

FAFSA Application (cont) Will receive a student aid report (SAR) Look at the expected family contribution (EFC) on the SAR Colleges will use your EFC to award financial aid Check with individual schools for their financial aid application deadlines

FAFSA Application (cont) EFC

Surviving College Dos –Buy groceries and make dinner in your dorm – Ramen noodles are a great deal! –Take advantage of free entertainment – go to football or volleyball games Donts –Buy fast food for every mean – it can be very expensive and/or unhealthy –Overspend on entertainment – going to concerts every weekend

Conclusion Research the car you want to buy Make sure you can afford the car Credit is a privilege and not a right- it can be taken away if abused Set up a spending plan and follow it closely Fill out the FAFSA early Learn from the mistakes of others