Presentation on theme: "Good Debt vs. Bad Debt 7 th Grade Income vs. Expenses #3."— Presentation transcript:
Good Debt vs. Bad Debt 7 th Grade Income vs. Expenses #3
Pre-Test 1.What is a good debt? 2.When credit card bills are paid off within a month, how much interest must be paid? 3.How much more is the lifetime earning increase of a 4-year college graduate than the average 4-year college costs?
Objectives Good Debt – Created value or has the potential to create value Bad Debt – Difficult paying money back or does not add meaningful value Credit Card Problems Postsecondary Education Value vs. Costs
Review Last Lesson 1.Tool on the internet that provides information about income vs. expenses Reality Check 2.What is the annual salary needed to cover your expenses? Answers will vary Average Range: $50,000-$60,000 3.What careers of interest cover those expenses? Answers will vary Usually needs to be a high-skilled career
Debt Debt: Owing money It is very difficult to live your life debt-free The challenge – Which debt makes sense – Which debt does not make sense – Wisely managing and limiting the money you borrow
Good and Bad Debt Good Debt – Need something but do not have the money to buy it – Taking out loans: can afford the monthly payments – Creates value and provides way to earn more money Bad Debt – Things that can be consumed fairly quickly with no or little cash or personal value – Buying something you really do not need – Cannot afford the monthly payments
Usually Good or Bad Debt? Groups agree on answers – Which of the loan items below are usually good or debts? – Give reasons why they are good or bad debts Credit card finance charges Buying a home Paying for college Buying clothes Paying for a vacation
Groups Share With Class Which of the loan items are usually good or debts? Give reasons why they are good or bad debts – Credit card finance charges – Buying a home – Paying for college – Buying clothes – Paying for a vacation
Usually Good Debt Buying a home – Most people need a loan to buy a home – Interest money is tax deductible – When it is bad: Monthly payments too high for income Paying for college – Costs are often much less than increase in income – When it is bad: High tuition with few long-term financial or personal benefits
Usually Bad Debt Credit Card Finance Charges – Often very high interest, Payments primarily going to interest – When it is good: Pay balance quickly, buy something important Buying Clothes – Not recommended to borrow for items consumed fairly quickly – When it is good: Clothes essential for new job, pay back fast Paying for a vacation – When costs creates payments you cannot afford, consumed quickly – When it is good: Cost slightly over your savings, rejuvenates you
Good and Bad Debt Video Watch the Good and Bad Debt videoGood and Bad Debt Pay close attention: what is good or bad debt? Mixed opinions on whether borrowing money to buy a car is a good or bad debt Discussion Point Many Americans have a car loan Is taking out a car loan a good or bad debt? Why?
Credit Card Interest 1.The average interest rate is 20% for credit cards 2.When credit card bills are paid off within a month, no interest is paid 3.The credit card company requires people to pay at least 3% of the principal every month
Credit Card Scenario #1 1.Mai charges $1,000 to her credit card for a vacation – Her credit card interest rate is high: 20% 2.She only pays the minimum amount per month: 3% of the principal which is $30 – It takes her 25 years to pay off the debt 3.Mai pays a total of $2,224.06 – $1,000 of principal, $1,224.06 of interest – That is a major way credit card companies make money – This type of situation happens way too often in America
Credit Card Scenario #2 1.Ed has bad credit rating for not paying previous loans – His interest rate is very bad because of this: 37% 2.For the same $1,000 vacation loan – Ed paid $24,040.81 in interest – Mai paid $2,224.06 (that is still bad) 3.It took Ed 50 years to pay back the debt – This type of loan is also too common in America
Postsecondary Financial Aid Approximately 70% of college students Receive financial aid they do not have to pay back Example: Grants, Scholarships, Work Study Average amount of student financial aid per year For 4-year college of annual costs of $25,000 $9,100 per year
High School Graduate Wage Difference 2-Year College Wage Difference: $514,500 $514,000 - $12,000 = $502,000 4-Year College Wage Difference: $1,116,000 $1,116,000 - $100,000 = $1,016,000 10-Year College Wage Difference: $3,348,000 $3,348,000 - $250,000 = $3,098,000
College Loans: Usually a Good Debt Students usually pay much less on college costs – Than the salary increase they will make in a lifetime Example: 4-Year Costs: $100,000, Salary Increase = $1,116,000 Going to a postsecondary institution and borrowing money is most often a good debt – The degree has more financial value than the debt
Post-Test 1.What is a good debt? 2.When credit card bills are paid off within a month, how much interest must be paid? 3.How much more is the lifetime earning increase of a 4-year college graduate than the average 4-year college costs?
Review Good debt is – Something that creates value or has the potential to create value Amount of interest when credit card bills are paid off within a month – $0.00 Lifetime earnings increase of a 4-year college graduate more than the average 4-year college costs – Over 1 million dollars