Millionaire in the Making: What Young Adults

Need to Know About Money

Barbara O’Neill, Ph.D., CFP®

oneill@aesop.rutgers.edu

What are Your $$$ Questions?

Jump$tart’s Twelve Principles of Personal Financial Literacy

• Twelve principles for young adults to

become financially successful – http://jumpstart.org/12-principles-calendars.html

• Available as a calendar in PDF format: – http://jumpstart.org/assets/files/12%20Principle%20

Calendars/2012_J$_Calendar-time-CM.pdf

The Twelve Principles • Know your take-home pay

• Pay yourself first

• Start saving young

• Compare interest rates

• Don’t borrow what you

can’t repay

• Budget your money

• Money doubles by “The

Rule of 72”

• High returns equals high

risks

• Don’t expect something

for nothing

• Map your financial future

• Your credit past is your

credit future

• Stay insured

1. Know Your Take-Home Pay

• Take-Home Pay = Net Pay = Disposable

Income

– Amount of income remaining after mandatory

deductions (e.g., taxes) and withholding

• Discretionary Income

– Money left after paying household expenses

– Include savings for goals as an “expense”

• Know these numbers before committing to

large expenses

2. Pay Yourself First

• Treat savings as a household “expense”

• Give it the priority of a car loan payment

• Make savings automatic

– Employer retirement savings plans

– Mutual fund and DRIP stock automatic

investment plans

– Checking to savings transfers

– Need more ideas? See

http://www.americasaves.org/

3. Start Saving Young

Source: TIAA-CREF; assumes an 8% average annual return

Time + Money = Magic!

Source: NEFE High School Financial Planning Program

4. Compare Interest Rates

• Bankrate.com: http://www.bankrate.com/

• Consumer Action: http://www.consumer-action.org/

• Federal Reserve: http://www.federalreserve.gov/creditcard/survey.html

Rule of Three Credit Card Comparison

• See Personal Finance class assignment http://rci.rutgers.edu/~boneill/assignments/creditcard.html

• Key Criteria:

– Annual fee

– Late fee

– Over-the-limit fee

– Method for computing balance

– Rewards for use

– APR

Key Credit Terms

• Finance charge

– Total dollar amount you pay to use credit

– Includes interest costs and fees, such as service charges or credit-related insurance premiums

• Annual Percentage Rate (APR)

– Percentage cost of credit on a yearly basis

– Key to comparing costs when shopping for rates

– “Apples to Apples” comparison required by law

It is important to shop around for credit

5. Don’t Borrow What You Can’t Repay

Debt stinks! (http://www.itsahabit.com/musiccd.html)

– Ties up future income

– Prevents people from saving

– Costs money (interest and fees)

– Can lead to repossession, foreclosure, bankruptcy

– Causes physical symptoms of stress

The High Cost of Minimum Payments

Data derived from Credit Card Smarts calculator

Warning Signs of Debt Problems

• Paying only the minimum balance each month

• Trouble even paying the minimum amount due

• Total balance increases every month

• Missing loan payments or paying late

• Using savings to pay for necessities

• Getting second or third payment notices

• Borrowing money to pay old debts

• Exceeding the credit limits on your credit cards

• Denied credit due to a bad credit report

6. Budget Your Money

• Spending Plan Worksheet: http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf

• Positive Cash Flow: Income > Expenses

– Increase income

– Reduce expenses

– Do both

Seven Step Budgeting Process

1. Set financial goals and identify required savings

2. Estimate income from all sources

3. Budget an emergency fund and goal savings

4. Budget fixed expenses (include 1/12 occasional expenses)

5. Budget variable expenses

6. Record spending amounts

7. Review and revise as needed

What are Your Latte Factors™?

7. Money Doubles By “The Rule of 72”

• Calculates the number of years it takes for principal to double – Number of Years = 72 divided by interest rate

– Example: 72 ÷ 6% = 12 years

• Calculates the interest rate it takes for principal to double – Interest rate = 72 divided by number of years

– Example: 72 ÷ 10 = 7.2%

http://www.moneychimp.com/features/rule72.htm (calculator)

The Rule of 72 Source: Garman/Forgue, PERSONAL

FINANCE, Fifth Edition

8. High Returns Equals High Risks

Source: Garman/Forgue,

PERSONAL

FINANCE, Fifth

Edition

Investment Risk Factors Source: Garman/Forgue, PERSONAL FINANCE, Fifth Edition

9. Don’t Expect Something For Nothing

If it sounds too good to be

true, it probably is” • Phishing scams

• “Pump and dump” scams

• “Free lunch” seminars

• “Guaranteed” returns > other investments

• Exotic sounding deals

• Exclusive, limited-time offers

10. Map Your Financial Future

• Be a “future-minded” planner

• Set SMART Goals: http://njaes.rutgers.edu/money/pdfs/goalsettingworksheet.pdf

– Short-Term: Under 3 years

– Medium-Term: 3 to 10 years

– Long-Term: 10 or more years

• Match savings/investments to goals

• “What you think about, you bring about”

11. Your Credit Past is Your Credit Future

• People with low credit scores pay more to

borrow money

– FICO score range: 300 (low) to 850 (high)

• Negative information stays on your credit

report for 7 years (bankruptcy- 10 years)

• Credit scores are used in job hiring, car

insurance premiums, apartment rentals

Credit Scoring Factors

• Bill payment history, weighted to

emphasize past 12 months (35%)

• Proportion of outstanding debt to

available credit limits (30%)

• Length of credit history (15%)

• Number of recent credit inquiries (10%)

• Mix of types of credit used (10%)

12. Stay Insured

• Health insurance: “Age 26 law” (federal), NJ

“Dependent Under 31” law, and COBRA

– http://www.state.nj.us/dobi/division_consumers/du31.html

• Life insurance (if dependents)

• Disability insurance

• Renter’s and Auto insurance with adequate

liability limits

Key Messages

You are a Millionaire

in the Making

Time + Money =

Magic!

Financial Education Resources

• NEFE Cash Course: http://www.cashcourse.org/rutgers

• Personal Finance Course: http://rci.rutgers.edu/~boneill/

• America Saves: http://www.americasaves.org/

• PowerPay: https://powerpay.org/

• Rutgers Cooperative Extension:

http://njaes.rutgers.edu/money/default.asp#resources

Questions? Comments? Experiences