Autonomics Jean Walker Director, West Texas Center for Economic
Education College of Business West Texas A&M University Canyon,
Texas
Slide 2
The TCEE programs are made possible by the following TCEE
partners. copyDR. EnviroChem Services, Inc. Trout Foundation John
Anderson Less B. Fox RBC Wealth Management
Slide 3
Autonomics Economics TEKS: (20)Personal financial literacy. The
student understands how to provide for basic needs while living
within a budget. Dollars and Sense TEKS: (1)The student
demonstrates management of individual and family resources such as
finances, . transportation . (D) The student is expected to analyze
the consequences of an economic decision made by an individual
consumer such astransportation ..
Slide 4
Note to Teacher: Concepts vital to applying personal finance to
an individuals decision making abilities can be taught using the
purchase of a car or a truck as the hook. Saving (for down payment
or for total amount) Budgeting (see slides at end) Credit (see
slides at end) Qualifications for borrowing Relationship of
interest rates to credit profile Insurance Sales tax and payroll
taxes
Slide 5
The Top 10 Mistakes Teenagers Make When Buying a Car
Slide 6
Mistake #1 Not understanding the purchase process: Down
payment: Unless you have cash saved for the purchase price*, you
either need to trade in another vehicle or make a down payment* of
approximately 20% of the cars value. Sales Tax: You will pay 6.25%
Texas sales tax. Car payments: The amount of a car payment is a
function of the price, interest rate, and number of payments. (See
handouts on price negotiation.) (Activities 1 & 2 use a
decision making model to teach product selection and an online
calculator to determine the payment amount.)
http://www.bankrate.com/calculators/auto/auto-loan-calculator.aspx
http://www.bankrate.com/calculators/auto/auto-loan-calculator.aspx
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Mistake #1 (cont) * Note to teachers: Saving (and compound
interest) and savings goals can be inserted here. Questions for the
class: How many hours of work will it take to save for the down
payment? How many to buy the car with cash? Consider this: Your car
down payment is $3000. (20% of $15,000) 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(1-.0765)]. You will work
406 hours to make the down payment. Or buying a $3000 junker will
take 406 hours of work.
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Mistake #2 Buying a NEW car Consider this: A new car loses 46%
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 smarter buy. from Consumer
Reports, April 2015
Slide 9
Mistake #3 Focusing on payment 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 into financial trouble,
becoming upside down on the car. Besides making you upside down,
extending the payments leads to higher total interest paid over the
length of the loan.
Slide 10
Mistake #3 (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 http://www.bankrate.com/calculators/auto/
auto-loan-calculator.aspx http://www.bankrate.com/calculators/auto/
auto-loan-calculator.aspx
Slide 11
Mistake #4 Not realizing how much work it takes to make a car
payment Consider this: Your car payment is $250/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(1-.0765)] You
need to work about 34 hours just to make a monthly car payment
Slide 12
Mistake #5 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 34
hours for the car payment and you now have to work 47.5 hours each
month! (And that doesnt include the hours to pay for gas, repairs,
new tires, and yearly registration!)
Slide 13
Mistake #6 Thinking you can get really cheap car insurance
Consider this: Texas requires 30/60/25 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. Terms to discuss: premium deductible Economics
TEKS: (19) (C) The student is expected to evaluate the costs and
benefits of buying insurance. Dollars and Sense TEKS: (1)The
student is expected to apply management principles to decisions
about insurance for individuals and families.
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Mistake #6 (cont) You will pay more for insurance than your
parents unless you buy under their policy. Factors that affect
insurance rates: Age Gender Driving record (tickets) Credit record
Car selection (sporty, SUV, etc.) An extended warranty is a form of
insurance. In 2014, Consumer Reports said 55% of owners who
purchased an extended warranty hadnt used it for repairs exceeding
the average $1,200 cost of the warranty. Financial planners say put
the money an extended warranty would cost into an emergency savings
account instead.
Slide 15
Mistake #7 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
Reports 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 or Edmunds to validate car price. www.kbb.com
www.nada.com www.edmunds.com
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Mistake #8 Buying a gas guzzler Consider this: If your car gets
25 miles/gallon and gas is priced at $2.50/gallon, then gas costs
10 cents per mile. Driving 100 miles will cost $10.00, which is
more than an hour of work at minimum wage. What if the price
increases to $3.00 or $4.00/gallon? Perhaps gas mileage should be a
major criteria.
Slide 17
Mistake #9 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 Note to teacher: See slides
at end about teaching credit and budgeting.
Slide 18
Mistake #10 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 7 years. Note to teacher: See slides at end about
bankruptcy.
Slide 19
Credit, Bankruptcy & Budgeting
Slide 20
Economics TEKS (12) Economics. The student understands the role
of money in an economy. The student is expected to: (C) examine the
positive and negative aspects of barter, currency, credit cards and
debit cards. (18) Personal financial literacy. The student
understands the role of individuals in financial markets. The
student is expected to: (E) identify the types of loans available
to consumers; (F) explain the responsibilities and obligations of
borrowing money; and (G) develop strategies to become a low-risk
borrower by improving ones personal credit score. (19) Personal
financial literacy. The student applies critical-thinking skills to
analyze the costs and benefits of personal financial decisions. The
student is expected to: (A) examine ways to avoid and eliminate
credit card debt; (B) evaluate the costs and benefits of declaring
personal bankruptcy; (20) Personal financial literacy. The student
understands how to provide for basic needs while living within a
budget.
Slide 21
Dollars and Sense TEKS (2) The student demonstrates management
of financial resources to meet the goals of individuals and
families across the life span. The student is expected to: (A)
evaluate the need for personal and family financial planning,
including budgeting, expense records, and maintaining economic
self-sufficiency. (B) compare types of loans available to consumers
and distinguish criteria for becoming a low-risk borrower; (C)
connect mathematics to the understanding of interest, including
avoiding and eliminating credit card debt; (I) investigate
bankruptcy laws, including ways to avoid bankruptcy.
Slide 22
Factors in evaluating credit: Capacity and capital what is your
cash inflow and what assets or debts do you have? Collateral if
they can repossess it, they will loan more on it Character as
determined by your credit record and credit score Conditions when
business conditions are bad, credit issuers are not as free with
credit
Slide 23
Credit Report Credit report includes: information about credit
accounts account balances and payment history legal actionssuits,
liens, bankruptcies, wage attachments, collection items credit
inquiries Credit bureaus: Equifax Experian TransUnion
Slide 24
Who Gets to See Your Credit Report? Lenders - use it to: Make
the credit decision Determine amounts of credit Determine the
interest rate Potential landlords Current or potential employers
Insurance companies (premiums can increase if the score drops too
low)
Slide 25
Other Credit Information History is visible on report for 7
years after last transaction (10 years for bankruptcy) Beginning
February 2010, students under the age of 21 must show proof of
income to get a credit card or have co-signer Check your credit
report annually for free at
www.annualcreditreport.comwww.annualcreditreport.com
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What is a credit score? The FICO score is the most common
(determined by Fair Isaacs, Co.) The FICO score falls between 300
850 Other evaluators of credit have their own proprietary scores
VantageScores 501 - 990
Slide 27
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
Slide 28
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
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General Rules of Thumb for Credit Monthly payments on
non-housing debt (credit cards, and other installment loans) should
not be more than 10% of monthly take-home pay. Example: If you take
home $2,000 per month, monthly payments should be no more than 10%
of $2,000, or $200. Non-housing debt should be no more than 20% of
yearly take-home pay. Example: If you earn $2000 a month after
taxes, your yearly take-home pay is $24,000, and 20% of that would
be $4,800 Mortgage payments should be no more than 28% of monthly
gross income. Example: You earn $48,000, or $4,000 per month. So
28% x $4,000 = $ 1,120. (The $1,120 represents principal, interest,
taxes, insurance.)
Slide 30
Bankruptcy When budgeting fails and credit gets out of control,
the last resort is bankruptcy. Chapter 7 straight bankruptcy Assets
that are not exempt are sold to pay off debts. All debts are
discharged. Chapter 13 wage earner plan You retain assets and pay
off debt over 3-5 years while creditors are held at bay. If your
monthly income is more than the mean income in your state, you must
file Chapter 13 rather than Chapter 7. What debts cannot be
discharged? Student loans Alimony or child support Most taxes Debt
taken on in anticipation of bankruptcy Certain suits for damages
Economics TEKS: (19) Personal financial literacy. The student
applies critical-thinking skills to analyze the costs and benefits
of personal financial decisions. The student is expected to: (B)
Evaluate the costs and benefits of declaring personal
bankruptcy;
Slide 31
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
Slide 32
Setting Up a Spending Plan List all income (wages or other
regular income). List all expenses (car insurance, gas, cell phone,
car payment, dining out, rent, activities, groceries, clothes,
savings). Fixed expenses installment payments, car insurance, rent,
savings (pay yourself first) Variable expenses food, clothing,
entertainment, some car expenses Subtract expenses from income to
determine if there is a surplus or a deficit. Overcome a deficit by
increasing income or reducing expenses. Budget templates are
available in Microsoft Excel to build a spending plan.
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Spending Plan Example Key: Income Fixed Expenses Variable
Expenses
Slide 34
Spending Plan Example Key: Income Fixed Expenses Variable
Expenses Increasing hours worked and reducing variable expenses
balances the budget, but the budget still has no savings
component.