Your Financial Plan
- Take Charge of Your Life and Your Money!
Have a plan! Define your financial goals. What do you want out of life? To graduate debt-free? To save money for a house or a new car? Make plans to reach your goals.
Best Financial Tools
- Take Action! Reach Your Goals!
Take action until your goals become a reality. Save money with automatic payroll deductions. Save bonus income, like a tax refund.
- Control Your Spending
Create a simple spending plan. Think of a budget as your financial map. It tells you how much money you have coming in, where you must spend it, and how much you can save.
Best Financial Tools
- Remember to Save Money for Fun Things
Pay for big expenses as soon as you get your paycheck. Then determine how much you have to save and how much you have to spend.
- Get Organized
Take an hour to create a filing system to help keep track of financial paperwork and other documents: Bill Payments, Savings & Investments, Loans & Credit Records, Taxes, etc. Track all bill due dates in one place. Know how long to keep documents.
Chart for How Long to Keep Financial Documents
- Keep Track of Your Student Account
Your NCard offers you convenience that comes with responsibility. It's very easy to lose track of how much you are spending. Little things add up!
Information about the NCard Campus Account
- Protect Your Personal Information
Be cautious about giving out your social security number and credit card & bank account numbers online. Make sure the website is secure by checking that the address starts with https://. Track of statements and receipts. Shred when you do not need them anymore.
- Be Proactive About Identity Theft
Copy the fronts & backs of all credit & debit cards and keep the copies in a safe location. This enables you to cancel the cards if they are lost or stolen.
What to Do if Identity Theft Happens
- Sounds Like Common Sense, But DO NOT Overdraw Your Account
Do not assume your account balance at the ATM is correct. Remember, some purchases might take some time to appear on your account.
- Keep Track of ATM Withdrawals
Don't waste money on overdraft charges!
- Identify Wants vs. Needs
You probably understand food is a need and a latte is a want. But some mornings, a latte is sure to feel like a need. Maybe coffee is a need but gourmet coffee drinks are a want.
Wants vs. Needs: A One Day Chronicle
- Become a Better Shopper
Think about unnecessary purchases at least a week before buying. Use coupon sites, such as Groupon, Lincoln Journal Star: Today's Deal, Living Social, Red Plum, and Restaurants.com. Research products online to make sure you get the best price.
- Become a Better Saver
Make your money work for you. Any money you save grows. Start by teaching yourself to save money in small increments.
- Pay Yourself First
Include savings as part of your spending plan. Automatically deduct money from your paycheck and put in a savings account. Experts recommend trying to save at least 10% of your income every month.
- Learn the Power of Compounding
Compounding means your money earns money, and the earnings on your money earn money. Even if you only have a small amount of savings, the longer you let it earn compound interest, the more significant the results.
- Become a Savvy Investor
Learn about your savings and investing options: savings accounts, money market accounts, US savings bonds, certificates of deposit (CDs), stocks, bonds, mutual funds.
SEC Basic Investing Information
- Know the Best Investors have an Investment Plan
Assess your risk tolerance and your investment goals.
- Start Investing in College (if you can)
Start investing as soon as you can. Experts agree Roth Individual Retirement Accounts (IRAs) are the best bang for your buck for young adults. When you reach retirement age, you may withdraw all the money 100% tax free.
- Save Money for Unexpected Expenses
Avoid going into debt over medical bills, car & computer repairs, and unexpected trips. Look at the little things you buy and cut back. You won't even notice. For example, buying a pop every day adds up to over $500 a year.
- Avoid Money-Wasting Temptations
Take a certain amount of cash out for the weekend and don't spend any more than that. When shopping, make a list so you won't be tempted to buy extras.
- Don't Let Car Expenses Drive You Crazy
Shop for the cheapest car insurance. Park your car in the cheapest lot on campus. Get routine car maintenance done on time to extend the life of your car and avoid car repairs.
- Know What Tax Credits & Deductions You Qualify For
Come April, you want to know what credits and deductions you qualify for so you get the refund you deserve. Be prepared. Research if you will benefit more from taking the standard deduction (a lump sum deduction the government allows) or itemizing (deductions you add up yourself).
IRS Deductions Listing
- Understand Your Financial Aid
Know what types of aid you have (grants, scholarships, student loans, work study). Know all the details. Keep all important documents in a safe place.
UNL Financial Aid Information
- Be Smart About Student Loans
Before you accept a student loan, carefully review it. Make sure you know what you will have to repay and when. It adds up faster than you think! A good guideline for college students is to have no more than 10% of the expected gross income from their first job going for repayment of all debt. 15% would mean you probably will not be able to buy a new car, and 20% is the start of the "danger zone" when debt is out of control.
Plan for Student Loan Repayment
Student Loan Advisor Calculator - This Student Loan Advisor provides you with an estimate of the amount of educational debt you can reasonably afford, given the expected starting salary for your major.
- Only Borrow For Necessary Expenses
Student loans should only cover necessary costs like tuition, room & board, books, and school supplies. Know what your monthly student loan payments will be. This can help you keep borrowing to a minimum.
- Keep Track of Your Obligations
Visit http://www.nslds.ed.gov/nslds_SA/ to find out how much you owe and what your interest rates are. Student loans are a serious obligation that will affect your financial future.
- Avoid Paying Interest
In general, max out your subsidized loan borrowing power before using unsubsidized loans.
- Lower Interest Payments
If you have the money, make interest payments on unsubsidized loans while you are still in school.
- Keep Your Financial Aid Documents
Know what you have to do to ensure you keep the money coming! For example, some scholarships require you to keep a certain GPA.
- Keep Looking for Financial Aid
Keep applying for financial aid all the way through college. Ask about scholarships available to students in your major. Reapply for aid you didn't receive last year if your personal situation has changed, such as a sibling starting college.
- Pay Close Attention to Financial Aid Deadlines
The most common mistake students make is missing financial aid deadlines. Mark important dates on your calendar!
- Submit a New FAFSA Every Year & Do It Early
Complete a FAFSA even if you don't think you'll qualify for any financial aid. You might be surprised. Do it as soon after January 1st as you can because some funding is first-come, first-serve.
- Remember: You & Your Parents Need to Do Your Taxes Before the FAFSA
If you file your taxes online, you can use the IRS data retrieval tool to save time on your FAFSA.
- Be Smart with Your Refund Check
SAVE your refund check in a separate savings account and only tap into it when you need to pay for necessary expenses later in the semester. Remember that refund checks are actually additional debt, not a true refund.
- Plan for Repaying Student Loans
Keep other debts low to help keep money available to pay off your student loans faster.
- Only Use Credit if It's Good for You
Use credit only if you are certain you are able to repay the debt. Read all application materials carefully, especially the fine print. Know what you're getting into. Know what fees you may be charged.
- Be Smart When Choosing a Credit Card
Generally, look for a credit card with a low annual percentage rate and little to no annual cost. Always compare different credit cards and choose the best fit for you.
Bankrate: Compare Credit Cards
- Know the Introductory Interest Rate will Not Last
Credit card companies offer low introductory interest rates, some even 0% interest, in order to get you to sign up for their credit card. These rates do not last. Know how long introductory rate will last and what the rate is after that period.
- Pay Your Bills on Time
Pay the entire balance to avoid paying interest. Check your monthly statement carefully to make sure all transactions are correct.
- Understand Credit Card Lingo
Be aware of the grace period. This is the period of time during which no interest is charge on purchases if you have no outstanding balance on the card.
All About Credit Tutorial
- Avoid Irresponsible Credit Management
1-2 cards are enough for college students. Any more than that and you'll have trouble keeping track of everything. If you feel you might be at risk of being irresponsible with credit, request your credit limit to be lowered.
- Avoid Cash Advances
Generally, don't use cash advances. It's the easiest way to rack up fees and pay high interest.
- Know How to Create a Debt Repayment Plan
If you get over your head in debt, know how to handle it. Generally, experts agree a good strategy is to first cut spending on unnecessary items and put extra money toward the debt with the lowest balance. Once that is paid off, start paying down the next debt. Repeat the process until all debt is eliminated.
Best Financial Tools
- Know to Get Help When You Need It
If you feel lie you're sinking into debt and there's no way out, come to the SMMC! We can help you develop a debt repayment plan.
- Know Why a Good Credit Score is SO Important
Your credit score is an indicator of your use and repayment of borrowed money over time - a numerical value ranging from 300 to 850. The average credit score is around 700. If you have a low score, you will pay more for mortgages, loans, and insurance. You may be prevented from getting an apartment, and in some cases, even a job.
FICO: Understanding Your Credit Score
- Safe Way to Build Credit
A gas card is an easy way to establish credit. Charge only gas for an amount that you know you will be able pay off in full each month.
- Make Payments on Time
The easiest way to establish your score.
- Only Open Accounts You Need
If you open too many accounts, your credit score will go down. Do not open too many accounts at once.
- Keep Debt Levels Low
Keep balances of credit cards 30% OR LESS of the total credit limit.
- Monitor Your Credit Report
Credit scores begin with the information from your credit report. Make sure this information is correct by requesting your report for free from www.annualcreditreport.com.
- Fix a Bad Credit Score
If you had credit problems in the past, the best things to do to fix your score are: stop taking on debt, avoid opending new credit accounts, work to pay your debts down, and PAY YOUR BILLS ON TIME!
Your Financial Future
- Take Time to Prepare for Your Career
No matter how far off graduation seems to be, always attend on-campus interview and career fairs. It's never too early to hone your interview skills and networking is crucial to landing a job.
- Know How Much You Will Make
Figure out the salary range for your chosen career. Look into jobs for different locations. Compare and calculate costs of living.
UNL Career Services Career Guide
- Learn How to Analyze Benefits
You will need to review retirement benefits, health care coverage, and other insurance. Remember to consider additional perks, such as tuition reimbursements. Taking all these factors into consideration will help you effectively compare job offers.
- Start Investing in a 401K as Soon as You Can
If you invest in your employer's 401K, they will match a percentage of the amount you contribute, which is FREE MONEY!
- Talk to Your Parents About Money
Know what their expectations are for how you handle your money. Do they expect you to get a job? Know what you can expect of your parents. Are they going to help you pay your school and living expenses?
- Know the Difference Between a Bank & a Credit Union
A bank is a for-profit financial institution. A credit union is a non-profit financial institution in which the members own part of the credit union. Both offer most of the same services.
- Find the Best Deal for Your Checking Account
Research banks and credit unions and see what they offer. Are there any special student accounts? What are the fees - overdraft, transfers, monthly fee? Is there a minimum balance required? What is the interest rate? Compare Checking Accounts
- Make School Your First Job
Working doesn't have to interfere with your grades, but it does mean you have to manage your time carefully. Experts agree students should not work more than 20 hours per week. Remember that school is your most important job and will give you the biggest payoff down the road.
- Look for a Job On Campus
You don't have to travel away from campus, most have flexible hours, and you can find a job related to your major.
- Be Prepared for Filling Out Job Paperwork
When you start a new job, you will have to fill out a W-4. The number you put on line 5 of the form is the number of exemptions you estimate you will be entitled to in the coming year. The more allowances you take, the less income tax will be withheld from each paycheck. Generally, if you put down a 2, you will underpay your taxes and will owe the IRS money in April. If you put down a 1, you will probably pay the right amount. If you put down 0, you will pay the maximum all year and will get a refund when you file your taxes.
- Biggest Money Waster = Not Using Your Meal Plan
If you have a meal plan, limit eating out. This is the easiest way to waste money.
- Resist Peer Pressure
If you are pressured by college friends to spend money you don't have, keep in mind your long-term goals in order to remind yourself that your money is going to more important things.
- Know the Difference Between Good Debt & Bad Debt
Good debt is investing in something that will create value and build wealth, such as student loans. An example of bad debt is purchasing disposable items using high-interest credit cards & not paying the balance in full.
- Learn How to Save Money
Many freshmen blow through their savings accounts during the first few months of their college careers. Take the time to avoid this. Use a spending plan to allow you to see how much money you'll have for fun stuff. Realize you can cut back rather than eliminate spending in certain areas.
- Compare the Cost of an Apartment vs. a Dorm Room Before You Move Off-Campus
You may or may not save money by moving out of the dorm. Costs for off-campus housing add up quickly. Compare the costs for all expenses.
CashCourse Moving Off Campus Guide
- Pay Your Rent on Time
If you do get an apartment, always pay the rent on time. If you don't, you could damage your credit score.
- Talk to Your Roommates About Money
Make sure you and your roommates are very clear about how you will share the costs of everything. Know what will happen if one of your roommates moves out before the lease expires.
UNL Money FAQs
Main Resource: "Personal Finance, Tenth Edition," Garman, E. Thomas & Forgue, Raymond E., 2010.
MOST COMMON UNL STUDENT MONEY QUESTIONS
When I'm shopping, I always seem to end up buying a lot of stuff I don't need. How do I stop overspending?
Most of us are familiar with the concept of retail therapy. Our emotions, such as stress or boredom, usually drive impulse purchases. Sometimes buying things can put us in a better mood, but the high only lasts a short time. Then, our highs are replaced by feelings of guilt and worry over mounting debt.
An Accounting alum, Rob, shared his technique for resisting impulse buying.
"Ask yourself: Do I really need it? - Do I need it today? - What if I don't buy it now? - Can I find this item cheaper someplace else? He also suggested setting financial goals for yourself, such as saving for a vacation or a new car. When shopping, keep your goals in mind. Remind yourself what you really want your money to go towards."
- UNEXPECTED EXPENSES:
I got a speeding ticket. How do I handle this unexpected expense?
A Journalism Alum, Erin, found herself in this situation more than once. Unexpected expenses kept happening to her - car repairs, computer issues, you name it.
"Every time something unexpected happened, I had to ask my parents for money, then work extra hours to pay them back."
Everyone we talked to recommended that every college student have an emergency fund. Experts suggest having enough money to cover 3 to 6 months of living expenses. However, it's usually difficult to hit that target. One Finance upperclassman, Stacey, told us she tries saving at least $50 a month. Set a goal like this for yourself and your savings account will start growing right away.
- FINANCIAL AID:
Tuition is so expensive. How do I find more money to pay for tuition?
A Child, Youth & Family Studies alum, Emily, recommended that students never stop applying for scholarships.
"Individual colleges at UNL give out scholarships, so check with them. Some other places to apply for scholarships are in your Greek houses and student organizations. Another thing to do is look for a job that offers employee education benefits. Some employers will pay a certain percentage of your tuition costs if you work a certain number of hours each week. Ask your supervisor if you qualify for these benefits."
A majority of upperclassman also recommended reducing expenses to free up more money for tuition bills. Create a spending plan to help you see where your money is going and to help you identify areas where you can reduce your expenses.
- CREDIT CARDS:
Should I get a credit card?
There are good reasons for getting a credit card. For example, if you hope to establish a good credit score early in life. If this is the case, you need to have the financial resources to pay your credit card balances in full each month. One Accounting alum, Rob, recommended that students that use credit set limits for themselves on what they will purchase with credit cards, and have the self-discipline to avoid wavering from that point of view.
Also, one Finance upperclassman, Stacey, said that all students that use credit cards need to understand the consequences of using credit. If you mismanage credit, your credit score will decrease, meaning once you graduate you will end up paying more for mortgages, auto loans, and insurance AND may be prevented from getting an apartment and, in some cases, even a job. Many employers now check credit scores before extending job offers due to credit scores being an indicator of responsibility.
Is it worth it to be in clubs or Greek houses? How about employment - is it really worth it or should I concentrate on my classes?
Unanimously, everyone we asked agreed it is a good idea to be active in campus organizations. Employers look for marketable skills, leadership skills & experience. When you graduate, you need to be able to show that you were working on these skills in college. Being in student organizations is a great way do that. Most people suggest only joining 2 or 3 organizations. It's important to assess how much free time you have. Then research organizations and find the best fit for you.
For employment, research shows 10-20 hours is enough for most students. When trying to figure out how many hours to work, ask yourself why are you working. Is there a way you can reduce your expenses? Remember, school is your first job. Many alums suggest looking for an on-campus job. On-campus jobs offer flexible schedules and convienent locations. If you do want to work off-campus, find a job with minimal expenses. Try to find a job close to campus to reduce your gas expenses. And no matter what job you have, an Advertising alum, Erin, suggests making sure you are always presenting your best image. You need to start networking in college to get the job you want when you graduate. Every person you impress could be a possible mentor and could help you get your first job.
- MOVING OFF CAMPUS:
Is moving off campus really cheaper?
It depends. Us SMMC reps did some research. We talked to a student that lives in a reasonably-priced, reasonably-nice apartment. He has a one bedroom and lives about 2 miles from campus and works about 5 miles from campus. His expenses are as follows:
Rent - $550; Electricity - $60; Internet/Cable - $90; Food - $160 ($40/week); Gas - $80 Total = $940
However, look at how much he pays for food. He hardly ever eats out, so the $40 per week is for food he cooks. If he didn't cook and ate fast food a majority of the time, at an average of $6 for lunch & dinner, and still counting about $15 per week for breakfast, snacks and beverages at home, he would spend around $400 a month on food - making his total monthly expenses $1,180. Not being able to cook can be expensive!
For comparison, living in a single room in Abel/Sandoz/Harper/Schramm/Smith for an academic year is $9,247.00 - about $1,155 per month. However, remember that he wouldn't have to pay as much in gas. Plus, the experience of living on campus is invaluable.
An Advertising alum told us, "I loved living on campus. I met so many of my lifelong friends in my dorm. Also, there were always free events going on. If I would have lived off campus, I don't think I would have met as many people or done all the fun things available to UNL students."
Let's see what happens if he decides to get a roommate and move into a 2-bedroom apartment. If he still keeps making the majority of his food, his monthly cost will be around:
Rent - $300; Electricity - $40; Internet/Cable - $45; Food - $160 ($40/week); Gas - $80 Total = $625
If he doesn't cook: Rent - $300; Electricity - $40; Internet/Cable - $45; Food - $400; Gas - $80 Total = $825
For comparison, living in a single room in Abel/Sandoz/Harper/Schramm/Smith for an academic year is $8,647.00 - about $1,080 per month.
The most important thing to do before you move off campus is to assess your situation. Know you are going to miss out on opportunities to make friends, attend all the free events UNL has to offer, work out at the Rec, and eat with your friends in the dining hall. Are you really going to be able to cook a majority of your food or would it be less expensive for you to eat in the dorms?
- EMERGENCY FUNDS:
I have started an emergency fund and put $50 into it each month, but how do I know when to stop? How much is enough?
Experts recommend having enough money in your emergency fund to cover 3-6 months of living expenses. To figure out how much this really is, you need to look at your spending plan. Look at the expenses you have, especially fixed expenses like rent and utilities. Determine where you would have to spend money, regardless of whether you have income or not. The idea is that you should have enough money in your savings to support you for at least three months with no other income added. Some people prefer to have more than this, but 3 months is a good starting place and a way to make sure that you are always financially secure.
I hear a lot about the stock market and investing. How do I know if it's the right time for me to invest? Should I worry about it at all?
To determine if you're ready to start investing, there are a few things you need to consider. First, think about your spending plan. Does your income exceed your expenses? Do you have adequate insurance? Do you have an emergency fund for 3-6 months of living expenses set aside? Finally, do you know that you won't need the extra money from your spending plan for a set period of time? If the answer to all of these questions is yes, investing might be the right option for you.
One idea is to think about short-term investing. Short-term tools can include U.S. Savings Bonds or Certificates of Deposit. With a bond, you loan money to the government for a set period of time and they will pay you back with interest. CDs are the same as bonds, but you loan your money to a bank or a credit union instead.
There are many other investing options. To determine which are right for you, you will need to research and understand the risk, return, and amount of time each investment will take. Come to the SMMC for more help.
- FUN MONEY:
All of my friends are going to these great concerts and places for Fall Break, but I'm not sure if I can afford to go with them. Is it possible to have both a plan for my money and money for entertainment?
Yes. You need to create a spending plan based on your current income. Whether this income is from scholarships, loans, or work, you will need to determine how much you have before you spend it. Then, create expense categories for things like groceries, rent, utilities, and other necessary things.
Once all of this spending is accounted for, you can see how much money you have left over for the things that you want and for savings. Many students try to save at least $50 dollars a month, either for a financial goal or an emergency fund, but it is up to you. No matter what you decide to save, the money you have left over after that is what you have to spend on entertainment. For this category, decide on an amount that you can afford and are comfortable with. Once you have your spending plan created, you will know exactly how much you can afford to spend on entertainment while still saving and reaching your financial goals.
- FREE MONEY:
I would love to find some free money for school. Where can I find scholarships?
Make sure to fill out the on-line Scholarship Application for Current Undergraduate Students. The application is available in November and must be submitted by February 1st. To access the information, log into MyRED and select the Scholarship Application for Current Undergraduate Students. Submission of this on-line application allows you to be considered for scholarships awarded by the Office of Scholarships and Financial Aid and to have your information made available to your college and department. The awarding of scholarships to current undergraduate students is based on one or several of the following criteria: cumulative grade point average, financial need, and a resume of activities.
Also check through your individual college for their specific scholarships. For example, the College of Arts & Sciences has several scholarships available. To apply for their scholarships, they require a resume, a one-page narrative evaluating your own scholastic performance to date in terms of your professional goals and objectives, and 2 letters of recommendation from instructors. Their application due date is February 1.
To find private scholarships, the SMMC recommends registering for FastWeb - http://www.fastweb.com - a free on-line scholarship database. You create a profile and the system searches for scholarships that you might qualify for. It's quick, easy and free!
Is it really worth it to have an internship?
If you're on the fence about whether or not to get an internship during college, know that employers overwhelmingly say internship experience is the most important factor they consider when hiring new college graduates for full-time positions. Following are some of the benefits of internships:
- You will gain industry knowledge you won't learn anywhere else.
- You will accumulate evidence of your abilities.
- You will make critical professional contacts.
- You will gain confidence in yourself.
- You will possibly land a full-time job, which is a great feat!
UNDERSTANDING PERSONAL FINANCE
- What is personal finance?
Personal finance is the study of personal and family resources considered important in achieving financial success. Personal finance involves how people spend, save, protect, and invest their financial resources.
Your financial literacy is your knowledge of facts, concepts, principles, and tools that are fundamental to being smart about money. Financial literacy empowers you. It improves your ability to handle day-to-day financial matters, helps you avoid the consequences of poor financial decisions, and helps you make informed and confident personal money decisions.
Financial responsibility means that you are accountable for your future financial well-being. You strive to make good decisions regarding your finances. Studying personal finance will help you avoid making financial mistakes and show you how to take advantage of financial opportunities. For most people, the biggest barrier to achieving financial success is living like you are rich before you are.
- What are the building blocks to achieving personal financial success?
Know the personal finance isn't rocket science. You can responsibly manage your personal finances by making appropriate plans and taking responsible actions to implement those plans.
Important: Spend less so you can save and invest more. Recognize that financial objectives are rarely achieved without sacrificing current consumption. To achieve financial goals, you must put money into savings or investments - assets you purchase with the goal of providing additional income from the asset itself. By saving and investing, people are more likely to have funds available for future consumption.
Achieve personal financial success - which is the achievement of financial aspirations that you desire, plan, or attempt. Many people seek financial security, which provides the comfortable feeling that your financial resources will be adequate to fulfill any needs you have as well as most of your wants. Others want to be wealthy and have an abundance of resources. A truth of personal finance is that you cannot build financial security or be wealthy unless you spend less than you earn.
- Does the economy affect my personal financial success?
Your success in personal finance depends in part on how well you understand the economic environment; the current stage of the business cycle; and the future direction of the economy, inflation, and interest rates.
The economy can be described as the system of managing the productive and employment resources of our country. The US federal government attempts to regulate the country's overall economy to maintain stable prices (low inflation) and stable levels of employment (low employment.) The government seeks to achieve sustained economic growth, which is in creating production and consumption in the economy.
The business cycle is a process by which the economy grows and contracts over time. We prefer to be in the expansion phase, where production is at high capacity, unemployment is low, retail sales are high, and prices and interest rates are low or falling.
To make sound financial decisions, you need to know where we are in the business cycle, how well the economy is doing, and where the economy might be headed. Do this by paying attention to some economic statistics that are regularly reported in the news. The most widely watched leading economic indicator is the consumer confidence index. It indicates the degree of optimism that consumers express about the state of the economy. It helps gauge consumers' willingness to spend.
Also pay attention to inflation - which is the steady and sustained rise in general price levels across economic sectors. You can forecast inflation by tracking the federal funds rate - which is the rate that banks charge one another on overnight loans. When the economy slows down too much the Fed reduces the federal funds rate and in turn lenders reduce their rates for short-term loans, making it less costly to borrow and spend. When the Fed believes the economy is growing too fast, it raises the rate in an effort to reduce borrowing and slow down the economy.
- How can I think like an economist when making financial decisions?
Understand the opportunity cost of a decision - which is the value of the next best alternative that must be given up. Examples of personal opportunity costs are time, effort, and health, and examples of financial opportunity costs are interest, safety, and liquidity. Using the concept of opportunity costs allows you to address the personal consequences of your choices because every decision involves trade-offs.
Determine how much utility you will gain from a decision. Utility is the ability of a good or service to satisfy a human want. Marginal utility is the extra satisfaction derived from having one more incremental unit of a product or service. Marginal cost is the additional cost of one more incremental unit of some item. When known, this cost can be compared with the marginal utility received. For example, assume that you consider spending $150 instead of $90 for a front-row seat at a concert. What marginal utility will you gain from this decision? Perhaps an ability to see more or the satisfaction of having one of the best seats in the facility. In practice, people are inclined to seek additional utility as long as the marginal utility exceeds the marginal cost.
- What is perhaps the single most important concept in personal finance?
The Time Value of Money - the understanding that dollars to be received or paid out in the future are not equivalent to those received or paid out today. For example, if you receive a dollar today, it is worth more than a dollar received five years from now. Today's dollar can be saved or invested. In five years you expect it to be worth more than a dollar.
The time value of money involves 2 components: future value and present value.
Future value is the value of an asset projected to the end of a particular time period in the future. You can calculate the future value of a lump sum or the future value of a series of deposits - called an annuity. For example, if you invest $10,000 at 6% interest, it will grow to $57,435 in 30 years.
Present value is the current value of an asset that will be received in the future. You can calculate the present value of a lump sum or the future value of a series of deposits (annuity). For example, if you want to have $20,000 for a down payment on a new home in ten years, you can figure that if you receive a 7% return, you will need to set aside $10,166 today to reach your goal.
- What is credit?
Credit describes an arrangement in which goods, services, or money is received in exchange for a promise to repay at a future date.
Often, consumer credit is either:
* A loan that is repaid in equal payments over a set period of time
* Credit cards, which allow repeated use of credit as long as regular, monthly payments are made
- Are there disadvantages to credit use?
Using credit can have downsides. Negative aspects include:
Negative Effect on Financial Flexibility
The money that you pay each month on your debt is money you could have spent elsewhere on other opportunities. Credit use also reduces your future buying power, as the money you pay out on a loan includes a finance charge as well as the principal.
It is Tempting to Spend More Money
A major disadvantage of credit is that its use can lead to overspending. Once you begin carrying credit card debt, it may seem easier to buy more on credit, especially if you have more than 3 or 4 cards - as is typical for US credit card holders.
You Can Become Financially Overstretched
Consumers with monthly non-mortgage debt repayments amounting to 20% of monthly take-home pay are considered to be dangerously in debt and run the risk of financial problems.
Interest is Costly
Interest is the price of credit. In other words, it is the rent you pay while you use someone else's money.
- Should I use a credit card?
Many people are afraid of using credit cards. If used correctly, credit cards can be a useful financial tool. Advantages of credit card use include:
Can Build Good Credit - If you use credit wisely, you will build a good credit score (For more about credit scores, see next item)
Can Be Used in Emergencies - Some people use credit to pay for unexpected expenses such as automobile repairs
Can Take Advantage of Free Credit - Retailers sometimes offer free credit for a period of time to allow the buyer to pay later without having to pay finance charges
Before deciding to use credit, students should make sure they embrace the financial habits of good credit users, including:
They are able to discipline themselves to use credit cards to purchase only what they can afford
They understand the importance of paying off their entire credit card balance each time they get a credit card bill so they prevent wasting money on interest
Understand their credit management habits will affect their credit score, which will affect their financial future (For more about credit scores, see next item)
The Credit CARD Protection Act of 2009, signed into law by President Obama on Feb. 22, 2010, contains new protections for college students. Highlights from this act include:
A credit card cannot be issued to a person under the age of 21, without a co-signer over 21 years of age, or without proof of means to repay.
Prohibits banks from providing promotional items, such as pizza coupons, to entice students to take on debt by signing up for their credit cards.
Requires card companies to give a 45-day notice of any rate increases.
- What is a credit score?
First, it's important to recognize the difference between credit reports and credit scores. A credit report is a record of your history of your bill and debt payments. The information in your credit report is voluntarily given to the 3 credit reporting bureaus: Equifax, Experian, and Transunion by companies that you make payments to. The items in your credit report determine your credit score - a numerical value ranging from 300-850. The average score is around 700. Companies use credit scores to determine if you would be someone that would pay back money that they let you borrow.
Having a high credit score will save you money through lower interest rates on mortgages, auto loans, and insurance rates. Having a low credit score could prevent you from getting an apartment and, in some cases, even a job. Employers check credit scores to help them determine if you would be a responsible employee.
Credit scores change gradually as you change the way you handle credit. For example, past credit problems impact your score less as time passes. Many other things also affect your credit score. These include your payment history, the amounts you owe, length of credit, new credit accounts, and types of credit used.
Credit Score Factors:
Length of Credit History
Types of Credit Used
- What can I do to ensure I manage credit wisely & create a good credit score?
Realize that credit scores DON'T just include credit cards. Any time you are making a payment, your payment history could be reported to the credit report bureaus. Items include: Student Loans, Auto Loans, Personal Loans, etc. Remember, your lender has the choice to report your bill paying habits to the 3 major credit reporting bureaus.
Pay Bills on Time
Delinquent payments, even if only a few days late, and collections can have a major negative impact on your credit score - dropping your score as much as 60 points.
Only Use 30% of Credit Available
High outstanding debt can affect a credit score.
If you have been managing credit for a short time, don't open a lot of new accounts too rapidly.
Once you have an account opened, leave it open to maintain a long account history. New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.
Know that credit bureaus like to see a mix of differet types of credit use, including installment type loans, which require fixed monthly payments (auto loans, mortgages) and revolving credit, which requires regular repayments and a predetermined spending limit (credit cards).
- What should I look for in a good credit card?
When choosing a credit card, there are four things you should look at:
APR (Annual Percentage Rate) - The total cost to use credit in a year. The lower the APR, the better. For example, if one month you are not able to pay your balance in full, the lower the APR, the less you will pay in interest.
Grace Period - This is the amount of time, usually 20 to 25 days, during which you don't have to pay interest on purchases made with a credit card if you have no outstanding balance on your card. Knowing how long your grace period is will help you know the amount of time you have before you will be charged interest for using your card.
Fees - The fees you could be charged to use credit include: Annual Credit Card Fee, Over-the-Limit Fee, and Balance Transfer Fee. Look for cards that have little to no fees.
Rewards - Rewards are one of the perks of having a credit card. They will vary from card to card. Make sure you know all the restrictions and when your reward points expire.
- Are there other ways students can build credit besides having a credit card?
If you are not able to receive a credit card on your own and wish to start building credit, you can:
Ask your parents if they will add you as an authorized user on their credit accounts. If your parents are responsible with credit, then your credit score will rise.
Consider taking out a small installment loan. You will most likely need a co-signer. If you make your payments on time, your credit score will rise.
Apply for a secured credit card. With secured cards, applicants make a deposit which serves as the credit limit on the account. Since borrowers are borrowing against their own funds, lenders tend to be more lenient about application standards. As long as the cardholder pays on time and keeps their balance in check, the issuer typically promotes them to a regular, unsecured card. However, be selective when choosing a secured card. Many have high fees.
- Where can I check my credit score? What if I find out there's a mistake on my credit report?
You can check your credit score for free at www.annualcreditreport.com. You can get one free credit report from each of the 3 credit reporting bureaus, so 3 free credit reports each year. NOTE: The 3 credit reporting bureaus may receive different information, so credit reports may vary slightly.
The following information is from www.fico.com.
To insure that the mistake gets corrected as quickly as possible, contact both the credit bureau and organization that provided the information to the bureau. Both these parties are responsible for correcting inaccurate or incomplete information in your report under the Fair Credit Reporting Act.
First, tell the credit bureau in writing what information you believe is inaccurate. The credit bureau must investigate the item(s) in question, usually within 30 days, unless they consider your dispute frivolous. Include copies (NOT originals) of documents that support your position. In addition to providing your complete name and address, your letter should:* Clearly identify each item in your report you dispute.
* State the facts and explain why you dispute the information.
* Request deletion or correction.
Send your letter by certified mail, return receipt requested, so you can document that the credit bureau received your correspondence. Keep copies of your dispute letter.
Second, write to the appropriate creditor or other information provider, explaining that you are disputing the information provided to the bureau.
Include copies of documents that support your position. If the provider again reports the same information to a bureau, it must include a notice of your dispute. Request that the provider copy you on correspondence they send to the bureau. Expect this process to take between 30 and 90 days.
- What if I check my score and it's really low?
The following information is from www.fico.com.
Make Sure Your Credit Report Doesn't Have Any Mistakes
In particular, check to make sure that there are no late payments incorrectly listed for any of your accounts and that the amounts owed for each of your open accounts is correct. If you find errors on any of your reports, dispute them with the credit bureau and reporting agency.
Setup Payment Reminders
Making your credit payments on time is one of the biggest contributing factors to your credit score. Some banks offer payment reminders through their online banking portals that can send you an email or text message reminding you when a payment is due. You could also consider enrolling in automatic payments through your credit card and loan providers to have payments automatically debited from your bank account.
Reduce the Amount of Debt You Owe
This is easier said than done, but reducing the amount that you owe is going to be a far more satisfying achievement than improving your credit score. The first thing you need to do is stop using your credit cards. Use your credit report to make a list of all of your accounts and then go online or check recent statements to determine how much you owe on each account and what interest rate they are charging you. Come up with a payment plan that puts most of your available budget for debt payments towards the highest interest cards first, while maintaining minimum payments on your other accounts.
If you have missed payments, get current and stay current.
The longer you pay your bills on time after being late, the more your credit score should increase. Older credit problems count for less, so poor credit performance won't haunt you forever. The impact of past credit problems on your credit score fades as time passes and as recent good payment patterns show up on your credit report. And good credit scores weigh any credit problems against the positive information that says you're managing your credit well.
Be aware that paying off a collection account will not remove it from your credit report. It will stay on your report for seven years.
Pay off debt rather than moving it around. In fact, owing the same amount but having fewer open accounts may lower your score.
Don't close unused credit cards as a short-term strategy to raise your score.
Don't open a number of new credit cards that you don't need, just to increase your available credit. This approach could backfire and actually lower your credit score.
- What if I get into credit trouble?
You should meet with someone to help you assess your situation and help you determine why you are in credit trouble. You should also build a debt repayment plan and learn how to use credit wisely in the future. Come to the SMMC for help.