Financial Lessons from Current Events #1

Current Events - Question 1 of 5

Current Scenario: High energy costs are affecting the prices of food because energy is used to transport and package food. Food prices will continue to rise during the last half of this year. Overall, prices are expected to rise 3.5%, with milk prices rising as much as 5%.

What can you do in your life to help you deal with rising food costs?

Use your credit card to pay for food when it becomes to expensive
Adjust your budget to cover rising costs
Skip the grocery store and eat fast food

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Source: Wisconsin Ag Connection

ANSWER:
Adjust your budget to cover rising food costs

LESSON FOR YOUR LIFE: Understanding the Importance of Budgeting and Choosing Budget-Friendly Healthy Foods

Creating a Budget

Creating a budget will help you deal with rising food prices. Knowing where you money is going will allow you to see how much money you'll have to spend in certain expense categories.

Creating a budget while in college can help you:

• Meet personal goals such as studying abroad
• Remain better prepared for emergencies
• Stay out of debt
• Keep accurate and up-to-date records
• Prepare to begin thinking about longer-term financial planning

Simple Steps for Creating a Budget:

1. Track Your Spending
   Americans are notorious for underestimating how much money they spend.
2. Pay Major Bills First, Then Budget
   It's easier to plan a budget after first setting aside money for your tuition, books, student fees, and other large annual or semiannual costs.
3. Create a Spending Plan
   Once you identify your spending habits and knock out significant expenses, you can get started on creating a budget. Your "spending plan" will be a purposeful map for how to spend your money.

Improve Your Health While Improving Your Wallet

Even with rising food prices, it's a myth that eating healthy has to be expensive. Many superfoods - foods that are known to confer remarkable health benefits - are very inexpensive. Once such "superfood" is beans.

Here are some more budget-friendly superfoods to add to your meals:

• Brown Rice
• Whole-Wheat or Multi-Grain Pasta
• Whole-Wheat Bread
• Frozen Vegetables
• Potatoes
• Fresh Spinach
• Canned Tuna
• Eggs
• Apples
• Bananas
• Low Fat Milk
• Low Fat Yogurt

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Current Events - Question 2 of 5

Current Scenario: After the 2008 economic meltdown, finances were very uncertain, making saving money extremely important. To help with this, certain rates have changed which affect everyone’'s paychecks. Social Security taxes have fallen and minimum wage has increased. This means that there is more take-home money in a paycheck —which is perfect for saving.

Which is the best way to deal with financial uncertainty?

Create a savings fund to cover costs in case of an emergency
Spend all your money to help the economy
Wait until you land a higher paying job to start saving

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Source: ABC News

ANSWER: Create a savings fund to cover costs in case of an emergency

LESSON FOR YOUR LIFE: Creating an Emergency Fund & Understanding the Importance of Saving Money

Emergency Funds

The first priority for your savings should be to set aside money in an emergency fund. This money will allow you to pay for unexpected expenses — such as a medical bill or a car repair — without going into debt.

Keys to Building an Emergency Fund:

• Try to set aside enough to cover your basic living expenses for at least three months
• Keep the money in an easily accessible savings account or money market account
• Determine what is a true emergency (job loss, car repair) and only use the money in these circumstances

The Power of Compound Interest

The longer you save money, the more it can grow in value due to compound interest. Compound interest means you earn interest not only on the amount you deposit in a savings account, but also on all the interest you earned previously. Compound interest is one of the most powerful personal finance tools you can put to work for you throughout your life. Want proof?

Check out this example: You can be a millionaire by the time you retire -if you start saving when you are young. Let's compare two 21-year-olds that decide to save for retirement. Luis puts $3,000 per year in an IRA and earns 8% compound interest yearly. Cheryl waits seven years longer and begins to invest the same way. At age 65, Luis will be a millionaire - with almost twice as much money as Cheryl - even though he invested only $21,000 more.

To start saving it's important to develop savings goals. By knowing precisely what you want to accomplish, you’ll be more motivated to achieve it.

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Current Events - Question 3 of 5

Current Scenario: Gas is predicted to cost $5 per gallon by the end of 2012. This is partially caused by an increase in demand for gas. Now that the economy is starting to recover, people want to drive more, and the supply for gas is not able to keep up.

Which of the following is a good way to deal with rising gas prices?

Drive as much as you want and hope that gas will go down
Find ways to save money on car and driving related expenses
Take a taxi everywhere, it's much cheaper then driving yourself

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Source: ABC News

ANSWER: Find ways to save money on car and driving related expenses

LESSON FOR YOUR LIFE: Save Money on Car Expenses

Tips for Saving Money on Gas

• Carpool
  Take turns driving to cut down on your gas bill.
• Combine Trips
  Do errands on your way home from class instead of making a separate trip.
• Use Your Bus Pass
  Every UNL student gets a free bus pass. Use it!
• Pick A Better Route
  The more you have to slow down or stop, then accelerate, the more gas you will use. Look for alternate routes with fewer stop lights.
• Drive Slower
  It's a proven fact that driving fast will increase the drag (turbulence) and thus increase your fuel consumption

Ways to Reduce the Cost of Car Insurance

• Drive Safely
  Most insurance companies give discounts to drivers who have had no accidents or tickets in the last three to five years.
• Buy a Low-Risk Model
  Collision and comprehensive coverage may be reduced by a substantial amount if you buy a new or used car that is at lower risk for damage or theft.
• Buy Your Renter's Insurance from the Same Insurance Company
  Many insurance companies give discounts when you buy both your auto insurance and renter's or homeowner's insurance from the same company.
• Tell Your Insurance Company if You've Reached a “Milestone” Age
  Depending on your insurer, you rates will go down when you reach an age between 25 and 30 years old, as long as you have a good driving record.
• Ask About Other Discounts
  Some insurance companies give discounts for degreed engineers or teachers, persons in the military, or those willing to buy via the Internet. Don't be afraid to ask what other discounts might apply to your particular situation.
• Compare Rates
  It pays to shop around. You can get free quotes for car insurance online. When comparing rates, be sure to compare service and what is covered—not just the rates.
• Maintain Good Credit
  Most insurers use credit information to create an "insurance risk score," which is used to help determine your auto insurance rate. The idea is that there is a correlation between your insurance risk score and the likelihood that you will file a claim. If you have poor or shaky credit, be prepared to pay a higher premium than your buddy who's the same age and has the exact same model car.

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Current Events - Question 4 of 5

Current Scenario: Taxes have fallen for the first time in ten years. Part of the reason for this is because of credits like the Making Work Pay Credit. The credit is applied to your tax return and comes back to individuals as a refund. It is up to $400 and can be claimed if you are not a dependent.

What should you do to prepare for getting your taxes done?

Talk to your parents and understand your dependency status
Don't worry about having an understanding of the tax credits available to you - Your tax preparer will know everything
Throw away your W-2s - You don't really need them

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Source: CNN.com & IRS.gov

ANSWER: Talk to your parents and understand your dependency status

LESSON FOR YOUR LIFE: Becoming Tax Savvy

If you earn money, you are required by law to pay taxes on it. Here are some guidelines to help you prepare for getting your taxes done:

• Ensure the Right Amount of Withholding
  Having taxes withheld from your paycheck enables you to pay taxes throughout the year - a little at a time. Doing this allows you to avoid having a huge tax bill in April. It is important to make sure you're not having too much money taken out. If you receive a large refund at tax time, this means you've loaned the government that money, interest free.
• Compare Itemized vs. Standardized Deductions
  When you file your taxes, you can choose between using itemized or standard deductions. Itemized deductions are those that you calculate yourself. The standardized deduction is a lump sum that the government allows you to take. Figure out which deduction is greater.
• Understand your Dependency Status
  Talk to your parents and decide if they are going to claim you as their dependent or if you are going to claim yourself
• Understand the Tax Credits Available to You
  It's a good idea to do some research before you get your taxes done so you know what tax credits you may be eligible for - including education credits.

Some common tax deductions include:

• Tuition and fees
• Student loan interest
• Mortgage interest
• Charitable donations
• Medical expenses

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Current Events - Question 5 of 5

Current Scenario: Because of the recent recession, people are cutting back on spending in certain areas. This includes dining-out. Instead of eating at an expensive restaurant, people are enjoying more fast-food restaurants. McDonald’s share price, for example, has increased throughout this year because of their inexpensive prices.

People are having to choose how to spend their money wisely - which includes deciding what is a want and what is a need.

Which of the following could NOT happen if you don't identify your wants vs. your needs?

You run the risk of not being able to pay your necessary bills
Nothing - You'll be able to balance your budget eventually
You run the risk of overspending

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Source: CNN.com

ANSWER: Nothing - You'll be able to balance your budget eventually

LESSON FOR YOUR LIFE: Be Able to Identify Wants vs. Needs

If you are not able to identify your wants vs. your needs, you run the risk of overspending. For some of us, overspending can be almost unconscious. We're not even aware of the hole we've dug ourselves into until it's too late. But in order to meet our financial goals, we need to live within our means.

Four Common Reasons People Overspend:

If you recognize any of these, see if you can weed that behavior out of your financial life.

• Peer Pressure
  Friends can encourage us to spend money we don't have.
• Want to Feel Good NOW
  Sometimes you want to reward yourself, so you go shopping. You might feel better for a while, but then you get the bill.
• Don't Have, or Ignore, Financial Goals
  If you've never set financial goals for yourself, you may not have considered the benefits of saving or investing for your future. That makes it easier to spend money right now, even though every spending decision you make today will affect the quality of your future financial health.
• Addictive Spending
  Just as people become addicted to gambling, a person can become addicted to the emotional high of spending. If you find that you are having problems with spending and debt, seek help.

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