Money Talks: It just says “Goodbye” Tips to help you avoid: High-cost Loans, Frauds, Scams, & other financial troubles To continue the slide show, press Page Down, or mouse click. To back up, press the Page Up key on your keyboard. To end the slide show, click on the Back ← command. If you’re not careful, Is Education Worth It? Average Annual Income High School Dropout High School Graduate College Graduate (2002 U.S. Census Bureau) 20,764 27,160 43,529 The Legal Greed Spectrum Some Honest are people out there who Fair treat others with honesty, integrity, and fairness. There find legal means of cheating from us if we aren‟t careful. Cheat Illegal There Some act just like sharks, and don‟t care what is legal or not. are also those who will cheat, steal, and some will even murder for money. Steal Murder Utah has a reputation for being one of the fraud capitals of the world. Reasons? What makes us susceptible? Honestytoo trusting Most of us try to be honest, we are used to dealing with other honest people, and too often, we are unprepared when a con artist comes along. It is sad and ironic that our personal honesty can lead us to be too trusting. Positive Motivation Wants Even though we don‟t like to think of ourselves as greedy, greed is not an on-off switch. It may be said that all of us have some degree of greed. If we channel that greed in a positive direction, it may be called positive motivation. If we allow our greed to take us into the negative realms, vile and destructive behaviors result. Negative Service With a Smile The best cons use them very well! How can we protect ourselves from smiley-faced crooks? Don‟t sign it unless you agree to it! can you agree to it if you don‟t understand it? can you understand it, if you don‟t read it? you still don‟t understand it, get some help before signing!!! If How How Tips to help you avoid a lot of the problems: NOTHING is RISK-FREE Especially nothing involving money! If someone claims that something is “risk free” they either don‟t understand, or they are lying (if money is involved, there is always risk of loss, as well as opportunity loss, etc.)! The Greater the The Higher the Rate Exception? If you have money at a federally insured bank or credit union, you can usually get a better interest rate without changing your risk of loss - by putting your money into time certificates, rather than in a regular savings account. There is a timing risk, however. If you need your money now, and your certificate doesn‟t mature for 3 months, you have a timing problem. 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Risk Not only in racing, but: in financial matters! Especially Reg. Savings CD (Time Certificate) If it sounds too good to be true you will remember this one saying, and use a little common sense, you‟ll be able to avoid most of the frauds and scams. Most of them promise unrealistic rewards or benefits. The con artists depend on people whose greed exceeds their good judgement! Why If It is! would someone you don‟t even know want to give you money, or teach you some secret way to get it? Don‟t fall for it! When big money is at stake Greed Brain Interest If you save money, you Get it borrow If you money, you you spend too much of your future earnings, you mess up your future. If Pay it A very easy concept, but not enough people put it to work in their lives! Don‟t participate in unethical deals! If someone offers you a deal that takes advantage of someone else... What assurance do you have that they won‟t also con you? Want to know an easy way to make a million dollars next year? Invest $10,000,000 at 10% APR Want to know another way? Put $1 into savings each month -- for 168 years (at 5%). These may sound silly, but somewhere in between $1,000,000 for 1 year, and $1 for 168 years, is a valid way to build wealth. Save $100 each month at 5% $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 1st year Savings $1200 Interest Earned $30 Save $100 each month at 5% $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 5th year Savings $6000 Interest Earned $830 Save $100 each month at 5% $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 10th year Savings $12000 Interest Earned $3530 Save $100 each month at 5% $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 15th year Savings $18000 Now earning > $110+ each month Interest Earned $8730 Savings Goal: 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Many Emergency For Sure Buy Stuff financial experts recommend that you save 10% of what you earn. Stash it away and try to never, ever spend it! In order to do that, you will need at least one other account: I call it the “for sure” savings account. This account is for the “for sure” expenses which come from time to time. Example: Auto repairs. If we drive a car, we will have repairs, maintenance, and insurance. We don‟t always know when, but we know that they will happen. Another example: Christmas. Those among us who celebrate Christmas are highly likely to spend significant amounts at Christmastime. Start With: 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Start Emergency For Sure Buy Stuff immediately with a “For Sure” savings. Estimate your for sure expenses for each year and save enough each month to cover them. When you decide to do the emergency fund, you may not be able to start with 10% right away. But start with something, even if it is only 1%. Then, as your income increases, increase the amount going to your emergency fund at least until you reach 10%. Increase as you can: 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Keep Emergency For Sure Buy Stuff increasing as your income increases. Build More: 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Emergency For Sure Buy Stuff More: 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% You Penalty for withdrawal IRA 401K 457K Roth IRA Emergency Inconvenient For Sure Buy Stuff may wish to do like some people do: put your emergency fund into accounts which penalize withdrawal. For many of us, that thought of penalty is sufficient to prevent us from withdrawing the money early. It is also advisable to put your “for sure” savings into an account which is inconvenient to get to. If it is too easy to access, it may be gone when you need it. Invest vs. Save 8000 7000 6000 5000 4000 3000 2000 1000 0 is a graph of the growth pattern of a particular mutual fund (group of stocks) compared to the same amount invested at a slow, steady pace of a 5% federally insured time certificate. Notice how the mutual fund has had stronger growth, but also periods of decline. What is it going to do next? You may wish to keep at least some of your savings in the safer, but slower growing time certificates. Here J93 D -9 3 J94 D -9 4 J95 D -9 5 J96 D -9 6 J97 D -9 7 J98 D -9 8 J99 D -9 9 J00 D -0 0 J01 D -0 1 Invest vs. Save 8000 7000 6000 5000 4000 3000 2000 1000 0 we look at the “growth” during years 2000, 2001, and into 2002, we see that the time certificate has done much better. Remember, the greater the rate, the greater the risk. Some have described investing in the stock market as “legalized gambling”. With some study, you may be able to minimize the risk, nevertheless, there is still risk involved, no matter what the investment, or how sure it sounds. If J93 D -9 3 J94 D -9 4 J95 D -9 5 J96 D -9 6 J97 D -9 7 J98 D -9 8 J99 D -9 9 J00 D -0 0 J01 D -0 1 Gross Income 80000 70000 60000 50000 40000 30000 20000 10000 0 Disposable Fixed 3 6 9 12 15 18 21 24 27 Income College $1,600,000 HS Grad $900,000 Dropout $600,000 Expenses 30 33 36 39 is a graphic representation of the average lifetime earnings of the high school dropout, graduate, and college graduate. The red represents fixed expenses (housing, utilities, food, etc.), the green represents income which a person can do with what s/he pleases. This 0 Assuming that during the next 10 years or so, you will have somewhere around $30,000 disposable income, how much of it do you want to spend on what you want? If you borrow at 7% to buy a new car every 5 years, you‟ll only get to spend $25,000 on cars (the rest goes to interest). If you borrow at 18% by using a credit card and paying for each of your purchases in an average of 5 years, assuming 5 yr. payout you‟ll only get to spend ~$20,000 on what you want. Disposable Income $30,000 ~$25,000 assuming 5yr. payout ~$20,000 assuming 5 yr ~14,000 Save If you borrow at: 36% 18% 7% Before you borrow, know the APR!!! Annual Percentage Rate (APR) The Federal Truth in Lending Act requires lenders to disclose the APR to consumers. It is our basis of comparison. It is a great tool for us to know if we are getting a good deal! Unfortunately, there are still lenders out there who state rates other than the APR (in violation of federal law). Some refer to an add-on rate, some to a weekly or monthly rate. Remember, the basis of comparison is the Annual Percentage Rate. 9% (add-on rate) is ~20% (A.P.R.) Some people only ask: “What‟s my payment amount?” Don‟t be one of them. When you borrow, always try to pay less than... 13% Consider A.P.R. yourself unlucky (or______) if you can‟t beat 13%! Why people pay more than 13% Uneducated Deceived Not enough income Bad credit Interest Rate Ceiling 40 35 30 25 20 15 10 5 0 Banks & CUs <13% Credit Cards ~18% That is, unless you use your credit card as a means of borrowing. The average credit card rate is ~18%. < 36% 18% 13% Small Loan 18-36% Many small loan companies charge between 18 and 36% APR. If you keep your credit good and stay with the reputable lenders, you can nearly always beat 13% APR. Some states have an interest rate ceiling of 36%. Utah did at one time, but currently has no limit. We are seeing some rates that are astronomical. For instance: TOO EASY LOAN COMPANY Promissory Note with Security Interest Security: 1996 Olds Amount Financed Total of Payments Annual Finance The amount of credit The amount you will Percentage Charge provided to you or on have paid after you your behalf. have made all Rate The cost of your credit as a yearly rate. The dollar amount the credit will cost you. payments as scheduled. $2000.00 $6,442.80 300% 25% per month Payment Schedule: 12 Payments of $536.90. $4,442.80 Beginning 2/4/99 and on the 4th of each month thereafter until final payment is made on January 4, 2000. These are actual figures taken from a real loan which was faxed to the Department (name of lender changed). Notice the APR. Which is higher 13% or 300%? The borrower got 12 monthly payments of $536. If he pays back everything on time, he pays a total of $6,443 in one year. He pledged a 96 Oldsmobile, which was worth about $10,000 at the time this loan was written. If he misses a payment, they take his car. What happens to his equity? Many of these “auto title lenders” have been stating a monthly rate rather than the APR. Auto Purchase Honest Cheat Where on the greed spectrum are car salesmen? They can be anywhere. Some are very unscrupulous, others are very honest. Even if you deal with an honest one, you still have a conflict of interest. He wants to make money, you want avoid paying as much as you can. Who is to protect you? If you don‟t, probably nobody. Steal Murder Auto Loans: APR Loan Amt Term Mo Pmt Interest Tot. Pmts Difference Comparing different financing arrangements, and the cost of borrowing $10,000 at 7, 12, and 25% APR. Notice that the individual who got the 12% rate pays a total of $1466 more than the one who got 7% (assuming each pay according to the terms of the contract). If he had made 5 phone calls to lenders, he would have found the 7% loan. Is it worth $1466 to make 5 phone calls? Sometimes yes! 7% 12% 25% $10,000 $10,000 10,000 5 years 5 years 5 years $ 198 $ 222 $ 294 $ 1,881 $ 3,347 $ 7,610 $11,881 $13,347 $17,610 $1,466 The individual who got the $5,729 25% rate would pay a total of $5729 more than the one who got the 7% rate. He knew about the 7% loan, but didn‟t qualify because of bad credit. Insurance Full Coverage & P.I.P. Single Liability interest ins. As the name implies, it only protects the lender “No-Fault” More expensive! Fails to provide No-Fault Penalties for failure to maintain no-fault insurance: Utah State law requires No-fault insurance, the penalties for failure to maintain are severe. Collision Comprehensive Lenders require collision and comprehensive insurance. Failure to maintain insurance puts the borrower in default of his/her contract. At default, the lender can repossess, but instead, usually add: License Revoked 1 yr+ Car Impounded $200+ Ticket & fine $400-1000 SR 22 (high risk) Ins. How Much Can I Afford to borrow? One tool used by many of the more reputable lenders : Mo. Inc. Debt-to-Income Ratio If your monthly debt payments (including mortgage or rent) are less than 36% of your monthly gross income, and if your credit is good, you have a good chance of getting a loan with the lower-rate lenders. Why not 96%? Because we need to live: 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Debt Pmts. 36% Mo. How Much Can I Afford to borrow? Mo. Inc. Misc. Food Utilities If you have a debt-to-income ratio of 36%, some months, you will have just enough to cover expenses. What will you do when you have a highOccasionally you expense month? will have a bit Remember the “for sure” savings extra. account! You will have months like this! 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 36% Taxes Debt pmts Credit Cards: Our Friends? Credit Credit Or Our Foes? They can be either, depending on how we choose to use them. Credit Card Purchase we pay off our credit card balance each month, we pay no interest (most credit cards). If If we don‟t pay the entire balance, interest will be charged. 0 -50 -100 -150 -200 -250 -300 -350 -400 Bal 0 -50 -100 -150 -200 -250 -300 -350 -400 Purch Pmt Bal Simplified Credit Card Statement Last Month‟s Balance Payments received Interest Auto Repair Center Joe‟s Gas & Goodies Babe‟s Apparel Store Ending balance Minimum Payment Due 128.42 (128.42) We have 0 choice of the paying the 289.94 entire balance, the minimum 14.32 required or payment, some amount 96.24 in between. If 400.50 we wish to avoid paying interest, we must pay the entire balance. 20.00 1000 0 Paying only the minimum required payment is a very costly way to use credit cards -1000 -2000 -3000 -4000 -5000 Minimum At payment (and make no other purchases): 18% it would take 34 yrs to pay off -- $ 12,893 int. 21.9% At 88 yrs to pay off -- $ 43,729 int. 1000 0 -1000 -2000 -3000 -4000 -5000 A very costly way to use credit cards IF Some people charge against their credit cards to the limit, then try to consolidate. Many financial institutions say: Yes, but only you have 0 1000 -1000 -2000 -3000 -4000 -5000 1000 0 -1000 -2000 -3000 -4000 -5000 good credit enough income equity The most expensive way to use Credit Cards 200 0 -200 -400 -600 -800 -1000 -1200 people charge on their credit cards until they go slightly over their limit, then even if they make the minimum required payment, they get deeper into debt as their balance increases because of: Some Over-limit fees. Credit Cards WonderCard Set up Fee? Annual Fee? Most 5224 789 003 290 fees. credit card companies do not charge setup fees or annual Grace Period? you wish to avoid paying interest, make sure your credit card plan charges no interest when you pay off the balance within the grace period, and do it!. If APR? If you don‟t pay your balance each month, be sure to pay attention to the Annual Percentage Rate and find a credit card with a low rate. 27” TV Suppose you see a TV you want to buy with a retail price of $400. $400.00 If cash you have saved enough in your “buy stuff” account, you can withdraw your money and buy the TV. If you use a credit card, and pay off the balance within the billing cycle, you pay no interest (if it is a credit card which has the grace period). 27” TV On Sale you shop around and find the same TV for $350, you just saved $50. But what did you save in terms of your ability to earn money? If you are in an average tax bracket of about 20%, you must earn $62.50 before you can spend $50. So if you avoid spending $50, that is like earning $62.50. If you earn $10 per hour, you just saved the equivalent of 6 1/4 hours of work! If $350.00 by smart shopping $50 / .80 = $62.50 earn $62.50 / 10 = ~6 1/4 hrs 27” TV $400.00 using a credit card at If a person charges the $400 TV and can pay- 18% A.P.R. $26.00 per month it will take During that time the buyer would pay 18 months to payoff. in interest, for a $59.00 total cost of $ 459 $59 shouldn‟t ruin anybody‟s life, but, who wants $59 added to each of their purchases? $59.00 / .80 = $74 earn $74 / 10 = ~7.4 hrs extra to pay the 59. 27” TV $400.00 Finance Company at 36% A.P.R. 18 mo. Pmts. $29.00 per mo. $123.00 int. Total Cost $ 523 $123 / .80 = $154 $154 / 10 = ~15.4 hrs 27” TV $400.00 Rent-to-Own A rent-to-own company was offering the same TV for $70 per month How many months would be fair before ownership? When asked, they said 18 months (196% A.P.R.) ($860.00 int.) the APR nor the interest is required to be disclosed on a rent-to-own contract, because technically, they are not “loans”. Neither Total Cost $ 1260 $860.00 / .80 = $1075.00 earn $1075.00 / 10 = 107 hrs 27” TV $400.00 Too Easy Loan (Bad Credit OK) 300% A.P.R. Car Title Pawn If 18 months $102.00 payments $1,433 interest Total Cost $ 1833 $1433 / .80 = $1791 1791 / 10 = 179 hrs 27” TV $400.00 Payday Loan 0 -10 -20 -30 -40 -50 -60 -70 -80 -90 -100 -110 a person borrows 100 from a payday lender for a week, not a big deal. S/he paid $10 interest. However we are finding that many people use payday loans over and over. If 27” TV $400.00 Payday Loan 0 -10 -20 -30 -40 -50 -60 -70 -80 -90 -100 -110 27” TV $400.00 10% (per week) Payday lenders have been notorious for illegally stating a weekly rate rather than the APR when asked about the cost of their loans. Remember, the fair basis of comparison for loan costs is the APR (as well as the dollar amount). 10% per week is about 520% APR. (10% x 52 wks = 520) 18 months Payday loans are not intended to be more than short-term loans, usually less than one month. But, for comparison purposes, if someone used a series of payday loans to finance the TV over 18 months: $2,725 interest Total Cost $3125 Why? Why do people pay high interest rates? Desperate people do desperate things --Over-extended. People with excessive debts do not qualify for low-rate loans. --Bad Credit. People with bad credit history usually do not qualify for low-rate loans. --Low income. People with low income relative to expenses do not qualify. --Gambling. Compulsive gambling has been the financial downfall of many. --Alcoholism. The individual whose 300% loan --Drugs. was shown early in this presentation was an alcoholic. A very high percentage of the people in jails and prisons are their because of drugs. X-cons have a difficult time establishing good credit. --Health problems. Some health problems are preventable, and health insurance helps immensely when we do have problems. Credit Bureau Reports Bill S. Preston Employer: Wylde Stallyns 529-00-0000 The low-rate lenders do not want to see payments more than 30 days late Department Store Credit Card Dumpy Bikes Fast Car Lot 1000 5000 500 6000 1050 5>30 4999 6>30,3>60,1>90 especially not 60 & 90 430 Collection agency 0 Repossession Any one of the above can disqualify a person from borrowing from the lower-rate lenders for quite some time. Lenders are also starting to pay attention to credit card balances relative to limits. Credit cards at their limit are often counted negatively as are cards over their limit. Credit Card 2000 Home Mortgage 70000 Overdraft Line of Cr 2000 0 as agreed They do like to see a few paid as 65000 current agreed, or current accounts. 0 as agreed Even rarely used credit cards help build “good credit” (as long as a person pays on time and doesn‟t have too many credit cards). A person can establish credit without paying any interest by paying off credit card balances within the billing cycle, and by maintaining an overdraft line of credit with a zero balance. Popular Credit Scoring System: 35% Payment history – older & small items count less 30% Amount of debt – overextended? 15% Length of credit history 10% New credit – amount accumulated within the past 12-18 months 10% Types of credit – too many credit cards Credit Repair Scams Bill S. Preston Employer: Wylde Stallions 529-00-0000 Creditor Limit Bal Comments Department Store 1000 1050 5>30, 3>60 Credit Card 5000 4999 6>30,3>60,1>90 Dumpy Bikes 500 430 Collection agency Fast Car Lot 6000 0 Repossession Credit Card 2000 0 as agreed Home Mortgage 70000 65000 current Overdraft Line of Cr 2000 0 as agreed Some companies claim to be able to remove legitimate debts from credit reports. They are fraudulent! Do not participate in a fraud. If you find errors on your credit report, you may correct them yourself by contacting the credit bureau directly. Equifax: 800 685-1111, Trans Union: 800 916-8800, Experian: 888 397-3742 If you don‟t pay your bills on time, your bad credit will inhibit you: Borrowing Buying a home Renting Many landlords are looking at credit histories. Increasing insurance rates Many insurance companies charge higher rates to people with poor credit. Credit Card Companies Getting a good job Many credit card companies are routinely pulling credit reports on their existing customers. When those customers have negative credit with other debtors, their interest rates are increased. Many employers are looking at credit reports in their employee selection process. What if you‟ve already been smashed financially? Hang on until you can bounce back! Satisfy your obligations asap (high rates 1st)!* Keep everything current for 2+ years. *If you can‟t, get some help. “Pre-Approved” What Does it mean? NOTHING! Beware! Don‟t count on “pre-approved” financing arrangements. Too often “pre-approved” simply means you name was obtained from a solicitation list. Late Payments can be extremely EXPENSIVE! If you pay 30 days late, – your credit report is negatively affected which results in increased future costs. If you are 1 minute late on some contracts – you get late fees late fees can change a debt from a reasonable interest rate to an outrageous effective rate. Contrary to popular Repossessions belief, lenders do not need to notify a person before repossessing. Legal & other fees Fees can bring financial death! ~ Derived from information obtained from Utah Division Of Consumer Protection‟s website. Top Scams in Utah 1. Identity Theft 2. Deceptive Business Training Seminars. 3. Fraudulent Telemarketing Schemes. 4. Fraudulent Charities. 5. Travel Scams. 6. Nigerian Money Frauds. 7. Deceptive Car Repair Practices. 8. Prize Promotion Scams. 9. Telephone Slamming & Cramming. 10. Advance Fee Loan & Credit Card Scams. 11. Credit Repair Scams. Loan Scam (STRICTLY CONFIDENTIAL) We want to assist you in this UNIQUE venture. These European transactions are Legal, allowing you to borrow hundreds of thousands of dollars and NEVER have to repay a cent!! How? The lender (Offshore Bank) deducts a compensating balance from the proceeds of your loan, your loan is SELF-LIQUIDATING or PAID OFF by the compensating balance. EVERYONE QUALIFIES. No risk what so ever!! Application Fee $65. Loan Scam (STRICTLY CONFIDENTIAL) We want to assist you in this UNIQUE venture. These European transactions are Legal, allowing you to borrow hundreds of thousands of dollars and NEVER have to repay a cent!! How? The lender (Offshore Bank) deducts a compensating balance from the proceeds of your loan, your loan is SELF-LIQUIDATING or PAID OFF by the compensating balance. EVERYONE QUALIFIES. No risk what so ever!! Application Fee $65. Nonsense! E-mail Scam? WORLD CURRENCY CARTEL will instruct a LIMITED number of people on „HOW TO CONVERT $25 INTO $100 OF LEGAL CURRENCY‟. We will transact the first conversion for you, after that you can easily and quickly do this on your own, hundreds or even thousands of times every month. TAKE ADVANTAGE OF THIS “SECRET FLAW”!… There is a one time membership fee of only $35… Your important instructions will be mailed… We are only accepting CHECK-BY-FAX payable to NDML. Fax it to 212-000-0000. E-mail Scam? WORLD CURRENCY CARTEL will instruct a LIMITED number of people on „HOW TO CONVERT $25 INTO $100 OF LEGAL CURRENCY‟. We will transact the first conversion for you, after that you can easily and quickly do this on your own, hundreds or even thousands of times every month. TAKE ADVANTAGE OF THIS “SECRET FLAW”!… There is a one time membership fee of only $35… Your important instructions will be mailed… We are only accepting CHECK-BY-FAX payable to NDML. Fax it to 212-000-0000. Nonsense! URGENT Congratulations Ms. Uccer, Yordas Uccer You have been pre-approved 1 F St. for a gold card with a U-Falls Forthis, UT 84666 $10,000 limit valid exclusively toward all purchases from provider. Provider: Crudcorp Inc. Status: Pre-Approved Mail your $29.95 annual fee along with this notice. Limit: $10,000 Full details of your Rate: 12% APR membership will be included with your card. URGENT Congratulations Ms. Uccer, Yordas Uccer You have been pre-approved 1 F St. for a gold card with a U-Falls Forthis, UT 84666 $10,000 limit valid exclusively toward all purchases from provider. Provider: Crudcorp Inc. Status: Pre-Approved Mail your $29.95 annual fee along with this notice. Limit: $10,000 Full details of your Rate: 12% APR membership will be included with your card. Debit Cards? Why? “Easy access to checking” Dangers Holds on your account Can cause bounced checks Mail order - dissatisfied? Lost or stolen? Money gone. Debit Card 5224 789 003 290 Debit Card Purchase 400 350 300 250 200 150 100 50 0 Bal Advantages: No debt (using own money) Easy access to checking Disadvantages: Money Holds gone Bounced checks Hazards of Checking Accounts Keep To avoid the your blank checks in a safe place If someone steals your checks and forges your name, technically, since you didn‟t sign the checks, you did not authorize the money to be deducted from your account, and are therefore not responsible. However, once the money is gone from you account, you may not be able to get it back. The financial institution may claim that you were negligent... To avoid checking acct. problems: (1) statement. The sooner you reconcile, the easier it is. If you fail to notify the bank within 60 days errors they may have made, you are unlikely to get your money back. Reconcile your records to the bank‟s the day your get your bank Balance 123.00 1422 Joe‟s grocery 120.39 1423 SLC Utilities 68.00 Paycheck 535.29 635.27 1424 Dumpy Bikes 25.00 605.27 First Bank Balance Statement 100.00 Deposits 9/10/00 9/14/00 200.00 535.29 Checks Cleared 9/9/00 9/14/00 Ending Balance 20.00 120.39 694.90 To Avoid Have Bounced Checks: a backup arrangement for when you make a mistake. 2000 1500 1000 500 0 By 2000 1500 1000 500 0 setting up an overdraft line of credit (an empty loan tied to your checking account), when you make a mistake and write a check for more than the balance in your account, you can avoid bounced checks. Line of Credit Checking Overdraft Line of Credit 2000 1500 1000 500 0 2000 1500 1000 500 0 A loan advance is made to cover your check. If you pay off the loan balance as soon as you learn of it, the interest and fees are minimal (at most financial institutions). Line of Credit Checking Overdraft Line of Credit If A lady made a simple mistake on her check register, which caused one check to bounce. The bank deducted a $20 returned check fee. That caused 3 other checks to bounce… Within one month, she had incurred $600 of returned check fees. If she had set up and properly maintained an overdraft line of credit, she would likely have incurred less than $5 of interest and fees. you don‟t set up a backup system, you could run into a situation like this: 2000 1500 1000 500 0 $20 returned check fee $60 100 300… $600 Checking Fees Some people defeat the purpose of their overdraft line of credit High 2000 1500 1000 500 0 rate 2000 1500 1000 500 0 And returned check fees! use their overdraft line of credit as a common loan or charge account, and thus defeat the purpose of having it. Then, if they make a mistake, their check not only bounces, but they are paying interest at a higher rate than is available on other types of loans. They TV Mountain Bike Stereo VCR Rack Bike Line of Credit High 2000 1500 1000 500 0 rate 2000 1500 1000 500 0 But a high rate times zero is zero. If you keep the line of credit empty (zero balance), you pay no interest, you have a backup system for your checking account, and you build a credit rating without paying interest. Line of Credit Checking Some financial institutions allow their checking accounts to be tied to savings accounts. Then if the customer makes a mistake on their checking account, the money is automatically transferred from a savings account. This can work well if sufficient is maintained in savings, if it is not used too often, and if the financial institution doesn‟t charge large fees. 2000 1500 1000 500 0 2000 1500 1000 500 0 Checking Savings 2000 1500 1000 500 0 2000 1500 1000 500 0 Checking Savings Keep your backup available for when you need it! 2000 1500 1000 500 0 2000 1500 1000 500 0 2000 1500 1000 500 0 Line of Credit Checking Savings Each time you refinance, you add to your debt (nearly always). Dangers Lurking! If you are considering refinancing or consolidating loans, beware. Consolidations and refinances can be very useful, but they can also cause problems such as much more interest paid over the life o f the loan. Be careful that you don‟t defeat your intent. There are monsters out there who are more than willing to take as much money as you are willing to give them. In 2002 lady called the Department of Financial Institutions. She had wanted to get a better rate on her mortgage loan. She found out that she‟d gotten a very bad deal the last time she refinanced. She had refinanced her home 2 years prior “because interest rates had gone down.” She thought she was getting the loan terms shown in the left column below. When she went to refinance again, 2 years later “because rates had gone down again,” she found out she actually had the loan in the middle column below. I asked why she signed such a loan, she said she was in a hurry and didn‟t read the documents. A very costly mistake! According to my calculations she lost about $24,000 by not paying attention. Typical Re-financed $147,000 “Closing Costs” $3,000 New Loan $150,000 Rate 8% Prepay Penalty $0 NWF $147,000 $17,000 $164,000 10% $7,000 Diff $14,000 $3,000 7,000 $24,000 Mortgage Loans: Compare All Costs Before Signing Anything “Closing Costs” Fees Another Typical Badguys Difference Total Closing Costs $3,034 13,466 (10,432) mortgage company charged a family about $10,000 more in closing costs than most other mortgage companies would have charged. Variable vs. Fixed Rate addition, they were given a variable rate loan (indexed artificially low) and payments increased every 6 months. The borrowers thought they were getting a fixed rate loan (where payments stay the same). In Home Loans: Beware Prepayment penalties? 2. Compare Rates 3. Compare Fees 4. Fixed vs. Variable? 1. Avoid Closing Traps Take Don‟t especially if delayed your time just (sign, sign, sign) Understand what you are signing and why. Expect delays, and keep all your other obligations current. Could be one of the most important 3 hours of your financial life. Avoid Advanced-Fee Loan Scams Don‟t fall for promises to get you a loan or a credit card regardless of credit problems! Don‟t wire $49 to New York… Don‟t give solicitors your account numbers! Who do they prey on? The most vulnerable - those who can least afford the loss. Dear Sir, CONFIDENTIAL BUSINESS PROPOSAL FROM THE NIGERIA CHAMBER OF COMMERCE, I HAVE THE PRIVILEGE TO REQUEST FOR YOUR ASSISTANCE TO TRANSFER THE SUM OF $45.5 MILLION U.S. DOLLARS INTO YOUR ACCOUNT. THE ABOVE SUM RESULTED FROM AN OVERINVOICED CONTRACT, PAID BY A FOREIGN CONTRACTOR. WE REQUIRE YOUR ASSISTANCE. THE TOTAL SUM WILL BE SHARED AS FOLLOWS: 70% FOR US, 25% FOR YOU AND 5% FOR LOCAL AND INTERNATIONAL EXPENSES INCIDENTAL TO THE TRANSFER. THIS ACTION WAS HOWEVER INTENTIONAL. WE ARE FORBIDDEN TO OPERATE A FOREIGN ACCOUNT THE TRANSFER IS RISK FREE. REPLY URGENTLY, ALBERT KATUKA Dear Sir, CONFIDENTIAL BUSINESS PROPOSAL FROM THE NIGERIA CHAMBER OF COMMERCE, I HAVE THE PRIVILEGE TO REQUEST FOR YOUR ASSISTANCE TO TRANSFER THE SUM OF $45.5 MILLION U.S. DOLLARS INTO YOUR ACCOUNT. THE ABOVE SUM RESULTED FROM AN OVERINVOICED CONTRACT, PAID BY A FOREIGN CONTRACTOR. WE REQUIRE YOUR ASSISTANCE. THE TOTAL SUM WILL BE SHARED AS FOLLOWS: 70% FOR US, 25% FOR YOU AND 5% FOR LOCAL AND INTERNATIONAL EXPENSES INCIDENTAL TO THE TRANSFER. THIS ACTION WAS HOWEVER INTENTIONAL. WE ARE FORBIDDEN TO OPERATE A FOREIGN ACCOUNT THE TRANSFER IS RISK FREE. REPLY URGENTLY, ALBERT KATUKA Americans have been flooded by numerous versions of the Nigerian money scam, don‟t fall prey to their too-good-to-be-true claims. #1 Cause of Divorce 70-80% of divorcing couples attribute the marriage breakdown to money problems BEWARE Tell me your credit card number Tell me your checking account # Tell me your Social Security # Wire fees out of state BEWARE Tell me your credit card number Tell me your checking account # Tell me your Social Security # Wire fees out of state Remember Understand what you sign. Don‟t sign anything you don‟t agree to.* Shop for the best deal available to you. Keep your greed under control. Pay Off Loans Early Bal Rate Term Pmt Total Int Pd Savings (If simple interest) 10,000 12% 60 mo 222 13,346 3,346 10,000 12% 57 mo 232 13,167 3,167 10,000 12% 47 mo 272 12,582 2,582 10,000 12% If 179 764 1,277 38 mo 322 12,069 2,069 you pay as little as $10 extra principal each month, on such a loan as this, you can avoid paying the lender $179 (less interest). The more you pay, the quicker you pay them off, and the less money you pay them. Make sure you make your extra principal payments in the manner your lender prescribes. Pay Off Mortgage Early Bal Rate Pmt Term (360 mo) Tot Cost Savings 136,283 8% 1000 30 yr 360,000 223,717 136,283 8% 1010 29 yr 349,056 212,773 10,944 136,283 8% 1050 25 yr 317,100 180,817 42,900 136,283 7.75% 1283 15 yr 234,360 98,077 125,640 Bi-Weekly Payment Programs: A convenient way to pay off early, if: Your Your paydays are Bi-weekly lender accepts extra principal (most do w/o penalty) Reputable money handler (some have skipped) Low or no fees Warning: many charge a monthly service fee & set-up fee! $ 5 bw service fee $25 bw service fee $ 150 setup $ 4,000 setup The Advantage of Bi-Weekly Payments: Since there are 365 1/4 days in an average year, and 14 days in each bi-weekly period: 365 1/4 14 = 26.08929 there are periods each year. 26.08929 biweekly 26.08929 half payments 13 .04464 full payments in an average year About once every makes the equivalent of 11 years a person paying 1/2 of his monthly payment bi-weekly 13 1/2 monthly payments (by making 27 half pmts bi-weekly) Every ~11 years 3 months have 3 bw paydays (3 extra paydays -> 1 ½* extra full payments) *Since making 1/2 of the required monthly payment bi-weekly yields 26.08929 half payments in an average year, every 11.19946 years (average) an third bi-weekly period would occur. 1 (biweekly period) ÷ .08929 (average extra bw payment per yr) = 11.19946 (average years). Extra Principal: Bi-Weekly or Monthly Compare the advantage of extra principal payments on a loan with these terms: Loan 100,000 8% 733.77 mo 30 yr Rate Pmt Term Total Paid Save 264,157 Extra Principal bi-weekly: If 1/2 of the required monthly payment is paid bi-weekly: 26.09 half pmts are made each year, or 22.65 yrs 216,832 47,325 13.05 full payments each year (rounded). (by paying 17,000 early, you avoid paying $47,325 of interest) Mo. pmt 733.77 ÷ 2 = 366.89 bi-weekly 66.04 additional principal To gain the same advantage: Extra Principal Monthly Pay 1.09 x 733.77 = 1.09 = 1/12 of 13.05 pmts 799.81 22.5 yrs 215,948 48,209 Many lenders encourage borrowers to refinance. If the goal is to reduce monthly payments, a refinance may work just fine. If the goal is to pay less total interest, it may be better not to refinance, unless you refinance and keep paying the old payment. Re-finance and “save” hundreds each month if paid as agreed (100,000 30 yr 8% loan after 10 years) Mortgage bal. $ 87,724 734 pmt 8% 20 yr remaining Int. Car bal. 13,056 415 pmt 9% 3 yr remaining 95,000 Other 8,000 203 pmt 18% 5 yr remaining 50,756 Total 108,780 1,352 if keep paying 1352 no refi Consolidated you “save” 111,780 (avoid spending) if you keep paying 1,352 Int. & fees 782 pmt 7.5% 30 yrs 173,000 493 per month Int. & fees (117 mo) 9.75 50,000 yrs Great, if you keep paying the higher payment, and don‟t run up your credit cards, etc. again! Getting out of debt quicker, by focusing first on highest rate debts After .8 yr. more, Let‟s suppose someone had the following debts. They After 1 yr., start applying the amount formerly going to the doctor ($40) to the next highest rate debt (the dentist). After 1 year Term (yrs.) 8.5% 22.9 yrs. 9.0% 9.8% 18.0% 4.1 yrs. 3.6 yrs. 9.5 yrs. New Bal. New New Pmt. Term could meet the payments, but with no money to spare: Existing Obligations 1st Mort Auto Loan Trailer Credit Card 78,721 10,239 5,451 6,539 Balance Payment Rate Remaining (p & i*) 651 250 150 120 apply the amount formerly going to the doctor ($40) and to the dentist ($50) to the next highest rate debt (the credit card). After 1.8 years New Bal. New New Pmt. Term 77,554 651 21.9 8,072 250 4,126 150 6,253 120 0 794 0 90 3.1 2.6 8.5 0 .8 76,547 651 21.1 6,194 250 2.3 2,970 150 1.8 5,984 210 3.1 0 0 0 0 0 0 Doctor Dentist Totals 400 1,200 102,550 40 50 1331 21.0% 19.0% .9 yrs. 2.5 yrs. (*p&i stands for principal & interest) Getting out of debt quicker, by focusing first on highest rate debts After .7 yr. more, Let‟s suppose someone had the following debts. They After 1.9 more yrs, by applying the amounts formerly going to the doctor, dentist to the credit card, the new terms: After 3.7 years Term New New New Bal. Pmt. Term 73,863 651 19.2 1,153 250 0 0 0 0 0 0 .4 0 .7 0 0 could meet the payments, but with no money to spare: Existing Obligations Balance Payment Rate Remaining (p & i) applying the amounts formerly going to the doctor, the dentist, the credit card, trailer & auto loan to the mortgage loan. After 4.4 years New New New Bal. Pmt. Term 72,760 1,261 6.2 0 0 0 0 0 0 1st Mort Auto Loan Trailer Credit Card 78,721 10,239 5,451 6,539 651 250 150 120 8.5% 22.9 yrs. 9.0% 9.8% 18.0% 4.1 yrs. 3.6 yrs. 9.5 yrs. 2,745 360 0 0 0 0 0 0 0 0 0 Doctor Dentist Totals 400 1,200 102,550 40 50 1331 21.0% 19.0% .9 yrs. 2.5 yrs. Out of debt in 10.2 yrs. Under water? Some Mortgage Auto loan Cr Card Cr Card Doctor Dentist 7% 600 10% 250 19% 100 25% 150 18% 200 18% 100 1,400 7% 10% 10% 25% 10% 18% 600 250 80 150 120 100 1,200 lenders will reduce their interest rates if you ask - especially if you indicate that you are shopping around for better rates.
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