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Autonomics Jean Walker Director, West Texas Center for Economic Education College of Business West Texas A&M University Canyon, Texas

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The TCEE programs are made possible by the following TCEE partners. copyDR. EnviroChem Services, Inc. Trout Foundation John Anderson Less B. Fox RBC Wealth Management

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Autonomics Economics TEKS: (20)Personal financial literacy. The student understands how to provide for basic needs while living within a budget. Dollars and Sense TEKS: (1)The student demonstrates management of individual and family resources such as finances, . transportation . (D) The student is expected to analyze the consequences of an economic decision made by an individual consumer such astransportation ..

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Note to Teacher: Concepts vital to applying personal finance to an individuals decision making abilities can be taught using the purchase of a car or a truck as the hook. Saving (for down payment or for total amount) Budgeting (see slides at end) Credit (see slides at end) Qualifications for borrowing Relationship of interest rates to credit profile Insurance Sales tax and payroll taxes

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The Top 10 Mistakes Teenagers Make When Buying a Car

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Mistake #1 Not understanding the purchase process: Down payment: Unless you have cash saved for the purchase price*, you either need to trade in another vehicle or make a down payment* of approximately 20% of the cars value. Sales Tax: You will pay 6.25% Texas sales tax. Car payments: The amount of a car payment is a function of the price, interest rate, and number of payments. (See handouts on price negotiation.) (Activities 1 & 2 use a decision making model to teach product selection and an online calculator to determine the payment amount.) http://www.bankrate.com/calculators/auto/auto-loan-calculator.aspx http://www.bankrate.com/calculators/auto/auto-loan-calculator.aspx

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Mistake #1 (cont) * Note to teachers: Saving (and compound interest) and savings goals can be inserted here. Questions for the class: How many hours of work will it take to save for the down payment? How many to buy the car with cash? Consider this: Your car down payment is $3000. (20% of $15,000) You work for $8.00/hr (above minimum wage). IRS takes 7.65% of your wages for Social Security, leaving you with $7.39/hr [$8.00(1-.0765)]. You will work 406 hours to make the down payment. Or buying a $3000 junker will take 406 hours of work.

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Mistake #2 Buying a NEW car Consider this: A new car loses 46% of its value in the first 3 years! A car 3 years old is still a very good car a used car is a much smarter buy. from Consumer Reports, April 2015

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Mistake #3 Focusing on payment amounts and not on the total car price Consider this: If your only criteria for buying a car is having a low payment, you could get into financial trouble, becoming upside down on the car. Besides making you upside down, extending the payments leads to higher total interest paid over the length of the loan.

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Mistake #3 (cont) Learn to use a car payment calculator* to determine how much a payment will be. Multiply the amount of the payment by the number of payments to see total amount you will pay. * Go to http://www.bankrate.com/calculators/auto/ auto-loan-calculator.aspx http://www.bankrate.com/calculators/auto/ auto-loan-calculator.aspx

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Mistake #4 Not realizing how much work it takes to make a car payment Consider this: Your car payment is $250/month You work for $8.00/hr (above minimum wage) IRS takes 7.65% of your wages for Social Security, leaving you with $7.39/hr [$8.00(1-.0765)] You need to work about 34 hours just to make a monthly car payment

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Mistake #5 Forgetting to include car insurance in your monthly payments Consider this: Assume you get really cheap insurance at $100/month $100/$7.39 = 13.5 hours; so add 13.5 hours to your 34 hours for the car payment and you now have to work 47.5 hours each month! (And that doesnt include the hours to pay for gas, repairs, new tires, and yearly registration!)

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Mistake #6 Thinking you can get really cheap car insurance Consider this: Texas requires 30/60/25 minimum liability insurance (per person/all people/property damage). If you finance the car, the lender will require collision and comprehensive insurance for the amount financed. Terms to discuss: premium deductible Economics TEKS: (19) (C) The student is expected to evaluate the costs and benefits of buying insurance. Dollars and Sense TEKS: (1)The student is expected to apply management principles to decisions about insurance for individuals and families.

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Mistake #6 (cont) You will pay more for insurance than your parents unless you buy under their policy. Factors that affect insurance rates: Age Gender Driving record (tickets) Credit record Car selection (sporty, SUV, etc.) An extended warranty is a form of insurance. In 2014, Consumer Reports said 55% of owners who purchased an extended warranty hadnt used it for repairs exceeding the average $1,200 cost of the warranty. Financial planners say put the money an extended warranty would cost into an emergency savings account instead.

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Mistake #7 Not researching car prices, safety and reliability factors, or desirable features which help the car maintain value Consider this: Read Motor Trend, Road and Track, and Consumer Reports for new car information. Know the invoice price prior to entering a showroom or sales lot. Use Kelley Blue Book or NADA Used Car Guide or Edmunds to validate car price. www.kbb.com www.nada.com www.edmunds.com

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Mistake #8 Buying a gas guzzler Consider this: If your car gets 25 miles/gallon and gas is priced at $2.50/gallon, then gas costs 10 cents per mile. Driving 100 miles will cost $10.00, which is more than an hour of work at minimum wage. What if the price increases to $3.00 or $4.00/gallon? Perhaps gas mileage should be a major criteria.

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Mistake #9 Not understanding the importance of credit worthiness to get a car loan Consider this: You cant borrow money if you have bad or no credit (possible to get co-signer). What are the basics lenders review before approving a loan? Income, payment history, credit score, and collateral Note to teacher: See slides at end about teaching credit and budgeting.

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Mistake #10 Deciding if you cant keep up with the payments, you could just sell the car or let the lender repossess it Consider this: You may be upside down and unable to sell the car for what you owe. If the lender repossesses the car, that goes on your credit record for 7 years. Note to teacher: See slides at end about bankruptcy.

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Credit, Bankruptcy & Budgeting

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Economics TEKS (12) Economics. The student understands the role of money in an economy. The student is expected to: (C) examine the positive and negative aspects of barter, currency, credit cards and debit cards. (18) Personal financial literacy. The student understands the role of individuals in financial markets. The student is expected to: (E) identify the types of loans available to consumers; (F) explain the responsibilities and obligations of borrowing money; and (G) develop strategies to become a low-risk borrower by improving ones personal credit score. (19) Personal financial literacy. The student applies critical-thinking skills to analyze the costs and benefits of personal financial decisions. The student is expected to: (A) examine ways to avoid and eliminate credit card debt; (B) evaluate the costs and benefits of declaring personal bankruptcy; (20) Personal financial literacy. The student understands how to provide for basic needs while living within a budget.

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Dollars and Sense TEKS (2) The student demonstrates management of financial resources to meet the goals of individuals and families across the life span. The student is expected to: (A) evaluate the need for personal and family financial planning, including budgeting, expense records, and maintaining economic self-sufficiency. (B) compare types of loans available to consumers and distinguish criteria for becoming a low-risk borrower; (C) connect mathematics to the understanding of interest, including avoiding and eliminating credit card debt; (I) investigate bankruptcy laws, including ways to avoid bankruptcy.

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Factors in evaluating credit: Capacity and capital what is your cash inflow and what assets or debts do you have? Collateral if they can repossess it, they will loan more on it Character as determined by your credit record and credit score Conditions when business conditions are bad, credit issuers are not as free with credit

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Credit Report Credit report includes: information about credit accounts account balances and payment history legal actionssuits, liens, bankruptcies, wage attachments, collection items credit inquiries Credit bureaus: Equifax Experian TransUnion

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Who Gets to See Your Credit Report? Lenders - use it to: Make the credit decision Determine amounts of credit Determine the interest rate Potential landlords Current or potential employers Insurance companies (premiums can increase if the score drops too low)

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Other Credit Information History is visible on report for 7 years after last transaction (10 years for bankruptcy) Beginning February 2010, students under the age of 21 must show proof of income to get a credit card or have co-signer Check your credit report annually for free at www.annualcreditreport.comwww.annualcreditreport.com

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What is a credit score? The FICO score is the most common (determined by Fair Isaacs, Co.) The FICO score falls between 300 850 Other evaluators of credit have their own proprietary scores VantageScores 501 - 990

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FICO Credit Score Calculation Scores range from 300 850 and are a snapshot in time; your score can change in either direction depending on your credit report

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FICO Score Explanations Payment history most import component of credit score calculation Amounts owed balance owed compared to available credit Length of credit history length of time since first credit account was opened New credit credit inquiries and recent account openings Credit types mortgage, installment (auto), revolving (credit card), and other

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General Rules of Thumb for Credit Monthly payments on non-housing debt (credit cards, and other installment loans) should not be more than 10% of monthly take-home pay. Example: If you take home $2,000 per month, monthly payments should be no more than 10% of $2,000, or $200. Non-housing debt should be no more than 20% of yearly take-home pay. Example: If you earn $2000 a month after taxes, your yearly take-home pay is $24,000, and 20% of that would be $4,800 Mortgage payments should be no more than 28% of monthly gross income. Example: You earn $48,000, or $4,000 per month. So 28% x $4,000 = $ 1,120. (The $1,120 represents principal, interest, taxes, insurance.)

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Bankruptcy When budgeting fails and credit gets out of control, the last resort is bankruptcy. Chapter 7 straight bankruptcy Assets that are not exempt are sold to pay off debts. All debts are discharged. Chapter 13 wage earner plan You retain assets and pay off debt over 3-5 years while creditors are held at bay. If your monthly income is more than the mean income in your state, you must file Chapter 13 rather than Chapter 7. What debts cannot be discharged? Student loans Alimony or child support Most taxes Debt taken on in anticipation of bankruptcy Certain suits for damages Economics TEKS: (19) Personal financial literacy. The student applies critical-thinking skills to analyze the costs and benefits of personal financial decisions. The student is expected to: (B) Evaluate the costs and benefits of declaring personal bankruptcy;

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Spending Plan (Budget) Most important tool to ensure financial freedom Reduces pressure of instant gratification purchases if money is already allocated Keep track of all income and expenses Use it to create emergency money fund to reduce or eliminate credit card charges

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Setting Up a Spending Plan List all income (wages or other regular income). List all expenses (car insurance, gas, cell phone, car payment, dining out, rent, activities, groceries, clothes, savings). Fixed expenses installment payments, car insurance, rent, savings (pay yourself first) Variable expenses food, clothing, entertainment, some car expenses Subtract expenses from income to determine if there is a surplus or a deficit. Overcome a deficit by increasing income or reducing expenses. Budget templates are available in Microsoft Excel to build a spending plan.

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Spending Plan Example Key: Income Fixed Expenses Variable Expenses

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Spending Plan Example Key: Income Fixed Expenses Variable Expenses Increasing hours worked and reducing variable expenses balances the budget, but the budget still has no savings component.