Financial Literacy Program

If you are 20 and plan to retire at 65:

• Instead of buying a $5 coffee…
• Invest it for 45 years at the historical stock market return of 10.15%
• You’ll have $387.50 (only a 77x of your money)! 
• You could help your grandkid buy their first car if you save on coffee for 20 days! ($7,750)

Try it Yourself!

Go to Compound Interest Calculator

Start with an easy base number, say $100

Enter a rough estimate of how much you could save each month

• • See budgeting for help finding this number

Set timeline to 45 years (65 is a rough estimate for age of retirement)

Play with different interest rates 

• • Average inflation adjusted return on the S&P 500 over the past 50 years is 6.7%
  • The rate without inflation is 10.8%
  • The 10-year treasury rate is 2.0% inflation adjusted (Considered a risk-free investment)
  • The rate without inflation is 5.9%

Look at the returns after 35 or 25 years, this is the equivalent of you starting to invest 10 or 20 years later

Emergency Fund

• Cash reserves set aside for unplanned expenses or emergencies
• Rule of thumb is 6 months of income
• Brings comfort and peace of mind

Short Term Goals 

• Down payment on a car
• Saving for a trip

Long Term Goals

• Down payment on a house
• Retirement fund
• College fund for children

A budget is a plan for one’s income and expenses over a period. Keeping a budget will benefit you by ensuring that you have enough money to do the things that you want and by letting you save for long-term purchases and/or investments. You’ll probably be unable to buy a down payment on a house, for instance, if you never save more than $5 a month.

Everyone has a different financial situation which will largely dictate their spending. It is important to understand the value of saving early, but the decision is ultimately yours!

Here is a solid guideline if you want something to build around:

• 50% Needs: housing, groceries, transportation, bills
• 30% Wants: travel, entertainment, shopping
• 20% Savings: high-yield savings emergency fund, investment accounts, retirement

1. 1. If possible, record your income and expenses over a previous period.
   2. See how this breaks down between needs, wants, and savings
   3. If something doesn’t seem to be worth its cost, consider moving the money towards savings!
   4. Pay attention to recurring expenses
   5. Conduct Monthly Check-ins by going over expenses accumulated over the month

• • • Reflect on what you could improve on and what you did well
    • Did I successfully follow my budget?
    • Where could I spend less?
    • What can I do to improve my spending habits?
    • Be kind to yourself! Being aware of your spending habits is the first step towards improving them!

Many find it helpful to automate saving a designated amount when they earn money. This will give you a more realistic impression of how you can spend to meet your goals.

Short term loans are meant to be paid off in full within a much quicker time period (1-3 months). They will often have high interest rates or fees relative to long term loans.

• Credit cards
• Payday loans
• Bank overdraft

Long term loans are meant to be paid off over longer periods of time (3-30 years). Long term loans can help build credit if they are paid on time. You may or may not be able to pay off these loans early depending on the terms of the loan.

• Mortgages
• Student loans
• Car loans

Interest rates have both a compounding period (weekly, monthly, annually), and a rate usually denoted as a percentage.

The interest rate on long-term loans will generally reflect the rate your lender could get without risk of losing their investment (Government bonds) plus an individualized risk premium based off of your credit score.

The formula for total payment is: Principal * (1 + interest rate)^number of periods. You can subtract the principal amount to find the interest amount.

You can experiment with interest rates here: Compound Interest Calculator

It depends on how long you’re unable to pay.

In the short term:

First and foremost, your credit score will suffer as lenders gain increased doubt about your likeliness to pay them back in the future. This credit hit will take at least 7 years to become nullified, however it reduces in impact over this time period.

Secondly, you will be charged either a fee or interest depending on the type of loan.

In the long term:

Oftentimes long-term loans are collateralized.

Mortgage lenders can foreclose on a house, taking back ownership

Auto lenders can repossess your vehicle, taking back ownership

If you default on federal loans, the government can garnish (reduce) your wages, or even deny you eligibility for future federal benefits

If this happens to you, it’s not the end of the world, however there are certainly serious repercussions. This is why it is important to understand and stay on top of your loans.

Home Loans, also known as mortgage loans or mortgages, are loans you take out to buy a house. These can serve as a great tool for becoming a homeowner.

• These will generally be the largest loans you ever have
• Tend to span over either 15 or 30 years
• Seller gets paid up front, partly by your down payment, and partly by your lender
• In exchange, you pay interest on the amount you borrow

You can experiment with hypothetical home loans here: Mortgage Calculator

Student loans are loans for education from the federal government or private lenders. There are multiple types of federal loans, and most have more favorable terms for borrowers than private loans.

i. For instance, most federal loans have fixed interest rates — some private loans have rates that may increase —, allow one to delay payment until after graduation, and offer flexible repayment plans.

ii. Some federal loans are “subsidized.” A subsidized loan results in a lower total interest payment for the borrower over time because the government pays the interest on the loan while the borrower is in school.

iii. Visit this U.S. government website for more details on the differences between private and various federal loans.

A number between 300 and 850 that indicates your trustworthiness (likeliness to pay back a debt)

• Banks use your credit score to gauge your borrowing risk. They will charge you more interest if they believe there’s greater risk you won’t pay them back
• TLDR: You get better deals when borrowing with a higher credit score

Payment History: 35%

• Showing banks that you’ve consistently made on time payments for a long period of time!
• Start early!

Amounts Owed: 30%

• Owing more money makes you viewed as having a greater risk to not paying something back

Length of Credit History: 15%

• This involves the age of your oldest line of credit, not necessarily how well you’ve managed it (Though this is the most important factor)

New Credit: 10%

• Your credit score will be negatively affected by having too many hard inquiries within a short period of time
• A “hard inquiry” is something that happens when you look to take out a loan and a lender checks your credit
• These will generally clear off your report after 6 months

Credit Mix: 10%

• Showing you can manage different types of credit will improve your creditworthiness

Ex: Credit cards, home loans, car loans

On-time payments on credit (Credit Cards, Home and Auto Loans)

Long credit history (Start Early)

Responsible credit usage (Use it like a debit card and set up automatic payments)

Here’s how your credit score would impact a 30-year home loan.

Same loan, almost $200,000 saved