debt - the graduate center, cuny...2016/10/27 · only 5% say paying off student loan debt is their...

Debt:one piece of the financial

puzzle

Financial security

SAVING

S

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3 legged stool – each leg is as important as the next Spending– one leg of financial security stool Debt is spending but not with your own money How you spend and use debt informs how much you can save You can’t invest unless you save Unless you can invest, it’s hard to build financial security –

Debt:“The single largest expense you’ll pay in life is interest. You’ll spend more money on interest than food, vacations, cars, school, clothes, dinners out, and all forms of entertainment. You do this because you don’t save enough and demand a lifestyle you can’t actually afford. The future owns your income.”

Morgan Housel

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Financial writer Tax on future income to pay for today’s lifestyle Good debt vs bad debt

DebtHow much will your debt cost

you over a lifetime?

A typical person will likely pay????

in interest on credit purchases over the course of his or her life.

http://www.credit.com/tools/lifetime-cost-of-debt/?

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$279,002 Managing debt robs your time and energy, reduces what you can contribute to society and your community – to others Go to website Pick subject: age, gender, state of residence – HOW MUCH DEBT? – toggle the FICO score� Debt is an obligation of your future income to pay for your current lifestyle If debt is up, then savings/investing is down Good debt vs bad debt – school, house

Increase in Household Debt 2006-2015

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http://www.marketwatch.com/story/every-second-americans-get-buried-under-another-3055-in-student-loan-debt-2015-06-10

Plus student loan debt Average student loan debt for Class of 2016: Average debt for graduate students: Average monthly student loan payment

(for borrowers 20-30 years old): Student loan delinquency rate of

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Student Loan Hero – average debt http://www.usnews.com/news/articles/2014/03/25/how-much-outstanding-loan-debt-is-from-grad-students-more-than-you-think Article cited 2008 law that allowed unlimited borrowing for graduate degrees combined with 10 yr forgiveness plans as to why graduate debt has risen f Debt stats: Since 1978 college tuition has gone up 1120%, food up 244% and medical services up 601%; average to payoff is 21 years, 93% of loans are Federal, 17% delinquency rate but that is based on all loans; for loans that are calling for a payment, 27% delinquency rate; $4100 average credit card debt at graduation 37172 Average student loan debt for Class of 2016: $37,172 Average debt for graduate students: $57,600 Average monthly student loan payment (for borrowers 20-30 years old): $351 Student loan delinquency rate of 11.6% , 57600, 351, 11.6%

Increase in Student Loan Debt 2006-2015

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http://www.marketwatch.com/story/every-second-americans-get-buried-under-another-3055-in-student-loan-debt-2015-06-10

Student Loan Hero’s 2015 Student Loan Burden Report

https://studentloanhero.com/press/2015-student-loan-burden-report-student-loan-hero/

47% have postponed purchasing a car44% have postponed traveling the world41% have postponed buying a house25% have postponed moving out of their parents’ home46% would go on fewer dates33% would give up gym memberships32% would have only 1 haircut a year31% would eat ramen for weeks Only 5% say paying off student loan debt is their #1 financial goal Instead, 54% prioritize rent, 44% their credit card bill, 34% saving money

and 29% their retirement

Would research more grants/scholarships (52%)Would start saving earlier (48%)Would find more ways to save and control costs while in

school (42%)Would better research and understand financial aid and

the implication of taking on student debt (23%)Would open a dedicated college savings account (24%)Would compare future earnings to cost of education

In hindsight…

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Source: http://ticas.org/posd/map-state-data-2015 data from 2014 Indiana Univ – debt letters – dropped 11%, $31M �http://www.indystar.com/story/news/education/2014/07/06/indiana-universitys-debt-letters-cut-student-borrowing/12277277/ Total of student loans should not be greater than 1st year employment earnings; consider profession, i.e. the lifetime earnings of a bachelor’s degree in petroleum engineering is $3.6M more that Bachelors in Childhood Education https://mappingyourfuture.org/paying/debtwizard/ This calculator is based on the recommendation that your student loan payment be no more than 8 percent of your gross earnings. The calculations do not take into consideration a high amount of credit card or other debt. $2.9 billion unused federal grant awards in last academic year By Medha Imam, Northwestern University 11:00 am EDT January 20, 2015 Yet according to a study from NerdScholar, around $2.9 billion of federal grant money was left unclaimed after high school seniors eligible for Pell Grants — which don’t have be paid back — neglected to complete the Free Application for Federal Student Aid (FAFSA) in the last academic year

Ways to reduce debt?

Pay off strategiesFederal loans Standard – Graduated - Income based – Income Contingent Public Service Forgiveness Programs – gov’t, non-profit, 10 yrs

Refinancing with a private lender Need 700+ credit score or prove $2k/mo in disposable income You give up advantages of Federal loans

Signing bonus with employer?Inheritance?Pay extra to principleUse debt payoff snowball strategy

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SoFi – started 2011 by Stanford Biz School grad - $6B in loans by year-end CommonBond – graduate school loans Amt forgiven under PSFP is NOT considered income – won’t be taxed Loan servicers are coming under fire Use debt payoff calculator: http://www.whatsthecost.com/snowball.aspx; financialmentor.com (snowball)

https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action#view-repayment-plans

Repayment choiceswww.gradsense.org

Exit Counseling

Debt to Income RatiosMORTGAGE PAYMENT RATIO <28%PITI: 1000Gross Monthly Income: 4000Ratio (<28%) 25%

ALL DEBT RATIO <36%PITI: 1000Car payments: 250Minimum credit card payments:Student loan payments: 351Child support:Other monthly debt obligations:Total monthly expenses: 1601Gross Monthly Income: 4000Ratio <36% 40%

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Going forward, your financial ability is determined by 2 things – your debt and how you handle it (credit score) 41% have postponed buying a house $150k home = $1000 PITI

http://www.myfico.com/crediteducation/calculators/loanrates.aspx

Relationship between credit and debt

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As of 9/2; best rate 3.123, worst rate 4.706 Difference between lowest (best rate) payment and highest (worst rate) payment is $184/mo – big deal

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FICO score Fair Isaac Corporation: Engineer Bill Fair and mathematician Earl Isaac found FICO on the principle that data, used intelligently, can improve business decisions Vantage score – resent competitor Many FICO scores Many FAKE-O scores Excellent = #1�Good = #2 Fair = #3-4 Poor = #5-6 and no credit extended

Opportunity Cost

$184/month at 8% over 30 years

$25/month at 8% over 30 years

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Test: Definition: Opportunity Cost - the loss of potential gain from other alternatives when one alternative is chosen. Key concept: Building wealth is most often built at the margins Wealth doesn’t come from the big returns, the home runs…but the small, incremental savings over time

Three Major Credit Bureaus Equifax: www.equifax.com Experian: www.experian.com TransUnion: www.transunion.com

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Check your credit report – 25% have errors that could affect your credit score while 5% had errors that made a substantial (25 or more point) difference in their credit score Different data – different scores = Financial GPA • Identifying Information: Name, SS number, current/previous addresses, birthdate, employer • Public Record Information from Local Courthouse: Liens, foreclosures, bankruptcy, etc. • Other Credit History Information: List of loans and credit cards, timeliness of payments, highest and current balance, negative information (7 years) • Inquiries: Self-initiated, promotional (for marketing purposes), and periodic creditor reviews

Scoring your credit

Payment history

Utilization

Length of credithistoryNew credit

Mix of credit

35%

10%

10%

30%

15%

Student loan credit is included

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Talk about credit cards – rewards, emergency fund • Bill payment history, weighted for recent months (35%) Student loan payments • Proportion of outstanding debt to available credit limits (30%) • Length of credit history (15%) • Number of recent credit inquiries (10%) • Mix of types of credit used (10%)

DAMAGE POINTS Super Prime Prime

781-850 661-780

Maxed out card minus 25-45 pts minus 10-13 pts

30-day late payment minus 90-110 pts minus 60-80 pts

Source:http://www.creditcards.com/credit-card-news/fico-credit-score-points-mistakes-1270.php

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Bankruptcy – 10 years All information – 7 years

How do you know if a credit card offer is a good idea?

SAVING

S

BUDGET

The 50-20-30 budget50% goes to fixed costs

Rent/mortgage, utilities, car payment, debt obligations, contractual obligations, groceries, gas

20% goes to financial goals Building an emergency fund, paying off debt,

saving and investing

30% goes to flexible spending Eating out, cable, clothing, gifts, entertainment,

pets, vacation

Source: http://www.learnvest.com/knowledge-center/your-ultimate-budget-guideline-the-502030-rule/

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Want my excel doc? Your ONE number - People who budget save 10% of income on average vs 3% for those who don’t Elizabeth Warren – Sen fr Mass, Consumer Financial Protection Bureau advocate Warren Buffet – Save first then spend what’s leftover…instead of spend first and save what’s leftover Track just one number Envelopes – marshmallow study – DISCIPLINE!

How to allocate disposable income between debt, savings and investing?

SavingsShort term money Money you’ll need in the next 5-10 yrs

Emergency account – how much?Use a bank or credit union Ally.com = 1.0% CapitalOne360.com = .75%

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Money magazine states that 78% of us will have a major negative financial event in any given 10-year period.

Is it worth putting extra money into a saving account?

Investing

Long term moneyMutual funds over stocks Low cost Diversified (lower risk) Auto-pilot (target date)

Roth IRA

Is it worth opening an IRA vs just stashing the moneyin a savings account?

Short term = high risk1 Year Returns 1926-2015

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

1926

1928

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2002

2004

2006

2008

2010

2012

2014

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%19

26

1928

1930

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20 year returns for the S&P 500

Time = reduced risk

Challenge of Picking Stocks

OR

The challenge of picking stocks

In his popular personal finance book arguing that investors can’t consistently beat the market (A Random Walk Down Wall Street), economist Burton Malkiel says that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”

What is a mutual fund??

A type of investment that allows you and me to buy a basket of stocks and/or bonds. (diversification)

A mutual fund reduces the risks and costs of investing in individual stocks and bonds.

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There are over 15,000 total stocks in the US - 5,000 are widely traded. Worldwide – 60,000

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Mutual funds reduce fees and lower risk with broad exposure Reference Morningstar to research fees NPR Morning Edition - Your Money and Your LIfe

Auto pilot

53.90% U.S. stocks 36.00% Non-U.S. stocks 10.10% Bonds

Cost? .16% $1000 minimum

Vanguard Target Retirement 2055

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There are over 15,000 total stocks in the US - 5,000 are widely traded. Worldwide – 60,000 14,000 mutual funds 2055 – 25 today, you’ll be 65 Pay attention to 401k choices – get advice

What’s the best way to invest in the stock market?

Investor A: Early Funding

Investor B: Late Funding

Age Saved Balance Saved Balance

20 $2,000 $2,200 $0 $0

21 $2,000 $4,620 $0 $0

22 $2,000 $7,282 $0 $0

23 $2,000 $10,210 $0 $0

24 $2,000 $13,431 $0 $0

25 $2,000 $16,974 $0 $0

26 $2,000 $20,871 $0 $0

27 $2,000 $25,158 $0 $0

28 $0 $27,674 $2,000 $2,200

29 $0 $30,441 $2,000 $4,620

Age 60 $0 ????? $2,000 ?????

Total Saved $16,000 $64,000

Why start sooner rather than later…

Save $2000 every year?

$2000 per year is $X per month?

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BTW, $2000 a year is $167/month

Return Time Until Investment Doubles

2% 36 years

3% 24 years

4% 18 years

6% 12 years

8% 9 years

9% 8 years

10% 7.2 years

Rule of 72

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn’t… pays it.”

Albert Einstein

David Swensen has made an average return of 13.9 percent a year over the last 20 years for Yale, adding $20.6 billion to the university's endowment. That gives him the best track record of any institutional investor around. “Low costs and diversification serve investors well."

Gretchen Tai runs Hewlett-Packard's pension and 401(k) plans. She's got a great track record, too. “Be disciplined and stick to your savings plan, and keep an eye on the total fees you pay for managing your portfolio.”

Jack Bogle created the world's first index fund for ordinary people. He founded Vanguard Group, which now manages $3 trillion. “Buy a stock index fund and add bonds as you age.”

Warren Buffet’s will for the benefit of his wife: “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. I suggest Vanguard’s.”

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http://www.npr.org/2015/10/17/436993646/three-investment-gurus-share-their-model-portfolios

What’s an investment strategy for $25k that balances risk and return?

Resources U.S. Department of Education: www.ed.gov Student Loan Hero: www.studentloanhero.com www.finaid.org www.edvisors.com www.studentaid.ed.gov www.studentloans.gov http://www.dwoq.com/ Doctors without Quarters http://www.whatsthecost.com/snowball.aspx (payoff strategies) www.annualcreditreport.com (check your credit reports) www.myfico.com (how your credit score is calculated) http://www.learnvest.com/knowledge-center/your-ultimate-budget-

guideline-the-502030-rule/ https://investor.vanguard.com/mutual-funds/index-funds http://www.npr.org/2015/10/17/436993646/three-investment-gurus-

share-their-model-portfolios Chris Arnold, NPR, Your Money and Your Life

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Student Loan Hero – started by guy grad with 16 student loans and $104k in debt – how to manage, refi, consolidate, payoff

http://www.ed.gov/

http://www.studentloanhero.com/

http://www.finaid.org/

http://www.edvisors.com/

http://www.studentaid.ed.gov/

http://www.studentloans.gov/

http://www.dwoq.com/

http://www.whatsthecost.com/snowball.aspx

http://www.annualcreditreport.com/

http://www.myfico.com/

http://www.learnvest.com/knowledge-center/your-ultimate-budget-guideline-the-502030-rule/

https://investor.vanguard.com/mutual-funds/index-funds

http://www.npr.org/2015/10/17/436993646/three-investment-gurus-share-their-model-portfolios

debt - the graduate center, cuny...2016/10/27 · only 5% say paying off student loan debt is their...

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