Financial Aid Guide

Do you want to make good financial decisions? Budgeting is much more than tracking your expenses! It is about knowing how you spend money, understanding your monthly statements, making major purchases and more. Use this guide to discover where you spend your money today, and make educated decisions about how you want to spend it in the future.

Making significant progress on achieving your financial goals means knowing your income sources and financial obligations. To get started, make a list of your income sources, fixed expenses and variable expenses. Fixed expenses such as rent, car payments and insurance costs, don't change from month to month. Variable expenses, such as utilities, clothing and food, can change each month.

You may discover some income sources you haven't considered as well as some expenses you're fortunate enough to not have at this point in your life. No matter what your situation is, you'll have virtually everything you need to create your annual budget and develop a clear picture of where you are now and where you want to go.

Budgeting Steps

• Organize and gather bills and income statements (approximately 45 minutes).
• Complete a budget worksheet at http://www.mymoney.gov/category/topic1/budgeting-worksheets.html (approximately 60 minutes).

Types of Bills and Income Statements

• Paycheck stubs
• Other documents showing income sources (financial aid, spouse/family income, child support, alimony, etc.)
• Credit card bills
• Electric utility bills
• Gas company bills
• Cell phone bills
• Internet service bills
• Cable/satellite TV bill
• Check book or bank statements
• Magazine subscription invoices
• Newspaper subscription invoices

Are you having trouble finding all your monthly bills and income statements? For a more complete picture, set aside a space in your home — on your counter or in a box or folder — to place every bill, statement and pay stub you receive in the next month. You should have most of what you need by the end of the month.

If you have more income than expenses, now is the time to start a savings account or add to your existing savings. If you have more expenses than income, search for ways to reduce your spending.

Saving money is easier than you may think. Here are some cost-cutting tips to help you reduce your monthly expenditures. Some suggestions are relatively painless, while others require a concentrated effort.

Save a Little

• Use a grocery list.
• Don't shop when hungry.
• Clip coupons and buy bulk foods.
• Combine errands to save gas.
• Bring lunch to work or school a few times a week.
• Leave credit cards at home.
• Limit the amount of cash you carry.

Possible monthly savings: $50

Save Some More

• Shop at consignment/thrift stores.
• Use an economy car or public transportation.
• Limit yourself to one meal out each week.
• Cancel cable TV or cell phone service.
• Rent a DVD instead of going to the movies.
• Lower your thermostat setting in the winter, and raise it during the summer months.

Possible monthly savings: $250

Save Even More

• Eat out only once a month.
• Use public transportation as often as possible.
• Cancel cable TV, cell phone and Internet services.
• Visit the library instead of going to the bookstore.
• Share living costs with one or more roommates.
• Read books that suggest additional ways to save.

Possible monthly savings: $500

Do you need a guideline for understanding where your money should go? The Bureau of Labor Statistics offers the following percentage breakdown of the average person's after-tax expenses.

• Housing: 33%
• Food: 13%
• Healthcare: 6%
• Savings: 10%
• Transportation: 19%
• Entertainment: 5%
• Clothing: 4%
• Other: 10%

As with any journey, a great way to get started is to find out where you stand today. Make an expense diary to track what you purchase throughout the week. Write down what you buy, how much it costs and how you pay for it. After a week or a month, review your diary. You may be surprised to learn how much you spend on incidental items and how you choose to pay for them. This will help you determine where you can reduce your expenses and how you should pay for future purchases. It only takes five minutes a day!

Credit can open the door to buying a home, car or other item, but it can also lead to significant stress. Take time to understand how credit works and its impact on your life. This section contains information and links that will help you determine your current credit situation as well as ways to improve it.

What is Credit?

• Credit is the borrowing of money to make a purchase and the repayment of money with added interest and fees.
• Revolving credit means:
  • You can repeatedly borrow up to a set limit.
  • You may be able to make minimum payments.
  • You may encounter fees.
• Credit cards are a type of loan that can be very expensive to repay.

Credit Card Benefits

• Helps in emergency situations
• Convenient to use
• Easy way to make Internet purchases
• Required for car rental
• Safer than carrying cash
• Sometimes offers travel and/or cash-back rewards

Credit Card Risks

• High fees
• High interest rates
• Short or no grace period
• Leads to impulse purchases
• Can lead to bad credit if not used wisely
• Credit terms can be confusing

Grace Period

• The number of days that can pass before interest is applied (usually between 20 days and one month)
• To receive a grace period, you must:
  • Pay your new balance in full
  • Pay your bill on or before the due date

Making Minimum Payments

• No grace period
• Interest is charged from the purchase date
• May take years to pay off debt

Convenient Credit Card and Loan Alternatives

• Cash
• Checks
• Debit and check cards
• ATM cards

Loan Calculator

If you have student loans, many resources are available to help you manage your payments. Use the link below to estimate your monthly student loan repayment and discover your repayment options.

• http://studentaid.ed.gov/PORTALSWebApp/students/english/OtherFormsOfRepay.jsp

Understanding Your Debt

Almost everyone has debt. Some types of debt are good and some are bad.

Debt related to something that grows in value or increases your personal value — such as a home or an education — is usually good debt. For a strong financial future, consider limiting debt for items that lose value over time, such as cars and clothing. To determine whether something is worth incurring debt for, ask yourself these questions:

When the item is paid off, will:

1. I remember what I bought?
2. The item have value?
3. The total cost (purchase price plus interest) be worth it?

If you answer "yes" to all three questions, the debt is most likely a good use of credit. If you answer "no" to even one question, consider saving your money until you can pay cash.

How to Read a Credit Card Statement

Credit card statements generally contain five types of information:

General Statement Information

• Your name, address and account number (your entire account number may not appear for security reasons)
• Statement start and end dates
• The name and contact information of your credit card company

Account Information

• Your balance at the beginning of the statement period
• Payments made to your account
• Purchases made with your account
• Your credit limit
• Your new balance owed
• Your available credit (your credit limit minus your new balance owed)
• The minimum payment accepted
• Your payment due date

Account Summary Information

• Your previous balance
• The total cost of all purchases
• The total amount of cash advances
• The total amount of payments made
• Applied finance charges
• Applied late charges, transaction fees, annual fees and other fees
• The current amount due
• Past-due amounts (if any payments have been missed)
• Amount by which you have exceeded your credit limit (if applicable)
• Your new balance

Transaction Summary Information

• Reference number for each transaction (helps the credit card company research a purchase if you have questions)
• Date for each transaction (the date the purchase or payment occurred)
• Posting date for each transaction (the date the purchase or payment was applied to your account)
• Merchant name where each transaction occurred
• City and/or state of merchant for each transaction
• Amount of each transaction

Interest Rate Summary Information

• Interest rate applied for purchases
• Interest rate applied for cash advances
• Other interest rates and fees

Credit Card Repayment Calculator

Credit card balances can take decades to pay off. By paying more than the minimum due each month, you can substantially reduce the amount of time it takes to pay off your balance. For example, a $2,500 balance with a 15 percent interest rate will take nearly 24 years to pay off with minimum payments. The same balance can be paid off in approximately nine years if you pay more than the minimum amount due. Use the link below to calculate the amount of time it will take you to pay off your credit card debt with minimum payments.

• http://www.federalreserve.gov/creditcardcalculator/

Understanding a Credit Offer

Under federal law, all credit solicitations and applications must include certain key information. This information appears in a disclosure box similar to the one shown below.

Glossary

APR for purchases
The annual percentage rate you'll be charged if you carry over a balance from month to month. If the card has an introductory rate, you'll see that rate as well as the rate that will apply after the introductory rate expires.

Other APRs
The APRs you'll be charged if you get a cash advance on your card, transfer a balance from another card or are late in making a payment. More information about the penalty rate may be stated outside the disclosure box (in a footnote, for instance). In the example above, the APR will increase to 23.9 percent if you make two payments that are more than 10 days late within a six-month period.

Variable rate information
Information about how the variable rate will be determined (if relevant). More information may be stated outside the disclosure box (in a footnote, for instance).

Grace period for repayment of balances for purchases
The number of days you'll have to pay your bill in full for purchases without incurring a finance charge.

Method of computing the balance for purchases
The method that will be used to calculate your outstanding balance if you carry over a balance and incur a finance charge.

Annual fees
The amount you'll be charged every 12 months for simply having the card.

Minimum finance charge
The minimum, or fixed, finance charge that will be applied during a billing cycle. A minimum finance charge usually applies only when a finance charge is incurred; that is, when you carry over a balance.

Transaction fee for cash advances
The fee that will be imposed each time you use the card for a cash advance.

Balance-transfer fee
The fee that will be imposed each time you transfer a balance from another card.

Late-payment fee
The fee that will be imposed when your payment is late.

Over-the-credit-limit fee
The fee that will be imposed if your charges exceed the credit limit set for your card.

Since your savings can grow substantially over time, now is the perfect time to get started. The earlier you save, the more money you'll have in the future.

There are many choices when it comes to saving money. First, identify whether your goals are long term or short term. Short-term goals are goals you want to accomplish in five years or less, or money you'll need to access in an emergency. A down payment for a house or car would be considered a short-term goal, as would saving for a vacation.

Long-term goals, such as funding your retirement or child's college education, are goals you plan to reach in 10 years or more. If you have long-term goals, it might make more sense to invest.

Investing can be risky, so traditional savings are encouraged for accomplishing short-term goals. If you're trying to put a down payment on a house, for example, a stock market investment could lose 10 percent or more of its value just before you need to access the funds. Saving with a bank or credit union, on the other hand, insures your money and protects it from losing value.

Saving vs. Investing

Rule of 72

Imagine you have $1,000 and decide to put it into a savings account or invest it. How long will it take to double your money? The rule of 72 will give you the answer. To apply this rule, divide 72 by the interest rate you're earning. The result is the number of years it will take you to double your investment.

Example: Suppose you're earning 8 percent interest on your $1,000 investment. To figure out how long it will take to double your money, divide 72 by 8.  The result, 9, means your $1,000 will grow to $2,000 in nine years. In another nine years, that $2,000 will double to $4,000, as long as you continue to earn 8 percent interest.

Where to Save

Note: When choosing a financial institution, select one that is FDIC insured so your money is protected, even if the bank or credit union fails.

Banks and credit unions offer several savings options for accomplishing your short-term goals.

Checking account

A checking account is a good way to start accumulating money. It offers the lowest interest rate of all account options but allows the most transactions. When opening a checking account, look for one with low fees or no fees at all.

Savings account

If you have $100 or more, you might want to consider opening a savings account. Savings accounts generally pay higher interest rates than checking accounts but do not offer as much flexibility.

Money market accounts

With larger amounts of money, other options become available that pay more interest. Money market accounts have higher interest rates than checking or savings accounts but limit the number of times you can withdraw your money.

Certificate of deposit (CD)

If you won't need your money for six months or longer, a CD is a good option. With CDs, the longer you agree to lock away your money, the higher your interest rate will be. Most CDs require a minimum deposit (usually $250 to $1,000), pay a higher interest rate, and don't allow any deposits to or withdrawals from the account for a specified amount of time (usually six months to five years). If you take your money out early, you could be charged a penalty, usually equal to three months' interest.

Savings Calculator

Now is the best time to save for the future. Putting money away today can lead to significant rewards down the road by putting a home, car, travel and a secure retirement within reach. If, after graduation, you start putting $100 a month into an account that accrues 8 percent interest, you'll wind up with $149,036 after 30 years.

Use the link below to see how much your savings can grow over time.

• http://www.mymoney.gov/content/savings-calculator.html

The Web sites listed below provide information on managing personal finances and information on consumer protection.

MyMoney.gov
A wealth of information from the U.S. government that is intended to help improve financial literacy and education in the United States.

360 Degrees of Financial Literacy
Sponsored by The American Institute of Certified Public Accountants, provides information on basic money management skills such as living within a budget and handling credit and debt.

FDIC Consumer News
Provides articles on how to become a smarter, safer user of financial services that will protect and stretch your earnings.

www.daveramsey.com
Website of nationally syndicated radio show host Dave Ramsey. This site discusses personal finance topics with an emphasis on reducing, avoiding and eliminating debt.