What Young Adults
Need to Know
About Money
Barbara O’Neill, Ph.D., CFP®
oneill@aesop.rutgers.edu
Twitter: @moneytalk1

Financial Capability is an
Important Life Skill
• Dr. Ehrenfeld’s 2012 Executive Dean’s
Distinguished Lecture: “Reinventing the
University for the 21st Century
• Key themes:
– Natural resources are reaching critical limits.
– The university must prepare its students to live this
new and dangerous environment
– Students need to learn to be more self-sufficient and
less dependent on the global economy

More on Essential Life Skills
• Dr. Ehrenfeld Lecture Summary/Video:
http://discovery.rutgers.edu/events/2012/davidehr
enfeld.html
• Essential life skills include personal finance,
growing food, basic cooking, basic home repairs,
basic health care, computer trouble-shooting,
clothing repairs, and bartering/labor exchange
• SEBS Personal Finance class:
http://rci.rutgers.edu/~boneill/

How Much Do You Know
About Personal Finance?
Take the FINRA National Financial
Capability Study Knowledge Quiz:
http://www.usfinancialcapability.org/quiz.php

National Financial Capability
Study Knowledge Quiz
Five financial literacy
quiz questions:
– Interest rate
question
– Inflation question
– Bond price
question
– Mortgage
question
– Risk question
Number of
correct answers 2009 2012
None 7% 7%
One 11% 12%
Two 17% 19%
Three 24% 23%
Four 27% 25%
Five 15% 14%
Average number
correct 2.99 2.88
http://www.usfinancialcapability.org/quiz.php

The Two Sides of
Compound Interest
• When you invest,
compound interest
is your friend :-)
• When you pay
interest on credit
cards and loans,
compound interest
is your enemy :-(

Information Resource:
Jump$tart Coalition for
Personal Financial Literacy
• Washington DC-based non-profit
• Promotes financial literacy for students
from pre-K to college age
• The NJ Coalition for Financial Education is
a state affiliate of national Jump$tart

Jump$tart’s Twelve Principles
of Personal Financial Literacy
• Twelve principles for young adults to
become financially successful
– http://jumpstart.org/12-principles-calendars.html
• Available as a calendar in PDF format:
– http://jumpstart.org/assets/files/12%20Principle%20
Calendars/2012_J$_Calendar-time-CM.pdf

The Twelve Principles
• Know your take-home pay
• Pay yourself first
• Start saving young
• Compare interest rates
• Don’t borrow what you
can’t repay
• Budget your money
• Money doubles by “The
Rule of 72”
• High returns equals high
risks
• Don’t expect something
for nothing
• Map your financial future
• Your credit past is your
credit future
• Stay insured

1. Know Your Take-Home Pay
• Take-Home Pay = Net Pay = Disposable
Income
– Amount of income remaining after mandatory
deductions (e.g., taxes) and withholding
• Discretionary Income
– Money left after paying household expenses
– Include savings for goals as an “expense”
• Know these numbers before committing to
large expenses

2. Pay Yourself First
• Treat savings as a household “expense”
• Give it the priority of a car loan payment
• Make savings automatic
– Employer retirement savings plans
– Mutual fund and DRIP stock automatic
investment plans
– Checking to savings transfers
– Need more ideas? See
http://www.americasaves.org/

3. Start Saving Young
Source: TIAA-CREF; assumes an 8% average annual return
Time + Money = Magic!

Source: NEFE High School Financial Planning Program

4. Compare Interest Rates
• Bankrate.com: http://www.bankrate.com/
• Consumer Action: http://www.consumer-action.org/
• Federal Reserve:
http://www.federalreserve.gov/creditcard/survey.html

Rule of Three
Credit Card Comparison
• See Personal Finance class assignment
http://rci.rutgers.edu/~boneill/assignments/creditcard.html
• Key Criteria:
– Annual fee
– Late fee
– Over-the-limit fee
– Method for computing balance
– Rewards for use
– APR

Key Credit Terms
• Finance charge
– Total dollar amount you pay to use credit
– Includes interest costs and fees, such as service
charges or credit-related insurance premiums
• Annual Percentage Rate (APR)
– Percentage cost of credit on a yearly basis
– Key to comparing costs when shopping for rates
– “Apples to Apples” comparison required by law
It is important to shop around for credit

5. Don’t Borrow What You
Can’t Repay
Debt stinks! (http://www.itsahabit.com/musiccd.html)
– Ties up future income
– Prevents people from saving
– Costs money (interest and fees)
– Can lead to repossession, foreclosure, bankruptcy
– Causes physical symptoms of stress

What is the Worst Credit
Card Trap of All?
• Teaser rates?
• Default rates (penalty APRs)?
• Late fees?
• Over-the-limit fees?
• Minimum payments?

The High Cost of Minimum
Payments
Data derived from Credit Card Smarts calculator

Warning Signs of Debt Problems
• Paying only the minimum balance each month
• Trouble even paying the minimum amount due
• Total balance increases every month
• Missing loan payments or paying late
• Using savings to pay for necessities
• Getting second or third payment notices
• Borrowing money to pay old debts
• Exceeding the credit limits on your credit cards
• Denied credit due to a bad credit report

6. Budget Your Money
• Spending Plan Worksheet:
http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf
• Positive Cash Flow: Income > Expenses
– Increase income
– Reduce expenses
– Do both

Seven Step Budgeting Process
1. Set financial goals and identify required savings
2. Estimate income from all sources
3. Budget an emergency fund and goal savings
4. Budget fixed expenses (include 1/12 occasional expenses)
5. Budget variable expenses
6. Record spending amounts
7. Review spending and saving patterns
 Review financial progress
 Revise goals and budget allocations

What are Your Spending Leaks?

7. Money Doubles By
“The Rule of 72”
• Calculates the number of years it takes for principal to
double
– Number of Years = 72 divided by interest rate
– Example: 72 ÷ 6% = 12 years
• Calculates the interest rate it takes for principal to
double
– Interest rate = 72 divided by number of years
– Example: 72 ÷ 10 = 7.2%
http://www.moneychimp.com/features/rule72.htm (calculator)

The Rule of 72
Source: Garman/Forgue, PERSONAL
FINANCE, Fifth Edition

8. High Returns Equals High
Risks
Source:
Garman/Forgue,
PERSONAL
FINANCE, Fifth
Edition

Investment Risk Factors
Source: Garman/Forgue, PERSONAL FINANCE, Fifth Edition

9. Don’t Expect Something
For Nothing
If it sounds too good to be
true, it probably is”
• Phishing scams
• “Pump and dump” scams
• “Free lunch” seminars
• “Guaranteed” returns > other investments
• Exotic sounding deals
• Exclusive, limited-time offers

10. Map Your Financial Future
• Be a “future-minded” planner
• Set SMART Goals:
http://njaes.rutgers.edu/money/pdfs/goalsettingworksheet.pdf
– Short-Term: Under 3 years
– Medium-Term: 3 to 10 years
– Long-Term: 10 or more years
• Match savings/investments to goals
• “What you think about, you bring about”

11. Your Credit Past is Your
Credit Future
• People with low credit scores pay more to
borrow money
– FICO score range: 300 (low) to 850 (high)
• Negative information stays on your credit
report for 7 years (bankruptcy- 10 years)
• Credit scores are used in job hiring, car
insurance premiums, apartment rentals

Credit Scoring Factors
• Bill payment history, weighted to
emphasize past 12 months (35%)
• 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%)

12. Stay Insured
• Health insurance: “Age 26 law” (federal), NJ
“Dependent Under 31” law,
http://www.state.nj.us/dobi/division_consumers/du31.html
• Also, COBRA, ACA exchanges:
https://www.healthcare.gov
• Life insurance (if dependents or co-signers)
• Disability insurance
• Renter’s and auto insurance with adequate
liability limits (at least $300,000)

Closing Messages
• You are a “Millionaire in the Making”
• Time + Money = Magic!
• Compound interest can be your best
friend or your worst enemy

Financial Education Resources
For College Students
• Money Smart for Young Adults (FDIC):
http://www.fdic.gov/consumers/consumer/moneysmart/young.html
• NEFE Cash Course: http://www.cashcourse.org/
• Love Your Money: http://loveyourmoney.org/
• Money Skill: http://www.moneyskill.org/
• SEBS Personal Finance Course: http://rci.rutgers.edu/~boneill/
• Rutgers Cooperative Extension: http://njaes.rutgers.edu/money/

Questions? Comments?
Experiences