Debt: Debunking the Myths (Parts 1-7)

Answer the following questions you watch the videos by Dave Ramsey on the myths about Debt:
Note: Don't print until we complete the "Myths" section.

Myth 1

• Myth: If I ____________ money to a friend or relative, I will be helping them.
• Truth: The relationship will be strained or ________ .

Myth 2

• Myth: By ______________ a loan, I am helping out a friend or relative.
• Truth: The bank requires a cosigner because the person isn't likely to ___________.  Be ready to pay the loan and have your credit damaged.

Myth 3

• Myth: ___________ ____________, rent-to-own, title pawning, and tote-the-note lots are needed _______________ for lower income people to help them get ahead.
• Truth: These are horrible, greedy rip-offs that aren't needed and benefit no one but the owners of these companies.

Myth 4

• Myth: The ___________ and other forms of gambling will make me ____________.
• Truth: The lottery is a _______ on the poor and on the people who can't do math.

Note:  Texas Tech University did a study on the Texas Lottery and found that people without a high school diploma spent an average of _________ a month playing the lottery.  College graduates spent _________ a month on average.  When studies are done on the lottery, it's always the lower-income ZIP codes that generate the highest revenue on sales.

Myth 5:

• Myth: ____________ payments are a way of life and you'll always have one.
• Truth: Staying away from car payments by driving reliable used cars is what the typical ____________ does.  That is how they became millionaires.

Myth 6:

• Myth: ____________ your car is what sophisticated financial people do.  You should always lease things that go down in value.  There are tax advantages.
• Truth: Consumer Reports, Smart Money magazine and a good calculator will tell you that the car _______ is the most ________ way to finance and operate a vehicle.

Myth 7:

• Myth: You can get a good deal on a _____________ car.
• Truth: A new car loses _________ of its value in the first four years.  This is the largest purchase most consumers make that goes down in value.

On average, a $28,000 car will be worth $8,400 in four years.

Myth 8:

• Myth: I'll take out a 30-year mortgage and pay ______________.
• Truth: Life happens and something else will always seem more important.  Never take out more than a _________ year fixed-rate mortgage.

Myth 9:

• Myth: It's wise to take out an ________ or a ___________ mortgage if "I know I'll be moving."
• Truth: You will be moving when they _______________.

The adjustable-rate mortgage is here to keep the _____________ from losing money.  It transfers the ____________ of higher interest rates to you.

Myth 10: 

• Myth: You need a __________  __________ to rent a car or make ____________ online or by phone.
• Truth: A __________ card does all of that.

Myth 11:

• Myth: I pay my __________ _______ off every month with no annual payment or fee.  I get brownie points, air miles and a free hat.
• Truth: When you use cash instead of plastic, you spend ___________ less because spending cash hurts.

According to carddata.com, U.S. consumers racked up an estimated $51 billion worth of fast food on their personal credit and debit cards in 2006, compared to $33.2 billion one year ago.

Myth 12:

• Myth: I'll make sure my ___________ gets a credit card so he or she can learn to be responsible with money.
• Truth: Teens are a huge ___________ of credit card companies today.

As soon as you get to college, you will receive offers from credit card companies.  About 80% of college graduates have credit card debt before they even get a job.

Myth 13:

• Myth: The home equity loan is good for __________ and is a substitute for the emergency fund.
• Truth: You don't go into ____________ for emergencies.

Myth 14:

• Myth: Debt _____________ saves interest and you get a smaller ________________.
• Truth: Debt consolidation is a _______________.

Debt consolidation saves little or no _______________ because you will throw your low interest loans into the deal.
You cannot ____________ your way out of debt!  _____________ payments equal more _________ in debt.

Myth 15:

• Myth: Debt is a _________________.  It should be used to create prosperity.
• Truth: The _______________ is slave to the lender.

When surveyed, the Forbes 400 were asked, "What is the most important key to building wealth?"  _____________ replied that becoming and staying ________ free was the number one key to wealth building.

The Dangers of Debt

This time of year is notorious for the growth of personal debt -- mostly due to purchasing Christmas presents with credit cards.  Today we will be starting Dave Ramsey's video series on the Dangers of Debt.

Before we begin, answer the following questions:

1. In what ways is it easier, safer, or more convenient to use a credit card instead of cash?
2. What kinds of "rewards" do credit card companies offer customers for using their cards?
3. Why is it important to "Build your credit?"
4. Why are teenagers the number one target of credit card companies?

During [or after] the video, answer the following questions:

1. About how many credit card applications does the average college student receive their first year of college?
2. What does "living paycheck to paycheck" mean?  (70% of Americans are doing it)
3. What is a "paradigm shift"?
4. How has the perception of debt changed since the early 1900's?  (Beginning with the 1910 Sears Catalog example)  How do our great grandparents, grandparents, and parents see debt differently?
5. How did credit cards begin in the 1950's?
6. Approximately how many credit card offers went out last year?  (According to this movie from a few years ago)

And something to think about:

pred·a·tor  

/ˈpredətər/

Noun

1. An animal that naturally preys on others.
2. A rapacious, exploitative person or group.

Maxed Out: Finishing Up

Today we will be finishing up the Maxed Out video and questions.  Next we will briefly discuss the ramifications of credit cards before beginning the next part of the assignment today.

Continue "Maxed Out" Clips & Discussion

Yesterday we watched another piece of the 2006 documentary "Maxed Out" by director James Scurlock.  Scurlock originally set out to make a movie about the crazy spending habits of Americans, but after he started researching the issue and interviewing borrowers, he change his focus to the lending industry and the effects of deregulation.

The Washington Post called this documentary "a matter of life and debt" and sent on to say, "This swift-moving documentary is something all American high school graduates should watch... especially before they head to college and are asked to sign up for credit cards."

The segments we watched this week discussed how the lending industry "sells debt" to companies who go after those who owe them money.  It also covers the tragedy that can happen when people get so deep into debt that they can't see a way out.

In Microsoft Word, answer the following questions (Don't print when finished because we will continue with this tomorrow):

1. What tactics do debt collectors use get people to pay?
2. Why do debt collectors push people so hard?
3. Why do some people resort to pawn shops?
4. Who funds the largest check cashing chain in the U.S.?
5. Do you think lenders are partially responsible for America's debt crisis?  How so?
6. Why does your credit card company want you to be late on your payments?
7. Why do credit card companies want customers who have filed bankruptcy?
8. Why do credit card companies want 18 year old college students?
9. Why don't Senators and Congressmen punish credit card companies for "predatory lending"?
10. Discuss your right to privacy from individuals, corporations, and the Government.

About the Movie:  Answer these on the same page as the previous 10 questions

1. What is your opinion of the movie?  
2. Is it worth showing to students next year?
3. In what ways did the movie change the way in which you look at money?

Maxed Out

Today we will begin watching part of an award-winning documentary called, "Maxed Out". We will be pausing the movie every few minutes to discuss various aspects of the movie as they relate to this class, our experiences, and our future. Please feel free to comment, ask questions, or ask for clarification.

You can rent this movie at local movie stores or, if you have Netflix Streaming at home, you can view it at: http://movies.netflix.com/WiMovie/Maxed_Out/70058892?trkid=496624

An interesting juxtaposition from the opening scene in Maxed Out is this video about the economic collapse of Las Vegas and the drying up of the housing market there.

Guest Speaker: Rihannah Mitchell (WestAmerica Bank)

Today we have a guest speaker (Rihannah Mitchell) from WestAmerica Bank.  I expect everybody to pay attention, ask relevant questions, and be respectful.

The WestAmerica web site is at: https://www.westamerica.com/

Budget: Creating an Excel Spreadsheet

If you're having trouble understanding the coordinates in Excel, try to think of them like a Battleship game:

 In this example, the boat that has been hit is at cell E7.  The boat in the bottom-right corner is at cell J10.

Rows are horizontal... like the rows of a theater.  And they are numbered -- row 3, row 4, etc.

Columns are vertical... like columns in a building.  They are lettered -- column A, B, C, etc.

Next we will open and explore this spreadsheet:  Spreadsheets

• When you open it, go to FILE > MAKE A COPY and save it to your folder to work on.

Looking at Budgets

Today we are having a class discussion about budgets and building a "Hard Times" budget using the absolute minimum amounts for rent, car insurance, food, utilities, etc. We will also calculate monthly income based on a minimum wage and will discuss how tight our budgets might be.

Homework:  Another "Ask Someone Who Knows" assignment where students are to ask someone who owns a house *and* someone who rents an apartment/house for a general budget.  [Forms Will Be Here]

We will be using this data on Tuesday in a spreadsheet, so make sure you get it done.

After Our Discussion

We went with the absolute minimum that we thought we could survive on and these are the numbers we went with:

Monthly Expense	Amount	Explanation
Housing / Rent	$ 400	Studio apt.
Food	$ 100	Eating only Ramen / Mac&Cheese
Car Payment / Insurance	$ 60	No car payment / budget insurance
Gas, Oil & Auto Maintenance	$ 100	Economical car / minimal driving
Utilities (PG&E, Water, Garbage)	$ 150	Basic utilities
Phone / Cell / Internet	$ 35	Cheapest service possible
Cable / Satellite	$ 0	None.
Health Care / Medicine	$ 0	None -- need to regular medication.
Clothing	$ 6	Shirt, pant & budget shoes per year.
Entertainment	$ 10	One event or maybe Netflix.
Pets	$ 0	No pets.
Sundries (TP, Soap, Shampoo, etc.)	$ 50	Budget products (dollar store TP)
Furnishings & Kitchenware	$ 20	The basics (pillows, dishes, pots)
School Expenses	$ 0	No school (or scholarships/grants)
Credit Card Payments	$ 0	No credit cards... EVER.  :)
Child Care	$ 0	Hopefully not yet.
Savings	$ 0	Hard times -- no budget for savings.
Laundry / Dry Cleaning	$ 20	One load per week.
Energy Drinks, Soda & Candy	$ 0	None.

That comes to a total of  $951.00 per month.

So how much can you make working full time (no days off and no vacation days)?

Well, with minimum wage being $8.50 per hour, if you worked full time (40 hours per week) every week for 12 months (no vacations or sick days)... you would make around $1473 per month ($8.50*40*52/12).  But wait... there are taxes and other things (Social Security, Disability, etc.) that come out of your check.  You will likely bring home more like $1105.  That gives you a surplus of $150 each month!  That means if you actually ever want to eat something besides Ramen noodles... or buy a pair of shoes... or pick up a candy bar... you can probably do it.

Remember, though... that things like a flat tire, a car repair, a broken tooth, an injury, breaking your phone, etc. can eat up months of your "extra" money.  The smart move is to put "extra" money into savings for those kinds of emergencies.

The other thing to remember is that you may [some day] want to go out with friends... or see a movie... buy a birthday present... or buy a video game.  That money has to come out of somewhere.

Budgets: The Cost of Living on Your Own

Last week I asked you to interview someone who lived in a house and someone who lived in an apartment to get an idea of how much it will cost living on your own.  Clearly there will be differences based how nice the apartment/house is, whether you are renting or buying, how large it is, and where it's located... but you should have a general idea at this point.  The biggest variations will probably include how people spend their "extra income" -- although quite often answers about these questions are not completely honest.

Collaboration: Today I would like you to sit for a few minutes with another person [who actually did the interview] and compare figures.  Make sure you note the other person's information on your paper.  Discuss the information with them; including why the amounts are different, difficulties you had in getting the information, etc.  After you finish comparing notes, sit with another classmate and compare notes with them.

Discussion: Next we will have a brief discussion to compare overall notes.

Hands-On: Next we will work on our "Hard Times" budget and set some actual numbers down that you learned from your interviews.

Video: Finally we will finish up Dave Ramsey's Savings (Part III).

Savings: Part II & III

Do you think people who make more actually save more?  Think again.  Harris Interactive conducted a survey for CareerBuilder.com [November/December 2006] of 6,169 full time adult workers.  The survey, according to a Reuters news release, found that 19% of workers who make over $100,000 live paycheck to paycheck.

Today we are continuing with our lesson on Savings.  You should continue your Microsoft Word document from yesterday.

  1.  You should save money for three basic reasons:

• ___________________
• ___________________
• ___________________

EMERGENCY FUND

  2.  _________________ are going to happen.  Count on it.

  3.  Baby Step 1, a beginner emergency fund, is __________________ in the bank (or $500 if your household income is below $20,000 per year).

  4.  Baby Step 3 is a fully funded emergency fund of __________ of expenses.

  5.  A great place to keep your emergency fund is in a __________ ___________ account from a mutual fund company.

  6.  Your emergency is NOT an _____________, it's ______________.

  7.  Do not ______________ this fund for purchases.

  8.  The emergency fund is your ______________ savings priority.  Do it quickly!

  9.  The second thing you save money for is ______________.

PURCHASES

  10.  Instead of __________ to purchase, pay cash by using a __________ __________ approach.

  11.  What is the average monthly car payment in the U.S.?

After the video is over, take a few minutes to answer the following questions:

  12. What is a "sinking fund"?

  13. Why isn't "90 days same as cash" really "the same as cash".

Knowledge of the importance of an Emergency Fund has been around for centuries.  Consider the quote:

"In the house of the wise are stores of choice food and oil, but a foolish man devours all he has." -- Proverbs 21:20

WEALTH BUILDING

  14.  The third thing you save money for is __________ __________.

  15.  _____________ is a key ingredient when it comes to wealth building.

  16.  Building wealth is a __________________, not a sprint.

  17.  Pre-___________________ (PACs) withdrawals are a good way to build in discipline.

  18.  __________ ___________ creates a mathematical explosion.  You must start _________.

After the video is over, take a few minutes to answer the following questions:

  19.  Discuss the idea of "Wants vs. Needs" in a short paragraph.

  20.  Discuss why someone who put less money into savings ended up with almost a million dollars more than someone who put in more money for more years.

Why worry about what "might" happen?  Consider the quote:

"If you do the things you need to do when you need to do them, then someday you can do the things you want to do when you want to do them." -- Zig Ziglar

Save your assignment, print it out, and turn it in to the box.  

Type Results of Interviews

Last week [or was it the week before?] your homework was to interview four people about spending money and living on their own. Everybody should have been able to find and interview at least 3 of the 4 people on the list by now.

Your assignment today is to write a standard 5-paragraph essay using the material you gathered in your interviews.  You should have an introductory paragraph, three body paragraphs, and a conclusion paragraph.  Discuss what you learned: living on your own, differences among age groups, and spending habits.

Remember that I am interested in what YOU think and feel about what you learned as much as I am the data itself.  Something that sets you apart from everybody else in this class is that only you know what you think and feel.

PLEASE put some real thought into this essay.  I appreciate intelligent thoughts, interesting data, and funny anecdotes.

Tomorrow we will be talking about budgets, so make sure your Interview about personal budgets is done.

Banking: Recollections of Pine Gulch

Today we will be reading a fictional story about how a "bank" started in California during the Gold Rush (1849).  While it's fictional, it does a good job of explaining how banks work, why our printed money is so complex, how loans work, etc.

The story is located here: http://pinegulch.blogspot.com

After reading the story, answer the following questions:

1. Why was there a demand for Slim's services in Pine Gulch?  
2. How did Slim use this demand to create a monetary system for the town?
3. Why was it important for Slim to go to San Francisco to get the ink and paper to write the receipts?  
4. Why did the people of Pine Gulch accept these receipts as currency?
5. How did Slim increase the money supply in Pine Gulch?  How did he decrease it?  Who benefited from this practice?
6. Why did Slim have to leave town after Big Bart shot him?
7. How did Slim become one of the richest men in Pine Gulch?
8. Did this story change your understanding of how money or banking works?  Explain.

When finished, print and turn in your responses.

The History of Money

As we have been discussing banking and reading the Recollections of Pine Gulch story, we have touched on the topic of "What did we really use before we had money?"  The first response is usually, "gold" but there have been many other "standards" for monetary systems.

Barter	The first people didn't buy goods from other people with money. They used barter. Barter is the exchange of personal possessions of value for other goods that you want. This kind of exchange started at the beginning of humankind and is still used today. From 9,000-6,000 B.C., livestock was often used as a unit of exchange. Later, as agriculture developed, people used crops for barter. For example, I could ask another farmer to trade a pound of apples for a pound of bananas.
Shells	At about 1200 B.C. in China, cowry shells became the first medium of exchange, or money. The cowry has served as money throughout history even to the middle of this century.
First Metal Money	China, in 1,000 B.C., produced mock cowry shells at the end of the Stone Age. They can be thought of as the original development of metal currency. In addition, tools made of metal, like knives and spades, were also used in China as money.  From these models, we developed today's round coins that we use daily. The Chinese coins were usually made out of base metals which had holes in them so that you could put the coins together to make a chain.
Silver	At about 500 B.C., pieces of silver were the earliest coins.   Eventually in time they took the appearance of today and were imprinted with numerous gods and emperors to mark their value. These coins were first shown in Lydia, or Turkey, during this time, but the methods were used over and over again, and further improved upon by the Greek, Persian, Macedonian, and Roman empires. Not like Chinese coins, which relied on base metals, these new coins were composed from scarce metals such as bronze, gold, and silver, which had a lot of intrinsic value.
Leather Currency	In 118 B.C., banknotes in the form of leather money were used in China. One-foot square pieces of white deerskin edged in vivid colors were exchanged for goods. This is believed to be the beginning of a kind of paper money.
Noses	During the ninth century A.D., the Danes in Ireland had an expression "To pay through the nose." It comes from the practice of cutting the noses of those who were careless in paying the Danish poll tax.
Paper Currency	From the ninth century to the fifteenth century A.D., in China, the first actual paper currency was used as money. Through this period the amount of currency skyrocketed causing severe inflation. Unfortunately, in 1455 the use of the currency vanished from China. European civilization still would not have paper currency for many years.
Potlach	In 1500, North American Indians engaged in potlach, a term that describes the exchange of gifts at banquets, dances, and various rituals. Since the trading of gifts was so important in figuring the leaders’ community status, potlach went out of control as the gifts became more extravagant in an effort to surpass others' gifts.
Wampum	In 1535, though likely well before this earliest recorded date, strings of beads made from clam shells, calledwampum, are used by North American Indians as money. Wampum means white, the color of the clam shells and the beads.
Gold Standard	In 1816, England made gold a benchmark of value. This meant that the value of currency was pegged to a certain number of ounces of gold. This would help to prevent inflation of currency. The U.S. went on the gold standard in 1900.
Depression	Because of the depression of the 1930's, the U.S. began a world wide movement to end tying currency to gold. Today, few nations tie the value of their currency to the price of gold. Other government and financial institutions now try to control inflation.
Today	At present, nations continue to change their currencies. For example, the U.S. has already changed its $100 and $20 banknotes. More changes are in the works.
Tomorrow	Tomorrow is already here. Electronic money (or digital cash) is already being exchanged over the Internet.

*Based on NOVA Online's the Secrets of Making Money, "The History of Money."  See also Glyn Davies' History of Money from Ancient Times to the Present Day.

There is a video on YouTube which does a fair job of describing how banking was started, although it is very Euro-centric.  You can find it here: http://www.youtube.com/watch?v=D0IJCGuNtqk

Another cute cartoon of how money came about can be found here -- although it rushes through some of the important changes: http://www.youtube.com/watch?v=TLVoV6gK8mE

Personal Finance Lessons That Should Be Taught in High School

by Guest Contributer to Money Q&A

The following is a guest post from Briana Myricks who writes at her blog, How’s Married Life?

High school teachers emphasize preparing for the real world, but in reality, how many of the things you learned in high school do you use today? Has The Scarlet Letter been mentioned at any time outside of a classroom? Do you utilize your US history lessons when it’s not an election year? Besides knowing what H20 means, what elements do you remember from chemistry class?

Part of a valuable high school education should include things you will definitely experience in the real world. One subject that should be taught is personal finance, as that’s something that can be used even before a student graduates. Since personal finance is such a broad subject, what topics specifically should be taught in high school?

How to balance a checkbook: Even though checkbooks and ledgers are going a little out of style with the use of debit cards and online banking applications, students should know how to balance a checkbook. This essential step is all about knowing how much money you have, especially after making a deposit or a purchase. Once a student gets the hang of balancing a checkbook, they have a better grasp of what money management is.

How to save for an emergency fund: High school students love to live in the moment, so very few of them actually think about something happening in the future. Learning about saving for an emergency fund is very important, as it will give them a head start for saving. They should know what constitutes as an emergency, which is something even some adults have a hard time grasping.

How to set up a budget: Budgeting is going to be important, no matter how old someone is. Learning to set up a budget includes knowing your expenses and your income, and ensuring the two will leave you in the positive, or at least breaking even. Without a budget, you have a disconnect as to what you may be spending and paying for. Setting a budget, even when you’re in high school, helps you keep track of how much disposable income you have after your expenses are paid for.

Investing basics: When you hear from the experts, many of them emphasize that it’s never too early to start investing. When students learn the basics about what’s included in investing and how to do it, it may spark their interest to look into it further, or give them a general idea of it if they ever become interested in it later on in life.

Insurance basics: High school students may have heard about car insurance or phone insurance, but again, there’s a disconnect to it since they usually don’t pay for it. It’s important that they learn what insurance is, how it works, and what it can be used for. There’s no doubt they’ll need to know about things like deductibles, and it could be sooner than later that they need the knowledge.

How to manage credit: Once students graduate from high school and go off to college, that’s a time where they become vulnerable to credit card companies, and when many students find themselves discovering debt. Teaching them ahead of time, before they rack up debt, is extremely important. Students need to know what credit is, how to look for interest rates, and learn the importance of paying back the money they borrowed in a timely manner.

These lessons are sometimes learned the hard way in adulthood, but if personal finance is included in high school curriculum, students can avoid the hard lessons.

Why is Personal Finance an Important Class?

As you have probably heard me say many times, I truly believe that "Life Skills and Personal Finance" is the single most important class you will ever take in high school.  It demonstrates principles of spending, saving, and money management as well as career research and planning and preparing you for living on your own.

Some of the major components of this course include:

• Professional Portfolios: Our first portfolio check was last week.
• Personal Finance: We will be working through budgeting, spreadsheets, etc. and will begin a series of videos by Dave Ramsey, a nationally syndicated financial planning expert. We will also be working through a banking simulation unit using checks, ATM cards, etc.
• Life Skills: These will include renting an apartment, buying a car, looking for roommates, dealing with babies, handling stress, exploring college choices, etc.

Today will be watching a few short video clips by Dave Ramsey.

Before we begin, let's quickly discuss the following:

1. About what percentage of marriages end in divorce? 
2. What is the number one cause for divorce in America?
3. What is the number one cause for male suicide in America?

[Watch: GETTING STARTED > ORIENTATION]

Before the next video let's discuss the following:

1. "Griffs financial experience." or... "Why you should listen to me."
2. "I wish someone had told me..." or... "What would you tell yourself if you could go back in time?"

[Watch: GETTING STARTED > DAVE'S PERSONAL TESTIMONY]

Before watching the next video, let's discuss the following:

1. Have you ever played a game with someone who didn't tell you the rules?
2. Ever have someone change the rules while you were playing because you didn't know any better?
3. Would you like to play a game where those you were playing the game with knew the rules better than you did?
4. How likely is it that you could win a game you didn't know how to play?

This video clip from the movie "Stripes" demonstrates this point:

While watching the next video [Chapter 1: Savings - Part 1] answer the following questions in Microsoft Word -- but don't print yet.  We will continue next week.  (Let me know if we need to pause for a moment or if you have a question.)

1. The best way to become a millionaire is _____________.
2. Baby Step 1 is __________ in an emergency fund.  
3. If you make under $20,000 a year, put ____ in an emergency fund.
4. ___________ must become a priority.  Always pay ________ first.
5. What country saves the most money?
6. The United States has a _________ savings rate.  Which means we are __________ more than we ____________.
7. Saving money is about __________ and ____________.
8. Money is __________________.

Next Week:  Remember the bring in the "Ask Someone Who's Been There" (4 people) page and the "Ask Someone Who Knows: Budget Questions" by Tuesday.