AN INTRODUCTION TO
BASIC FINANCIAL PRINCIPLES
Presented by:
Sis. Valerie B. Young, M.S.
SEMINAR OUTLINE
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INTRODUCTION TO FINANCIAL MANAGEMENT
BASIC BUDGETING
HOW CREDIT AFFECTS FINANCIAL HEALTH
NET WORTH VS. INCOME
REAL ESTATE
SAVINGS/RETIREMENT PLANNING
INSURANCE
Q&A
INTRODUCTION
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What is financial management?
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Why is financial management important?
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Financial management involves handling your financial situation in
a responsible manner in order to achieve financial independence.
The decisions you make regarding your personal finances affect
many aspects of your life, as well as the lives of your family.
Wealth and poverty (defined)
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Wealth is defined as an abundance of valuable material
possessions or resources (i.e., your money works for you, you do
not have to work for your money).
Poverty is defined as the state of being poor or having a lack of the
means of providing material needs or comforts (not the same as
being “broke”).
PRINCIPLE # 1 – YOU MUST WORK
(I Tim. 5:8; II Thess. 3:10)
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God expects us to work. It does not matter what
type of job we have, all that matters is the effort
we place into our job, and how we behave while
on the job (i.e., displaying integrity).
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The provider of a home should work diligently to
provide adequately for themselves, as well as
their family.
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When we do this, we will be in a better financial
position to help others, as well as ourselves.
PRINCIPLE # 2 – A BASIC BUDGET IS
ESSENTIAL TO YOUR FINANCIAL HEALTH
(Prov. 27:23; Luke 14:28-30)
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A budget is a practical way of analyzing your current
spending. Preparing a budget will help you to
determine if your money is being used in an
appropriate manner.
Creating a basic budget requires three steps:
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Identifying how you currently spend your money;
Evaluating your current spending, and setting goals that take
into account your financial objectives; and
Tracking your spending to make certain it stays within those
guidelines.
BUDGETING TIPS
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Your budget should be tailored to your specific needs, values, and
priorities, with special consideration given to personal goals.
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It is important to be realistic when establishing spending categories
and quarterly expenses.
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Let your budget determine your discretionary income (money left over
after living expenses) before you decide to pursue additional
installment debt.
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Keep your records simple.
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Remember, you are the only one who can maintain your budget.
Making purchases without careful thought and planning can (and will)
destroy your spending and savings plan.
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Do not panic if your expenses exceed your income. It may be
necessary to revise your budget by reducing spending as much as
needed. If your expenses are less than your income, you should begin
allocating funds for future goals.
PRINCIPLE # 3 – MAINTAINING GOOD CREDIT
IS ESSENTIAL TO YOUR FINANCIAL HEALTH
(Ps. 37:21; Prov. 22:1)
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Credit is the amount of money that is available to you by lenders.
Credit is a “promise to pay.”
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Your credit score identifies the risk associated with extending you
services. A computer-generated mathematical calculation of this
information appears on your credit report (commonly known as your
“FICO Score”). The lower your credit score, the higher the interest rate.
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A credit score is comprised of the following:
– Payment History (35%)
– Amounts Owed (30%)
– Length of Credit History (15%)
– New Credit (10%)
– Types of Credit Used (10%)
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There are three credit bureaus:
– Experian, Trans Union, and Equifax
– It is important to note that not all bureaus have the same
information. Thus, your score can different with each credit bureau.
MAINTAINING GOOD CREDIT
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Having good credit should be important to everyone, it can help you to:
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Obtain a home mortgage
Rent an apartment
Finance a vehicle
Obtain/Maintain employment
Set up utility accounts
It is also important to maintain good credit. The following steps will ensure that your
credit rating remains positive:
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Making payments on time
Not overextending yourself
Paying what you owe
Avoiding “impulse” purchases
Reviewing your credit report regularly for inaccuracies
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The Fair Credit Reporting Act requires each of the nationwide consumer reporting
companies to provide you with a free copy of your credit report, at your request, once
every 12 months. To order, visit annualcreditreport.com or call 1-877-322-8228.
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You are also entitled to a free credit report if you have been denied credit due to
something on your credit report.
MAINTAINING GOOD CREDIT
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Factors to considering when choosing credit:
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What is the interest rate? Does it change based on credit history?
Is there a grace period?
Are there additional charges (i.e., annual fees)?
What are the penalties for late payments?
How to improve your credit rating:
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If you have had financial difficulties that have negatively impacted
your credit rating, do not despair. You can take steps to improve
bad credit. While you cannot erase bad credit, you can replace it
with good information.
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Obtaining a secured credit card is one of the best ways to improve
your credit rating. Many credit card issuers will offer you a secured
credit card regardless of how poor your credit might be. These
credit cards require individuals to deposit a certain amount of
money as collateral, but once an individual has demonstrated a
good payment history, he/she will normally qualify for a unsecured
credit card.
PRINCIPLE # 4 – A POSITIVE NET WORTH IS
ESSENTIAL TO YOUR FINANCIAL HEALTH
(Deut. 8:18)
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Net worth is defined as the total value of everything
you own (assets), minus the total value of everything
you owe (liabilities).
Salary is defined as the regular wages received by
an employee from an employer on a weekly,
biweekly, or monthly basis.
To date, Black Americans have a median net worth
of $5,998 (compared to $88,651 for Caucasian
Americans), and 32% of Black Americans have a
zero or negative net worth. (Source: The Covenant)
NET WORTH
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Why understanding your net worth is important:
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Most people feel that if he/she is making “good money” then
they are doing fine. However, if a family member were to
lose his/her job, or someone were to become ill, there are
often no resources to pull from.
The benefits of knowing your net worth:
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You will know your current financial state
You will have a clear picture of your assets, as well as debts
You will be better able to ensure that you have adequate
insurance
It will provide you with a concrete figure by which to track
your wealth
NET WORTH
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Strategies for increasing net worth:
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Understand the difference between appreciating
(assets that increase in value) and depreciating
assets (assets with finite lives that lose value over
time)
Invest in real estate
Reduce debt
Increase savings
NET WORTH
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Assets that will likely appreciate:
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Real estate properties
Savings accounts
Investments
Cash value in life insurance policies
“Assets” that will definitely depreciate:
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Vehicles
Clothes
Cash (i.e., $100 today will only be worth approximately
$94.00 next year due to the “time value of money”)
VEHICLES – A DEPRECIATING “ASSET”
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Why should you consider purchasing a “pre-owned”
vehicle?
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Today, late-model used cars are not only a safe buy, they
also make good financial sense. Buying used enables you to
avoid the heaviest depreciation hit.
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More and more manufacturers offer "certified pre-owned"
programs. Cars sold as certified pre-owned (CPO) bridge the
gap between new and used. They are subject to a rigorous
inspection and repair process, and usually are covered by a
warranty from the manufacturer. CPO cars usually cost more
than other used cars, but the added warranty and peace of
mind make them a good value.
VEHICLES – A DEPRECIATING “ASSET”
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We will now look at some popular luxury vehicles, and how
they depreciate:
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2006 Land Rover Range Rover HSE
 MSRP - $74,285
 1st year depreciation $22,004
 2nd year depreciation $7,343
 1st year opportunity cost* - $1,061
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2007 Cadillac Escalade ESV
 MSRP - $59,175
 1st year depreciation $18,465
 2nd year depreciation $3,855
 1st year opportunity cost $904
*Opportunity Cost is the cost of something in terms of an opportunity foregone (and the
benefits that could be received from that opportunity).
VEHICLES – A DEPRECIATING “ASSET”
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2007 GMC Yukon XL Denali All-Wheel Drive
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MSRP - $49,970
1st year depreciation - $12,225
2nd year depreciation $3,827
1st year opportunity cost - $725
2007 Lexus GS 450h Sedan
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MSRP - $54,900
1st year depreciation - $10,087
2nd year depreciation - $5,584
1st year opportunity cost - $773
VEHICLES – A DEPRECIATING “ASSET”
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Now let us look at some popular mid-range cars, and
how they depreciate:
– 2007 Toyota Camry LE V6
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MSRP - $23,340
1st year depreciation - $4,051
2nd year depreciation - $2,280
1st year opportunity cost - $403
2007 Toyota Corolla LE
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MSRP - $15,415
1st year depreciation - $2,268
2nd year depreciation - $1,577
1st year opportunity cost - $305
PRINCIPLE # 5 – INVESTING IN REAL ESTATE
CAN IMPROVE FINANCIAL HEALTH
(Luke 14:28-30)
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The advantages of home ownership:
– Building equity
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When you purchase a home, (unless you have an interest-only
mortgage) every monthly mortgage payment you make contributes to
your equity—your actual ownership of that home.
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A portion of your monthly payment is allocated to paying down the
principal on your loan (the base amount for which you took out your
home loan), while the balance goes toward interest and escrow items
(such as your home insurance and taxes).
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The longer you own your home, the larger the portion of each month’s
payment that is applied to your principal—and the greater your equity.
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However, when you rent, you never build equity. When you leave your
apartment or rental home, you have no ownership stake in that
property whatsoever.
INVESTING IN REAL ESTATE
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The advantages of home ownership:
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Tax advantages
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The federal tax code offers many advantages to
homeowners that are not available to people who rent.
First among these advantages is the homeowner’s ability
to write off their mortgage interest. During the first
several years of home ownership, this tax deduction can
total thousands of dollars.
As a property owner, you will also be required to pay
property taxes. These property taxes are generally
deductible from your personal income taxes.
INVESTING IN REAL ESTATE
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The advantages of home ownership:
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Appreciation
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In general, the value of your home will increase over time.
Historically, homes in the United States have appreciated
(gone up in value) around 5% each year.
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Of course, homes do not always go up in value. Several times
in the last 50 years, the American housing market has actually
declined. When interest rates rise sharply, mortgage rates also
rise, causing people to be less likely to want to buy homes.
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Even though these “bust” cycles can be painful, homeowners
who hold on to their properties for 5 or 10 years almost always
see their homes appreciate in value.
INVESTING IN REAL ESTATE
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Types of mortgages:
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Fixed rate mortgage
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These loans have an interest rate that is fixed for the life
of the loan, and a monthly payment that stays the same.
Adjustable rate mortgage (ARM)
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ARM Loans offer the opportunity to take advantage of a
changing market. The interest rate on an ARM loan
varies periodically as interest rate conditions change.
Because the interest rate fluctuates, the initial rate on an
ARM is lower than a fixed rate mortgage.
INVESTING IN REAL ESTATE
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Balloon mortgage
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With a balloon mortgage, borrowers get lower rates and payments for
a specific period, usually anywhere from 3 to 10 years. At that point,
the borrower must pay off the principal balance in a lump sum. Under
certain conditions, the mortgage can be converted to a fixed or
adjustable rate mortgage.
Interest-only mortgage
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A mortgage is “interest only” if the monthly mortgage payment does not
include any repayment of principal for some period, such as 5 years.
During that period, the loan balance remains unchanged. At the end of
that period, the payment is raised to the fully amortizing* level. In such
case, the new payment will be larger than it would have been if the loan
had been fully amortizing at the outset. The longer the interest only
period, the larger the new payment will be when the interest only period
ends.
* Amortization is the process of paying off a loan through specifically
structured periodic payments.
INVESTING IN REAL ESTATE
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Subprime mortgage
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These days, even individuals with less-than-stellar credit can
purchase a home – as long as they are willing to accept higher
interest rates, and agree to more difficult terms. Subprime
mortgages are usually one to six points over the prime rate.
Black Americans are 3.6 times as likely as non-minorities to
receive a subprime mortgage, and 4.1 times as likely as nonminorities to receive a refinance loan through a subprime
lender. (Source: The Covenant)
You can avoid subprime mortgages through special home
buyer programs such as NACA
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NACA is a nonprofit corporation whose goal is to stabilize
neighborhoods and maximize homeownership opportunities for
working people and families. For more information, visit
naca.com.
INVESTING IN REAL ESTATE
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How much can I afford?
As a rule of thumb, most lenders will qualify you for a loan that has
a total monthly payment between 28% to 36% of your gross
monthly income (in other words, your income before taxes).
For example:
Your yearly salary:
Your gross monthly income*:
Gross monthly income x 28%
Gross monthly income x 36%
$40,000
$3,333
$933
$1,200
Therefore, as a rough estimate, for a person making $40,000 a year, their
lender will likely qualify them for a loan with a monthly payment in the $933
to $1,200 range.
Assuming a 6% interest rate and 30-year mortgage, this homebuyer could
qualify for a home priced between $142,000 and $183,000.
------------------------------------------* $40,000 divided by 12
INVESTING IN REAL ESTATE
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A Home Equity Loan uses a portion of the value of
your primary residence, above what you owe on your
existing mortgage, as security for a loan. Home
Equity Loans allow you to:
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Receive your money in one lump sum; and
Pay it back in fixed principal and interest
payments over a fixed period of time.
A Home Equity Loan often makes good sense if:
– You need a set amount of money for a specific
purpose, such as an addition to your home.
INVESTING IN REAL ESTATE
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A Home Equity Line of Credit is a form of revolving credit in which your home
serves as collateral, with a Home Equity Line of Credit, the individual:
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Receives an established credit limit with a variable interest rate that you can
access with checks and sometimes a credit card;
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The individual is given a set period of time, known as the draw period,
during which he/she can draw on their line of credit; and
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The lender may include the option to renew your credit line when the draw
period expires.
A Home Equity Line of Credit often makes good sense if:
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You want to have money available for different reasons over a long period
of time
CAREFUL consideration should be taken with either option. If you fall behind in your
payments, you are putting your house at risk!
INVESTING IN REAL ESTATE
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Cautions about these types of loans:
– Watch out for low introductory rates, especially on revolving credit
lines. Your loan rate may start at 6 percent, but 4 months later
increase to 12 percent. The loan rate may be variable, based on
the prime rate in the future. Many variable rate loans have no cap
on how high the interest rate may go. Consumers should avoid
loans without "caps" or with "caps" higher than they can afford to
pay, no matter how low the current rate.
– Watch out for points and closing costs that could total several
hundred dollars.
– Watch out for balloon payments. If you cannot pay the balloon,
you may lose your home.
– Also, beware of loans packed with unnecessary or expensive life
insurance, property insurance, or credit insurance. Buying credit
or disability insurance cannot be made a condition of getting a
loan. Property insurance can be required, but can always be
purchased through your own insurance company.
PRINCIPLE # 6 – SAVING AND RETIREMENT-PLANNING
IS ESSENTIAL TO YOUR FINANCIAL HEALTH
(Prov. 6:6-8)
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As a good steward, it is your responsibility to
not only address the short term financial
needs of your household, but the long term
financial needs as well.
First, it is important to understand the
difference between the “saving” and
“investing”. Saving money merely means to
put it aside as a reserve. However, investing
money means to commit the funds to a
financial vehicle in order to earn a financial
return.
SAVING AND RETIREMENT-PLANNING
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Why save money?
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To build a strong financial foundation (saving):
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A strong financial foundation is designed to take
the anxiety, pressure, and stress out of personal
money management. It places a buffer between
you and danger. A strong financial foundation
should be established in order to deal with the
inevitable, unexpected, and negative financial
events in life.
SAVING AND RETIREMENT-PLANNING
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To build a strong financial future (retirement planning):
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Now more than ever, saving for retirement has become
extremely important. With the average life expectancy in the
U.S. increasing, and a large population of Baby Boomers
currently approaching retirement age, Social Security may not
be enough to support you through your retirement years.
Regardless of your age, now is the time to start building your
nest egg in order to maintain a comfortable lifestyle throughout
your retirement.
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The need to build a strong financial future is a reality that we
all must face. Once your financial foundation is established,
you should then start working on your financial future.
SAVING AND RETIREMENT-PLANNING
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To save money, you must do one of two things, or a combination of
both:
 Limit your lifestyle
 Increase your income
What should I do with the money I save?
 For short-term savings, open a savings account
– Internet banks (such as ING) offer better rates than
“traditional” banks
 For long-term savings (retirement planning), consider the
following:
– Company-sponsored 401(k), 403(b), TSP
– Individual Retirement Account (IRA)
– Annuities
PRINCIPLE # 7 – OBTAINING INSURANCE IS
ESSENTIAL TO YOUR FINANCIAL HEALTH
(Prov. 27:1; Prov. 27:12)
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Life is filled with uncertainties, and we are all required to take
risks daily. The purpose of insurance is to allow individuals to
transfer the unacceptable risk of loss to someone else (the
insurance company).
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It is important to determine the risks that you and your family
face in order to make an informed decision about insurance.
You must decide whether to insure some risks (through
obtaining insurance), or depend on your own resources to
cover those risks (self insure).
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The unknown CAN happen. Catastrophic losses DO occur.
Even the best financial plan can fail if it does not consider risks
such as death, disability, personal liability, and loss or damage
of substantial assets.
QUESTIONS??
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THANK YOU!!
…ABOUT THE PRESENTER
Sis. Valerie B. Young, M.S. is a financial advisor,
specializing in business and personal financial
management. She obtained a Bachelors of Science
degree in Marketing from Morgan State University in
1996, and a Masters of Science degree in Business
Management from The University of Maryland,
University College in 2006.