Before Debit Cards

Before the 21^st century, if you wanted to buy groceries or visit the mall, you had 4 options that you could use to pay, all of which had their own drawbacks: Cash, checks, credit cards, and short-term financing.

Cash is always reliable to make a purchase, but is prone to being lost or stolen. Not all shops accept checks, both because they are inconvenient to cash, and because of the ease of check fraud (writing a check for which you do not actually have the bank deposits to pay). Credit and short-term financing both include financing charges, so using these methods usually made purchases more expensive.

Between cash and checks, most people carried an ATM card, which could be used at ATM machines to withdraw cash and check bank balances on the go. Since most people already had these cards, many convenience stores installed ATM machines right near their cash registers, so customers could withdraw cash directly ahead of making a purchase. This meant many stores could eliminate the need to accept checks or credit cards (which also include transaction fees to the businesses for each purchase), and just have all customers use cash, without requiring them to carry it all day.

The Birth of Debit

This system began in the 1970’s, when the first ATM machines were invented, and still continues today in some older convenience stores that have not adopted their own card readers. However, in the 1980’s and 1990’s, some bigger grocery stores and other chains began integrating the ATM system directly in to their checkout system. This allowed “ATM” purchases – allowing customers to make payments directly from their bank account, without relying on paper checks. This system is called “online debit”, since every time you make a payment, the debit card reader validates the purchase immediately against your bank balance and executes the transaction.

This system was popular (and is still in place today), but there was one piece missing – stores around the world already accepted credit cards, and the process of integrating ATMs with the checkout system was costly. To get around this last hurdle, banks that issued ATM cards began working directly with credit card issuers to build the modern Debit Card – an ATM card that can also process payments anywhere credit cards are accepted. This type of payment, called “offline debit”, works differently – instead of validating the transaction immediately, transactions are validated in batches by the credit card companies (usually within 1-2 days).

Online and Offline Debit

Online debit works almost instantly – if you have a mobile app for your checking account, you will probably see the funds get deducted from your account a few minutes after a purchase has completed. Offline debit does not work quite as fast. Instead of immediately deducting the funds, the credit card processor usually puts a “hold” on your account for the purchase amount, then actually deducts the payment a few days later.

Because of this delay, you should still always keep a record of all your debit purchases – otherwise you could accidentally overdraw based on just a quick check of your bank balance.

Sometimes you will have the option to pick which transaction you want – if a card reader asks “Debit or Credit” for your card, the “Debit” transaction is typically online, while the “Credit” option is typically offline.

Debit Limits and Fees

Debit cards work similarly to credit cards when you want to buy something, but the fees work very differently. Credit cards make their money by charging interest on borrowed amounts, they usually do not charge customers for each transaction (or limit the number of transactions you can make).

Debit cards use your already existing bank balances, so you won’t get interest charges, but banks do still charge to use them.

Typical debit cards issued to young people might have a few different kinds of charges:

• Account Fees – this would be a fee charged for having your checking account. This fee will usually go up or down depending on your checking account type – account types that give you more flexibility with your debit card are usually more expensive
• Usage Limits – your bank may limit the number of times you can use your debit card per month (which can be as low as 10 transactions). If you go over this limit, you will typically be charged a fee per transaction.
• Overdraft fees – Overdraft fees happen when you spend more on your debit card than you had in your checking account. Your checking account may or may not allow overdraft – you can choose to opt in or opt out. If your account does not allow overdraft and you attempt to make an “online debit” transaction, the transaction will be declined.

Pop Quiz

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Challenge Questions

1. How is a debit card and credit card different?
2. How might using a credit card at an ATM be different than using a Debit card?
3. How do you know if some ATM machines charge for their services.
4. List 5 places where an ATM is located near to where you live.

Beginners trying to tackle their personal finances for the first time see debt as sort of a “boogeyman,” a specter that looms overhead, trying to trap people into inescapable cycles of minimum payments and late fees. Or at the very least, something to be avoided whenever possible.

Deep down, we all know this is not really the case. Having a healthy amount of debt is almost an essential part of growth but taking on lots of small debts frequently can also be very dangerous to your bottom line.

Distinguishing Good Debt from Bad Debt

When we talk about “good debt”, it usually refers to debt that was taken on to help advance your future income or increase your net worth. Bad debt, on the other hand, is debt that is taken on with no real long-term gain.

Examples of Good Debt

Good debt can include things like

1. Student loans to get a new degree or certification that improves your job prospects
2. A mortgage on a house
3. Refinancing a loan on your house for home improvements
4. A car loan
5. Short-term credit card debt

In all of these cases, the debt is taken on to serve some specific purpose. A student loan to pay for education is a long-term investment in making yourself a higher income earner. Taking out a mortgage to buy a house can greatly increase your net worth in the long run, and mortgage payments can frequently be lower than rental payments.  Refinancing your home means taking out a loan based on the equity you have built up through past payments.  This can allow you to reduce your interest rates or to finance home improvements that can make your home more valuable before selling it. Car loans can greatly increase your job prospects by providing a flexible transportation option.  Short-term credit card debt can be beneficial to your current financial situation, depending on your bank fees and credit card perks.

When Good Debt Goes Bad

All of the examples above are examples of debt taken on for exactly the right reasons.  But this debt can still turn bad, becoming burdensome to your personal financial situation.

1. You may drop out of school or not finish your degree, but you are still responsible for repaying your student loan
2. The interest you pay on your home mortgage may be greater than the property’s increase in value over the course of the loan
3. You may refinance your home loan at a less favorable interest rate
4. You may take out a car loan and end up with a car in constant need of repairs
5. A crisis may hit, causing you to make purchases that increase your credit card balances

All of these transformations can happen with little notice, but good financial planning helps you identify the risk before you take on debt and helps you plan for when things go wrong.

Identifying Risk

Identifying risk before taking on debt is an exercise in financial planning – looking at what you are expecting and determining the chances that something might go wrong. Other lessons in this course will provide more details on how to identify certain types of risk, but here are some of the factors to look for in the debt we have covered in this lesson.

Student Loans

Before choosing what to study or your specific career path, make a list of your top 5 areas of interest.  Then research jobs in each of those fields.  Look for answers to questions such as “How much does each job pay?” and “How much competition will there be in this job field when I am ready to apply?”.  This simple exercise can help you visualize not just what you need to do to succeed in each of these desired paths, but it will also help you determine how likely taking on this debt is going to pay off.

Home Mortgages

Before you decided to buy a home, there are many questions you need to answer.  How long do you plan on living in this home?  Five years or 30 years?  How have property values changed in this area over time?  How do property values in this location line up with the property market as a whole? If you lose your job, how long can you keep paying the mortgage? Remember that when you are renting, it is much easier to move somewhere cheaper than it will be to try to sell your home.

Refinancing A Loan

Before you refinance a home loan, carefully consider how much you need that loan. Refinancing for a better interest rate is usually a smart move, but investing in home improvements can be trickier. Will those home improvements increase the value of your home when it’s time to sell?  It is not a good idea to refinance a mortgage just to deposit the cash in your bank account, but if you have other debts that need to be paid, the cash acquired through refinancing can help. 

Keeping Your Debt Good

How can you keep your debt from turning bad?

The key is being able to look realistically at your potential purchase and try to remove emotions from the decision. Is this debt something that will really help your position in the long run? If yes, take time to make an itemized list of the potential risks so you are thinking ahead.

Next, evaluate how taking on this debt will impact your budget or your spending plan. Long-term debt is considered a “fixed need” while short-term credit card debt is a “variable need.”

If all of this sounds like a lot of work before making a purchase, you’re right. It is! Taking on debt is something to always carefully consider.  Debt will make a significant dent in your ability to meet your other financial goals.

If you are in control of your personal finances, you will likely have good debt taking up a sizable piece of your monthly spending. As long as you can afford this debt, making on-time payments regularly, you will feel good about the progress you are making in improving your self-worth.  But if things start to get out of control in your life, you might find your good debts turning bad.  If this happens, find a way to resolve them as quickly as possible.

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Challenge Questions

1. In your own words, explain the difference between good debt and bad debt.
2. How might good debt become bad debt?
3. How can emotions cause you to increase your debt?
4. When refinancing homes, what risks should people be aware of?
5. Are there ways in which people can take to minimize their debt?

Automatic Payments – Blessing Or Curse?

That title may be a bit hyperbolic – Automatic Bill Payments can be a huge time saver, and do help make sure your bills get paid on time (avoiding late fees and general headaches). This does come at a price, though – when your bills are automatically paid, you may not always have a receipt on hand, or realize exactly when the payment processes.

This can wreak havoc on your planning processes and account reconciliations, and can be especially dangerous if you generally rely on your online bank balance to decide whether or not you have enough cash for a particular purchase.

If you have automatic bill payments set up for your rent, cell phone bill, credit card, and internet access, it is very important to know exactly when each of these bills is paid to get an accurate measure of how much surplus you have left in the month. This might be obvious for a rent bill that accounts for 20% of your monthly spending, but much less obvious for smaller cell phone bills or automatic savings withdraws.

The most common problems people have with automatic payments is when one processes late, or forgetting about one of them and making a purchase that sets you over your spending limits. If you already have a savings cushion, this might not be a problem, but bigger purchases can end up with your payments overdrawn or bounced checks. This can rack up banking fees very quickly, making the problem even worse than it was to start with.

Automatic Payments and the Importance of Budgeting

This is where your budget comes in. If you take time to update your budget regularly, you should have a very good idea of what your expected surplus is at the end of the month after all your automatic bill payments are processed.

This means that instead of relying on checking your bank balance before making a purchase or going out, you can just think about how your current spending decision fits into the budget or spending plan you already have laid out. If you know how much surplus you expected, and approximately how much your current spending has lined up with your plan, it makes it much easier to decide if a potential purchase fits into your plan or not.

Account Reconciliation

The rise of automatic payments means that the exercise of reconciling your accounts, or evaluating how much you’ve spent versus how much you expected to spend, takes on much greater importance. Click here to read more about account reconciliation!

The “Best Practice” is to do your account reconciliation and updating your budget/spending plan once per month, at the same time. This means that you can directly evaluate your spending habits and your financial goals, but to do this you absolutely must have an accurate picture of your account balances and spending when you sit down to do it.

This means that any expected automatic payments that have not yet executed need to be taken into account. With the rest of your account reconciliation, you are just comparing your receipts of purchases already made to what your bank transaction history tells you. If you use automatic payments, you need to add an extra step in confirming that each of your expected automatic payments from each month has also been processed. If not, you can make the adjustment yourself in your spreadsheet, but letting it go forgotten can seriously hurt your ability to make solid plans for the future.

Pop Quiz

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Challenge Questions

1. What are the advantages and disadvantages of setting up auto payments?
2. How might creating a monthly calendar of when payments go out help you with your budgeting?
3. How can cash flow be a factor when setting up auto payments?
4. How might having an emergency fund be a good thing when setting up an auto payment?

When learning about managing your finances, many experts will recommend you begin with a budget.  A budget is a tool that tracks income and expenses, and it allow you to set goals and make plans for the future.  Developing a budget for a specific project, for a special event, or to help you with your monthly spending are all examples of using a budget to help you manage your financial situation.

Your Personal Budget

When you mention the word “budget” to others, you may get a negative response. That’s because people often associate budgeting with restrictions.  They feel that if they go on a budget, it’s like going on a diet.  They won’t be able to spend money in the way that they’d like. But a budget is really a financial planning tool. Every person or household should have a personal budget, not just to help keep spending under control, but also to help achieve what’s important financially, whether that’s saving for college, buying a second car, or going on that Hawaiian vacation. An effective budget will give you a clear picture of your expected income, a detailed look at where you spend your money, and it will help you set and achieve realistic savings goals.

There’s a reason that the word “personal” is used with budgeting.  Although guidelines are often provided to help you determine how much to spend in different areas of your life, the choice is really yours.  Your budget is designed for you based on your goals, so if you have enough income to spend more on your transportation needs, then go ahead and buy that Tesla.  The purpose of having a budget is so that you have a plan for spending your money. This helps you avoid debt and achieve what you want to with your money.

In order to build your personal budget, you will need to gather your financial records, spend time to categorize and analyze your current spending, create a balance between earnings and expenses, consciously plan for expenses that you might be facing in the future, and put everything together while considering your long-term financial goals.

Gathering Your Financial Records

Your financial records include items like receipts from your last few months of spending, credit card and bank statements, your recent pay stubs, and your rent and cell phone contracts. When you are building your budget for the first time, gather as much information as you can on your past spending, if possible for the past few months.

Your goal when gathering your financial records is to have a completely clear picture of how you already spend your money. The biggest challenge of building a good budget is making sure it is realistic. Having exact records of how you spent your money is the best way to plan moving forward.

Categorizing and Analyzing Your Spending

Once you have your records in front of you, it’s time to categorize your spending.  Your goal is to separate all of your spending into needs versus wants, and then into fixed versus variable expenses.

Needs and Wants

Needs are the things you must purchase in order to survive. They include necessities such as rent, utility bills, groceries, and medical expenses.  They also include legal responsibilities such as paying taxes.

Wants are things that you chose to spend money on, but in theory they are items you don’t really need.  Eating out, holiday gifts for friends and family, TV/streaming subscriptions, and new clothes might be in this category.

Once you have sorted your records into needs versus wants, you need to look closer and divide them into “fixed” and “variable” expenses.

Fixed and Variable

Fixed expenses are items whose cost stays the same from one month to the next.  This means you can reliably plan for these expenditures. They include expenses such as rent, your cell phone bill, or a subscription fee for a video streaming service.

Variable expenses change from month to month, so it is hard to plan accurately for these expenses. They might include how much you spend on fashion, how many times you go out to eat, or how much you spend on gas for your car.

Some of your expenses may need to be split into smaller categories.  For example, food is a need, so you could try to lump all of the money you’ve spent on “eating” into one category.  But it’s more honest and will help you create a realistic plan if you separate your food items into categories such as groceries, coffee, and eating out.

Putting It All Together

Once you have finished sorting your records, list the categories of everything you’ve spent money on, placing the information in 4 different boxes – “Fixed Needs,” “Fixed Wants,” “Variable Needs,” and “Variable Wants.” Every penny you spent in the months you are analyzing should be included in these boxes.

Try to complete this spending analysis for the past six months if you can.  What you’re looking for is enough data so that you can determine your “average spending” in each category. The more months you can look at, the better your future budget plan will be!

Balance Against What You Earn

Once you have taken an honest look on how you spend your money, you can start to balance these numbers against how much you earn.

If you earn all your money from one single full-time job, this part is easy – just look at your most recent pay stubs. But if you have a part-time job or some side hustles, estimating your income each month gets a bit harder.

Remember that the more months you can look at, the more accurate the numbers will be for your future budget. When reviewing your income numbers, take an average of what you have been earning.  Do not assume you will always make as much as you did last month or in your “best” month. Be honest with yourself. It is better to have extra income at the end of the month than to always be expecting more income than you actually received.

Once you’ve determined this average income number, you can compare it with your normal spending.  If the result shows that you are already earning more than you are spending, great!  If your income is less than your spending, you will know you have some work to do.  But regardless of what you see, there is still more planning to do.

Looking Ahead

Budgeting helps you make a definite plan to save money for those things you want and need in the future.  There are several strategies to help you plan for unexpected and irregular expenses, but most come down to spending a few minutes for planning. One simple task will help you look ahead at expected expenses that often sneak up on you because you don’t pay them regularly.  The task involves making a chart of irregular expense, determining when they need to be paid, and identifying how much the expenses will most likely be.  (Use the previous year’s numbers to help you estimate this year’s costs.)  Think about what holidays are coming up, and how much you plan on spending on gifts. If you visit the dentist twice a year, include that in your chart so you have the extra cash set aside BEFORE the visit.

Here’s an example of what this budget planning chart might look like.

Remember that being honest with yourself and including as much information as possible will make your budget a valuable document to help you with financial decisions.  Pretending expenses are smaller than they really are or forgetting to include them in your plan is the fastest way to break your budget. But effectively “planning ahead” for your variable expenses is one of the cornerstones of success.

Setting Your Savings Goal

Now that you have an honest look at how much money flows in and how much flows out, you can set a realistic savings goal for every month.

Your savings goal will come from two concepts – Pay Yourself First and creating your Emergency Fund.

Pay Yourself First

Pay Yourself First means that you are making your savings goals your #1 priority.  This strategy has consistently proven to be the most effective way to achieve your long-term goals. A pay-yourself-first strategy means that before you pay any bills or address any of your expenses, you set aside money for your savings. You no longer wait to see how much money is left at the end of the month to put into your savings account.  Savings is absolutely “taken care of”.

Following the pay-yourself-first strategy means you would rather hit your savings goals and occasionally be late paying other expenses than wait until the end of the month and only save what is “left over.” Your savings goal sits at the very top of your “Fixed Needs” category every month, and money always goes into savings.

How much should you save?  A good savings goal should be at least 10% of your expected income every month. If you have never been consistent with saving, you may need to immediately find ways to adjust your other expenses so that you can always hit your savings target.

What you do with the money you have saved is up to you.  Investing can help your savings grow, but investing includes risks.  Keeping your money in a savings account is safe, but it is not the fastest way to build wealth.

Your Emergency Fund

An Emergency Fund is savings you have set aside in case of true emergencies — large, unexpected expenses that may completely break your budget. If you are just starting to build an emergency fund, your first goal should be to save enough money to cover one month’s worth of expenses.  Try to reach that goal by the end of a year. Your long-term goal is to save enough money to cover six months’ worth of expenses.  Do this as quickly as possible but target to reach this goal within the next 5 years.

Your emergency fund is not part of your regular savings.  It is money allocated for those unexpected expenses like a major car repair, traveling home for Grandma’s funeral, or physical therapy following your broken ankle.  If you currently have no emergency fund or your emergency fund contains less money than needed to cover one month’s worth of expenses, cut back on spending in your “Variable Wants” category.  The sacrifice now will help you relax later when you need that money and it is available for you.  If you’ve had to use money from your emergency fund to cover unexpected expenses, you will need to cut back on spending in the following months in order to replenish your fund.

Unlike your regular savings, money in your emergency fund should not be invested. It should be set aside in a savings account, available for immediate withdraw in case of emergencies.

Basic Budgeting Strategies

We have a whole other lesson focusing just on budgeting strategies, but when you build your first budget keep these tips in mind:

• Be honest with yourself. If you are not honest with how much income you have or how you are spending money now, you will never be able to effectively control your spending in the future.
• If you need to make budget cuts, focus on your fixed expenses first. If you can shave money off your rent or downgrade recurring monthly subscriptions, it will have a much bigger long-term impact on your savings goals than if you skip going to the restaurant once or twice a month.
• Set up automatic transfers to move money from your checking account to your savings account either every time you make a deposit or at a fixed time each month. If you do not need to “remember” to set aside money for savings, it makes it much easier to hit your savings goals.
• Spend a few minutes each month doing a “budget status check.” Simply checking your bank account balance might not be enough.  Taking a quick look at your bank account balance, credit card balance, and thinking about bills that still need to be paid that month will give you a good feel for how much money you can safely spend without breaking your budget.
• When you spend less money than you budgeted for, you have freed up money that can be saved or invested. This is a win-win for you. 
• If you go over budget by spending more than you had planned for, it means you will potentially have less money the following month.  You may need to make sacrifices and do with less. Thinking about opportunity cost and doing some comparison shopping will be more important as you now have less money than was anticipated.

[qsm quiz=82]

Challenge Questions

1. What do you understand by the term budget?
2. How might a budget help you with your financial goals?
3. How can you relate opportunity cost to budgets?
4. How would comparison shopping help with your budget?
5. If you pay yourself first, are you more likely to make smarter money decisions with the money that is left and why?

Your parents probably have experience reconciling their checkbook by comparing your own written records with their bank statements.

In today’s world, reconciling your checkbook isn’t a common activity for two reasons:

1. Paper checks probably only account for a small amount of your total expenses per month
2. You probably have an automatic record with your bank’s online services showing how much you paid for anything purchased with a debit card

This does not mean you can skip the account reconciliation though. In fact, the way instant payments and other conveniences work probably make it more important than ever to spend a few minutes per month reconciling your accounts.

What does it mean to reconcile?

In relationships, reconcile means to resolve differences in order to restore friendly relations between two people.  You see this in movies when a married couple gets separated and then decides they still want to be married, or when a daughter decides, after being upset with her father for 20 years, that she wants to reconcile their relationship.  In relationships, reconciling means to make things right.

In financial terms, reconcile means to compare your personal records with the bank’s records to see if they match.  And if they don’t match, you want to discover where the error is and “make it right.”  You don’t want to think that you have more money than you do, and you also don’t want to think that you have less money than you do. So the process of reconciling your bank accounts is important.

Reconciling for the 21^st Century – Why is it Important?

Today you will still get paper receipts for almost every payment you make in person, and online copies of receipts for every purchase you make online.

There are still two factors that make reconciliation necessary:

Entry Errors at Storefronts

The cheapest and easiest way for stores and restaurants to take credit and debit cards is by using a stand-alone card reader. These readers operate independently from the normal cash register system, meaning your waiter or clerk will need to manually enter your total charge before scanning your card. 

You can tell which establishments do this because you will probably get two receipts – one issued by the establishment (listing what you bought and the items’ prices), and one printed by the card reader (usually just listing the total). Since these two items are registered separately, there is a chance that the person entering your total entered the wrong amount.  This is usually done accidentally, but it means you pay more or less than you should have paid.

If you look at the two receipts immediately, you will catch the error and the store can make the correction while you are still there by voiding the first transaction and creating a corrected one.  However, often the receipts go into the shopping bag and you may not notice the discrepancy until you get home.  You can make the correction later by comparing your “original” receipt with your bank statement and bringing both to the establishment to prove the error. Of course, this is only possible if you kept the true receipt listing what you bought, how much you were supposed to pay, and the time stamps on both the receipt and the bank statement showing it was the same transaction.

Transaction Processing Time

When you make a transaction, the establishment you are buying from needs a “middle man” to contact your bank or credit card company to actually transfer money. This is called “Payment Processing”, and there are a few ways it can happen.

If you are working with bigger companies, the payment will usually process immediately – you can see it appear on your credit card transactions or bank statements immediately. However, It is very common for online stores to use bulk payment processing, which means all payments process one or two days after the purchase was made (this can be a lot cheaper for smaller stores, since the payment processors have lower fees for batches). This can also happen with larger in-person stores (such as large grocery chains or gas stations) that may bulk-process orders.

While delays may only have a one or two day waiting period, it can add up if you are checking your bank balance on the fly to figure out how much cash you have. Each small “delayed” transactions can account for huge amounts of overdraft fees if you think you have money in your account but it is really tied up in pending transactions.

The much bigger processing delays can come from anything you might pay with a paper check (such as rent). These only processes after someone physically takes the check to a bank to deposit it, so the processing time is entirely up to whoever you pay. This can also happen with your paycheck – many payroll systems pay only when someone from your company’s payroll department confirms your pay amount, which means when you actually get the cash in your account will differ depending on weekends, holidays, and that person’s workload.

The 10 Minute Reconciliation

Once a month, you should take 10 minutes to reconcile your checking account.  Remember this means you are comparing the amount of money you think you have in your account with what the bank says you have in the account.  If you keep your receipts, this process will go much faster.  Her are four steps to help with your reconciliation task.

• Step 1: Confirm your big purchases match your receipts
  • Do this for your 10 biggest purchases of the month, just to make sure there were no errors.
• Step 2: Make sure all your deposits are accounted for
  • Check all your paychecks or any other transfers that you have received are properly appearing.
• Step 3: Make sure your payments are accounted for
  • Check specifically larger payments, like the week’s grocery trip, or some gifts you bought online – you do not need to be exact.
• Step 4: Record your totals
  • Once you have established your true bank balance, record this number in your spreadsheet for future reference. This helps you later determine how your spending is moving from month to month.

Working With Checks

You might not need to write checks often, but there are still some cases where it comes up! Be sure that any checks you write are also included in your reconciliation, even if they have not yet cleared your bank account. When you write a check to your friend Sue, she has to deposit your check into her bank account.  Her bank then contacts your bank electronically to make sure you have enough money in your account to transfer into Sue’s account.  If you do, then the money is transferred and the check is considered “cleared.”  This “clearing” process could take days or weeks depending on how quickly Sue deposited the check and how long it takes the banks to communicate with each other.

A check will always include:

• Your printed name
• Your signature
• The person or company you are paying
• The date you wrote the check
• The amount, written out in words
• The amount, in numbers
• Your signature
• Your account number
• Your routing number (this number is a unique number for your bank, used with your account number to identify your exact bank account)

Checks can also optionally include a memo, which is a note to remind yourself or the person you’re paying why you wrote this check.

Try It!

See if you can identify how to properly fill out a check. In this example, your name is Mark Brookshire, and you are writing a check to City Cable Company on April 18, 2019 for $142, to pay for your March bill. Drag the elements from the right side onto the place on the check where they belong.

Pop Quiz

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Challenge Questions

1. What do you understand by the term account reconciliation?
2. Why is it important to do an account reconciliation each month.
3. How might a financial advisor help?

When you are getting your financial records organized, it is important to keep track of your spending, and with your spending comes receipts.  If you think about a typical shopping trip, it is easy to accumulate several receipts quickly as you shop at different stores, stop for a bite to eat, and fill up your car with gas.  Saving receipts can add up to a lot of paper very quickly, so some of the most common questions beginners are faced with is “Which receipts do I have to save?” and “How long do I need to keep them?” 

The Four Receipt Criteria

When you make a purchase, you will probably be tempted to crumple up the receipt and throw it in the nearest recycling bin as soon as possible. But before you toss it, go through this mental checklist:

1. Will I want to return this purchase later?
2. Is this purchase accounting for 10% or more of what I expect to spend this month?
3. Do I need this receipt if something breaks?
4. Do I want to claim this purchase on my taxes?

This might add an extra second to your transaction time, but that second can add up big time!

Receipts for Returns

This is the easiest decision.  In almost every case, you will have a very hard time returning an item to the store if you do not have a receipt to prove you made the purchase.  This means that for clothing, appliances, and any item that could be defective or break, you will want to save the receipt. 

How long should I save them?

Returns are usually accepted only within 30 to 60 days of the purchase, so you can generally throw these out the next time you do an “account reconciliation” – a few minutes you spend each month making sure there are no errors in your credit card statement or bank balances.

Receipts you are saving in case of returns can also be saved separately from your other more permanent financial records, making it easier to throw them away regularly.

10% Purchase Receipts

If you think this purchase will account for 10% or more of this month’s spending, you should keep the receipt for that month’s account reconciliation. Since the dollar amount spent for these purchases is large, you will want to double-check the receipt against the stated purchase price to make sure you weren’t overcharged.

How long should I save them?

If you do not need these for tax reasons, you can safely throw these away as soon as you finish your account reconciliation.

Warranty Receipts

When you purchase electronics or some types of repairs by a licensed professional, the product or service will often come with a warranty. A “warranty” means they promise nothing will go wrong within some time frame. If something breaks or there is a defect in the warranty period, the manufacturer will usually replace it free of charge.

Warranties cover items such as a new TV or cell phone, car repairs done by a licensed mechanic, a new video game console, and other expensive items.

How long should I save them?

If the product comes with a warranty, you will want to keep the receipt plus proof of the warranty for as long as you own the product.  If you have a service performed which comes with a warranty, you will want to keep the service paperwork and warranty for the life of the warranty period.  Find a safe place in your home, such as in a filing cabinet, to keep this paperwork organized.  You’ll be grateful you have it when something goes wrong.

Tax Purchases

You might be surprised at what types of deductions you can claim on your taxes. Paid any tuition or job training? You can claim it! Did you need to buy something required for work, like a uniform? You can claim that too! Depending on where you live, you might be able to claim what you spent on public transit, improvements to your house, and much more.

If what you bought can be claimed on your taxes, you need to keep your receipts much longer, and it is a lot more important to keep them organized. You’ll be grateful you have it when something goes wrong.

How long should I save them?

If you claim something on your taxes, you need to keep the receipt for at least 7 years. This is the threshold for the IRS to audit your tax filings. Then if the IRS does decide to audit you, you will have the necessary paperwork to show that you made those purchases. At the end of that 7-year period you can ceremoniously throw away all the receipts from 7 years ago to make room for a new batch!

Electronic Receipts

Many retailers now give the option to have receipts emailed to you electronically. If you take this option, you can set up folders in your email account where you can move everything quickly and easily for future reference – without having to worry about paper files.

Try It!

Try matching the following receipts to the category for how long you should save them. Some items can fit in more than one place!

Pop Quiz

[mlw_quizmaster quiz=80]

Challenge Questions

1. When was the last time you received a receipt. Did you check it and did you keep it?
2. Have you ever received the wrong change?
3. Have you ever returned a product to a store. Were you asked for a receipt?
4. Why might the IRS expect you to keep receipts?
5. How might keeping your receipts help you with your spending plan?

To be “in debt” means to owe money to someone else, usually making fixed payments to pay back the amount over time, plus interest.

Debt means different things to different people – having some debt is perfectly healthy for your personal finances, but too much can leave you buried. There is also a major difference between personal debt and business debt.

Personal Debt

Your “personal debt” is how much money you owe to other people, businesses, banks, credit card companies, and other creditors. Your total debt also includes any outstanding mortgages and student loans.

Having personal debt is not inherently a bad thing, but having too much debt so that you are unable to pay it back in a timely fashion is a huge problem. Reaching the point where you are unable to pay back your personal debt is known as being insolvent.

Sources of Personal Debt

There are many sources of personal debt, some are considered healthier than others.

Credit Card Debt

Credit card debt is having an outstanding balance on your credit card. Each month that you have an outstanding balance, you are required to make at least a minimum payments. Interest will continue to accrue on the outstanding balance you haven’t yet paid back, so you will be paying back even more later.

The good news is that using a credit card responsibly is a basic way you can build your credit.  Building credit shows your trustworthiness in using borrowed money.  This helps develop your credit score, providing opportunities for getting additional loans for mortgages and other big purchases later in life.  The bad news is that credit card debt which grows too quickly or remains outstanding for too long is one of the key sources of financial trouble for young people.

For students and individuals just starting their first jobs, having a credit card may feel like a blessing.  Credit cards can sometimes be used as “bridge funds” between paychecks or student loan payouts.  They allow you to make purchases or make payments on living and school expenses.  Having that card available may seem like an easy fix to your current financial dilemma.  However, if you don’t quite understand how credit cards work, you can rack up a large amount of credit card debt, leaving you with large monthly payments that need to be taken care of.  This could create a situation where you are unable to pay back the full amount in a timely manner. Remember that every month that you have a balance on your card, interest builds up, making it more expensive to pay off the card in the long run.

Credit card debt does have its place in most people’s financial lives, though. When used appropriately, credit cards can be a great way to build up a credit history, and most credit card companies offer reward programs that can make credit cards more attractive to use than cash for everyday purchases.

Student Loan Debt

Many university students need to take out student loans to finance their education. Student loans are a lump-sum form of debt that usually pays out every semester or year, but the loan does not need to be repaid until after you graduate from the university and hopefully find a job.

Student loans are popular because they make it easier for more people to obtain higher education, and by living off borrowed money, students can focus entirely on their studies.  Even students who work while in school may still take out a student loan to help pay for tuition costs.  The major downside to having student loans is that these former students begin their professional lives with a large cloud of student loan debt looming.

Even though you may not need to start paying back your loans until after graduation, interest usually starts accumulating as soon as the loan is dispersed. This means that the longer you wait to start paying it back, the bigger the debt becomes.

Student loan debt is also treated differently from other types of debt.  Even if you file bankruptcy, you probably won’t be able to discharge your student loans. (Discharging debt through bankruptcy means your debt is cancelled.  You no longer owe.)  This exception in the law exists to prevent fresh graduates from declaring bankruptcy right out of school and discharging their full debt immediately. It means that regardless of how insolvent you become, you will still have to pay back your student loans.  In recent years, if you still owe on your student loans and haven’t been making payments, the government will try to retrieve what you owe by keeping a portion of your income tax returns.

Mortgages and Car Loans

Mortgages and car loans are loans taken out to pay for a house or car. These loans usually have the house or car you’re buying posted as “collateral”, meaning that if you fail to pay back the loan, the house or car could be repossessed to pay back the debt.

Mortgages and car loans are usually looked at as positive debit.  As long as you made good purchasing decisions and received loans with decent interest rates, taking out these loans is seen as a necessary part of your credit life. Their major downside is that these loans are typically much larger than what you would see with normal credit card debt, which means you will be paying them back over a much longer period of time.

The longer you are paying back a debt, the more careful you have to be that you always have enough money available to make at least the minimum payment, otherwise the loan will going into default. For example, if you take out a 20-year mortgage on your house, you need to be sure that you have a plan to keep making the mortgage payments for the next 20 years, even if you lose your job somewhere along the line or a  financial disaster strikes.

Generally speaking, if you find yourself in the position where you think you might not be able to make your mortgage or car payment, you will be in a better position if you sell the house or the car yourself rather than waiting until your creditors seek repossession.

Impact of Debt on your Net Worth

Your net worth is based on your balance of assets (things you own like your house, cash, jewelry, and anything else of value) against your liabilities (your total debt). As your debt increases, your net worth goes down.

The flip side is that if you use debt to make valuable purchases, like taking out a mortgage to buy a house, the value of this asset (your home) may increase at a higher rate than the interest you pay on it. When looking at increasing your net worth, consider the lifetime growth of your assets against the debt needed to fund the purchase of those assets. 

Defaulting On Personal Debt – Creditor’s Options

If you “default” on your debt, it means you are unable to repay it, and your creditors will start attempting to recover their loss. This can lead to debt collection for them or bankruptcy protection for you.

There are different legal methods that creditors can take to collect their debt from you. During this process, there are consumer protections to safeguard you against illegal practices.

Repossession

If you posted anything as collateral for your loan (like your car), the creditor can take possession of that item if you stop making your loan payments, and they can usually do this without notifying you. The creditor can then sell off what is repossessed and use the sale to satisfy the amount that was owed.  If they can’t get back the amount that you owe them when it is sold, you may still be liable to pay back the difference.

Wage Garnishment

If there was no collateral involved with the loan, the creditor can sue you which forces you to pay back the loan amount.  The court system provides different methods to recover the money. One common method is “wage garnishment.” In this method, a certain amount of money is taken out of your paycheck directly and sent to the creditor before you even see it. There is usually a cap on how much can be taken, generally no more than 25% of your paycheck, but the cap can be lower depending on the state you live in.

Property Lien

A “property lien” is another type of court order which a creditor can use to recover money from an unpaid debt.  A property lien is a public statement saying that you owe the creditor money, and that until that debt is repaid, the creditor now owns a piece of your property.  Having a property lien does not immediately do anything to you, but it opens up the door to foreclosure.  The creditor could force the sale of your property to satisfy the debt you owe.

Most creditors prefer to avoid foreclosure since it is a lot of work to arrange the sale, so foreclosure is typically left as a “last resort.”  Instead, if you have a property lien against an asset, you will typically have to pay off your debt by using the proceeds you make when you sell the property.  Once the lien has been paid, you will then have a “clear title” that you can use to transfer ownership to the new owners. If your creditor does decide to foreclose on your property, they only have a right to the amount of money that they’re owed.  If the property is sold for more than you owe, you get to keep the rest of the money.

Defaulting On Personal Debt – Debtor’s Rights

Even if you default on your debt, you still have certain rights and options available.

The Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act is a consumer protections measure that helps protect individuals from unfair harassment by their creditors. It makes it illegal for creditors to

• Call you before 8 a.m. or after 9 p.m.
• Call you at work if you tell them your boss does not allow it
• Publicly post your name and address as a “bad debtor”
• Pretend to be a lawyer or police officer to force you to pay your debt
• Pretend they have a court order when they don’t
• Contact you at all if they know you are represented by a debt attorney
• Contact your friends/family/co-workers and tell them about your debts
• Contact you (other than with official court papers) after you explicitly request in writing that they stop

The Act also requires anyone who contacts you about your debt to tell you who they are calling on behalf of and the total amount you owe. If a debt collector breaks any of these rules, they can be penalized by the Consumer Financial Protection Bureau.

Bankruptcy

If you really find yourself insolvent, you may need to consider bankruptcy. A simple bankruptcy, known as “Chapter 7,“ involves selling off all your assets above a minimum threshold (usually $5000 – $6000). A trustee takes possession of all your property and assets and sells them. The proceeds are then distributed between your creditors. Over 90% of all bankruptcies are this type.

After declaring bankruptcy, all debts (apart from student loan debt, child support, and a few other special cases) are “discharged.” The creditors are no longer able to collect on them.  However, the person who filed for bankruptcy generally will be unable to obtain any new credit for 3 to 5 years.  This impacts financial transactions such as getting a simple credit card or even renting an apartment.  A bankruptcy will appear on your credit report for 7 years.  Remember that using credit deals with trustworthiness, so declaring bankruptcy shows others that you didn’t hold up your end of the deal.  You will need to work extremely hard to repair your financial reputation. 

Business Debt

Business debt works a bit differently from personal debt.  Businesses (especially big businesses) are in debt nearly all the time. Making payments on this debt is generally considered part of their normal operating expenses.

Why is Debt Different for Businesses?

When you take on personal debt, you know you will be paying off that debt for a period of time.  Eventually you want to retire and live off your savings, so it is in your best interest to minimize how much debt you have by that time. During your working years, you will also probably have a cap on how much more money you earn each year.  Most people don’t expect to receive 20% raises every year for their entire life.

These constraints do not apply for businesses.  They expect to exist and continue to do business forever, so they do not have a point on their horizon where they need to be “debt free.”

The biggest difference, though, is that businesses use debt as leverage.  They borrow money in order to make more money through opening new factories, hiring new employees, doing more research, etc. Each time a business takes out a loan, it is saying that it expects to be able to use that money to make more money.  And the money earned is greater than the cost of that loaned money.  For example, if a business can borrow $10,000 with a 10% interest rate to bring a new product to market this year, and it can earn $30,000 in extra revenue from sales of that product, then taking out that loan is a positive decision. 

As businesses pay off their debts, they will often continue to re-finance, or borrow against the new value they have created since their last loan. This means that their actual dollar amount of debt grows over time. With individuals, we are mostly concerned with how big our debt is, but a business only needs to worry about how much they are paying back relative to how much they are earning. If their earnings keep increasing, then there isn’t a problem if their debt is increasing too, as long as their debt is not growing faster than their revenues.

Get PersonalFinanceLab

This lesson is part of the PersonalFinanceLab curriculum library. Schools with a PersonalFinanceLab.com site license can get this lesson, plus our full library of 300 others, along with our budgeting game, stock game, and automatically-graded assessments for their classroom - complete with LMS integration and rostering support!

Learn More

[qsm quiz=77]

Challenge Questions

1. In your own words, explain what debt is.
2. List as many different types of debt as you can.
3. How can having debt cost you more money?
4. What message or warning would you give to anyone before they get into debt?
5. Are there any pieces of advice that you would share with others about managing their money to avoid debt?

In order to be self-sufficient in our economy, everyone needs some type of income – money to pay the bills and other living expenses, but that income comes in many shapes and forms.

When you have a job, the total compensation from your employer consists of more than just the paycheck you get.  Different employers offer many different compensation packages.  Finding the right balance between them all is often a careful point of negotiation when accepting a job offer, but the first step is knowing what they are!

Direct Compensation

Direct compensation is what you get from your employer for doing your job—how you are being paid. This is directly laid out in your employment contract, collective bargaining agreement, or other terms of your job.

Salary and Wages

When people think of their “income,” salary or wages is usually the first number that comes to mind.  It is the actual cash that your employer pays you per year. When considering different job offers, this is the easiest number to consider for income and compensation because it is easy to compare “apples to apples” between jobs.  $45,000 or $47,500?  Which is greater?

Your salary or wages is also called your gross pay.  Gross means that it has not been adjusted to reflect taxes, withholdings, retirement contributions, or other non-cash perks.  It is the amount you start with when you calculate the number of hours you’ve worked and how much you get paid for those hours.

Hourly Wages

Hourly wages are the most basic form of compensation.  You are paid a specific amount for every hour that you work. Most people’s first jobs will be hourly, but many high-end professionals and independent contractors also charge by the hour.  Part-time employees, whose scheduled work hours differ week to week, are almost always paid by the hour.

If you do work as a contractor, it means that you are self-employed, but you contract out your time and energies to work for someone else (either a person or company). Companies like Uber and Deliveroo, who offer a lot of flexibility to their workers, employ most of their workers as “contractors”. Contractors are typically paid a specific amount per hour of work, plus expenses (since a contractor typically has to buy their own work materials and get paid back for them later). Contractors are not typically eligible for any compensation other than this hourly rate.

If you work as an hourly employee, that means that you have a specific agreement with your employer. Employees typically have much less flexible schedules than contractors.  They are scheduled to work for a specific amount of time every week and are compensated based on the total number of hours they actually work. Hourly employees may be entitled to other perks and forms of compensation, depending on their employment agreement. This could include free food for someone who works at a restaurant, getting to see movies for free for someone who works at a movie theater, or a holiday bonus.  Hourly employees who end up working more than their scheduled hours are often paid “overtime” as compensation.

Salary

A worker who is paid a salary is not paid per hour but instead is paid a set amount every pay period based on a set number of hours worked per week, month, or year. Salaried workers are almost exclusively full-time employees.

Even though salaried workers are not paid per hour, their contracts usually state that they are expected to work at least 30-35 hours per week. If they need to work more than this as part of their normal job duties, they are not paid overtime.

Salaried workers are more likely to receive other types of compensation in addition to their base salary including things like paid holidays, mileage reimbursement, and paid sick time.

Insurance

In addition to salary and wages, most employers offer group insurance as well. Group insurance is offered to all employees of a company who get a “group deal” for insurance at a fixed cost each year. Because many employees take advantage of this insurance program, the insurance company is able to offer lower premium rates than you would typically get if you had to purchase insurance as an individual. 

The cost of the group insurance is shared between the employee and the employer.  The employee’s share is deducted from their gross pay, while the employer’s share is paid directly by the employer.

Health Insurance

If you work for a large company, you will almost certainly have group health insurance included as part of your employment package. As an employee, you can usually add your family members and children to your insurance coverage. Since buying health insurance on your own can cost twice as much, (or more) health insurance is a major form of compensation to consider when comparing job offers.

Life Insurance

Many employers will also include life insurance as part of the employment package. Life insurance has two functions:

1. If you pass away before the maturity date on the policy, your survivors are given a lump-sum of cash as a form of compensation for your lost income.
2. If you live beyond the maturity date, most life insurance policies also have a “maturity payout” which is a lump-sum of cash that can be added to your retirement savings.

Retirement Account Contributions

Many employers will also offer to help with retirement savings through programs such as 401k, 403b, or a pension plan.

Direct Contributions To Savings

The most common method employers use to help you save for retirement is by paying directly into your retirement account, like a 401(k), usually matching your own contribution. This means that for every dollar you save yourself, your employer will also contribute an extra dollar, doubling your savings rate. This form of employer contribution is very popular both with employers and employees, since it gives employees direct control of their retirement accounts.  Employers also benefit through reduced employee turnover, tax deductions, or tax credits. 

By maximizing your retirement savings early, (meaning you save the maximum eligible amount per year) you can effectively double the amount you’ve saved because your employer contributes the same amount. Since your retirement savings is being invested, you will also be earning returns on your investment through the growth of stock, payments of dividends, earning interest on bonds, etc., you’re getting an even bigger bonus.

For more information on employer-sponsored retirement savings programs, like the 401(k), check out our article on retirement.

Pension Schemes

Employers might also offer a direct pension program.  After retiring from a company with a pension program, you receive a check each month for the rest of your life. The amount you receive is typically based on how long you worked with the company and how much you earned over your lifetime.

Even if you leave one company and start working somewhere else, you will still be able to collect a pension from the first one based on how long you worked there. Pensions are less common in recent years, as many employers favor direct-contribution plans instead.

Indirect Compensation

Indirect compensation are other forms of “payment” you receive that do not necessarily have a known dollar amount. These are often considered “perks” of your job. 

Equity Compensation

Equity compensation means the company provides a way for its employees to own company stock and benefit from some of the company’s profits. This can be through direct stock compensation, (receiving shares of stock in the company) stock options, (giving employees the right to buy company stock at a later date at a fixed price) or even through profit sharing, (splitting the company profits with employees).

Forms of equity compensation are most popular with employees in management roles.  They act as a form of motivation to encourage employees to help the company grow, since the better the company does, the more valuable the equity compensation becomes. Because start-up companies haven’t yet experienced substantial success, employees are often offered direct stock compensation. Once the company grows, the value of your shares of stock increases, sometimes dramatically. 

Vacation Time

Vacation time, how much of it you receive and how often you are eligible for it, is a key piece of indirect compensation. Vacation days, sick days, and personal days all vary greatly from company to company, but having those paid days off can be a major source of compensation.

Flex Time

A new form of compensation to reward employees and attract new talent in recent years has been the introduction of flexible working hours and conditions. Typically, in the past, businesses had set hours of operation, so you were expected to work from 8:00 a.m. to 5:00 p.m. with a one-hour lunch break.  An example of flex time would be a company  allowing employees to work from 8:00 a.m. to 6:00 p.m. four days a week instead of working 9:00 a.m. to 5:00 p.m. five days a week.  This provides employees with regular 3-day weekends. In another flex time option, companies may allow employees to work from home occasionally or flex their hours by starting and ending their work day later.

How much flexibility your job allows can be a major form of compensation offered by your employer.

Family Perks

Some companies offer perk packages specifically targeting employees with families. Typical perks include maternity/paternity leave, bonuses to accommodate child daycare, extra time off for child sick days, and sometimes a company-provided day care on site in the building.  Family perks are an important form of compensation companies offer to attract candidates who may be starting a family in the future or who currently have young children and need to consider how to balance their family-work commitments.

Other Sources of Income

Throughout your life, the majority of your income will come through your employment, but there are additional sources of income you should consider. 

Investment Income

Investment income are earnings you get from dividends, interest, selling stock, and other investment-related activities. Investment income becomes very important after you retire.  If you have been saving money in a retirement account, and have benefited from employer contributions, your investment income can be a very large amount by the time you retire.

You could also receive investment income through selling a house, investing in start-up businesses that provide you with profit-sharing or equity in the business, or using bonds or certificates of deposit that provided interest income when they mature.

Social Security

Social security provides retirement benefits and disability income for employees who have paid into the social security system and have reached a certain retirement age. Everyone who pays into social security is eligible for its benefits.  Social security can often be the most reliable form of income, but it usually not the largest. 

Combining social security income with other retirement income will help you live a comfortable life in your retirement years.

Pop Quiz

[qsm quiz=75]

Challenge Questions

1. What is the difference between a wage and a salary?
2. What is the minimum wage in your state?
3. What are the advantages and disadvantages of being on a salary and a wage?
4. Would you prefer to be paid a wage or a salary?
5. Other than pay, are there any other benefits that employees could potential get from working at a company?

In the past, information about your bank transactions, credit card transactions, investment statements, and other financial paperwork came through paper documents.  People were told to keep these documents safe or shred them when they were not longer needed.  Today, the majority of our financial records can be accessed online.  Apart from a few paper records, everything you need to know can be accessed from nearly anywhere in the world, instantly.

While online access definitely makes our record keeping simpler and eliminates a paper trail, we now need to ensure that we are the only ones who can access our online financial records.  Fraud and identity theft are growing problems, impacting millions of people each year.  Here are some basic steps you should follow to avoid becoming a victim.

Keeping Your Information Safe

When it comes to your unique identification (your birthdate, your social security number, your bank account numbers, your passwords, etc.), be aware that scammers would like to get that information in order to take advantage of you and others.  You might tell yourself that you’ll never give out that information, but when someone calls from the IRS asking you to confirm your social security number, you may do it without thinking.  After all, isn’t the IRS a trustworthy organization?  The answer is Yes, but fraudsters pretend to work for the IRS and other trusted organizations just to get personal information from people like you.  Giving your personal information to someone unwittingly is the biggest ways people give up their information to identity thieves and other fraudsters. There are a few best-practices you can use to make sure your information stays safe.

Never, Ever Give Out Your Password

Never give out your password.  This may seem obvious, but it remains the most common way that you allow someone access to your account.  An agent of a financial institution will never ask for your password. Employees whose job responsibilities include helping customers can access your accounts using their own administration tools.  Some companies will ask you to set up security questions to reset your own password if you forget what you chose.  Other companies will ask you to choose a PIN number so that if you need help with your accounts, the PIN acts as another layer of security.  

Create different passwords for your accounts.  Never use the password to your banking information on a website where you shop.  Some websites let their staff see your password or they store your password in such a way that it can be decoded easily. In the past five years, the news has reported stories of retailers or websites that were “hacked.”  This means that someone got unauthorized access to the website information, often including customer account information.  The hackers can then use the customers’ personal information in illegal ways.  Since people often use the same email address or username for different online accounts, hackers who have stolen your personal data will try the same username and password combination they stole from one site to get access to other sites. 

The best approach includes creating unique passwords for each of your accounts and updating your passwords every few months. 

Keep Your Credit Card Number Safe!

“Hello, this is Jameson calling from Visa.  Would you mind verifying your credit card number for me?”  Identity thieves often call and claim to be from the IRS, the electric company, or a local business who claims you just won a prize.  Why?  Because these are organizations you trust and they are hoping you’ll let your guard down and give them your credit card number.

This type of fraud also happens online through emails where you are asked to click a link and verify your information for your bank account, your Paypal account, your Apple account, etc.  These emails often ask for personal information in an effort to steal your login credentials or card information.  The links may even look very realistic. 

Just remember, if you weren’t the individual who initiated the phone call or the email, don’t give out your credit card number.  In all cases, call your financial institution to verify that they needed to reach you, or in the case of an email, report it as spam.

Other Security Measures

Most financial institutions and other retailers, such as T-Mobile, now have multiply layers of security in place to protect you and your accounts.  If you try to reach your online bank account and you are using a device that the bank’s server doesn’t recognize, such as a new computer or a computer at the hotel you are visiting, the bank will want to verify that you, the account holder, is truly the one trying to access the account.  The bank will send you a temporary PIN number via text, a phone call, or an email, and you will need to enter that information online in order to complete your login process.  

Most credit cards now include a chip and a CVV code.  The chip means that when you use your card at a retailer, your account information is scrambled, making it harder for the information to be stolen.  The CVV code (card verification value) protects your card number from being used in online transactions unless that code is also provided.

One security measure you need to be aware of is the way you share personal information on social networking sites.  If you post too much information about yourself, an identity thief can “uncover” key pieces of information about your life and use it to answer the “challenge questions” on your accounts.

Who CAN You Share Your Information With?

In the normal course of doing business, a company may ask for personal information about you.  After all, your personal information is what makes you unique, so that is an easy way for a company to create a unique customer database.  But there are only a few situations where you need to provide this data about yourself.  Your employer will need your personal information for wage and tax purposes.  A business may ask for your social security number in order to check your credit before giving you a loan, renting you an apartment, or making a job offer.  However, most institutions do not need your social security number at all.  If they ask for it, ask if they can provide you with a unique customer number instead.

The decision to share your key personal information is yours to make. Ask questions before deciding to share it.  Ask why they need that information, how it will be used, how they will protect it, and what happens if you decide not to share.  After all, it’s your identity at stake. 

What To Do When Disposing Of Your Devices

Computers, smartphones, and cameras allow you to keep a great deal of information at your fingertips, but when you dispose of, donate, or recycle a device you may inadvertently disclose sensitive information, which could be exploited by cyber criminals. The Department of Homeland Security Office of Cybersecurity and Infrastructure offers the following recommendations:

• For your Smartphone or Tablet, perform a hard reset. This returns the device to its original factory settings
• For your digital camera, gaming console, or media players, perform a factory reset and remove the memory cards from the systems.
• For your computer, you have a few options. Do a secure erase or wipe the hard drive using built-in or for-purchase software programs.  This will remove or erase sensitive information.  Physical destruction of your computer is the ultimate way to prevent others from retrieving your personal information.  You can pay to have a specialized service melt or pulverize your hard drive, or you can destroy it yourself by driving nails or drilling holes in it.

Whatever method you choose, just remember that your goal is to keep your personal information safe so that your accounts are not compromised, leading to potential theft or fraud.

Get PersonalFinanceLab

This lesson is part of the PersonalFinanceLab curriculum library. Schools with a PersonalFinanceLab.com site license can get this lesson, plus our full library of 300 others, along with our budgeting game, stock game, and automatically-graded assessments for their classroom - complete with LMS integration and rostering support!

Learn More

[qsm quiz=73]

Challenge Questions

1. Why are your personal details valuable to hackers?
2. How can you be effected when your private information gets into the wrong hands?
3. Have you or anyone you know ever been a victim of fraud. If so, explain how it could have been prevented.
4. Give three pieces of advice that you would pass onto someone younger than you, on how you can protect yourself against fraud and scammers.

Credit reports are a report that contains your credit history – both the good and the bad. If you watch late-night TV, you have probably seen a few commercials offering free credit reports, so you might know that these are important. Most people, however, don’t know just how big a role a credit report can play in their financial lives.

What is a Credit Report?

A credit report is a historical record of how you’ve managed your finances.  It shows how and when you pay your bills that are credit related, how long you’ve been using credit, how much debt you currently have, and what credit has been paid off and closed. 

There are three main organizations that provide credit reports in the United States: Experian, TransUnion, and Equifax.  Each of these organizations is specially licensed to collect information on all individuals in the U.S. that is related to their credit and payment history, criminal records, bankruptcies, and lawsuits. Your personal credit report is an overview of these activities for the last 7-10 years.

When you request credit from a company, you give that company permission to pull your credit report.  The company then asks one of the three credit reporting agencies for a copy of your credit report to help them assess your application for credit. Your report is probably pulled any time you want to open a credit card, take out a loan, get insurance, or rent a home. Sometimes potential employers might request a copy of your credit report, although in this case they need your written consent.

What is the difference between a “Credit Report” and a “Credit Score”?

Your credit report is a complete credit history, capturing information about the bills you have paid, the bills you paid late, the bills you didn’t pay, and their amounts. Your credit score is a number that represents how well you have repaid your debts.  The more responsible you have been, the higher the number.

Since a credit report contains different information from different sources, all of that information is consolidated into what is known as a “FICO score.” The FICO score basically distills all your credit history down to a number.  The larger this number is, the more trust the credit agencies have in you to pay your bills on time. If you have a clean credit report you will have a high credit score. A poor credit score indicates that you probably have a lot of late payments or complaints in your credit report.

Your income does not impact your credit score, but repeated requests to review your score do have a negative impact, since the credit rating agencies assume that if you are trying to get credit from many different places, your financial position might be unstable.

Why Do I Need To Care?

Both your credit report and your credit score are important, and they can have a huge impact on your financial life. Anyone who needs to assess your financial trustworthiness will probably look at your credit report, so it is absolutely in your best interest to keep it looking good.

Applying For A Credit Card

The first time your credit report might be viewed is when you apply for a credit card. The length of your credit history (how long you’ve been using credit), your credit score, how well you have kept up with previous payment obligations, and your income, will determine the range of credit options available to you.

Generally speaking, people with a poor credit history have lower spending limits, are charged higher interest rates, and are less likely to receive concessions (such as late payment forgiveness) or perks.  On the other hand, if your credit report looks good, you will have a wide choice of different credit card companies offering increasingly attractive terms to attract your business.

Applying For A Mortgage

When you want to buy a house, make sure you shop around for a lender. Since the dollar amount borrowed will be much greater, more lenders will be willing to take a chance on you.  This means more banks and lenders will be willing to lend to you in the first place, your interest rates will be better than those offered for a credit card (which can save you tens of thousands of dollars over the life of the loan), and you may have more flexible down payment options.

Renting an Apartment

When you rent an apartment, your potential landlord will probably pull your credit report. Landlords often use credit reports to compare different candidates and to determine the size of the security deposit they will require. Remember, the landlord is primarily concerned with making sure the rent will be paid on time. If a potential renter has a poor credit report, the landlord may rather wait for the next applicant than take a risk on a less trustworthy individual.

Getting Insurance

Since insurance companies are not extending credit to you, the information on your credit report may not play as large a role in determining whether or not to work with you.  However, insurers may use your credit report information when they determine your premiums and deductibles. They want to make sure all of their clients are paying on time. In the insurance industry, the insurance provider needs to take in at least as much money from premiums as they are paying out in claims.  If you don’t pay your premiums on time, that is bad for their business.

If you don’t pay on time for a few months in a row, the insurance company may cancel your policy.  And if you don’t pay for a few months and then play catch up right before filing a claim, the insurance company will probably charge you higher premiums to make up for your irregular payment history. 

Applying For A Job

In recent years, more employers are reviewing the credit history of potential job applicants. This trend first started in the finance and banking industry, but has been spreading to other employment sectors as well. Potential employers see your credit history as your overall professional trustworthiness, particularly if you have a long history of late payments.

What Exactly Is In My Report?

Your credit report follows your basic payment history to creditors. This includes:

• Credit card payments
• Cell phone payments
• Cable/Internet payments
• In-store financing For large purchases
• Unpaid parking tickets
• If you have been sued
• Any other outstanding debt

• Mortgage payments
• Rent
• Utilities (gas, electricity, water)
• Car payments
• Unpaid taxes
• If you have declared bankruptcy
• Pay Day loan payments

Items in your credit report do not stay there forever, so if you make credit mistakes when you are young, you might not need to suffer from them forever. Generally speaking, missed bill payments, collections, and most other items expire after 7 years. Bankruptcies and other civil judgments (like unpaid taxes) usually have a longer expiration, up to 10 years.

How Does This Information Get In My Credit Report?

The three credit reporting agencies get all of their information from your creditors.  Everything in your report was given to them by someone you did business with or someone who sued you. Not every creditor supplies this information. For example, if you rent an apartment, your payment history might not appear in your credit report unless your landlord makes a point to report it. And the reported rental information may be unbalanced negatively for you since landlords might not always report timely or late payments but almost certainly will report judgments and collections.

Creditors report information which is linked to you through your social security number and your address. Your social security number is the main way information is linked, but sometimes your address is also used to help prevent fraud and identity theft.

The Fair Credit Reporting Act

All of the details presented so far have been helpful for creditors and employers, but you also have some control over your credit report information.  The Fair Credit Reporting Act is a law that provides all consumers with certain rights to their credit report, and it includes restrictions on what businesses can include in the report and how they can use that information.

Consumer Rights

Once you have your credit report, you can dispute any claims on it if you feel they are not legitimate. You do this by calling the credit reporting agency who provided the report and filing a “dispute”. You also need to contact the lender who made the report and ask them to issue a correction if it is inaccurate. If the claim occurred because of an error, it will be removed from your report.

Even if a claim is not an error, you can contact the business who filed the claim and try to get it removed.  If the business decides to withdraw the claim, that information is removed from your report. This often occurs when people move out of their home without paying the final utility bills. If you contact the utility companies and pay the outstanding bills (plus a fee), the companies may withdraw the claims entirely from your report. If you do have these negative credit claims, it is always in your best interest to find them and take care of them as soon as possible.  Otherwise your future ability to obtain credit will be impacted.  For more information on disputing claims, visit http://consumer.ftc.gov.

If a potential employer wants to see your credit report, they need to get your written permission, only use your report information for the purposes of hiring you (and tell you what those exact purposes are), provide you with a copy of the report if they decide not to hire you (or fire you), and give you an opportunity to dispute any outstanding claims before they make their final decision.

If you get denied credit (or a job) because of the contents of your credit report, you also have the right to get a free copy for your own reference.

User Responsibilities

Businesses who order credit reports also have limits on how they can use the information.  Generally speaking, a business who orders a credit report must

• Only use the report for deciding the terms of your financial agreement
• Notify the individual if something in their credit report affected the business’s final decision
• Tell the consumer which company they got the report from so the consumer can verify the information

Data Provider Responsibilities

People and businesses who provide the data that is included in credit reports also have responsibilities. The most important responsibility is to make sure the information they report is accurate and up-to-date.

If you file a dispute, the data provider has 30 days to verify that the claim is accurate, or else the claim is removed from your report until they do so. The data provider must also take some safeguards to prevent data theft. This is why they require both a social security number and an address, so these items can be cross-referenced to check for identity theft.

The companies who provide data to the credit reporting agencies need to inform consumers before they file a claim and give the consumers a chance to resolve the claim before it appears on their credit reports.

Fixing Mistakes

Watch this great video from Bank of America showing how to find mistakes on your credit report, and get them corrected.

The Bottom Line

Your credit report is important, so don’t forget about it. You get one free look at your credit report each year, so you should take advantage of it. Some studies have shown that up to 30% of credit reports contain inaccurate information, so it is always in your best interest to have these issues resolved as soon as possible. (Note:  Your free annual credit report does NOT include your credit score.)

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This lesson is part of the PersonalFinanceLab curriculum library. Schools with a PersonalFinanceLab.com site license can get this lesson, plus our full library of 300 others, along with our budgeting game, stock game, and automatically-graded assessments for their classroom - complete with LMS integration and rostering support!

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[qsm quiz=79]

Challenge Questions

1. How is a credit score calculated?
2. What is the difference between a credit report and a credit score?
3. How important is it for you to build your score? Give examples of how this will help you financially.
4. List 3 Credit reporting agencies.
5. How might fraud affect your credit score?

Every time you buy something, you are considered a consumer.  The noun consumerism refers to the idea that spending money and consuming goods is good for our economy.  Because you are willing to spend money on goods and services, businesses are able to produce items, people are able to have jobs, money is able to flow, and our economy expands. 

As the world’s economy grows, each person is involved in more, and bigger, transactions, and so the rights and responsibilities of being a well-educated consumer are more important now than ever before.

What are Consumers?

If you buy something and use it, you are a consumer. If you make and sell something, you are a producer. Of course, most people are both – working as producers and buying as consumers. Just like businesses have certain responsibilities and practices they need to keep in mind, consumers have responsibilities in order to make sure they are not being taken advantage of. In the United States, every consumer has certain rights to ensure they get a fair deal. The most fundamental consumer right is the right to complain. This may not sound important, but it can have a much bigger impact than you would expect.

Consumer Rights

Implied Rights

An implied warranty means that when a company sells a product, they are selling a product that is defect-free.  If you take it home only to find it does not work, you have the right to go back to the store and ask for a replacement. Unless the product comes with a warranty, the store may not be obligated to give you a free replacement, but generally speaking, businesses prefer to keep their customers happy, so it is likely they will exchange your item for you.

Most front-line employees have a set of guidelines to follow as they work with customers who have product quality or service issues.  If you feel your issue is not being taken seriously as you talk with a lower level employee, you can always ask to speak to a higher level employee, such as the salesperson who worked with you or a manager. If you can demonstrate that the business willingly sold you something broken or defective, the sale may be considered fraud. Fraudulent business practices have their own set of consequences and regulations, so definitely report issues to the Better Business Bureau or the Federal Trade Commission.

You also have the right to leave negative feedback and reviews on review websites. Share your honest thoughts about your experience or purchase, but be professional and not offensive with your review. Again, this might seem like a small consolation, but companies (especially those doing business online) rely heavily on positive customer reviews, so speaking up can end up having a larger impact.

Explicit Rights

Explicit rights are the rights which are guaranteed through a contract or by law.

Warranty

Beside the implied warranty that comes with a product purchase, many products also come with an explicit warranty.  This warranty is usually written and includes information about how any product or service defects will be handled by the manufacturer or the retailer in the event that the product does not function as originally described or intended.  Most often if you experience a product issue, you will be asked to show proof of purchase (the original receipt). Then the business will repair or replace the defective item. In today’s electronic age, your sales receipt may include the warranty information, or the information sheet accompanying the product will provide instructions about the terms of the warranty.  If you have a warranty, along with a proof-of-purchase (including a receipt), you may be able to explicitly request the seller fulfill the terms of the warranty by offering repair or replacement. If they refuse, you have further legal right to sue in a small-claims court.

Legal Obligations

Several types of purchases have even more consumer protections by law. These include:

• Car Sales – These protections differ for each state, so check with your state’s consumer protection office to find out your explicit protections.
• Phone, Television, and Other Utilities – Public utilities have strict regulations over billing and service requirements. If you think that your utility provider is not fulfilling their obligations, you can contact your local franchising authority, the FCC, or even the Public Utility Commission.
• Banks and Lending Institutions– The banking industry likely has the strongest consumer protections in the United States, governed by several authorities. If you have a consumer dispute with a bank that cannot be handled by simply talking with the manager, visit the USA.gov resource center for more options.
• Airports – Each person has certain rights when travelling, including protections against discrimination, safety, and security at an airport. After you reach your destination, there are further protections for hotel stays.  For example, if you get bed bugs, you may be entitled to compensation. Like banks, hotel regulations differ by state, so visit the USA.gov resource center for more information.
• Housing – Each person has many rights to housing, at every level of government (local, state, and federal). This includes protection from discrimination, and in some cases controls on how high the rent can be raised per year.

If you believe you have a consumer complaint, the most important documents you need will be your receipts. Generally speaking, regulatory agencies require you to try to resolve any issue directly with the business before they get involved, so you should send the business your complaint in writing before trying to get additional help.

If you do need help with your consumer complaint, the best places to start are the Consumer Complains Resource Center at USA.gov and the Better Business Bureau.

Consumer Responsibilities

Consumers do not have a large number of implied protections. This is, in part, because business law is centered on the “reasonable person“ standard.  This standard focuses on the idea of “what would a reasonable person do in this same situation?”  Consumers are expected to put some thought into each purchase to make sure it is what they really want to do. If a consumer spends $9,000 on an iPhone game (which a consumer reported in 2015) before realizing how much money he was losing, he will not have many legal protections (unless he can demonstrate that the game was fraudulent in some way). Consumer protections are not designed to prevent consumers from making bad decisions.  It is the duty of every consumer to make rational, reasonable choices when choosing their consumption. The easiest way to do this is to build a spending plan and stick with it.

One final thought:  To make sure you have all the tools you need to file a complaint if you need to, always keep detailed financial records.

Get PersonalFinanceLab

This lesson is part of the PersonalFinanceLab curriculum library. Schools with a PersonalFinanceLab.com site license can get this lesson, plus our full library of 300 others, along with our budgeting game, stock game, and automatically-graded assessments for their classroom - complete with LMS integration and rostering support!

Learn More

[qsm quiz=72]

Challenge Questions

1. Using examples, explain what a consumer is.
2. How is a warranty both beneficial for the manufacturer and the consumer?
3. List 5 consumer “watchdog” organizations that have been set up to protect consumers?
4. Have you every bought a product that was faulty? If so, what were you able to do?