February 3, 2017
CBSI-001
eBook — Establishing a Financial Plan for Millennials
[TITLE/COVER]
How to Establish a Financial Plan — Pay off Debt and Establish Credit
[INTRO]
The possibilities are endless. You’ve made it through school and are on your way to the career
of your dreams. Now that life is settling down a bit, you likely have a sense of anticipation about
all of life’s opportunities that lie before you — promotions, family, maybe even a new home.
Before those dreams can become a reality, there are a lot of financial questions that need to be
considered. What does a healthy budget look like? How can I establish credit? What about
those school loans or other debt?
Each person’s story is different, so while this guide offers valuable advice addressing those
issues, talking with a financial professional from a credit union about your unique financial
situation is the best way to help you confidently move toward the next chapter in life.
[SECTION 1]
Build a budget that works
1. Determine what type of lifestyle you want
It’s easy to get caught up in someday...Someday I’ll have that four bedroom home with a swing
on the front porch. Someday I’ll spend weekends restoring old cars. Someday I’ll retire and
spend my days on the beach.
Go ahead and make the list. But if you want to get to that someday, it’s important to set financial
goals.
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What are your financial goals? Determining your financial goals begins by setting
timeframes for reaching them. Breaking your goals down into categories can be helpful
in planning your financial roadmap.
○ Short-term goals: Consider items you may want to invest in during the next year
or two. Perhaps you’ll need a new vehicle or would like to purchase furniture.
Separate the needs from the wants. While splurging on a tropical vacation
sounds great, it may need to take a back seat to buying a reliable vehicle to get
to work.
○ Intermediate goals: Where do you see yourself in the next 5–10 years? Are you
in a house of your own or the proud owner of a start-up business?
○
Long-term goals: Even if your career is just getting under way, it’s not too early
think about retirement. And if you’re planning a family, you’ll want to look at
saving for a child’s college education, too. The lifestyle you want is directly linked
to your financial ability to sustain it.
● What factors need to be considered?
When it comes to finances, there are many factors that are out of your control—stock
prices, the economy, job loss, health care costs. While you need to consider their
impacts, it’s important to focus on areas you can control, mainly spending.
2. Understand your current spending habits
It’s easy to purchase items with the click of a button. It feels painless until the bill comes at the
end of the month and the realization of how much you owe hits you. Consider tracking your
expenses for a period of time to help you recognize patterns. Examine where your money is
going by laying out your existing budget. Simply add up all your sources of income, then do the
same for your expenses.
● Necessary expenses: These usually cannot be adjusted considerably and may include
rent or housing payments, utilities, food, fuel, and transportation.
● Discretionary spending: This is where real progress can be made in adjusting a
budget. List out items like entertainment, travel, hobbies, eating out, and extra clothing.
● Prioritize spending to fit your goals. Compare the totals and make adjustments to
your discretionary spending, and if there are ways to cut back on those necessary
expenses, do it. Determine what’s most important to you. It might take some time and
self-discipline to get your budget where it needs to be, but you’ll develop healthy
financial habits along the way.
3. Tackle common assumptions
It’s easy to think you don’t have much to set aside for savings or an emergency fund. That may
be true, but small steps will get you far over time. Saving as little as $20 each week will
accumulate to more than $1,000 in a year. Other small changes that can add up include packing
a lunch, turning down the thermostat, and shutting off electronics when not in use.
Another common assumption is that financial planning can be put off until...fill in the blank.
Before you know it, you’re nearing retirement and wishing you had started years ago. It’s never
too early to start working on your financial roadmap.
4. Set realistic expectations
Research shows that fantasizing about what life could be like in the future can actually deter you
from reaching your goals because you’re more likely to procrastinate. While it’s good to envision
a positive future, it’s necessary to stay in the here and now and take the steps needed to get on
your way. When it comes to setting realistic financial goals, you’ll need to know exactly what
your financial situation looks like today so you can understand where you are and what it will
take to get where you want to be. A financial professional can help you determine what realistic
expectations for your financial goals may look like.
[SECTION 2]
Establishing credit
1. Understand why good credit is important
Reputation is important, whether from a personal perspective or a financial one. Good credit will
help establish your reputation as a good credit risk for lenders.
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Financial flexibility and security: There will be times when you’re unable to pay for
something immediately, can’t get access to your cash, or are faced with unexpected
circumstances. It might be as simple as paying for dinner or covering the cost of a major
car repair—if you don’t have the cash on hand, you need credit so you can put off paying
for those goods or services until a later date.
Used responsibly, credit can help you improve the quality of your life, overcome financial
obstacles and emergencies, and even (on rare occasions) save you money.
2. Know what it means to establish credit
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Establish a reputation as a good credit risk: When you make a purchase on credit,
you are being trusted to make final payment at some time in the future. If you pay as
agreed, the lender will likely want to do business with your again, and you’ll generally be
seen as a good credit risk.
What happens if you don’t pay your bills or consistently pay them late? You’ll develop a
reputation as a bad credit risk, and it may become difficult to get credit even when you
need it for an emergency.
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Lenders rely on credit reports: Usually, lenders rely on information provided by creditreporting agencies at some stage of the credit-granting process. These agencies collect
data about credit transactions. There are at least three major providers of such
information in the United States. With your permission, a lender can obtain a copy of
your credit report and evaluate your reputation for creditworthiness (a limited amount of
information can be gathered without your permission).
A typical credit report contains information about you, you address, your job, and your
income. Most importantly, it contains a history of your experience with lenders. It
typically includes details about who you obtained credit from, how much you borrowed,
when you obtained it, when you paid it back, whether you were late, how often you were
late, whether any collection actions were taken, and whether or not you filed for
bankruptcy.
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Have convenient access to credit: In most cases, it’s necessary to have a favorable
credit history on file with a major credit-reporting agency if you need to borrow money
quickly. Lenders typically ask you to fill out a credit application when you are seeking
credit. However, information in your credit application is likely to be seriously considered
only if it is consistent with information obtained from a credit-reporting agency or verified
independently.
Without a credit report, lenders have nothing to go on, and it may be easier for them to
deny credit rather than take a risk or conduct a lengthy independent investigation. If you
can’t get a credit application approved, then you won’t be able to establish credit.
3. Learn how to build good credit
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Obtain a free credit report: A credit report is simply a record of your past credit
relationships. There are several online options for obtaining a free credit report, or you
can speak with your lender for options. Even if you’ve always paid bills on time, it’s a
good idea to get a copy of your report because it can sometimes contain clerical errors,
or someone else’s bad credit information may be attached to your report, especially if
you share a common name (e.g., John Smith). You can force the credit reporting
agencies to investigate errors and either correct, confirm, or delete the information,
usually within 30 days.
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Choose a credit card with a low credit limit: Start out small and explore getting a
credit card with a low credit limit. Major credit card companies frequently offer small lines
of credit to college students or credit union members. Check with your credit union—
your status as a member may be enough to get you a card. The activity will be submitted
to a reporting agency.
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Apply for a retail store charge card or gas card: Many retail stores issue charge
cards, which are similar to credit cards, but can only be used at the issuing store. Most
major retailers will offer charge cards to first-time borrowers and offer a gift or discount in
return. The interest rates are usually high and credit limits low for first-time borrowers.
Likewise, most major petroleum companies offer gas cards to purchase gas and
services at any of the company’s stations.
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Get them, use them, pay them: Use your credit cards regularly to make small
purchases within your means and pay the full balance monthly. When you do, the
activity will be submitted to a reporting agency and you’ll be on your way to establishing
a good credit rating.
[SECTION 3]
Dealing with existing debt
What if you’re struggling to pay off debt from credit cards or student loans? Perhaps you’ve
already received notices from debt collectors or are behind on payments. The stress can be
overwhelming, but you’ll be relieved to know there are steps you can take to get back on track.
Doing nothing is the worst possible choice, and the longer you wait to take action, the more
severe your financial troubles are likely to become. Reach out to a financial professional to help
determine the best steps to get that debt under control.
1. Paying back credit card debt
When paying back debt, it’s usually a good idea to tackle your credit card debt first because
they typically have the highest interest rates.
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Beware of new borrowing: If you have credit card debt, make every effort to minimize
the use of your credit card to pay for purchases. Try paying with cash or a debit card for
a time so that your credit card balance doesn’t continue to grow.
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Pay more than the minimum: Credit card statements will provide a minimum amount
that needs to be paid each month to stay in good standing with the company. However,
if you only pay the minimum, you could be trapped in a lifelong battle with credit card
debt. Put more effort toward the loans with the highest interest rates, and consistently
pay as much as you can above the minimum without adding to the debt each month. To
make a bigger impact, look at selling some of your unnecessary possessions to pay off
the loans. Over time, your discipline can lead to financial freedom.
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Contact your lender: Credit card holders can often negotiate lower rates and form a
new payment schedule with the lender. They’ll generally work with you to determine a
plan that works best for your situation. Contact them to discuss your options, and talk
with your credit union to discuss how they may help.
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Transfer debt: Depending on your credit rating, you may be able to transfer your credit
card debt to a different lender that has lower interest rates. Many companies offer “0%
for a year” introductory offers that may provide the time you need to pay it off. It’s
important to read the fine print, however. Understand the terms and find out what the
interest rate will be once the grace period expires to make sure you’re not worse off in
the event you don’t end up paying it off in time.
2. Paying back student loans
In most cases, the amount a college graduate owes for student loans is far greater than his or
her credit card debt. The average student has more than $35,000 in student debt.
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Understand repayment options: Contact your lender or the current holder of your
student loans. For most people, identifying their lender is an easy task. Yet for others,
especially those who have several loans or who have fallen behind in their payments
with no communication to their lender, this task may prove more difficult. Don’t be
surprised if your loan is no longer with the original lending institution; it may have been
sold from one to another.
Do you have a federal student loan? In the past, the federal government offered only a
standard plan where you paid a fixed amount each month for 10 years. Now, the federal
government offers an assortment of flexible repayment options to help borrowers meet
their increasingly large student loan obligations.
[CALLOUT]
For more information on student loans, or if you are unsure who holds your federal student
loans, contact the Department of Education’s Debt Collection Service for Student Loans at (800)
621-3115. You can also contact the Federal Student Aid Information Center at (800) 433-3243
(800-4-FED-AID).
For private student loans — Contact your lender
For state student loans — Contact the appropriate state agency
For college loans — Contact your school
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Keep track of your paperwork: Get organized. Keeping accessible, accurate records
will make it easier to communicate with your lender. Open a file folder for each loan and
file any accompanying paperwork there, such as copies of promissory notes, coupon
booklets, correspondence from the lender, and any notes from phone conversations
(along with the name of the person you spoke with). Keep these documents at least until
you’ve paid off your loans in full.
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Understand student loan interest deduction: When preparing your income tax
returns, be sure to take advantage of any deductions related to your student loan
interest. The tax code is complicated and rules can change from year to year, so be sure
to check with a tax professional to make sure you’re getting the full benefit of any
deductions available to you, or visit the IRS website for more information.
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If you don’t repay your student loan: Generally, you are considered to be in default
when your loan payments are at least six months overdue and your lender has
concluded that you do not intend to repay the loan. Being in default is a serious matter,
and the lender will typically pass it on to either a collection agency or a guarantee
agency. These agencies are authorized by law to take aggressive action to get you to
make your payments, including garnishing your wages, intercepting your tax refund, and
even filing lawsuits. When at all possible, make every exhaustive effort to pay off your
debt.
[CLOSE/CTA]
Reaching your financial goals takes some planning. A financial professional is available to help
you understand your options, draft a realistic plan, and get you the answers you need. Call your
credit union today to schedule your complimentary consultation.
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Disclosures [INSERT]