Session 7: Taxes

For our final class, we planned on briefly discuss up the very last section, Taxes. Following that we were going to do a quick review of all the previous 6 classes. THEN - play [personal finance] games for the rest of the class period. I was pretty psyched. I spent ages preparing Personal Finance Taboo, Personal Finance Pictionary, Personal Finance and a pretty impressive homemade Personal Finance Jeopardy game to play in a classroom with no overhead projector.

Unfortunately the girls had a conflict and could only stay for about 15 minutes. It was a disappointing way to end the course as we were so looking forward to sending them off with a bang. Anyway, here is the summary for the information we covered (very quickly) taxes:

Session 7: Taxes – AKA Paying Uncle Sam

- Firstly, the reason we have taxes is to provide services to the American people. This includes the public education system, military, police, roads, parks, libraries, welfare, Social Security, Medicaid(a federally administered system of health insurance available to low income families), Medicare (a federally administered system of health insurance available to persons aged 65 and over). and much, MUCH more.

- Every American pitches in by paying taxes so we can benefit from these services. It would be awful if there was a fire, and the fire fighters demanded to be paid before they put out a fire…but the people didn’t have money.

- The amount that you owe depends on how much money you make. We have a progressive tax system which means that people who make more money pay more in taxes than those who earn less. (Someone start to draw the table below on the board)

- Before you start a job, you have to fill out a W4 form which identifies what you think your tax level should be. When you start working, you will notice that a small amount of tax will be automatically taken of each paycheck (instead of a huge amount coming out once a year). This is also called “withholding”. In the example below:

1. What is the Gross Pay?

2. What is the Net Pay?

3. How much has been taken out for taxes in total?

- Sales Tax: tax charged at the point of purchase for certain goods and services. In NYC 8.875%

- At the end of the year the IRS (Internal Revenue Service) calculates exactly how much tax you actually owe. If the total amount withheld from your paycheck during the year is more than the amount you actually owe at the end of the year, you get a tax refund. If the amount withheld is less than the total owed, you will need to pay when you file your taxes to make up the difference.

- For the 2009 tax year, children claimed as a dependent on their parents return had to file their own taxes if they met any of the following:

1) Earned income is greater than $5,700.

2) Self employment net earnings are greater than $400.

3) Earned and unearned total income is greater than the larger of $950 or earned income plus $300.

4) Unearned income (like dividends and interest) is greater than $950.

In case you were ever wondering: $1000 in federal tax dollars - where does it go?

The girls insisted that the federal government should take out a little from the military spending and improve the standard of public school lunches, because apparently "it nasty".

Session 6: Insurance and Investing

Insurance

- Insurance is a way to minimize some of the risks in life.

- You pay a small amount every month, and should something happen, the cost will be covered. For example: let’s say you pay $50 every month into a car insurance plan, and if you get into a car accident. If it costs $10,000 to fix your car, the insurance company will pay it for you. Of course, you might drive a car your whole life and never get into an accident, but insurance ensures that IF you do – the bill is covered.

- Different types: house, health, car, cell phone, renter’s, disability, life, pet

- Price you pay for insurance can vary depending on your history. If you have had a lot of car accidents, instead of $50 a month they may charge you $80 a month because you have a higher risk of getting into another one.

Investing

- What is investing? A way to make your money grow.

- Why should you invest? To make money, to stay ahead of inflation (inflation causes the increase of prices) to achieve your financial goals.

-Risk vs. Reward: explain the concept of low risk can mean low reward; high risk can mean high reward.

- Diversification means you shouldn’t put all your eggs in one basket. Because if the basket breaks and all your eggs are in it…they will all crack and break. Some financial instruments are more risky than others.

- Stock Market: Everyday term we use to talk about a place where stocks and bonds are "traded".

- Stocks: units of ownership in a company. We played a stock market game that I made up. Each of the two teams had to and choose one company (from a choice of three) in six categories. All the choices were companies they had heard of (Apple, Google, Tiffany’s, Disney, Netflix, Target etc) I revealed how their choices had fared over the last 12 months. We discussed how sales for some companies might be low in one season, but high in another season (e.g. an ice cream company will have high sales in the summer, but low sales in the winter because it’s cold outside) and that was sometimes the reason for fluctuation during the year.

- The goal is to buy the stock at a low price, hold it for a time, and then sell the stock for more than you paid for it. Aka, buy low, sell high.

- Article: Skip the Toys: The Case for Giving Kids Stock

Discussion questions:

1. What is stock?

2. Why does the writer encourage giving stock to children as a gift instead of toys?

3. What are some advantages of a custodial account?

4. If you could buy stock in one company, which would you choose and why?

Session 5: Credit History, Credit Reports, Identity Theft and Internet Scams

- Credit is based on a promise that you will pay it back. We went through a skit performed by two of the students where one girl keeps borrowing money from her friend, promising to pay her back the next day. Days pass and no money is returned. We discussed that when a friend breaks a promise you, the lender stop trusting that person, and as a result, might be less likely to lend money to that individual again. The moral of the story:

Aliya’s money situation was a bit tight when she bought those shoes. She didn’t have any money saved up at home to pay Jennifer back immediately. She needed to wait for her allowance first. By making a promise and then breaking it, Aliya lost Jennifer’s trust. Jennifer ended up telling some other friends how Aliya couldn’t pay her back. Her friends asked her if she would ever lend money to Aliya again. To which she replied, “probably not”.

- In personal finance, if you break the promise by missing a payment, the lender loses trust in you and tells the 3 credit bureaus (TransUnion, Experian, Equifax) who note it on your credit report.

- Your report is used to make a credit score (ask if they remember the range: 300 to 850). The better your credit history, the higher your score.

- Your score impacts whether future lenders what to lend you money, or if employers want to hire you, so it’s super important. Why? Because it’s a reflection of your character.

- Beware of identity theft and internet scams. Don’t carry your SSN on you; only buy online from reputable websites.

- Article: Newark man sentenced for numerous identity thefts

Teenagers are always engaged when I talk about Identity Theft. Unlike many topics in personal finance, this is one that applies directly to them. As the article demonstrated, Identity Theft can happen to kids, just like them. As a result we have to make sure that children are aware not to give their SSN to just anyone. It's a good habit to get used to asking why a SSN is being requested on a form. This was a topic that we encouraged them to their parents and guardians about when they got home.

Session 4: Credit and Borrowing

I was particularly excited to teach our middle school girls this class. "If there is one thing that you take away and remember from this class," I told them, "I hope it will be how a credit card actually works". Of course I wanted them to remember a bit of everything, but how credit cards work is probably one of the most misunderstood aspects of our personal finance. We started off with Banking Pictionary where we had the girls draw out ATM, Online Banking, Piggy Bank, Bounced Check and Bank of America -all terms we had discussed the previous week.

Then we got into the good stuff - credit and borrowing!

- Credit is basically borrowing. Credit is based on a promise that you will pay it back.

- Explain how a credit card works with an example transaction and statement.

While looking at the example statement, ask the class the following questions:
1. How much did Aliya spend at Best Buy?
2. What is the minimum monthly payment?
3. When is the December payment due?
4. Is it a good idea for Aliya to just pay the minimum?

- A debit card looks like a credit card, but when you use it money automatically and immediately comes out of your checking account. With a credit card no money immediately comes out of your account – you just borrow the money and agree to pay later.

- If you pay the full amount of your bill within one month, you will be charged NO interest at all.

- Avoid only paying the minimum –it get’s expensive because they charge interest on what you haven’t paid back. Best thing to do is pay off your bill in full every month.

- We make our spending decisions based on the pricetag, but if you wait a long time to pay it back, it costs more.

- Pros: Convenient, important to build a history of good credit (we will discuss further next week) , useful in emergencies, online purchases, rewards.

- Cons: High interest rates and fees so it can be expensive if you don’t pay bill immediately, temptation to overspend, stress of making payments on time.

- Article: Consumers Union warns teens: Don't keep up with the Kardashian Kard.

We had an open discussion about the high fees this "Kard" was offering. The girls all agreed that it sounded fairly ludicrous especially when they realized that by the end of two years the consumer would rack up fees of over $200! Amazingly, the following week the Kardashian Kard was canceled once they realized it was actually hurting, not helping their public image. Good riddance!

Session 3: Banking

We kicked off the day with a fun game where the class is broken up into two groups and given a sheet of paper. I say a word, for example "world" and each team has 60 seconds to come up with as many songs as they can think of which features the word, "world" (for example, "Whole New World from Aladdin, "Heal the World" by Michael Jackson etc). When time is up, each teach goes through their list (they have to sing the song as a team) and if the other team also has it they have to cross it off their list (no points). It was a great way to kick off the class!

- What is a bank? A financial institution which serves to connect depositors with lenders. Examples: Bank of America, Wells Fargo, Chase Bank

- What are some services that banks offer?

Checking Account – a bank account in which you can deposit and withdraw money as you please. You can withdraw either by using a debit card, or by writing a check. Used more regularly. Don’t pay interest.

Savings Account – a bank account designed to help you save money. Pays interest. Not for frequent withdrawals.

Debit cards vs. credit card - A debit card looks like a credit card, but when you use it money automatically and immediately comes out of your checking account. With a credit card no money immediately comes out of your account – you just borrow the money and agree to pay later. You can spend only as much as you have in your checking account. If you use more than what you have in your account, you might get charged an overdraft fee.

ATMs – Automated Teller Machines (the computerized machine designed to provide basic banking services without the need of human interaction)

Online Banking – a way to maintain your bank accounts over the internet. You can view your account. Transfer money. Pay bills etc.

FDIC Insured - If a bank is robbed, suffers a natural disaster or goes through some other change that makes it impossible to pay the customer his or her money, the government, through the FDIC, will replace the money that was damaged or stolen up to $250,000.

- What is interest? The “fee” you pay for borrowing money. Or the extra money you receive for lending money to a bank or financial institution. For example: If I borrow $100 from you, and you charge me 10% interest. When I return the $100, I will also have to pay you an extra $10 (10% of $100). The total I’ll owe is $110 which includes interest. I end up PAYING interest. YOU end up RECEIVING interest.

- What is Compounding Interest? (The interest will include interest calculated on interest). For example, if an amount of $5,000 is invested for two years and the interest rate is 10%, compounded every year: At the end of the first year the interest would be ($5,000 * 0.10) or $500. In the second year the interest rate of 10% will applied not only to the $5,000 but also to the $500 interest of the first year. Thus, in the second year the interest would be (0.10 * $5,500) or $550.

- We played the old brain teaser which goes something like this: Some wealthy parents were deciding how to pay their daughter her allowance this month. She was given two choices: Choice #1: Receive $300,000 for the month OR Choice #2: Starting with a penny on the first day, double her earnings every day for a month (e.g. day 1=$0.01; day 2=$0.02; day 3=$0.04; day 3=$0.08; etc). We take them through the value of the second choice every day. The table below shows that the second choice is by far the one that will result in higher earnings. In fact, the second choice will make the girl a millionaire in just 28 days! The girls LOVED this game!

- Article: Poor People Don't Just Need Cash, They Need Bank Accounts. Discussion questions:

1. What is the goal of Bank on San Francisco?

2. How do they achieve that goal?

3. How is Bank on San Francisco different to traditional banks?

4. Why do you think the President wants to support this program and copy it around the country?

5. Do you think it’s important that everyone (including the poor) has access to banks?

Session 2: Personal Mishap

Unfortunately I didn't make Session 2 due to a personal emergency so I can't recall exactly what Monica and Christine covered. Onto Session 3!

Session 1: Decision Making and Wants vs. Needs

Here is our general class outline. We started off with a fun icebreaker (Getting to Know You Bingo) which got everyone off their feet and interacting. We also had the girls establish their own group norms (aka rules) to help maintain a positive learning setting. Our class always ends with a current affairs article that somehow applies to our general topic of discussion. A link has been provided for you to read the article as well.

So here goes! Our general outline:

- What is Financial Literacy? Being educated, or “literate” about your personal money matters. It affects everyone, and the more you know the more financially successful you will be.

- Decision Making – we all have to make money decisions – Pepsi or coke? Candy or chocolate? Go to the movies with friends or stay in and study for a big exam.

- When we make a decision there is usually an Opportunity Cost – what is given up or sacrificed when one alternative is chosen instead of the next best alternative. So when you decide to stay in and study for a big exam, the opportunity cost is going to the movies and having fun with your friends.

- Wants vs. Needs – we all have wants vs. needs.

- Food, Shelter and Medicine are all needs.

- Ask class: What are examples of “wants"?

- What is Peer Pressure? Doing something because others are doing it.

- Some people make spending decisions because they are influenced by what their friends are doing.

- Remind them how we looked at different advertisements – marketers are always trying to influence the way you spend your money.

- Jobs/Income: Income is salary or money that is received by a person. For you, income might be through a regular allowance, for others maybe your income is from birthday money you receive.

- However you get money – it’s important to BUDGET so you don’t run out of money. By BUDGETING you will be able to afford what you need to as well as save up for some big things you might need or want.

- Current Affairs Article: Schools open lockers to advertising. Discussion Questions:

1. Why are schools considering selling advertising space?

2. If your school started doing this, do you think your spending decisions would be influenced by the advertisements?

3. Do you agree with advertising to children in school?

4. What the pros and cons of selling advertising space?

5. The article mentions “10% of the available surface” – is 10% too much, too little? What are the consequences of making 100% of available surface open for advertising, or going even further?