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Acquiring financial health

Many people find managing their money a difficult task. Their use of credit cards and loans early in their adult years can prevent them from acquiring financial health in their lifetime. It is tempting to spend money you have not yet acquired once you are no longer a student trying to make ends meet.

Be sure to complete the learning content for the Unit 7 topic “Financial Health” and the two referenced activities before attempting to engage in this discussion.

Note: To view the content for an already completed topic, double click on the topic’s circle in the learning map. A new page will appear. Under the Actions area select review from the drop-down options; this will open the topic with content. The practice and quick practice options only offer questions.

Instructions:
Complete the two financial health activities (The True Cost of a New Car and The True Cost of Credit Card Use) presented in Unit 7 Topic “Financial Health” related to spending money you do not have.
Share your experience with “The True Cost of a New Car” activity with your peers
Change the size of the loan, years to pay it back, and the interest rate three (3) to four (4) times.
Start with the lowest loan amount you might need for your new care and increase by $5000 to $10000 each turn.
Start with a 3% loan (entered as .03) and increase by one (1) or two (2) percent each turn.
In each case choose between 5 and 7 years to pay it back.
Describe one of the monthly payments you would have to make based on your selections.
Loan amount?
Interest rate?
Years to pay it back?
Monthly payment?
Total car cost?
Discuss the potential impact a car payment of that size might have on your monthly budget.
Describe the other monthly expenses you would have to remove or reduce to make your payments.
Why Is or isn’t the car worth the sacrifices you might have to make given the size of the monthly payments?
What other options do you have to avoid taking out a car loan?
Share your experience with ” The True Cost of Credit Card Use” activity with your peers
Consider the following scenario:
You spend an extra $50 a month using a credit card for the first year after graduation to make ends meet.
The interest rate charged by the credit card company is 18%.
The minimum payment you are required to send each month is $20.
Now consider the real cost of that $50 dollars a month by the end of that first year provided to you in the exercise.
How might the continued use of a credit card to fund an extra $50 of spending per month affect your long-term financial health?
Describe two ways you could avoid the long-term consequences of spending more than you have on a regular basis.

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Sample Answer

The True Cost of a New Car

I completed the “The True Cost of a New Car” activity several times, changing the size of the loan, years to pay it back, and the interest rate. I started with the lowest loan amount I might need for a new car, which was $10,000. I increased the loan amount by $5,000 each time, up to $20,000. I also started with a 3% loan and increased the interest rate by 1% each time, up to 5%. I chose to pay back the loan in 5 or 7 years.

Here is one of the monthly payments I would have to make based on my selections:

Loan amount: $15,000
Interest rate: 4%
Years to pay it back: 5
Monthly payment: $300
Total car cost: $18,000

Full Answer Section

A car payment of that size would have a significant impact on my monthly budget. I would have to reduce or eliminate other expenses, such as eating out, going to the movies, or traveling. I would also have to make sure that I had enough money saved for unexpected expenses, such as car repairs or medical bills.

I don’t think the car is worth the sacrifices I would have to make given the size of the monthly payments. I would be better off saving up for a car or buying a used car that I could afford to pay for in cash.

Here are some other options I have to avoid taking out a car loan:

Save up for a car. This would take longer, but it would be worth it in the long run.
Buy a used car. This would be a more affordable option.
Get a car loan with a lower interest rate. This would reduce the monthly payments.

The True Cost of Credit Card Use

I completed the “The True Cost of Credit Card Use” activity and was surprised by the real cost of spending $50 a month on a credit card with an 18% interest rate. By the end of the first year, I would have paid $78.00 in interest on the $500 that I spent. This means that the real cost of the $500 was $578.00.

If I continued to use my credit card to fund an extra $50 of spending per month, the long-term consequences for my financial health would be significant. I would end up paying a lot of interest on the debt, and I would have a harder time saving money for other expenses. I could also damage my credit score, which would make it more difficult to get a loan in the future.

There are two ways I could avoid the long-term consequences of spending more than I have on a regular basis:

I could only use my credit card for emergencies.
I could pay off my credit card balance in full each month.

By following these two tips, I can avoid paying interest on my credit card debt and build my credit score.

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