FINANCIAL LITERACY MODEL PROGRAM
EXERCISE #1: A GIFT YOUR FAVORITE AUNT EDNA HAS LEFT YOU $40,000.00 IN HER WILL. YOU HAVE JUST RECEIVED THE CHECK IN THE MAIL. IT IS YOURS TO SPEND AS YOU WISH. WHAT WILL YOU DO WITH THE MONEY?
What do many financial experts consider the key to financial security?
The Key to Financial Security? Your Income!
What is the key to financial security? ONLY INCOME? NO!! NOT “How much you EARN each year” but “How much you KEEP every year.”
Principle #1 The key to financial security is, SELF- LEADERSHIP
Lucy- “Charlie Brown, I’ve been thinking. I would like to change the world.” Charlie Brown- “Wow- how would you know where to start?” Lucy- “That’s easy Charlie Brown, I would start with you.”
CHANGE “Everyone thinks of changing the world, but no one thinks of changing himself” Tolstoy
CHANGE “To get what we have never had, we must do what we have never done.”
A Key to Causing Positive Change? SETTING GOALS!!
Harvard College MBA Study Goals at Graduation: 80% had no goals; 15% had unwritten goals; 5% had written goals 20 Years later: Unwritten goals: twice the net worth and income of those with no goals. Written goals: 10 times the income and net worth of the other two groups combined.
[ Exercise #2]WASTEFUL SPENDING Was there something that; - You really wanted, - You thought that you had to buy, and - Later realized that you wasted your money?
Principle #2 • If wecan’t develop the discipline to save money wecannot attain financial security.
Purposes for Savings: • EMERGENCIES; • PURCHASES; • WEALTH BUILDING.
1. Save for EMERGENCIES 78% OF US WILL HAVE A FINANCIAL CRISES IN THE NEXT 10 YEARS ($5,000-$10,000): • LOSS OF JOB; • CAR TROUBLES; • HEALTH TROUBLES; • FURNACE, etc. “WHAT ARE SOME OF YOUR EMERGENCIES?”
EMERGENCIES Emergencies will happen – successful people develop a plan to manage potential problems.32% of Americans cannot cover a $5,000 emergency from any source and most cannot cover it without taking on debt.
Start small, set aside a few hundred dollars for emergencies, then… As you begin your career you save 3-6 months of expenses just for emergencies before moving on to building investment accounts. Low risk, Low return accounts serve as an insurance policy for emergencies. The return on investment means little. This is not an investment account nor is it a hot tub fund, a bass boat fund, a vacation fund, etc.
2. Save For Purchases Instead of borrowing to buy something save and PAY IN CASH – plan expenditures and save up for them. It can be a huge step in achieving financial security.
PURCHASES • DO THE MATH: • SAVE AT 3% ; CHARGE AT 18%? • “90 DAYS SAME AS CASH?” • $4,000 car: • $211/mo. For 24 months = $5,064; • $4,000 cash? What could you have accomplished with the $1,064?
3. Save for Wealth Building Video- Millionaire in the Making: http://www.bing.com/videos/search?q=millionaire+in+the+making+moneytalk&mid=4895818BDCC010E1B2884895818BDCC010E1B288&view=detail&FORM=VIRE1 It’s not the amount that’s important, it’s the PLAN that counts. Before you can become a millionaire you must first become a hundredaire, a thousandaire, a ten thousandaire, …..
HOW CAN WE SET ASIDE a dollar or two or more a day?
CURRENT TEEN SPENDING In the U.S. teen-agers currently spend more than $84 billion per year. On average each teen-ager spends $3,200 per year. PORTLAND PRESS HERALD APRIL 26, 2008
WEALTH BUILDING $2.00/DAY or $725/year. Ages 17 – 57: 40 yrs. X $725 = $29,000.00 If invested in a 10.5% mutual fund: $406,000.00if saved until 65 years old:$912,000.
WEALTH BUILDING *$2/DAY or $725/year from 17 to 22. *$4.00/Day or $1,450/yr from 23-27 *$8/Day or $2,900 from Ages 28 – 32 *$16/Day or $5,800/yr ages 33-37 *$32/Day or $11,600/yr ages 38-63 If invested in a 9.00% mutual fund: $2,000,000 +if saved until 65 years old:$2,600,000 +
A. It’s all about the plan • It’s not the amount that matters it’s the plan that matters. - There was never a winner who wasn’t a beginner. - Start small and increase over time 1%, then 2%, then 3%, etc. • Mark Blier story
B. Pay Yourself First Pay yourself first – remind yourself that it is not what you make but what you keep that will create financial security.
SAVING EARLYWHICH PLAN IS BETTER? Scenario #1: $2,500/yr for 8 years from ages 19 – 26 for a total of $20,000 invested @ 9% and left to grow until 65: Scenario #2: $2,500/yr for 38 years invested from ages 28 – 65 for a total of $95,000 invested @ 9%: At age 65, which scenario creates the most savings?
Scenario #1: $2,500/yr from ages 19 – 26 @9%: At age 65, $20,000 becomes, $896,029. • Scenario #2: $2,500/yr from ages 28 – 65 @9%: At age 65, $95,000 becomes, $770,166. START SAVING NOW!
C. Make It Automatic The Automatic Millionaire- David Bach Automatic deposits to your investment account from your pay or from another savings or checking account.
D. Understand the Impact of Rates of Return Rate of Return = Growth/Loss Initial Investment $1,000 left in the bank for 1 year now has a balance of $1,100. R.O.R. = 1,100-1,000 = 100 = 10% 1,000 1,000 If there was only $900 left in the account: R.O.R. = 1,000 – 900 = -100 = -10% 1,000 1,000
R.O.R. v. LIQUIDITY Cookie Jar……….. 0.00% Savings Account… .25% 1 Year C.D. ……… 3.04% 2 Year C.D. ……… 3.40% 5 Year C.D. ……… 4.18% Home ……………..0 – 100+%
Savings: Predictable; Safe; Stocks: Unpredictable; Risky; Bonds: Predictable; Some Risk. LARGER RISK = LARGER RETURN SMALLER RISK = SMALLER RETURN
SAVINGS(11/7/2012) Savings Account… .15% 1 Year C.D. …………. .40% 2 Year C.D. …………. .65% 5 Year C.D. ………… 1.25%
WHY INVEST? (1970 – 2006) • Large Company Stocks: 11.2% • Small/Mid Company Stocks: 11.8% • International: 10.9% • Bonds: 8.5% • Real Estate 4.0% • U.S. Treasury Bills: 3.8%
E. Make compound interest work for you. The rate of return over an extended period of time is very important.
Which would you choose? $1 MILLION TODAY Or $.01 TODAY TO BE DOUBLED EVERY DAY FOR 31 DAYS?
Rule of 72 Dividing the expected interest rate into 72 will give you a close approximation of how long it will take your money to double. Examples: 2% $ will double every 36 years; 3% $ will double every 24 years; 6% $ will double every 12 years; 8% $ will double every 7 years; 12% $ will double every 6 years.
F. Diversify Your Investments(“Never put all your eggs in one basket”) • Stocks • Bonds • Real Estate • Your own business • Other income producing assets
“Never put all of your eggs in one basket!” • A company could go out of business; • A group of companies could experience stiff competition (U.S. auto industry); • National crises that affect everyone: • 9/11 & the Twin Trade Towers; • Hurricane Katrina/Sandy; • National Debt Credit Crisis; Diversity can reduce 70% of your total risk!!!!!!
Consider mutual funds-low cost -can invest in almost every asset class, i.e. real estate, bonds, stocks, commodities
MUTUAL FUNDS Single Stock/Bond v. Many Stocks/Bonds • Small Cap Mutual Funds; • Mid-Cap Mutual Funds; • Large Cap Mutual Funds; • International Mutual Funds; • Bond Mutual Funds.
G. Develop patience with a long term vision. You don’t have to hit a home run You don’t have to panic when the market dives.The average amount of time to become a millionaire is 22 years. The younger you start the longer you can enjoy it.
REMINDER • 80% of the money that you will make will come from the last 20% of your effort – but only IF you let your money grow.