Financial Literacy 101

1
Financial Literacy 101

• Todd Jorns
• www.flip4u.org

2
What would you do if you found 100?
3
My Mission

• Familiarize you with various financial
  terminology and principles.
• Inform you of the difference between saving
  versus investing.
• Inspire you to become investors.
• Challenge you to share this knowledge with family
  and friends.

4
Quiz

• Have you heard of these financial terms?
• Savings Account
• Checking Account
• CDs
• Stocks Mutual Funds
• Interest, Dividends Capital Gains
• Compound Interest
• Rule of 72
• Debt

5
(No Transcript)
6
Questions

• Does anyone have a savings account?
• Does anyone earn money?
• Does anyone know if they earn interest?
• Does anyone know the current balance of their
  savings account?

7
Todays Agenda

• How to Have a Net Worth of 1 Million at Age 55
• Interest Rates and Their Effect on Your
  Investments
• The Magic of Compound Interest
• Rule of 72 Lump Sum Investment
• Debt the Good, Bad Ugly

8
How to Have a Net Worth of 1 Million at Age 55
Monthly Savings Age Return of 10 Return of 8 Return of 4 Return of 2
20 264 435 1,094 1,646
25 442 670 1,440 2,030
30 754 1,051 1,945 2,572
35 1,317 1,697 2,726 3,392
40 2,413 2,889 4,063 4,768
45 4,882 5,466 6,791 7,535
50 12,914 13,609 15,083 15,861
Bloomberg Personal, September 1994
9
Interest Rates and Their Effect on Your
Investments
10,000 Lump Sum
5-yrs 10-yrs 20-yrs 30-yrs 40-yrs
0 10,000 10,000 10,000 10,000 10,000
1 10,512 11,051 12,213 13,497 14,916
2 11,051 12,212 14,913 18,212 22,241
4 12,210 14,908 22,226 33,135 49,399
6 13,489 18,194 33102 60,226 109,575
8 14,898 22,196 49,268 109,357 242,734
10 16,453 27,070 73,281 198,374 537,007
12 18,167 33,004 108,926 359,496 1,186,477
10
Interest Rates and Their Effect on Your
Investments
100 Per Month
5-yrs 10-yrs 20-yrs 30-yrs 40-yrs
0 6,000 12,000 24,000 36,000 48,000
1 6,155 12,625 26,578 41,998 59,038
2 6,315 13,294 29,529 49,355 73,566
4 6,652 14,774 36,800 69,636 118,590
6 7,012 16,470 46,435 100,954 200,145
8 7,397 18,417 59,295 150,030 351,428
10 7,808 20,655 76,570 227,933 637,678
12 8,249 23,234 99,915 352,991 1,188,242
11
The Magic of Compound Interest

• Investor A
• Opens Roth IRA at 7 interest at age 16.
• Invests 2,000/year for 10 years 20,000.
• After 49 years the Roth IRA is worth 410,186.
• Investor B
• Opens Roth IRA at 7 at age 30.
• Invests 2,000/yr for 35 years 70,000.
• After 35 years, IRA is worth 294,430.
• Difference of 115,756

12
Rule of 72

• The rule of 72 says if you take the interest rate
  you are receiving and divide it into 72, it will
  give you the number of years it will take for
  your investment to double.
• Example, 72 divided by 4 (interest rate at a
  bank) 18 years for your money to double.
• Another example, 72 2 36 years.

13
Rule of 72
Interest Rate (Lump Sum Investment) Interest Rate (Lump Sum Investment) Interest Rate (Lump Sum Investment) Interest Rate (Lump Sum Investment) Interest Rate (Lump Sum Investment) Interest Rate (Lump Sum Investment)
Year 2 4 6 8 10 12
72236 72418 72612 7289 72107.2 72126
0 1,000 1,000 1,000 1,000 1,000 1,000
6 1,130 1,268 1,432 1,617 1,813 2,047
12 1,277 1,607 2,051 2,616 3,288 4,191
18 1,443 2,037 2,937 4,231 5,962 8,579
24 1,631 2,583 4,206 6,843 10,811 17,561
30 1,843 3,274 6,023 11,067 19,603 35,950
36 2,083 4,151 8,625 17,899 35,545 73,592
14
Give Your Money a Job!

• You worked hard for your money, so why not let
  your money work hard for you!
• Savings Account (lt1) ok job (short-term
  savings lt1 year).
• CDs, Money Markets, Bonds (2-5) better job
  (medium-term savings lt5 years).
• Stocks, Mutual Funds (4-10) even better job
  (long-term savings gt5 years).
• Mixture of all three types priceless!

15
(No Transcript)
16
Debt the Good, Bad Ugly

• House Loan (Mortgage)
• Auto Loan (Car or Truck)
• Personal Loan
• Credit Card

17
House Loan (Mortgage)

• Mortgages are usually good debt because equity in
  the house is built up over time.
• Only borrow what you can reasonably afford to pay
  back each month.
• The shorter the term (15yr vs. 30yr) the less
  interest you pay over time.
• Shop around for lowest interest rate.

18
Auto Loan

• Auto loans are considered not so good debt
  because the value of the car goes down over time.
• The shorter the term (36 mo vs. 60 mo) the less
  interest you pay over time.
• Shop around for lowest interest rate.
• Better to buy a used car or save up and pay cash
  for your vehicles.

19
Personal Loan

• Personal loans are considered bad debt because
  you pay interest with no return.
• Only borrow if it is a true emergency.
• Shop around for lowest interest rate.
• Pay back the loan ASAP.
• Better to create your own emergency fund and
  borrow from and repay yourself.

20
Credit Card Debt

• Credit Card debt is ugly debt because you pay
  enormously high interest rates.
• Interest rates can range from 0 - 30
• Credit card debt is one of the leading causes of
  personal bankruptcy.
• Dont carry balance over each month.
• Better to only charge what you can easily pay
  back each month.

21
Credit Card Debt

• How long to pay off credit card?
• 5,000 balance
• 10 interest rate
• 100 monthly payment

22
Credit Card Debt

• How long to pay off credit card?
• 5,000 balance
• 10 interest rate
• 100 monthly payment
• Almost 5.5 years to pay off the debt.
• 1,495 of interest
• 5,000 principle
• 6,495 total money paid Ugly!

23
Credit Card Debt

• How long to pay off credit card?
• 5,000 balance
• 20 interest rate
• 100 monthly payment

24
Credit Card Debt

• How long to pay off credit card?
• 5,000 balance
• 20 interest rate
• 100 monthly payment
• Over 9 years to pay off the debt.
• 5,840 of interest
• 5,000 principle
• 10,840 total money paid Uglier!

25
(No Transcript)
26
Retirement Options/Vehicles

• 401(k) (corporations)
• 403(b) (not-for-profits-education/hospitals)
• 457(b) (government)
• Roth IRA
• IRA
• Annuities
• U.S. Savings Bonds
• CDs
• Savings Accounts
• Others

27
Web Resources for Kids

• http//www.younginvestor.com/
• http//www.strongkids.com/
• http//www.youngbiz.com/
• http//www.kidsmoney.org/
• http//www.marketwatch.com/pf/started/GettingStart
  ed_KidsMoney.asp

28
Other Web Resources

• www.bogleheads.org/
• www.savingforcollege.com/
• www.yourmoneypage.com/
• www.mrmoneymustache.com/
• www.early-retirement.org/
• www.flip4u.org

29
Things to Remember!

• Its not how much you earn, but how much you
  dont burn!
• Pay yourself first (saving investing).
• Invest 50 of your annual raise in you.
• Work smart, Invest hard, Retire peacefully.
• Give back (time money) to charities,
  churches, communities, schools, etc.

30
What would you do if you found 100?
31
Questions
tjorns_at_gmail.com www.flip4u.org