1. Building Wealth over the Long-Term Objective: Explain why an early start in saving and investing increases a household’s capacity to build wealth. Explain the benefits of diversification. Source: Learning, Earning & Investing, Theme 3 Lesson 12 Prepared by: Mrs. Quible

2. The three rules of saving and investing to be emphasized in the lesson: 1. Start early. Give money time to grow. 2. Buy and hold. Keep your money invested. 3. Diversify. Don’t put all your eggs in one basket.

3. Case Study Charlayne, the Accidental Millionaire When Charlayne was getting started in her first job, she didn’t use any of her pay to play the lottery or head for the casino along with all her friends. “Come on,” they said. “It’s the only way you’ll ever be a millionaire.” She took note of the “Who Wants to Be a Millionaire?” show on television. But she was pretty sure she would never become a millionaire by hitting the lottery or answering game-show questions. Yet Charlayne became a millionaire. How? Charlayne made an important decision when she began to work. With advice from the company’s benefits manager, she decided to have $20 withheld from each weekly paycheck and put into a mutual fund account. That wasn’t easy to do. Charlayne had many possible uses for an extra $20 each week. But the benefits manager persuaded her that putting $20 aside each week would be the best thing to do for her future. Charlayne’s company matched the $20 deposit she made each week. This meant an immediate doubling of Charlayne’s weekly savings. Over time, Charlayne didn’t exactly forget about her account, but she didn’t always monitor it closely. As printed statements arrived in the mail, generally showing that the value of her account was increasing, Charlayne became increasingly comfortable about her retirement plan. There were times when Charlayne really would have liked to have the money she was saving. But she never considered trying to take her money out of the retirement account. Somehow she found a way to scrape through when there was a financial crisis. When Charlayne retired, it became clear that her sustained program of investment had served her well. She had become a millionaire. Her retirement account was worth more than a million dollars. Steady payments from that account enabled Charlayne to travel and visit her grandchildren, go to movies or concerts when she wanted to, and live in comfort. She was even able to help with college expenses for next-generation members of her family. Most people are skeptical when they’re told that matched weekly contributions of $20 could make them millionaires — but the math works. Figure 1 shows how the money kept growing, in this case, until Charlayne became a millionaire.

4. Charlayne’s Scenario (Summarized) Charlayne graduates college, get a career. Employer asks her to contribute to a company retirement account. Started investing at age 25 $20 per week ($1040 per year) Employer matched funds Assuming 8.5% return

5. At the end of year 1 Assuming weekly contributions of $20 and the employer matching $20 Year Beginning Balance Addition to PrincipalReturn Ending Balance 0$0.00$2,080.00$88.40$2,168.40

6. You now have earnings on earnings At the end of year 2… Year Beginning Balance Addition to PrincipalReturn Ending Balance 0$0.00$2,080.00$88.40$2,168.40 1 $2,080.00$272.71$4,521.11

7. After 10 years Year Beginning Balance Addition to PrincipalReturn Ending Balance 0$0.00$2,080.00$88.40$2,168.40 1 $2,080.00$272.71$4,521.11 2 $2,080.00$472.69$7,073.81 3 $2,080.00$689.67$9,843.48 4 $2,080.00$925.10$12,848.58 5 $2,080.00$1,180.53$16,109.11 6 $2,080.00$1,457.67$19,646.78 7 $2,080.00$1,758.38$23,485.16 8 $2,080.00$2,084.64$27,649.80 9 $2,080.00$2,438.63$32,168.43

8. On the white board… I calculate how much she has contributed in the 10 years. Add how much the employer contributed. Compare it to how much the account is now worth.

9. At Retirement age… Hand out Visual of all years 41$697,824.84$2,080.00$59,403.51$759,308.35 42$759,308.35$2,080.00$64,629.61$826,017.96 43$826,017.96$2,080.00$70,299.93$898,397.89 44$898,397.89$2,080.00$76,452.22$976,930.11 45$976,930.11$2,080.00$83,127.46$1,062,137.57

10. On the white board… I calculate how much she has contributed in the 45 years. Add how much the employer contributed. Compare it to how much the account is now worth.

11. What would happen if she was so excited that she made $88.40, that she the interest out & spent it each year? Year Beginning Balance Addition to PrincipalReturn Ending Balance 0$0.00$2,080.00$88.40$2,168.40

12. What would that have looked like if she took out (or spent) the interest? 42$87,360.00$2,080.00$7,514.00$96,954.00 43$89,440.00$2,080.00$7,690.80$99,210.80 44$91,520.00$2,080.00$7,867.60$101,467.60 45$93,600.00$2,080.00$8,044.40$103,724.40

13. THE MAGIC OF COMPOUNDING When you save, you earn interest. When you take the interest out and spend it, it stops growing. But if you leave the interest in your account so it can grow, you start to earn interest on the interest you earned previously. Interest on interest is money you didn’t work for. It is money your money makes for you! Over time, interest on interest can increase your total savings greatly.

14. Hand out Marcus’s investing Year Beginning Balance Addition to PrincipalReturn Ending Balance 0$0.00 1 2 3 4 5 6 7 8 9 10$0.00$2,080.00$88.40$2,168.40 11$2,168.40$2,080.00$272.71$4,521.11

15. At retirement… he still has an impressive $445,540.33 But a far cry from Charlayne’s $1,062,137.57 The difference? Start with $20/week 10 years sooner. That extra $10,400 she invested (and the employer matched) was worth $616,597! 41$294,410.12$2,080.00$25,113.26$321,603.38 42$321,603.38$2,080.00$27,424.69$351,108.07 43$351,108.07$2,080.00$29,932.59$383,120.66 44$383,120.66$2,080.00$32,653.66$417,854.31 45$417,854.31$2,080.00$35,606.02$455,540.33

16. In order to leave money in savings or investments, you have to do these things: Spend less than you receive. How? Perhaps you could… Earn more by improving your formal education or job skills. Spend less by using a budget to keep track of where your money is going.

17. Become connected to financial institutions. How? Open and maintain accounts at mainstream financial institutions — banks, credit unions and brokerages. Manage your credit responsibly. How? Limit the number of credit cards you have. Limit your purchases to what you can pay off each month. Apply for loans when you are confident that your current income (in the case of college loans, future income) will allow you to repay the loan.

19. Don’t put your eggs all in one basket

20. Class Activity Given the following scenarios, move to the part of the room of where you would make your investment

21. INVESTMENT SITUATION #1 1. You have $5,000 to invest. No other information is available.

22. INVESTMENT SITUATION #2 2. You have $4,000 that you’ll need six months from now.

23. INVESTMENT SITUATION #3 3. You inherited $10,000 from your great-aunt; she has suggested that you save it for use in your old age.

24. INVESTMENT SITUATION #4 4. You are just starting a career and can save $50 per month for retirement.

25. INVESTMENT SITUATION #5 5. A new baby arrives, and Mom and Dad plan to save $100 a month for the child’s college education.

26. Explain that the students may be able to make better decisions if they learn more about the situation. The first item on Visual 11 is the $5,000 generic decision the students just made. Read the second item and ask the students to stand up and show where they would put their money. Some students will return to the same floor marker as before, but some will make different decisions. Go through the other items on Visual 11, showing how the students’ movements correspond to “movements” by investors — making different decisions, depending on the circumstances.

27. Closure What are three rules for building wealth? Start early, buy and hold, diversify. What does it mean to diversify? We don’t know what will happen with stocks & bonds, so spread your investments out