Investing and Personal Finance

Why Do We Save and Invest? When people earn money from working a job, it can be used be put into two major categories Satisfying current obligations (bills, rent, food) Saving it to accomplish medium – longer term goals (retirement, buying a home, saving for a child’s education) When looking at long term goals, it is important to plan out how much to save, and if and how that money should be invested to allow to grow and compound

Making a Budget As people enter the workforce and start earning a steady paycheck, it’s typically a good idea to create a budget based on income and expenses, and what goals you’re planning for Usually for a set time period such as a month Ex. Item Cost Rent $800 Phone Bill $70 Internet $50 Electricity $80 Retirement Savings (401k) $150 Home Fund $200 A budget is a good place to start for anyone looking to get their finances organized As you can see, some of these are current expenses, some are future expenses Has anyone here ever made a budget?

Good Rules of Thumb for Money Allocation The 50 – 30 – 20 rule: 50% of your check should go towards current needs such as housing and bills 20% of your check should go towards financial goals, such retirement, paying off debt, or buying a home (this can be more if you have multiple financial goals) 30% should be used for wants – you need to enjoy life while you’re here! Specifically for retirement, try to be socking away 10-15% of your income into a tax-sheltered vehicle to invest and grow it Try to have an emergency savings fund – usually 3-6 months worth of expenses Try to limit debt! Debt interest accumulation is the type of compounding you want to avoid

Investing Example - Retirement In the budget on the previous slide, you saw Retirement Savings (401k) A 401k is one of many tax-sheltered vehicles used to save for the goal of retirement – after all, we don’t want to have to work forever! We invest that money to allow it to be beat inflation and be worth something tomorrow, even as costs rise First step is to set a goal of when this money will be needed, and plan out how you’ll need to save and what investment growth expectations are 401ks, 403bs, 457bs, IRAs (Roth and Traditional) are common retirement accounts

Investing Example - Retirement Bob is a 22 year old starting a new job out of college. He wants to retire at age 67 He makes $50,000 per year and has decides to sock away 15% of his paycheck His employer matches 50% of his contributions up to 6% of his pay How much could be have when he retires? Try to guess! Source: https://www.bankrate.com/calculators/retirement/401-k-retirement-calculator.aspx Let the kids take some guesses

Retirement Example Detail How did Bob have $3,467,022 in retirement if he only contributed $549,979 and his employer only gave about $109,996? The answer INVESTING If Bob invested in a diversified mix of stocks, bonds, and money markets and the market returned around what is has historically (which is not guaranteed, more on that later), then the bulk of his balance is due to the power of compounding So what are stocks, bonds, and money markets?

Stocks Stocks are shares of equity, or ownership, in a publicly traded company You can buy stock in some of the companies you already know about The share price fluctuates with news in the markets, financial performance, and other factors You generally buy stock if you think that company with grow its earnings

Would you invest in these stocks? Why or why not? Keep in mind, a stock’s price is likely to go up if it is believed they will make more money in the future

Bonds Bonds are certificates that pay the owner a specified interest rate annually, and are issued by corporations, governments (US Gov’t), and municipalities (the city of Raleigh) If a bond has a 4% interest rate, and is bought at $1000, the owner will receive 4% interest ($40) per year, then get the original $1000 back at the bond maturity These are more conservative than stocks, but can still fluctuate

Money Markets These are your most conservative instruments, ie. Funds that you can invest in that may gain a small bit of interest but won’t go up with the market Think savings accounts Your broker/investment firm will typically have its own money market account, and interest rates will depend on the current environment You tend to go more towards this as you’re approaching your goal, as it won’t fluctuate or go down but it won’t have the opportunity to increase a lot

Diversification All three of the aforementioned asset classes combine to give someone a DIVERSIFIED portfolio Idea is that you don’t want to have all your eggs in one basket If everything is going up or going down at the same time, you’re not truly diversified!

How Do We Protect Against Loss? Consumers will often purchase insurance to protect themselves from the effects of a catastrophic loss Life insurance to protect against loss of a loved one (spouse) What happens if you have a child and a newly purchased home, and your spouse passes away? Car insurance to protect against loss of your car Health insurance to protect against the costs of health care if something damaging were to happen to you Dental insurance to protect against your teeth being damaged These are all types of insurance benefits your employer may have, and you’re responsible for signing up for

So what does this all mean for me? You’re most likely making important financial decisions even today, but especially after you leave Ms. Williamson’s class After high school: College: How much in financial aid/student loans will I need? Can I/should I work during college? What can I do to increase my earnings potential when I leave college? Workforce: How can I organize my paycheck to make sure I’m taken care of today AND tomorrow? How do I select benefits from my employer’s offerings? How much should I be saving, and how do I invest?

Financial Decisions As you enter the college and/or the workforce, remember that the choices you make today will affect your future self Be mindful of organizing your money in a way that allows you enjoy today while being prepared for tomorrow Financial stress is a big problem for most Americans today Being well-prepared financially will ultimately create a less stressful lifestyle What kinds of changes can you make today that will help your financial life later on?

Questions?