Personal Finance and the Stock Market Challenge August 2012

Materials Financial Fitness for Life (3-5) Earning, Learning, and Investing (High School) Financial Freedom

What do we need to teach? Earning Income Buying Goods and Services Saving Using Credit Financial Investing Protecting and Insuring

Earning Income Income for most people is determined by the market value of their labor, paid as wages and salaries. People can increase their income and job opportunities by acquiring more education, work experience, and job skills. The decision to undertake an activity that increases income or job opportunities is affected by the expected benefits and costs of such an activity. Income also is obtained from other sources such as interest, rents, capital gains, dividends and profits.

Buying Goods and Services People cannot buy or make all the goods and services they want; as a result, people choose to buy some goods and services and not buy others. People can improve their economic well-being by making informed decisions, which entails collecting information, planning, and budgeting.

Saving Saving is the part of income that people choose to put away for future consumption. People save for different reasons during the course of their lives. People make different choices about how they save and how much they save. Time, interest rates and inflation affect the value of savings.

Using Credit Credit allows people to purchase goods and services that they can use today and pay for those goods and services in the future with interest. People choose among different credit options that have different costs. Lenders approve or deny applications for loans based on an evaluation of the borrower’s past credit history and expected ability to pay in the future. Higher-risk borrowers are charged higher interest rates; lower risk borrowers are charged lower interest rates.

Financial Investing Financial investment is the purchase of financial assets to increase income or wealth in the future. Investors must choose among investments that have different risks and expected rates of return. Investments with higher expected rates of return tend to have greater risk. Diversification of investment among a number of choices can lower investment risk.

Protecting and Insuring People make choices to protect themselves from the financial risk of lost income, assets, health, or identity. They can choose to accept risk, reduce risk, or transfer the risk to others. Insurance allows people to transfer risk by paying a fee now to avoid the possibility of a larger loss later. The price of insurance is influenced by an individual’s behavior.

Stock Market Challenge: Saving and Financial Investing Interest Budgeting Saving Early Financial Investing Types of investments Risk / Return Diversification

Why Save? New phone Car College education House Retirement Emergencies

Short-term, Medium-term, Long-term Goals Short-term goals can be achieved in fewer than two months. Medium-term goals may take from two months to three years to achieve. Long-term goals require three or more years to achieve.

What is the Relationship Between Long-term and Short-term Goals? Breaking long-term goals into short-term goals helps them seem achievable.

Opportunity Cost of Saving Opportunity Cost – the value of the next best alternative you give up to obtain something

Budget Income (what is it per month) Expenses Fixed (car payment, WoW payment) Variable (food, movies, etc.) Saving (pay yourself first)

What can get in your way? A budget that includes saving is a good way to get to your goals. But what can happen to a planned budget? Each month, what can happen that will eat into your savings plan?

Teaching About Interest Principal x interest rate = total interest P x i = total interest Total Balance after one year = (1 + i) x P

Teaching About Interest Total Balance after n years, simple = (1 + n i) x P Total Balance after n years, compounded = (1 + i)n x P

Interest: Simple and Compound Simple Interest Yields Total Saving - Simple Interest Compound Interest Adds Total Savings Using Compound Interest Begin $100 1 $8.00 $108.00 2 $116.00 $8.64 $116.64 3 $124.00 $9.33 $125.97 4 $132.00 $10.08 $136.05 5 $140.00 $10.88 $146.93 6 $148.00 $11.75 $158.69 7 $156.00 $12.69 $171.38 8 $164.00 $13.71 $185.09 9 $172.00 $14.81 $199.90

Rule of 72 How long does it take the total amount of savings put into an interest-earning account to double? Answer: 72 / interest rate Example: 72 / 8 = 9, so it takes about 9 years for money to double at an interest rate of 8%

Rule of 72 works for other things… If a country’s population is growing at 3% a year, how long will it be before the population has doubled? Quadrupled? Answer: 72/3 = 24 years Answer: 48 years (doubled doubled)

What impacts total saving? Amount saved each year Interest rate Number of years saved

What to double? $5,000 at 5% for 5 years = $6,381 Do you double the amount, interest rate or years? Amount: $12,762 Interest Rate: $8,053 Years: $8,144 (Not generalizable…)

Assessment

Saving Early / Late Most important lesson…

Save Early / Late Save Early: Save Late: Age Save Total with Interest Saving Total With Interest 20 $ 2,000 $ 2,000 $ - 21 $ 4,160 22 $ 6,493 23 $ 9,012 24 $ 11,733 25 $ 14,672 26 $ 17,846 27 $ 21,273 28 $ 24,975 29 $ 28,973 30 $ 33,291 31 $ 37,954 32 $ 42,991 33 $ 48,430 34 $ 54,304

Save Early / Late Save Early: Save Late: 35 $ 58,649 $ 2,000 $ 2,000 $ 58,649 $ 2,000 $ 2,000 36 $ 63,340 $ 4,160 37 $ 68,408 $ 6,493 38 $ 73,880 $ 9,012 39 $ 79,791 $ 11,733 40 $ 86,174 $ 14,672 41 $ 93,068 $ 17,846 42 $ 100,513 $ 21,273 43 $ 108,554 $ 24,975 44 $ 117,239 $ 28,973 45 $ 126,618 $ 33,291 46 $ 136,747 $ 37,954 47 $ 147,687 $ 42,991 48 $ 159,502 $ 48,430 49 $ 172,262 $ 54,304 50 $ 186,043 $ 60,649

Save Early / Late Save Early: Save Late: 51 $ 200,927 $ 2,000 $ 67,500 $ 200,927 $ 2,000 $ 67,500 52 $ 217,001 $ 74,900 53 $ 234,361 $ 82,893 54 $ 253,110 $ 91,524 55 $ 273,358 $ 100,846 56 $ 295,227 $ 110,914 57 $ 318,845 $ 121,787 58 $ 344,353 $ 133,530 59 $ 371,901 $ 146,212 60 $ 401,653 $ 159,909 61 $ 433,786 $ 174,702 62 $ 468,488 $ 190,678 63 $ 505,967 $ 207,932 64 $ 546,445 $ 226,566 65 $ 590,160 $ 246,692 66 $ 637,373 $ 268,427 67 $ 688,363 $ 291,901

Closure What is saving? How do you do it? What is interest? What impacts how much you will have in the future? Amount, time, interest rate Simple vs. compound

Financial Investing Learning, Earning, and Investing for a New Generation Attached to Gen I Revolution by CEE http://www.genirevolution.org/

Basics: Investment Instruments What is a stock? What is a bond? What are mutual funds?

Fundamental Lesson

Risk vs. Return The dartboard!!!

The Pyramid of Risks and Reward Highest Risk--Highest Potential Return or Loss Lowest Risk--Lowest Potential Return or Loss

Higher Risk / Higher Earnings Lower Risk / Auto Insurance Home-owners Insurance Life Medical Disability Liability Insur.ance Insured Checking Savings Accounts U.S. Savings Bond CDs Treasury Issues Money Market Accounts High-Grade Municipal Bonds High-Grade Corporate Bonds Balanced Mutual Funds High-Grade Preferred Stock Conv. Bonds Blue Chip Stock Real Estate Growth Mutual Funds Collectibles Speculative Stocks or Bonds Bonds Penny Stocks, Commondities Higher Risk / Higher Earnings Lower Risk /

Diversification Why do we diversify?

Diversification Example You are an investor and want to invest $10. You have a choice of investing in each of the following stocks. The stocks cost $5.

Diversification Example Stocks: Bill’s Suntan Products Brett’s Rain Umbrellas Andrea’s Hamburgers

Diversification Example We are going to flip two coins to determine if: It is rainy (Heads) or sunny (Tails) If people are hungry (Heads) or not (Tails)

Your Stock’s Price Depends On: Rainy (Heads) Sunny (Tails) Hungry Not Hungry Bill’s Suntan $5 $10 Brett’s Rain Umbrellas Andrea’s Hamburgers

Choose Your Stocks With your $10, you can buy stock in either one or two companies. For example: You can buy one share of Bill’s Suntan products and one share of Andrea’s hamburgers. You could also buy two shares of Andrea’s hamburgers. You could also buy two of Bill’s or two of Brett’s – you get the idea…

The Flips Weather? Hungry? How did you do? How much risk did you face?

Choices You could not diversify: Two shares in one company and had either $10 (50%) or $20 (50%). You could choose two companies whose risks are not related. Bill / Andrea or Brett / Andrea means you could have had $10 (25%), $15 (50%), or $20 (25%). You could try to buy companies whose risks offset each other. Bill / Brett means no matter what, you had $15.

Reality Investors diversify by choosing: A larger number of stocks Stocks in different sectors Stocks in sectors that might offset risks.

Mutual Funds A mutual fund pools investors’ money. The fund puts its investors’ money into the markets on their behalf. In effect, investors own small amounts of many different assets. Mutual funds enable investors to avoid the risk that comes from owning any one asset. In other words, mutual funds make it easy to diversify.

Choices: Depend on Situation

Investment Situations You have $5,000 to invest. No other information is available. Savings account, CD, Bonds, Stocks, or Real Estate?

Investment Situations You have $4,000 that you’ll need six months from now. Savings account, CD, Bonds, Stocks, or Real Estate?

Investment Situations You inherited $10,000 from your great-aunt; she has suggested that you save it for use in your old age. Savings account, CD, Bonds, Stocks, or Real Estate?

Investment Situations You are just starting a career and can save $50 per month for retirement. Savings account, CD, Bonds, Stocks, or Real Estate?

Investment Situations A new baby arrives, and Mom and Dad plan to save $100 a month for the child’s college education. Savings account, CD, Bonds, Stocks, or Real Estate?

Summary Start Early Choose your risk level Diversify to reduce risk Know your situation…

How do I win? You are the opposite of a long run investor: High risk Low diversification

How do kids win? Learn about savings and compounding Understand risk vs. reward No such thing as free lunch If it is too good to be true, it probably is Understand diversification Know their goals through budgeting

Evaluation and Paperwork Books – Tell the Center who you are My evaluation… Thanks!