Climbing the Economic Mountain! Section 1 Twelve Key Elements of Economics Supply and Demand Supply and Demand: Applications and Extensions Supply and Demand: Basics Section 2 The Financial Crisis of 2008 Lessons from the Great Depression The Seven Major Sources of Economic Progress Section 3 Ten Elements of Clear Thinking About Economic Progress and the Role of Government Section 4 Twelve Key Elements of Practical Personal Finance

2 Section IV The 12 Key Elements of Practical Personal Finance!

3 Overview Financial insecurity in America The 12 key elements of practical personal finance Budgeting Exercise

4 Personal Finance IQ Quiz! What do you know about personal finance?

5 Financial Insecurity in America Why is there so much financial insecurity in America? Is it because our income is so low?

6 Not Really!

7 Consumption per person has also been growing!

8 More Consuming + Less Saving = More Debt

9 Debt Per Household

10 Who needs money when we have credit!

11 Credit Card Debt!

12 Interest on household debt as a percentage of income

13 Is America in Trouble? Real income per person is rising, but: Savings rate is falling Debt is increasing What can we do? Is there any escape?

14 Planning for Financial Success! The bad news: Failure to save regularly, conserve wisely, invest strategically, and use credit cards prudently is the major cause of financial insecurity in America The good news: Every one of these things is fixable!

15 The importance of financial security Financial security leads to: Less conflict in marriage Better health Retirement A greater ability to achieve personal goals

16 The Millionaire Mind!

17 The 12 Key Elements of Personal Finance The following is a list of fundamental steps that are necessary for achieving wealth and financial security into the future

18 #1 Discover your Comparative Advantage Discover what you can produce at a lower opportunity cost than other people. Don’t just think about money, your opportunity cost includes your personal satisfaction as well!

19 #1 Discover your Comparative Advantage Start looking for your comparative advantage now!

20 #2 Be Entrepreneurial Remember, in market economy, people get rich by helping others and discovering better ways of doing things

21 #2 Be Entrepreneurial Entrepreneurial talent involves the ability to discover: a.New products that are highly valued relative to their costs. The possibilities are endless!

22 #2 Be Entrepreneurial Entrepreneurial talent involves the ability to discover: b. Cost-reducing production methods

23 #2 Be Entrepreneurial Entrepreneurial talent involves the ability to discover: c.Profitable opportunities that others over look Its hard to know what will work….

24 #2 Be Entrepreneurial Ken Olson, chairman/founder of Digital Equipment Corp., 1977: "There is no reason anyone would want a computer in their home." Fred Smith’s (FedEx) Yale University Senior Project Grade Remark: "The concept is interesting and well-formed, but in order to earn better than a 'C,' the idea must be feasible."

25 #2 Be Entrepreneurial Would you have invested?

26 #2 Be Entrepreneurial Who would have thought….

27 #2 Be Entrepreneurial Requires the tolerance for risk: Entrepreneurial activity and self- employment are riskier than being employed by someone else This greater risk can translate into higher income and wealth

28 #2 Be Entrepreneurial Entrepreneurs tend to: a.Have high savings rates: they are often reinvesting in their businesses b.Work long hours and work more strategically A free market economy tends to promote entrepreneurship….

29 #2 Be Entrepreneurial

30 #3 Spend less than you earn Savings and Investment is the most likely way that you will become rich

31 #3 Spend less than you earn Start Saving Now! 1.If you don’t exert the willpower to save now, it is unlikely that you will start later.

32 #3 Spend less than you earn Start Saving Now! 2.The longer you wait to start saving, the more potential wealth you give up! You only have to save a little!

33 #3 Spend less than you earn Start out saving small amounts and then build up to larger amounts: “A journey of a thousand miles begins with a single step” – Chinese proverb, most commonly attributed to Lao Tzu

34 #3 Spend less than you earn Save Automatically: You can have money automatically deducted from your paycheck or bank account for savings Include a plan to save in your budget Save Strategically: Tax Deferred Savings 401 (k) Traditional IRA’s Roth IRA’s

35 #4 Don’t Finance Anything Longer Than Its Useful Life You don’t want to be paying for things long after your done consuming them. Three things worth financing: House Education Automobiles (in some cases)

36 #4 Don’t Finance Anything Longer Than Its Useful Life Things you don’t want to finance: Food Clothing Entertainment Vacations

37 #5 Get More Out of Your Money A.Avoid credit card debt! a. Interest rates on credit cards are very high (usually higher than savings and investment return rates). b. Always pay your credit card in full and on time

38 #5 Get More Out of Your Money B.Consider purchasing used items a. New cars lose substantial value as soon as they are driven off of the lot. b. Used cars have higher maintenance costs, but depreciation costs are much lower

39 #6 Begin paying into a real-world savings account every month Things are going to go wrong, its just a matter of when! Make contributions to an emergency savings account a regular part of your budget.

40 #7 Harness the Power of Compound Interest “Mr. Einstein, what is the most powerful force in the Universe?” “Compound Interest!”

41 #7 Harness the Power of Compound Interest The Rule of 70: Divide 70 by the expected rate of return and you will see how long it takes for your investment to double Again, its all about saving early!

42 #8 Diversify Don’t put all of your eggs in one basket: Investment involves risk, especially in the short run. Mitigate this risk by building a diversified portfolio.

43 #8 Diversify Historically, long term returns on stocks have been really good. Just make sure you: Hold a large number of unrelated stocks Hold stocks for a lengthy period of time.

44 #8 Diversify The Law of Large Numbers: The tendency, over an increasing number of observations, for the sample average to approach the population average (the expected value). If you hold a diversified set of stocks, some will do poorly while others will do well so that the rate of return will converge toward the historic average of the stock market

45 #8 Diversify Avoid Double Jeopardy: If your company offers you a stock-based retirement program then you may want sell your company’s shares as soon as you are permitted If you don’t, and the company goes under, then you have lost your job and your investment!

46 #8 Diversify

47 #9 Indexed Equity Funds Can Help You Beat the Experts Without Taking Excessive Risk Random Walk Theory: Current stock prices reflect all known information about the company, so unforeseeable events is what drives changes in stock prices. No one person, group of people, or company can predict changes in the stock market.

48 #9 Indexed Equity Funds Can Help You Beat the Experts Without Taking Excessive Risk Mutual Funds: a professionally managed collective investment scheme that pools money from many investors and channels this money into alternative investments Many types: money market, equity funds, bonds, etc.

49 #9 Indexed Equity Funds Can Help You Beat the Experts Without Taking Excessive Risk Managed equity funds are administered by professionals who research and select stocks in an effort to maximize your return Indexed equity funds reflect the holdings of broad indexes such as the Dow Jones and the S&P 500

50 #9 Indexed Equity Funds Can Help You Beat the Experts Without Taking Excessive Risk Go with indexed funds: 1.The administrative costs of indexed funds are lower than managed funds 2.Historically, the average long-term yield of indexed equity funds has been higher than managed funds

51 #10 For the long-run, invest in stocks; for the short-run, switch to bonds Historically, the real return from stocks has been higher than that for bonds. Over the long-run, your investment in stocks will be able to ride out the bad times in the market.

52 #10 For the long-run, invest in stocks; for the short-run, switch to bonds However, over short time horizons, stocks are risky. As you get older, you should switch a higher proportion of your investment over to bonds which is less risky.

53 #10 For the long-run, invest in stocks; for the short-run, switch to bonds Bonds do carry some risk: 1.Inflation Risk: Unexpected inflation erodes the purchasing power of the face value of the bond and interest earned 2. Interest Rate Risk: Unexpected increases in interest rates reduce the value of outstanding bonds

54 #10 For the long-run, invest in stocks; for the short-run, switch to bonds As your time horizon gets shorter, switch to bonds that will mature as you need the money

55 #11 Beware of Investment Schemes Promising High Returns with Little or No Risk Remember, there is no such thing as a free lunch! Principle-Agent Problem: The incentive problem that occurs when the buyer of services (investor) lacks full information about the circumstances faced by the seller of services (investee).

56 #11 Beware of Investment Schemes Promising High Returns with Little or No Risk Tips for avoiding investment fraud: 1.Only deal with reputable parties 2.Never purchase an investment by phone or 3.Do not allow yourself to be forced into a quick (or any) decision. 4.Do not allow friendship to influence an investment decision 5.Avoid investments that use high pressured marketing techniques. 6.If it looks too good to be true than it probably is

57 #12 Teach Your Children About Money Teach your children the value of a dollar Help your children develop a good work ethic and savings habit (teach them to save early)

#12 Teach Your Children About Money 58

59 #12 Teach Your Children About Money Save for your retirement over your children’s education Children make bad retirement investments

60 Review Understand the causes of the financial insecurity in America Know how to effectively budget your money and the importance of saving now for your future. Know the 12 Key Elements of Personal Finance: 1. Discover your comparative advantage 2. Be entrepreneurial 3. Spend less than you earn (Save Now!)

61 Review Know the 12 Key Elements of Personal Finance (continued): 4.Don’t finance anything for longer than its useful life. 5.Get more out of your money (avoid credit card debt and buy used) 6.Establish a real-world savings account 7.Harness the power of compound interest 8.Diversify 9.Indexed equity funds can help you beat the market 10.Invest in stocks for the long run and bonds for the short run 11.Beware of investment schemes promising high returns and little to no risk 12.Teach your children about money (earning and saving)

Climbing the Economic Mountain! Section 1 Twelve Key Elements of Economics Supply and Demand Supply and Demand: Applications and Extensions Supply and Demand: Basics Section 2 The Financial Crisis of 2008 Lessons from the Great Depression The Seven Major Sources of Economic Progress Section 3 Ten Elements of Clear Thinking About Economic Progress and the Role of Government Section 4 Twelve Key Elements of Practical Personal Finance

Thank You!