1. Personal Finance and the Stock Market Challenge
August 2012

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

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

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

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

11. Why Save?
New phone
Car
College education
House
Retirement
Emergencies

12. 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.

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

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

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

16. 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?

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

18. 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

19. 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

20. 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%

21. 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)

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

23. 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…)

24. Assessment

26. Saving Early / Late
Most important lesson…

27. Save Early / Late Save Early: Save Late: Age Save Total with Interest
Saving
Total With Interest 20
$ ,000
$ ,000 $ 21
$ ,160 22
$ ,493 23
$ ,012 24
$ ,733 25
$ ,672 26
$ ,846 27
$ ,273 28
$ ,975 29
$ ,973 30
$ ,291 31
$ ,954 32
$ ,991 33
$ ,430 34
$ ,304

28. Save Early / Late Save Early: Save Late: 35 $ 58,649 $ 2,000 $ 2,000
$ ,649
$ 2,000
$ ,000 36
$ ,340
$ ,160 37
$ ,408
$ ,493 38
$ ,880
$ ,012 39
$ ,791
$ ,733 40
$ ,174
$ ,672 41
$ ,068
$ ,846 42
$ ,513
$ ,273 43
$ ,554
$ ,975 44
$ ,239
$ ,973 45
$ ,618
$ ,291 46
$ ,747
$ ,954 47
$ ,687
$ ,991 48
$ ,502
$ ,430 49
$ ,262
$ ,304 50
$ ,043
$ ,649

29. Save Early / Late Save Early: Save Late: 51 $ 200,927 $ 2,000 $ 67,500
$ ,927
$ 2,000
$ ,500 52
$ ,001
$ ,900 53
$ ,361
$ ,893 54
$ ,110
$ ,524 55
$ ,358
$ ,846 56
$ ,227
$ ,914 57
$ ,845
$ ,787 58
$ ,353
$ ,530 59
$ ,901
$ ,212 60
$ ,653
$ ,909 61
$ ,786
$ ,702 62
$ ,488
$ ,678 63
$ ,967
$ ,932 64
$ ,445
$ ,566 65
$ ,160
$ ,692 66
$ ,373
$ ,427 67
$ ,363
$ ,901

30. 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

31. Financial Investing
Learning, Earning, and Investing for a New Generation
Attached to Gen I Revolution by CEE

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

33. Fundamental Lesson

34. Risk vs. Return
The dartboard!!!

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

36. 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 /

37. Diversification
Why do we diversify?

38. 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.

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

40. 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)

41. 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

42. 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…

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

44. 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.

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

46. 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.

47. Choices: Depend on Situation

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

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

50. 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?

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

52. 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?

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

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

55. 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

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