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

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.

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

At the end of year 1 Assuming weekly contributions of $20 and the employer matching $20 Beginning Balance Addition to Principal Return Ending Balance $0.00 $2,080.00 $88.40 $2,168.40

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

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

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

What would happen if she was so excited that she made $88 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 Principal Return Ending Balance $0.00 $2,080.00 $88.40 $2,168.40

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 $7,690.80 $99,210.80 44 $91,520.00 $7,867.60 $101,467.60 45 $93,600.00 $8,044.40 $103,724.40 Over $900,000 difference!

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.

Hand out Marcus’s investing Year Beginning Balance Addition to Principal Return Ending Balance $0.00 1 2 3 4 5 6 7 8 9 10 $2,080.00 $88.40 $2,168.40 11 $272.71 $4,521.11 He waits 10 years before beginning to save…

At retirement… he still has an impressive $445,540.33 41 $294,410.12 $2,080.00 $25,113.26 $321,603.38 42 $27,424.69 $351,108.07 43 $29,932.59 $383,120.66 44 $32,653.66 $417,854.31 45 $35,606.02 $455,540.33 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!

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.

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.

It’s easy to get pessimistic when financial assets go down, but that’s a bad time to sell. • It’s easy to get optimistic when financial assets go up, but that’s a bad time to buy. • Historically, the stock-market roller coaster ends up higher than it started out. Over long periods of time, people have done well by leaving their money in.

Don’t put your eggs all in one basket

Class Activity Given the following scenarios, move to the part of the room of where you would make your investment Make sure you have board signs up (at end of Power Point)

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

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

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.

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

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

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