Ten Rules of Wealth Building All Teachers Should Know Justus Morgan Financial Planner, CFP ®, EA Financial Service Group, Inc. Money Smart Week Wisconsin Lambeau Field October 10, 2007 Dr. Norman Cloutier Professor of Economics Director, UW-Parkside Center for Economic Education

Impact of Compound Interest Impact of Compound Interest 10% return on $100 = $10 in Period One10% return on $100 = $10 in Period One 10% return on $100 + $10 = $11 in Period Two10% return on $100 + $10 = $11 in Period Two 10% return on $110 + $11 = $12.10 in Period Three10% return on $110 + $11 = $12.10 in Period Three Rule of 72 to double your money Rule of 72 to double your money Rule 1 Start Saving Now

The Tale of Pat and Terry... Pat and Terry are 22-year-old first year teachers, each earning $30,000 per year in the same school district Pat and Terry are 22-year-old first year teachers, each earning $30,000 per year in the same school district Terry begins saving immediately, placing $40 per week in a diversified stock mutual fund Terry begins saving immediately, placing $40 per week in a diversified stock mutual fund Pat waits 10 years before she decides to invest in the same way Pat waits 10 years before she decides to invest in the same way

Terry’s 1 st 10 years...

Pat’s 1 st 10 years...

After 45 years in the school district... Procrastinating Pat’s portfolio is worth $455,540 Procrastinating Pat’s portfolio is worth $455,540 Early-saver Terry’s portfolio is worth $1,062,137 Early-saver Terry’s portfolio is worth $1,062,137

Learning, Earning and Investing #1 Why Save? #15 Why Don’t People Save? National Standards in Economics Marginal costs and benefits Scarcity Incentives Economic institutions Interest rates

Continue contributions during “good” and “bad” markets Continue contributions during “good” and “bad” markets Trying to “time” the market is a loser’s game Trying to “time” the market is a loser’s game Rule 2 Keep a Steady Course

Buy and hold... If you buy and hold, over the long-term the ups are greater than the downs

Does anyone know when the next market surge will be? S&P Source: Schwab Center for Investment Research

Learning, Earning and Investing #12 Building Wealth Over the Long Term #21 Lessons From History: Stock Market Crashes National Standards in Economics Marginal costs and benefits Economic institutions Interest rates

Rule 3 Know Your Risk Tolerance Historical Returns Range of Returns Cash3-4% -1% to 9% Bonds5-6% -5% to 15% Stocks10-12% -27% to 52%

Stock volatility declines with longer holding periods Source: Schwab Center for Investment Research Range of S&P 500 Returns

Learning, Earning and Investing #4 What’s a Stock? #6 What’s a Bond? National Standards in Economics Gains from trade Economic institutions Interest rates

Rule 4 Diversity Reduces Adversity Modern Portfolio Theory – Harry Markowitz, 1990 Nobel Laureate Modern Portfolio Theory – Harry Markowitz, 1990 Nobel Laureate Don’t put all your eggs in one basket Don’t put all your eggs in one basket Mutual funds pool investors’ savings Mutual funds pool investors’ savings Dollar cost averaging Dollar cost averaging

Learning, Earning and Investing #7 What Are Mutual Funds? #12 Building Wealth Over the Long Term National Standards in Economics Marginal costs and benefits Economic institutions Interest rates

Rule 5 The Market is Smart... Not only is the market smarter than we are, it is likely smarter than Wall Street analysts. Not only is the market smarter than we are, it is likely smarter than Wall Street analysts. Time in the market is more important than timing the market! Time in the market is more important than timing the market! We Are Not.

Implication of Rule 5... Use Index Funds Use Index Funds Reasons to use index funds: Reasons to use index funds: –Simplify investing –Cost-efficient –Returns outperform average mutual funds –Predictable management –Tax-efficient

Don’t take our word for it… –“The best way to own common stocks is through index funds” – Warren Buffet, Berkshire Hathaway Inc Shareholder Letter –"Most individual investors would be better off in an index mutual fund.“ - Peter Lynch –"Most of my investments are in equity index funds." – Bill Sharpe, 1990 Nobel Laureate

Learning, Earning and Investing #7 What Are Mutual Funds? National Standards in Economics Marginal costs and benefits

Rule 6 Be Prepared for Life’s Uncertainties Emergency cash reserves Emergency cash reserves Have adequate insurance Have adequate insurance –Automobile –Renters / Homeowners –Life

Learning, Earning and Investing #1 Why Save? #15 Why Don’t People Save? National Standards in Economics Marginal costs and benefits Scarcity Incentives Economic institutions Interest rates

Roth IRA vs.Regular IRA Pay with after-tax dollars Pay with after-tax dollars Distributions & earnings are tax-free Distributions & earnings are tax-free Use if expect higher taxes in future Use if expect higher taxes in future Pay with pre-tax dollars Pay with pre-tax dollars Distributions & earnings are taxable Distributions & earnings are taxable Use if expect lower taxes in future Use if expect lower taxes in future 401(k) & 403(b) have similar tax benefits 401(k) & 403(b) have similar tax benefits Use both for tax diversification Rule 7 Minimize Investment Taxes

Learning, Earning and Investing #7 What Are Mutual Funds? #12 Building Wealth Over the Long Term National Standards in Economics Marginal costs and benefits Economic institutions Interest rates

Learning, Earning and Investing #7 What Are Mutual Funds? #12 Building Wealth Over the Long Term National Standards in Economics Marginal costs and benefits Economic institutions Interest rates

Rule 8 Minimize Investment Costs Pay off credit cards Pay off credit cards –Where else can you get a guaranteed 17% return on your investment? Use low-cost investment products Use low-cost investment products –0.50% vs. 1.50% expenses over 20 years at 8% saves $7,200 on $10,000 investment –

Learning, Earning and Investing #7 What Are Mutual Funds? #14 Credit: Your Best friend or Your Worst Enemy? National Standards in Economics Marginal costs and benefits

Impact of Earning Master’s Degree Increased wage earnings Increased wage earnings –16% more with 5 years of service –26% more with 14 years of service Increased pension benefits Increased pension benefits –$5,600 more per year with MA+24 vs. BA –Increased benefit lasts for rest of your life Rule 9 Invest in Yourself

Yearly Earnings and Unemployment, Full-Time Wage and Salary Worker, Age 25 and over, 2005 DegreeEarningsUnemployment Doctoral$71,0501.6% Master’s$56,4502.1% Bachelor’s$46,8502.6% Associate$34,9503.3% Some college $32,6504.2% High School $29,1504.7% High School Drop Out $20,4507.6% Source: Bureau of Labor Statistics,

Learning, Earning and Investing #3 Invest in Yourself National Standards in Economics Scarcity Role of money Growth

Rule 10 Avoid Stupid Investor Traps Overconfidence Overconfidence Herding Herding Illusion of Control Illusion of Control Loss Aversion Loss Aversion Ignoring Costs Ignoring Costs Getting Entranced by New Issues Getting Entranced by New Issues

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