Financial Literacy 101 Todd Jorns

What would you do if you found $100?

My Mission Familiarize you with various financial terminology and principles. Inform you of the difference between “saving versus investing.” Inspire you to become investors. Challenge you to share this knowledge with family and friends.

Quiz Have you heard of these financial terms? –Savings Account –Checking Account –CDs –Stocks & Mutual Funds –Interest, Dividends & Capital Gains –Compound Interest –Rule of 72 –Debt

Questions Does anyone have a savings account? Does anyone earn money? Does anyone know if they earn interest? Does anyone know the current balance of their savings account?

Today’s Agenda How to Have a Net Worth of $1 Million at Age 55 Interest Rates and Their Effect on Your Investments The Magic of Compound Interest Rule of 72 – Lump Sum Investment Debt: the Good, Bad & Ugly

How to Have a Net Worth of $1 Million at Age 55 Monthly Savings Age Return of 10% Return of 8% Return of 4% Return of 2% 20$264$435$1,094$1,646 25$442$670$1,440$2,030 30$754$1,051$1,945$2,572 35$1,317$1,697$2,726$3,392 40$2,413$2,889$4,063$4,768 45$4,882$5,466$6,791$7,535 50$12,914$13,609$15,083$15,861 Bloomberg Personal, September 1994

Interest Rates and Their Effect on Your Investments 5-yrs10-yrs20-yrs30-yrs40-yrs 0%$10,000 1%$10,512$11,051$12,213$13,497$14,916 2%$11,051$12,212$14,913$18,212$22,241 4%$12,210$14,908$22,226$33,135$49,399 6%$13,489$18,194$33102$60,226$109,575 8%$14,898$22,196$49,268$109,357$242,734 10%$16,453$27,070$73,281$198,374$537,007 12%$18,167$33,004$108,926$359,496$1,186,477 $10,000 Lump Sum

Interest Rates and Their Effect on Your Investments $100 Per Month 5-yrs10-yrs20-yrs30-yrs40-yrs 0%$6,000$12,000$24,000$36,000$48,000 1%$6,155$12,625$26,578$41,998$59,038 2%$6,315$13,294$29,529$49,355$73,566 4%$6,652$14,774$36,800$69,636$118,590 6%$7,012$16,470$46,435$100,954$200,145 8%$7,397$18,417$59,295$150,030$351,428 10%$7,808$20,655$76,570$227,933$637,678 12%$8,249$23,234$99,915$352,991$1,188,242

The Magic of Compound Interest Investor A –Opens Roth IRA at 7% interest at age 16. –Invests $2,000/year for 10 years = $20,000. –After 49 years the Roth IRA is worth $410,186. Investor B –Opens Roth IRA at 7% at age 30. –Invests $2,000/yr for 35 years = $70,000. –After 35 years, IRA is worth $294,430. Difference of $115,756

Rule of 72 The rule of 72 says if you take the interest rate you are receiving and divide it into 72, it will give you the number of years it will take for your investment to double. Example, 72 divided by 4 (interest rate at a bank) = 18 years for your money to double. Another example, 72 ÷ 2 = 36 years.

Rule of 72 Interest Rate (Lump Sum Investment) Year2%4%6%8%10%12% 72÷2=3672÷4=1872÷6=1272÷8=972÷10=7.272÷12=6 0$1,000 6$1,130$1,268$1,432$1,617$1,813$2,047 12$1,277$1,607$2,051$2,616$3,288$4,191 18$1,443$2,037$2,937$4,231$5,962$8,579 24$1,631$2,583$4,206$6,843$10,811$17,561 30$1,843$3,274$6,023$11,067$19,603$35,950 36$2,083$4,151$8,625$17,899$35,545$73,592

Give Your Money a Job! You worked hard for your money, so why not let your money work hard for you! –Savings Account (<1%) – ok job (short-term savings <1 year). –CDs, Money Markets, Bonds (2-5%) – better job (medium-term savings <5 years). –Stocks, Mutual Funds (4-10%) – even better job (long-term savings >5 years). –Mixture of all three types – priceless!

Debt: the Good, Bad & Ugly House Loan (Mortgage) Auto Loan (Car or Truck) Personal Loan Credit Card

House Loan (Mortgage) Mortgages are usually good debt because equity in the house is built up over time. Only borrow what you can reasonably afford to pay back each month. The shorter the term (15yr vs. 30yr) the less interest you pay over time. Shop around for lowest interest rate.

Auto Loan Auto loans are considered not so good debt because the value of the car goes down over time. The shorter the term (36 mo vs. 60 mo) the less interest you pay over time. Shop around for lowest interest rate. Better to buy a used car or save up and pay cash for your vehicles.

Personal Loan Personal loans are considered bad debt because you pay interest with no return. Only borrow if it is a true emergency. Shop around for lowest interest rate. Pay back the loan ASAP. Better to create your own “emergency” fund and borrow from and repay yourself.

Credit Card Debt Credit Card debt is ugly debt because you pay enormously high interest rates. Interest rates can range from 0% - 30% Credit card debt is one of the leading causes of personal bankruptcy. Don’t carry balance over each month. Better to only charge what you can easily pay back each month.

Credit Card Debt How long to pay off credit card? –$5,000 balance –10% interest rate –$100 monthly payment

Credit Card Debt How long to pay off credit card? –$5,000 balance –10% interest rate –$100 monthly payment Almost 5.5 years to pay off the debt. –$1,495 of interest –$5,000 principle –$6,495 total money paid – Ugly!

Credit Card Debt How long to pay off credit card? –$5,000 balance –20% interest rate –$100 monthly payment

Credit Card Debt How long to pay off credit card? –$5,000 balance –20% interest rate –$100 monthly payment Over 9 years to pay off the debt. –$5,840 of interest –$5,000 principle –$10,840 total money paid – Uglier!

Retirement Options/Vehicles 401(k) (corporations) 403(b) (not-for-profits-education/hospitals) 457(b) (government) Roth IRA IRA Annuities U.S. Savings Bonds CDs Savings Accounts Others

Web Resources for Kids ttingStarted_KidsMoney.asphttp:// ttingStarted_KidsMoney.asp

Other Web Resources

Things to Remember! It’s not how much you earn, but how much you don’t burn! Pay yourself first (saving & investing). Invest 50% of your annual raise in you. Work smart, Invest hard, Retire peacefully. Give back (time & money) – to charities, churches, communities, schools, etc.

Questions