1. Copyright Leslie LumPage 1 Module 1 Why Are You Here?

2. Copyright Leslie LumPage 2 Module One Learning Objectives Set expectations for the course. Explore and dispel misconceptions about investing. Compile a personal budget. Demonstrate the benefits of saving. Apply compounding to savings set aside today. Set financial goals. Calculate present value of a sum needed in the future. Calculate future value of annual savings. Demonstrate the effect of varying inflation rates on future financial goals. Demonstrate the effect of varying rates of return on achieving future financial goals. Create a personal financial plan.

3. Copyright Leslie LumPage 3 Learning about investing means-- I’ll be rich. I’ll learn about stocks only. Once I’ve got the formula down, I’m set. I’ll never have to change my investments. I’ll change my investments all the time. I’ll be able to control exactly how much I make. I’ll make just as much as my cousin Arnie.

4. Copyright Leslie LumPage 4 I don’t need to know about investing because I’m going to hire someone to take care of my money. My employer takes care of my investing. I don’t have any money.

5. Copyright Leslie LumPage 5 The Investment Process Goals What you will and won’t invest in Knowledge of all the different kinds of investments A way of selecting the ones for you How to monitor your investments

6. American Financial Life Pop Quiz Copyright Leslie LumPage 6

7. 9/12/07 Your financial life 7

8. Salaries are leveling off. You can still improve your earnings with education. Washington 2006 Median Income Total:63,705 2-person families58,584 3-person families66,252 4-person families75,140 5-person families68,562 6-person families62,484 7-or-more-person families61,212 8

9. Expect to be self- employed,under-employed or unemployed sometimes. People change jobs on average every two years. 9

10. 9/12/07 How are we doing at savings? 10

11. 9/12/07 Could we save more? 11

12. Most of our wealth is in our homes

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14. 9/12/07 The importance of saving early Which is more? 1.Saving $4000 a year from 25 to 45 years old and then no more savings but you leave it in your account 2.Saving $8000 (double) a year from 45 to 65 years old 14

15. Another example of starting early Number of years Savings per year Total contribution sEarningsTotal 25-65 years404000160000$798,540.45$958,540.45 30-65 years354000140000$552,947.51$692,947.51 35-65 years304000120000$377,843.15$497,843.15 40-65 years254000100000$252,996.15$352,996.15 9/12/07 15

16. Copyright Leslie LumPage 16 How to start Know yourself –What do you want out of life? –How much work are you willing to put into it? –What trade-offs are you willing to make? –How much turbulence can you take? –How do you stand financially?

17. Copyright Leslie LumPage 17 Knowing yourself financially. What you spend every year for: Food at home. Food away from home. Transportation (Car, bus, insurance, gas) Housing (Rent or mortgage) Clothing Entertainment Tobacco Alcohol

18. Copyright Leslie LumPage 18 One personTwo personThree person Four person Five or more Expenditures Total23,50740,35945,50854,39553,805 Food at home1,5332,9543,6964,4045,151 Food away from home1,3022,3362,5123,0433,042 Alcoholic beverages314400315368309 Housing8,37112,94414,74417,91417,317 Apparel8621,6502,0132,6432,893 Transportation4,0127,6929,34810,77511,123 Healthcare1,4412,8272,2652,2532,150 Entertainment1,0972,0512,1372,7872,718 Personal297512555614658 Reading111168139155131 Education4234768301,059984 Tobacco203312397349416 Miscellaneous5187448431,156743 Cash contributions1,0631,4291,1671,2871,399 Personal insurance and pensions1,9603,8644,5475,5894,770 Personal Taxes1,8293,5993,0663,9002,652

19. Copyright Leslie LumPage 19 You have the highest chance of accumulating wealth when you: Invest in new hot tech stocks Have rich relatives who might include you in their wills Buy a lottery ticket Marry someone with money Save

20. Copyright Leslie LumPage 20 Making your money work for you

21. Copyright Leslie LumPage 21 Making your money work for you. What would you have if you did the following with $100 in 1995? Bought beer Put it in the bank for 5% interest per year Bought Microsoft stock (10 shares)

22. Copyright Leslie LumPage 22 Let’s use compounding another way—to find the (future) cost of a purchase decision You want to buy a second TV set for $400. What is this (future) costing you? (Use 20 years and 8% return. We use 8% because it’s historically the rate of return on investments over a long period of time.) –$467 –$892 –$1,254 –$1,865

23. Copyright Leslie LumPage 23 Lay out your goals Down payment on house Wedding Car Big trip College tuition Starting your own business Retirement

24. Copyright Leslie LumPage 24 Getting from here to your goals

25. Copyright Leslie LumPage 25 What do you have to set aside today for: (Use 8% return) A $40,000 down payment on a house in 10 years $50,000 college tuition for your kid in 15 years $800,000 for retirement in 30 years Just a minute---is it possible to save for big goals?

26. Copyright Leslie LumPage 26 For big goals save every year $40,000 down payment on house in 10 years ($2761 every year) $50,000 college tuition in 15 years ($1841 every year) $800,000 retirement in 30 years ($7062 every year)

27. Copyright Leslie LumPage 27 Which is more (and how much more)? Saving $1000 a year for 5 years at a 10% return Saving $300 a year for 45 years at a 5% return

28. Copyright Leslie LumPage 28 You’re 25 and plan to retire in 40 years. How much do you save every year to have a $1 M nest egg. If you start at age 45. If you start at age 35. If you start now.

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30. Copyright Leslie LumPage 30 It’s a moving target

31. Copyright Leslie LumPage 31 Calculate the effects of inflation on financial goals. Use 2% and 4% inflation. House in 10 years. Today’s price $200,000 Kid’s college education in 18 years. Today’s price $50,000

32. Copyright Leslie LumPage 32 That’s not the only uncertainty

33. Copyright Leslie LumPage 33 Calculate and comment on the annual savings needed Wedding in 5 years. Return 8%. Is 8% a good return to use? College education in 20 years. Return 13%. Is 13% a good return to use? Conclusion: Use sensitivity analysis in your financial planning. The future is uncertain.

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36. Copyright Leslie LumPage 36 Applying the annual savings formula Wedding - $1329 for 5 years First House - $5185 for 7 years Trade-up House - $5,449 for 8 years Kid 1 College - $4592 for 18 years Kid 2 College - $4871 for 18 years Retirement - $7166 for 40 years

37. Copyright Leslie LumPage 37 Katie’s Saving Plan