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Financial Literacy 101

Financial Literacy 101. Todd Jorns www.flip4u.org. Today’s Goals. Familiarize you with various financial terminology and principles. Inform you of the difference between “saving versus investing.” Inspire you to become better savers and investors. Quiz.

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Financial Literacy 101

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  1. Financial Literacy 101 Todd Jorns www.flip4u.org

  2. Today’s Goals • Familiarize you with various financial terminology and principles. • Inform you of the difference between “saving versus investing.” • Inspire you to become better savers and investors.

  3. 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

  4. 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? • Does anyone have a Money Tree?

  5. Investing versus Saving • 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

  6. How to Have a Net Worth of $1 Million at Age 55 Bloomberg Personal, September 1994

  7. Interest Rates and Their Effect on Your Investments $10,000 Lump Sum

  8. Interest Rates and Their Effect on Your Investments $100 Per Month

  9. The Magic of Compound Interest • Jimmie • Opens IRA at 12% interest at age 22. • Invests $2,000/year for 6 years = $12,000. • After 43 years IRA is worth $1,348,440. • Joel • Spends $2,000/yr on himself for six years. • Opens IRA at 12% at age 28. • Invests $2,000/yr for 37 years = $74,000. • After 43 years, IRA is worth $1,363,780. • Difference of $15,340 (start early!).

  10. The Magic of Compound Interest

  11. 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.

  12. Rule of 72

  13. 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. • CDs, Money Markets, Bonds (2-5%) – better job. • Stocks, Mutual Funds (4-10%) – even better job. • Mixture of all three types – priceless!

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

  15. 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.

  16. 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.

  17. 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.

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

  19. 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!

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

  21. 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!

  22. Earning Money to Save/Invest • Summer job • Baby sitting • Household chores • Outdoor chores (raking leaves, etc.) • Birthday money (save 50%) • Sell old toys at garage sale • Spend less

  23. 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

  24. Web Resources for Kids • http://www.younginvestor.com/ • http://www.strongkids.com/ • http://www.youngbiz.com/ • http://www.kidsmoney.org/ • http://www.marketwatch.com/pf/started/GettingStarted_KidsMoney.asp

  25. Other Web Resources • www.fool.com/ • www.morningstar.com/ • www.bankrate.com/ • www.savingforcollege.com/ • www.collegesavings.org/ • www.flip4u.org

  26. What’s Most Important • It’s not how much you make, but how much you keep! • It’s not how much you earn, but how much you don’t burn! • Pay yourself first (saving & investing). • Invest 20% or more of your earnings. • Work smart, Invest hard, Retire peacefully.

  27. Questions tjorns@gmail.com www.flip4u.org

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