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Human Action

Human Action. Lesson 7: Be Money Smart. Rule 1 Start Saving Now. Impact of Compound Interest 10% return on $100 = $10 in Period One 10% return on $100 + $10 = $11 in Period Two 10% return on $110 + $11 = $12.10 in Period Three Rule of 72 to double your money.

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Human Action

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  1. Human Action Lesson 7: Be Money Smart

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

  3. 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 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

  4. Terry’s 1st 10 years . . .

  5. Pat’s 1st 10 years . . .

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

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

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

  9. Does anyone know when the next market surge will be? S&P 500 1996-2005

  10. Rule 3Know Your Risk Tolerance

  11. Stock volatility declines with longer holding periods Range of S&P 500 Returns 1926-2005

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

  13. Rule 5The Market is Smart . . . 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! We Are Not.

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

  15. Don’t take our word for it… “The best way to own common stocks is through index funds” – Warren Buffet, Berkshire Hathaway Inc. 1996 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

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

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

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

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

  20. Rule 9Invest in Yourself

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

  22. Readings and Assignments Lessons for the Young Economist, 10 Read What Can the Law of Diminishing Marginal Utility Teach Us Read Game Theory

  23. My eulogy. I know I'm not dead, I just thought it would be kinda cool to write it myself, while I'm alive and well, and stick it on the end of a TV show. Okay, first, I meant well. Despite all the things for which I need to be forgiven, in my heart I know I meant well. I believe that my sins were driven by fear -- fear of being unloved, fear of poverty, fear of death, fear, fear, fear. What can I say? I was deeply influenced by a frightened mother. I'm not casting blame here; God knows what she dealt with as a little kid. Second, I tried hard. When it came to taking care of my children, I allowed nothing to get in my way -- even a closer relationship with them. I attribute that sin to "fear of being a bad provider." There's so much more to say but as you can see, space is limited. I'll continue eulogizing myself on future vanity cards. In the meantime, there's nothing to fear but fear itself... and lethal diseases, random violence, and tragic accidents.

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