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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. - PowerPoint PPT Presentation
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Financial Literacy 101Financial Literacy 101
Todd JornsTodd Jorns
www.flip4u.org
Today’s GoalsToday’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.
QuizQuiz
• 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
QuestionsQuestions
• 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?
Investing versus SavingInvesting 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
How to Have a Net Worth of $1 How to Have a Net Worth of $1 Million at Age 55Million 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 Interest Rates and Their Effect on Your InvestmentsYour Investments
5-yrs 10-yrs 20-yrs 30-yrs 40-yrs
0% $10,000 $10,000 $10,000 $10,000 $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 Interest Rates and Their Effect on Your InvestmentsYour Investments
$100 Per Month
5-yrs 10-yrs 20-yrs 30-yrs 40-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 InterestThe 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!).
The Magic of Compound InterestThe Magic of Compound Interest
Jimmie Joel Jake
Age Payment Accumulation Payment Accumulation Payment Accumulation
22 $2,000 $2,240 $0 $0 $2,000 $2,240
23 $2,000 $4,749 $0 $0 $2,000 $4,749
24 $2,000 $7,559 $0 $0 $2,000 $7,559
25 $2,000 $10,706 $0 $0 $2,000 $10,706
26 $2,000 $14,230 $0 $0 $2,000 $14,230
27 $2,000 $18,178 $0 $0 $2,000 $18,178
28 $0 $20,359 $2,000 $ 2,240 $2,000 $ 22,599
29-64 $0 ↕ ↕ $2,000 ↕ ↕ $2,000 ↕ ↕
65 $0 $1,348,440 $0 $1,363,780 $0 $2,712,220
Rule of 72Rule 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 72Rule of 72
Interest Rate (Lump Sum Investment)
Year 2% 4% 6% 8% 10% 12%
72÷2=36 72÷4=18 72÷6=12 72÷8=9 72÷10=7.2
72÷12=6
0 $1,000 $1,000 $1,000 $1,000 $1,000 $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!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!
Debt: the Good, Bad & UglyDebt: the Good, Bad & Ugly
• House Loan (Mortgage)
• Auto Loan (Car or Truck)
• Credit Card
House Loan (Mortgage)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 LoanAuto 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.
Credit Card DebtCredit 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 DebtCredit Card Debt
• How long to pay off credit card?
– $5,000 balance
– 10% interest rate
– $100 monthly payment
Credit Card DebtCredit 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 DebtCredit Card Debt
• How long to pay off credit card?
– $5,000 balance
– 20% interest rate
– $100 monthly payment
Credit Card DebtCredit 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!
Earning Money to Save/InvestEarning 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
22
Retirement Options/VehiclesRetirement 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 KidsWeb 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
Other Web ResourcesOther Web Resources
• www.fool.com/
• www.morningstar.com/
• www.bankrate.com/
• www.savingforcollege.com/
• www.collegesavings.org/
• www.flip4u.org
What’s Most ImportantWhat’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.
