Financial Literacy 101Financial Literacy 101

Todd JornsTodd Jorns

www.flip4u.orgwww.flip4u.org

What would you do if you found $100?

My MissionMy 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.

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

5

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?

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

• 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 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 (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 & UglyDebt: the Good, Bad & Ugly

• House Loan (Mortgage)

• Auto Loan (Car or Truck)

• Personal Loan

• 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!

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.bogleheads.org/

• www.savingforcollege.com/

• www.yourmoneypage.com/

• www.mrmoneymustache.com/

• www.early-retirement.org/

• www.flip4u.org

Things to Remember!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.

What would you do if you found $100?

QuestionsQuestionstjorns@gmail.comtjorns@gmail.com

www.flip4u.orgwww.flip4u.org