Money Management

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Finding Financial Freedom
Lesson 1: The Power of Investing
(Money Management for KMHS Seniors)

Introduction: Don't Follow The Crowd!

IBM Motto: “Think”
Apple Computer Motto: “Think Different”

A Tale of Two Families

Family #1: Jenny and Jim.
Family #2: Tom and Theresa

What "The Crowd" is doing: Americans and Their Money

Percentage of adults who don't have enough saved to last two weeks. ___
Percentage of adults who live paycheck to paycheck. ___
Percentage of adults who are not saving enough to retire comfortably. ____
Percentage of adults who are in debt. ____
Percentage of divorces due to arguments over money. ____
The average amount of credit card debt carried by individuals in 2004. ____
Percentage of families who spent more than they earned in 2004 ____
Amount of people who filed for bankruptcy in 2004. _____
Percentage of American workers who have not even attempted to calculate how much they need to save for retirement. ____
The personal saving rate went negative for the first time ever in 1998.
The debt carried by the average college graduate. ____
Percentage of people in their 20's who pay off their credit cards in full each month. ____
Average credit card debt for college students ____
Average credit card debt for graduating (college) seniors (2001) ____
Average credit card debt nationwide (2004) ____
Average college loan debt for undergraduate education (2002) ____
Personal debt is reaching record highs and personal savings is reaching all time lows. ____

Step #1: Learn the Awesome Power of Multiplication

Multiplication Illustration #1: Need Some Grain?

The Checkerboard: How much grain would be on the 64th square?

Multiplication Illustration #2: So You Like to Tear Paper?

How thick would the paper be after the 50th tear?

Step #2: Invest Wisely! ( Let Multiplication Work For You.)

Money Multiplication Made Easy: The Laws of 10's and 7's.

Invest your money at 7% interest and you'll double it every 10 years.
Invest your money at 10% interest and you'll double it every 7 years.

Ways to Get This Amount of Return on Your Investment

Stock Investments: Average over 10% for long-term investments. The safest bet is a total stock market mutual fund. Example Mutual Fund Company: www.vanguard.com .
Lending Money: If you lend money to people to purchase a car, the average rate for a slightly used car is currently over 8%.
Investing in Real Estate: Real Estate prices in Atlanta have been increasing by about 12% per year. By purchasing a house and renting it, you'd receive not only the rent, but also the appreciation (gain in worth of the house) each year. Investors who purchase, repair and sell foreclosure houses might net (your profit after subtracting all your expenses) a 10% profit on each house. Thus, if you could purchase, fix, and sell 7 houses every 2 years, you'd double your money every two years!

For the Median Income Family

Cobb County median (average) family income in Cobb County = $58,000 per year. Invest 10% of your income. That's $5800 per year ($16.01 per day), invested at 10% interest = over $1,000,000 in 30 years.

For the Low Income Family

Story: Oseola Enjoys Life and Saves a Fortune. Secrets to her success:

a. Work hard.
b. Enjoy life within your means.
c. Invest regularly. In her own words, ''The secret of building a fortune is compounding interest. It's not the ones who make big money, but the ones who know how to save who get ahead. You've got to leave your investment alone long enough for it to increase.'' (Simple Wisdom, p. 18)
d. Don't allow yourself to pay interest to others. ''I save my money till I can buy something outright.''

Action Points

Set a Written Goal ("If you aim at nothing, you'll hit it every time.")
Start Investing Early
Invest Regularly
Diversify

My Financial Goals:

Mark McCormack, in his book, What They Don't Teach You at Harvard Business School, tells of a Harvard study finding that 83% of Harvard School graduates had no goals 10 years after graduation; 14% had goals, but not in writing. The remaining three percent had written goals -- and were earning 10 times as much as the group with no goals.

I'd like to retire and be financially independent by my __ birthday.
That means I'll need to average saving __ per week, or __ percent of my income.
Now, I'll begin saving __ per week, and start investing it ____ (where?).

Homework: Ask your parents and other adult friends for their advice on money management. Example questions:

1) Thinking through your life experiences, what are some things you've done with your money that you'd recommend me to do as well?
2) What regrets do you have that you think I should avoid?
3) Are there other extended family members or family friends you'd recommend I go to for financial advice?

Step #3: Avoid Debt! (Don't Let Multiplication Work Against You.)

“Debt is a disease and credit cards are one of the easiest ways to get sick. Nobody ever got wealthy borrowing money for gifts, clothes, restaurants, entertainment, or travel.” (Consumer advocate Clark Howard)

Your greatest financial question: "Will you harness the awesome power of multiplication to work for you or allow others to drain your money by having multiplication work against you in the form of 'easy payments?'"

The X-Box Dilemma: What would you do?

Beating the System: Credit Cards and "Easy" Payments

“The Forbes 400 is a list of the richest 400 people in America as rated by Forbes Magazine. When surveyed, 75 percent of the Forbes 400...said the best way to build wealth is to become and stay debt-free.” “I have met with thousands of millionaires in my years as a financial counselor.... They all lived on less than they made and spent only when they had the cash. No payments.” (Dave Ramsey, p. 23)

$400 - Advertised price for X-Box and two accompanying games
$520 - Amount actually paid by credit at 13% with minimum payment of 3% over 51 months.

$9,000 = Average family credit card debt
$1170 = Average amount paid in interest per year (Like throwing a $100 bill out the window every month!)

Other fun stuff you could do with $1170 per year besides throw it out your window in interest.

Take a cool vacation.

Use $100 per month for something cool.

Invest that $1170 per year at 10% interest and have 1/4 million dollars in 32 years or 1 million dollars in 46 years.

Beating the System #2: Car Payments

Benji's Story

Benji's almost 17. His dad said he would pay $2100 toward his first car. Add this money to his savings, and he could purchase a nice sports car. Instead, he acquired a wrecked 1993 Honda Accord free of charge and fixed it up with the help of a friend for $1,000, parts and labor. This very reliable car should last 200,000 thousand more miles. Now, he doesn't have to work for car payments or expensive insurance. He just works for gas and expenses. His dad still gave him the $2100.00, which he plans to invest. He's also free to invest his savings, which would have gone toward the sports car. He has $8,000.00 invested in a foreclosure house, the profit of which he will reinvest in each new house he acquires. At this rate, he should be able to double his money every two years. Even with the impact of taxes, if he keeps living within his means and his investments keep paying off, he could conceivably retire with a fully paid off house and $1,000,000 by the age of 30.

“USA Today notes that the average car payment is $378 over 55 months. Most people get a car payment and keep it throughout their lives. As soon as a car is paid off, they get another payment because they “need” a new car.” (Dave Ramsey)

Just save that money for 8 months and you’d have $3,000.00, enough to pay for an older, but reliable car. So then you put the $378 per month in a total stock market mutual fund. If it averages 12% interest, and you pay in the money each month from when you’re aged 25 to 65, you’d have $4,447,084.01 at age 65.

Unless you have tons of money, buy reliable, used cars.

1. They cost less.
2. Cars last longer these days, so that many are reliable for 200,000 or more miles.
3. A new car depreciates greatly in value the day you drive it off the lot.

Beating the System #3: House Payments (Mortgage)

The problems people run into include:

Buying beyond our means. If we're stretched to the max, we can't enjoy life, even in a mansion.
Paying over too long a time period.
Forgetting the impact of frequent moves.
Purchasing at a premium price.

What people pay for the same house:

$100,000: The cash price
$151,894: Paid over 15 years at 6% interest
$215,000: Paid over 30 years at 6% interest

The bottom line: Pay the maximum you can pay comfortably each month on your house payment.

Action Points:

Commit yourself to learn financial management. Talk to your parents and other adults. Read. Talk to your friends.
Flee debt like your worst enemy. Use debt only for extreme emergencies and perhaps paying on a house, not for getting stuff before you can afford it.
Learn how to invest wisely.
Resist Peer Pressure ("keeping up with the Joneses") and Live Within Your Means.

Sources of Financial Wisdom:

Money Management Guru's:

http://www.daveramsey.com - Dave Ramsey is a popular talk show host who helps people move from paying debts to building wealth.
http://clarkhoward.com - Consumer advocate who has advice on buying cars, finances, etc.
http://www.vanguard.com - Great mutual fund company website with great articles to learn about investing in stocks and bonds.

Interest Rate Calculator (Lots of these on various sites.)

http://www.bankrate.com/gookeyword/rate/calc_home.asp - Offers many helpful online calculators for car payments, mortgages, investing, etc. http://www.tcalc.com/tvwww.dll?Save - Play around with interest calculators like this to find out how fast your money will grow as you invest various amounts of money at various interest rates.
http://www.cardratings.com/creditcardtrapcalc.html - Calculator to find out how much you pay over time if you carry a balance on your credit card.

Sites recommended by the Atlanta Journal for Compulsive Shoppers

www.stoppingovershopping.com - Gives treatment options.
www.4therapy.com/consumer/assessment/taketest.php - Take a self-assessment to see if you need help for a shopping addiction.
www.debtorsanonymous.org A 12-step recovery problem, including self-assessment questions.
www.addictionrecov.org/spendaddict.htm From the Illinois Institute for Addiction Recovery.

Helpful Radio Personalities: Clark Howard and Dave Ramsey.

Some Good Financial Books to Read (with a critical mind!) Read reviews on Amazon.com to learn the strengths and weaknesses of each book.

The Millionaire Next Door, by Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D. . Americans in general manage their money pitifully, digging themselves further and further into debt, while saving little or nothing for the future. Stanley and Danko decided to study the successful to discover what we might learn from them. They began their search for the wealthy in upscale neighborhoods, but discovered something odd. Many of those living large were not wealthy, but strung out on debt. Most of the wealthy were hidden away in quiet middle class neighborhoods driving affordable cars. That's why you just might find a millionaire living "next door." Most of them don't look like millionaires. Read this book to find out how the successful got that way and stay that way. Surprisingly, it's the way many normal people with normal salaries can get there, if they follow in their footsteps. Don't worry that it's 250 pages long and written by Ph.D.'s. It's written clearly and practically.
The Total Money Makeover: A Proven Plan for Financial Freedom, by Dave Ramsey (Nashville, TN, Thomas Nelson, Inc., 2003). Don’t be daunted by the 240 pages. The font is large and includes many testimonials, making it an easy read. Popular financial talk-show host Dave Ramsey writes and speaks with the passion of a man who took his family through the emotional hell of bankruptcy, but learned from his mistakes and achieved financial freedom. According to Ramsey, most of us are managing their money like idiots. Hard statistics indicate he’s right. We desperately need someone to tell us frankly how stupid we’ve been. Like the little boy in “The King’s New Clothes," Ramsey points out our financial nakedness, but follows through with a clear path to financial freedom. His answers include working smart and hard, living within our means, setting aside 3 to 6 months of wages in case of an emergency, paying off our debts “with gazelle intensity”, avoiding future debt like a plague, investing for the future, and giving to the needy. A strength is that he confronts the psychological factors that lead to financial problems, such as the peer pressure to "keep up with the Joneses".
The Richest Man in Babylon, by George S. Clason (Penguin Books). This delightful long-time best-seller has over 2 million copies in print. Many successful people refer to it as the book that most impacted their success. Learn the basics of acquiring wealth, not from dry discussions of facts and figures, but from intriguing stories set in ancient Babylon. A fun and life-changing read! His main principles are:

1. Save 10% of your income.
2. Live within your means.
3. Invest your savings wisely.
4. Make your home a profitable investment.
5. Plan for your future needs.
6. Increase your ability to earn through growing in wisdom and skills.
Financial Peace, for the Next Generation, by Dave Ramsey. (a high school curriculum)
Forty Eight Days to the Work You Love, by Dan Miller (Broadman and Holman), 224 pages. You'll do better at your job if you love your job. In light of this obvious thought (duh), shouldn't we be all about discovering who we are so that we can find a job we can really get into? Read this book to help you discover who you are and how to find the right niche for your personal temperate, desires, skills and abilities.
Anything by Larry Burkett or Ron Blue. Wise, insightful faith-based authors.
Think and Grow Rich! ( The Original Version, Restored and Revised, Aventine Press), by Napoleon Hill, 412 pages. Hill spent decades studying over 500 of America's wealthiest, most successful people. The result is a classic that influential speaker/author Brian Tracy calls "the best single book on personal success ever written."
The Wealthy Barber, by David Chilton, (Prima Lifestyles, 3rd edition), 224 pages. The Book of the Month Club called it "quite simply the best financial self-help book." It's appeal, like The Richest Man in Babylon, is that it gives sound, ageless, financial advice in an appealing, often funny, story form. In brief, a teacher, business owner and plant worker need financial advice. They are told to consult with a local successful barber who gives them sage advice. The introductory kind of book that people give to newlyweds and parents to pass on to their children and grandchildren.
Mary Hunt's Debt-Proof Living: The Complete Guide to Living Financially Free (Broadman and Holman) 346 pages, Mrs. Hunt found herself saddled with $100,000 worth of unsecured debt and had to radically change her lifestyle. This book shows how. Many say that it changed their lives. A faith-based guide to getting out of debt and staying out of debt.
Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money-That the Poor and Middle Class Do Not!, by Robert T. Kiyosaki (Warner Books), 205 pp. USA Today called it "a starting point for anyone looking to gain control of their financial future." It's appeal? Principles of accumulating wealth are couched in the story of how the author learned money management from an early age. His real dad was an educator with a Ph.D. His other "dad" was the father of his childhood friend. Surprise! The poor dad is the one with the Ph.D.! A great book for driving home the need to focus on building assets rather than just getting a raise. Also a great book to pique students' interest and get them discussing. Weaknesses: 1 - His criticisms of formal education may come across too strong to some. 2 - He comes across as if the accumulation of wealth is almost everything. 3 - Some advice is rather ludicrous, like promoting short-term stock trading with the claim that he successfully invested in "a new undervalued oil company that was about to find some oil deposits." (p. 155) So where do you find insider information like that, unless you're pretty tight with God? Yet, in my view, the strengths of this book outweigh its weaknesses.
How to Get Out of Debt and Live Prosperously, by Jerrold Mundis (Bantam), 320 pages. Provides the motivation to stop accumulating debt and start paying it off.